Court Office of Appellate Courts
R. Muck, Masha M. Yevzelman, Gauri S. Samant, Fredrickson
& Byron, P.A., Minneapolis, Minnesota, for relator.
M. Ellison, Attorney General, Wendy Tien, Assistant Attorney
General, Saint Paul, Minnesota, for respondent.
calculate Minnesota's research and development tax credit
under Minn. Stat. § 290.068 (2010), Minnesota
incorporates the minimum base amount limitation set forth in
I.R.C. § 41(c)(2) (2012).
the 2011 tax year, the denominator of the
fixed-base-percentage formula used to calculate a
taxpayer's Minnesota tax credit for increasing research
activities uses the taxpayer's federal, rather than
Minnesota, aggregate gross receipts for the years 1984
case requires us to interpret Minnesota's research and
development (R&D) tax credit statute. Minn. Stat. §
290.068 (2010). Specifically, we must answer two
questions. First, does the Minnesota Legislature's
incorporation of the federal tax code's definition of the
term "base amount" in section 290.068 include the
federal "minimum base amount" limitation?
See Minn. Stat. § 290.068, subd. 1(a)(2);
I.R.C. § 41(c)(1)-(2) (2012). Second, does the term
"aggregate gross receipts" as used in the Internal
Revenue Code's formula for calculating the R&D tax
credit refer to Minnesota or federal aggregate gross
receipts? See I.R.C. § 41(c)(3)(A). The
Minnesota Tax Court held that the Legislature incorporated
the federal "minimum base amount" limitation into
Minnesota's tax credit statute and that for the 2011 tax
year, the term "aggregate gross receipts" referred
to federal aggregate gross receipts, not Minnesota aggregate
gross receipts. We affirm.
General Mills is a Delaware corporation with its principal
place of business in Minnesota. The company manufactures and
markets branded consumer foods sold through retail stores,
and supplies branded and unbranded food products to the
foodservice and commercial baking industries. General
Mills' principal R&D facilities are located in
turning to the facts of this appeal, we begin with an
explanation of the tax credit provided for R&D expenses.
Generally, R&D tax credits are provided to incentivize
companies to increase R&D investments in a given tax
year. By providing a credit to the taxpayer, Minnesota
encourages "the creation of new products, new
high-paying jobs, and new businesses" by
"attract[ing] and retain[ing] . . . high-tech
industries" willing to conduct research within the
state. See Michael B. Fishman & Karalee
Ferreira, A Practical Guide to R&E Credits Offered at
the State Level, J. Multistate Tax'n &
Incentives, July 1999, at 14, 17 (1999).
R&D tax credit is calculated by subtracting a "base
amount" of qualified research expenses (QREs) from the
"qualified research expenses for the taxable year."
Minn. Stat. § 290.068, subd. 1. If a company has
increased its research investments in a given year, then its
"qualified research expenses for the taxable year"
typically will be greater than its "base amount"
QREs and it will be entitled to a tax credit. In 2011-the tax
year applicable here-if the difference between the base
amount and the taxpayer's taxable year QREs was $2
million or less, the taxpayer was entitled to a credit equal
to 10 percent of that difference. Id. To the extent
the difference exceeded $2 million, the taxpayer was entitled
to a credit equal to 2.5 percent on amounts exceeding $2
the credit is based on QREs above a "base amount"
of those expenses, the calculation of a taxpayer's base
amount is critical. Minnesota's R&D tax credit
statute looks to federal law to define this term.
See Minn. Stat. § 290.068, subd. 2(c) (relying
on IRC § 41(c), in part, to define "base
amount"). To calculate the base amount, the taxpayer
first calculates its "fixed-base percentage."
