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International Business Machines Corp. v. Commissioner of Revenue

Supreme Court of Minnesota

July 31, 2019

International Business Machines Corporation and Subsidiaries, Respondents,
v.
Commissioner of Revenue, Relator.

          Tax Court Office of Appellate Courts

          Walter A. Pickhardt, Michael J. Kaupa, Faegre Baker Daniels LLP, Minneapolis, Minnesota, for respondents.

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

         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 formula for calculating the R&D 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

         The facts of this case, as they relate to the structure of the tax credit for R&D expenses, are the same as set forth in General Mills, Inc. v. Commissioner of Revenue, No. A18-1660, __ N.W.2d __(Minn. July 31, 2019). Thus, we provide here only the facts relevant to this appeal. Respondent IBM is a technology corporation organized under the laws of New York. The company has several facilities in Rochester, Minnesota, where it engages in significant R&D activities.

         IBM timely filed its Minnesota corporate franchise tax return for the 2011 tax year; in its return, the company claimed Minnesota R&D credits based on its increased research activities. On April 15, 2016, IBM filed an amended 2011 Minnesota corporate franchise tax return requesting-based on a recalculation of the Minnesota R&D credit-a refund of $4, 395, 399. Relator Commissioner of Revenue denied IBM's refund claim.

         As in General Mills, see __ N.W.2d at __, IBM's refund request and the Commissioner's denial of the request reflect a disagreement on two issues. First, IBM and the Commissioner disagree on whether the "minimum base amount" set forth in I.R.C. § 41(c)(2) is incorporated into Minnesota's definition of "base amount." IBM argues that Minnesota does not incorporate the federal "minimum base amount" into its R&D credit; the Commissioner argues that it does. The parties also disagree on whether, in 2011, the term "aggregate gross receipts" in the fixed-base percentage formula referred to federal or Minnesota aggregate gross receipts. IBM contends that it referred to federal aggregate gross receipts, while the Commissioner argues the term was limited to Minnesota receipts.

         Following the Commissioner's denial of IBM's refund request, the company appealed to the Minnesota Tax Court. On May 17, 2018, the tax court heard consolidated oral arguments on joint motions for summary judgment in this case and in General Mills' case. On August 17, 2018, the tax court granted summary judgment in both cases. See Int'l Bus. Mach. Corp. v. Comm'r of Revenue, No. 9053-R, 2018 WL 4054529 (Minn. T.C. Aug. 17, 2018); General Mills, Inc. v. Comm'r of Revenue, No. 9016-R, 2018 WL 4053060 (Minn. T.C. Aug. 17, 2018).[2] On the first issue, the tax court agreed with the Commissioner, reasoning that the "minimum base amount" was incorporated by reference into Minnesota law. IBM, 2018 WL 4054529 at *6. ...


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