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General Mills, Inc. v. Commissioner of Revenue

Supreme Court of Minnesota

July 31, 2019

General Mills, Inc., Relator,
v.
Commissioner of Revenue, Respondent.

          Tax Court Office of Appellate Courts

          Thomas R. Muck, Masha M. Yevzelman, Gauri S. Samant, Fredrickson & Byron, P.A., Minneapolis, Minnesota, for relator.

          Keith M. Ellison, Attorney General, Wendy Tien, Assistant Attorney General, Saint Paul, Minnesota, for respondent.

         SYLLABUS

         1. To 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).

         2. For 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 through 1988.

         Affirmed.

          OPINION

          THISSEN, JUSTICE.

         This case requires us to interpret Minnesota's research and development (R&D) tax credit statute. Minn. Stat. § 290.068 (2010).[1] 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.

         FACTS

         Relator 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 Minnesota.

         Before 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).

         Minnesota's 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 million. Id.[2]

         Because 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).[3]

         Once 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.

         Two 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.

         Second, 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.

         General 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.

         In 2015, General Mills filed an amended 2011 Minnesota corporate franchise tax return based on a recalculation of its Minnesota R&D credit.[4] 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 plus interest.

         The 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 *5, *7-8.

         The 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.

         General Mills sought our review on the minimum-base-amount question. The Commissioner cross-appealed on ...


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