I.R.C. § 41(c)(1) (setting "fixed-base
percentage" as one component of the base amount
formula). To calculate its fixed-base percentage, a taxpayer
divides its "aggregate qualified research expenses"
for the years 1984 through 1988 by the taxpayer's
"aggregate gross receipts" for the years 1984
through 1988. See I.R.C. § 41(c)(3)(A). The
fixed-base percentage cannot exceed 16 percent. See
I.R.C. § 41(c)(3)(C).
the fixed-base percentage is calculated, the base amount is
calculated by multiplying that percentage by "the
average annual gross receipts of the taxpayer for the 4
taxable years preceding the taxable year for which the credit
is being determined." I.R.C. § 41(c)(1). The
product of this calculation results in a prior-year baseline
of QREs in dollar terms against which the actual taxable year
QREs are compared. As noted above, the tax credit is
calculated as a percentage of the difference between the base
amount and the taxable year QREs.
observations about this calculation are relevant to the
parties' dispute in this case. First, the federal statute
setting forth how the "base amount" is calculated
also includes a "minimum base amount" limitation.
I.R.C. § 41(c)(1)-(2). The "minimum base
amount" sets a floor-50 percent of the QREs for the
credit year-for the base amount. Accordingly, because the
credit is based on the difference between the taxable year
QREs and the base amount, the "minimum base amount"
floor may have the effect of reducing the amount of the
credit, particularly when the amount of QREs grows
substantially in a given year.
the larger the amount of "aggregate gross receipts"
used as the denominator in the formula for calculating
"fixed-base percentage," the larger the tax credit
available to the taxpayer. This is so because the larger
denominator means the fixed-base percentage (the ratio of
QREs to total gross receipts) is lower. The impact of a lower
fixed-base percentage is to lower the base amount (expressed
in dollar terms). A lower base amount means that the
difference between the base amount and the taxable year QREs
is larger. And because the tax credit is calculated as a
percentage of that difference, a larger difference means a
larger tax credit. Stated more simply and practically,
typically a taxpayer will prefer a larger amount of
"aggregate gross receipts" as the denominator in
the formula for calculating fixed-base percentage because it
likely results in a larger tax credit.
Mills claimed the Minnesota R&D tax credit on its timely
filed Minnesota corporate franchise tax return for the tax
year ending in 2011, claiming $1, 112, 772 as its credit.
Respondent Commissioner of Revenue does not dispute either
that General Mills was entitled to that tax credit or the
amount of the credit.
2015, General Mills filed an amended 2011 Minnesota corporate
franchise tax return based on a recalculation of its
Minnesota R&D credit. General Mills recalculated its R&D
tax credit in two ways. First, General Mills originally used
the federal "minimum base amount" when calculating
its Minnesota R&D tax credit; its amended return did not.
Second, on its initial return, General Mills used Minnesota
"aggregate gross receipts" in the formula for
calculating the R&D credit. In its amended return,
General Mills used federal "aggregate gross
receipts" for the R&D credit formula. As a result of
these changes, General Mills sought a refund of $949, 236
Commissioner denied General Mills' refund claim and the
company appealed to the Minnesota Tax Court. The tax court
resolved the appeal on cross-motions for summary judgment.
See General Mills, Inc. v. Comm'r of Revenue,
No. 9016-R, 2018 WL 4053060 (Minn. T.C. Aug. 17, 2018). The
tax court agreed with the Commissioner that the federal
"minimum base amount" is incorporated by reference
into the Minnesota R&D tax credit statute, and agreed
with General Mills that, for the 2011 tax year,
"aggregate gross receipts" referred to
federal, rather than Minnesota, aggregate gross
receipts. General Mills, Inc., 2018 WL 4053060 at
parties stipulated that if General Mills prevailed on the
aggregate-gross-receipts issue (which it did), and not on the
minimum-base-amount issue (which it did not), "then
[General Mills] is entitled to a total 2011 Minnesota R&D
credit of $1, 112, 772, which is the same amount as the
Commissioner previously allowed." Id. at *11
(internal quotation marks omitted). Accordingly, the tax
court's decision meant that General Mills was not
entitled to a larger tax credit or any refund on its amended
2011 tax return. Id.
Mills sought our review on the minimum-base-amount question.
The Commissioner cross-appealed on ...