Ashland Inc. and Affiliates, Respondent,
Commissioner of Revenue, Relator.
Court Office of Appellate Courts
A. Pickhardt, Faegre Baker Daniels LLP, Minneapolis,
Minnesota, for respondent.
Swanson, Attorney General, Wendy S. Tien, Assistant Attorney
General, Saint Paul, Minnesota, for relator.
foreign entity's election under federal tax law to have
its status as a separate entity disregarded is recognized
under Minnesota tax law when calculating the "net
income" of its domestic owner.
Including in "net income" the income of a foreign
entity that elects under federal tax law to be disregarded as
a separate entity does not violate Minnesota's
water's edge rule, Minn. Stat. § 290.17, subd. 4(f)
(2012), because the disregarded entity does not retain a
nationality separate from its owner under Minnesota tax law.
issue in this appeal from the tax court is whether the
consequences of an election made under federal tax law by a
foreign entity owned by respondent Ashland Inc., a domestic
unitary business, must be recognized in determining
Ashland's Minnesota tax liability. Concluding that the
income and apportionment factors of the foreign entity were
improperly included in Ashland's combined return, relator
Commissioner of Revenue excluded the foreign entity's
income and apportionment factors in calculating Ashland's
Minnesota tax liability. The tax court disagreed with the
Commissioner's conclusion and determined that the
consequences of the federal election were properly included
in the determination of Ashland's net income on its
Minnesota tax returns. The tax court accordingly granted
Ashland's motion for summary judgment. The Commissioner
appealed, arguing that Minn. Stat. § 290.17, subd. 4(f)
(2012), prohibits the inclusion of the foreign entity's
income and apportionment factors in the calculation of
Ashland's Minnesota tax liability, regardless of its
treatment under federal law. We affirm.
parties have stipulated to most of the relevant facts
underlying the Commissioner's appeal. Ashland Inc. is a
Kentucky corporation that does business in Minnesota, among
other states. In November 2008, Ashland acquired Hercules, a
C corporation incorporated under the laws of Delaware. Since
Ashland's acquisition of Hercules, Hercules's income
has been included in Ashland's consolidated federal
income tax return and in Minnesota, in the combined report
required by Minnesota's unitary business
1999 (before Ashland's purchase), Hercules has owned 100
percent of a Luxembourg entity, Hercules SARL. Treasury Regulation § 301.7701-3(a)
(2012) provides that "an eligible entity with a single
owner can elect to be classified as an association or to be
disregarded as an entity separate from its owner." It is
undisputed that Hercules SARL is the type of eligible entity
that can "elect its classification for federal tax
purposes." Id. In 1999, Hercules SARL elected
to be "disregarded as a separate entity, " and was
therefore no longer considered "separate from its owner,
" Hercules. Hercules SARL signified its election by
filing Form 8832 for "Entity Classification
Election" with the Internal Revenue Service (IRS) in
1999 (called "checking the box, " referring to the
box on Form 8832). See Treas. Reg. §
301.7701-3(c)(1) (2012) (requiring eligible foreign entities
to make their election known to the IRS via Form 8832 at the
time of election). Hercules SARL's election to disregard
its status as an entity separate from Hercules remained in
effect during all years relevant to this appeal.
the 3 tax years at issue in this appeal, Hercules SARL
operated at a total net loss. Because Hercules SARL elected to disregard
its status as an entity separate from its owner, on its
federal returns, Ashland treated Hercules SARL as a
"sole proprietorship, branch, or division" of
Hercules. See Treas. Reg. § 301.7701-2(a) (as
amended in 2011) ("A business entity with only one owner
is classified as a corporation or is disregarded; if the
entity is disregarded, its activities are treated in the same
manner as a sole proprietorship, branch, or division of the
owner."). Therefore, Ashland included the income,
losses, and deductions of Hercules SARL for the 3 years at
issue as the income, losses, and deductions of Hercules
itself when it filed returns with the IRS. The Commissioner
agrees that this tax-reporting treatment of Hercules SARL was
proper under federal tax law.
then prepared its combined report of the Ashland-Hercules
unitary business to comply with Minnesota tax requirements.
Relying on Minn. Stat. § 290.01, subd. 19 (2012), which
defines net income as "federal taxable income . . .
incorporating . . . any elections made by the taxpayer,
" Ashland factored in the election by Hercules SARL to
be disregarded as an entity separate from its owner,
Hercules. Thus, in its combined report, Ashland treated
Hercules SARL "in the same manner as a sole
proprietorship, branch, or division of the owner, "
Hercules, which itself was part of the Ashland-Hercules
unitary business. See Treas. Reg. §
301.7701-2(a). The income, losses, and deductions of Hercules
SARL were accordingly included as the income, losses, and
deductions of Hercules on the combined report of Minnesota
net income for the Ashland-Hercules unitary business.
February 2015, after an audit, the Commissioner determined
that Ashland improperly included the income, losses, and
deductions of Hercules SARL in its calculation of the
Ashland-Hercules unitary business income in 2009, 2010, and
2011. The Commissioner concluded, based on Minn. Stat. §
290.17, subd. 4(f), that as a foreign entity, Hercules
SARL's income and losses cannot be included in
Ashland's combined report even if the entity was part of
a unitary business. See id.
("The net income and apportionment factors . . . of
foreign corporations and other foreign entities which are
part of a unitary business shall not be included in the net
income or the apportionment factors of the unitary
business."). After excluding Hercules SARL's income,
losses, and deductions, the Commissioner recalculated the
Minnesota net income of the Ashland-Hercules unitary
business, and assessed Ashland with $1.167 million in
additional taxes, penalties, and interest.
appealed to the tax court. The Commissioner and Ashland filed
cross motions for summary judgment. The tax court granted
Ashland's motion and denied the Commissioner's
motion. Ashland Inc. v. Comm'r of Revenue, No.
08819-R, 2016 WL 6635813, at *9 (Minn. T.C. June 27, 2016).
court agreed with Ashland that Minnesota's "net
income" definition, Minn. Stat. § 290.01, subd. 19,
required the Commissioner to "recognize the
taxpayer's elections for federal income tax reporting
purposes, " and thus Hercules SARL must be disregarded
as an entity separate from Hercules under Minnesota tax law,
just as it had been under federal law. Ashland Inc.,
2016 WL 6635813, at *4-5. The tax court applied Treas. Reg.
§ 301.7701-3(g)(1)(iii) (2012), which provides:
If an eligible entity classified as an association elects . .
. to be disregarded as an entity separate from its
owner, the following is deemed to occur: The association
distributes all of its assets and liabilities to