HF 1866

as introduced - 84th Legislature (2005 - 2006) Posted on 12/15/2009 12:00am

A bill for an act
relating to taxation; corporate franchise; modifying
the definition of a foreign operating corporation, the
subtraction for foreign royalties, and the deemed
dividend deduction; amending Minnesota Statutes 2004,
sections 290.01, subdivisions 6b, 19d; 290.17,
subdivision 4.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA:

Section 1.

Minnesota Statutes 2004, section 290.01,
subdivision 6b, is amended to read:

Subd. 6b.

Foreign operating corporation.

new text begin (a) new text end The term
"foreign operating corporation," when applied to a corporation,
means a domestic corporation with the following characteristics:

(1) it is part of a unitary business at least one member of
which is taxable in this state;

(2) it is not a foreign sales corporation under section 922
of the Internal Revenue Code, as amended through December 31,
1999, for the taxable year; deleted text begin and
deleted text end

(3) deleted text begin either deleted text end (i) the average of the percentages of its
property and payrolls new text begin , including the pro rata share of its
unitary partnerships' property and payrolls, new text end assigned to
locations deleted text begin inside deleted text end new text begin outside new text end the United States deleted text begin and the District of
Columbia, excluding the commonwealth of Puerto Rico and
possessions of the United States deleted text end , as determined under section
290.191 or 290.20, is deleted text begin 20 deleted text end new text begin 80 new text end percent or deleted text begin less deleted text end new text begin more new text end ; or (ii) it has
in effect a valid election under section 936 of the Internal
Revenue Code new text begin ;
new text end

new text begin (4) the sum of its property and payroll, as determined
under section 290.191 or 290.20, that is located outside of the
United States exceeds $1,000,000; and
new text end

new text begin (5) 80 percent or more of its total sales or receipts
factor under section 290.191 is attributable to the sum of the
following:
new text end

new text begin (i) sales assigned to locations outside of the United
States;
new text end

new text begin (ii) receipts assigned to locations outside of the United
States, if the corporation is a financial institution or if 50
percent or more of the voting power of its stock is held by a
financial institution; and
new text end

new text begin (iii) sales made by the corporation assigned to locations
inside the United States, but originating from locations outside
of the United States new text end .

new text begin (b) For purposes of this subdivision, "United States"
includes the District of Columbia and excludes the possessions
of the United States.
new text end

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for taxable
years beginning after December 31, 2004.
new text end

Sec. 2.

Minnesota Statutes 2004, section 290.01,
subdivision 19d, is amended to read:

Subd. 19d.

Corporations; modifications decreasing federal
taxable income.

For corporations, there shall be subtracted
from federal taxable income after the increases provided in
subdivision 19c:

(1) the amount of foreign dividend gross-up added to gross
income for federal income tax purposes under section 78 of the
Internal Revenue Code;

(2) the amount of salary expense not allowed for federal
income tax purposes due to claiming the federal jobs credit
under section 51 of the Internal Revenue Code;

(3) any dividend (not including any distribution in
liquidation) paid within the taxable year by a national or state
bank to the United States, or to any instrumentality of the
United States exempt from federal income taxes, on the preferred
stock of the bank owned by the United States or the
instrumentality;

(4) amounts disallowed for intangible drilling costs due to
differences between this chapter and the Internal Revenue Code
in taxable years beginning before January 1, 1987, as follows:

(i) to the extent the disallowed costs are represented by
physical property, an amount equal to the allowance for
depreciation under Minnesota Statutes 1986, section 290.09,
subdivision 7, subject to the modifications contained in
subdivision 19e; and

(ii) to the extent the disallowed costs are not represented
by physical property, an amount equal to the allowance for cost
depletion under Minnesota Statutes 1986, section 290.09,
subdivision 8;

(5) the deduction for capital losses pursuant to sections
1211 and 1212 of the Internal Revenue Code, except that:

(i) for capital losses incurred in taxable years beginning
after December 31, 1986, capital loss carrybacks shall not be
allowed;

(ii) for capital losses incurred in taxable years beginning
after December 31, 1986, a capital loss carryover to each of the
15 taxable years succeeding the loss year shall be allowed;

(iii) for capital losses incurred in taxable years
beginning before January 1, 1987, a capital loss carryback to
each of the three taxable years preceding the loss year, subject
to the provisions of Minnesota Statutes 1986, section 290.16,
shall be allowed; and

(iv) for capital losses incurred in taxable years beginning
before January 1, 1987, a capital loss carryover to each of the
five taxable years succeeding the loss year to the extent such
loss was not used in a prior taxable year and subject to the
provisions of Minnesota Statutes 1986, section 290.16, shall be
allowed;

(6) an amount for interest and expenses relating to income
not taxable for federal income tax purposes, if (i) the income
is taxable under this chapter and (ii) the interest and expenses
were disallowed as deductions under the provisions of section
171(a)(2), 265 or 291 of the Internal Revenue Code in computing
federal taxable income;

(7) in the case of mines, oil and gas wells, other natural
deposits, and timber for which percentage depletion was
disallowed pursuant to subdivision 19c, clause (11), a
reasonable allowance for depletion based on actual cost. In the
case of leases the deduction must be apportioned between the
lessor and lessee in accordance with rules prescribed by the
commissioner. In the case of property held in trust, the
allowable deduction must be apportioned between the income
beneficiaries and the trustee in accordance with the pertinent
provisions of the trust, or if there is no provision in the
instrument, on the basis of the trust's income allocable to
each;

(8) for certified pollution control facilities placed in
service in a taxable year beginning before December 31, 1986,
and for which amortization deductions were elected under section
169 of the Internal Revenue Code of 1954, as amended through
December 31, 1985, an amount equal to the allowance for
depreciation under Minnesota Statutes 1986, section 290.09,
subdivision 7;

(9) amounts included in federal taxable income that are due
to refunds of income, excise, or franchise taxes based on net
income or related minimum taxes paid by the corporation to
Minnesota, another state, a political subdivision of another
state, the District of Columbia, or a foreign country or
possession of the United States to the extent that the taxes
were added to federal taxable income under section 290.01,
subdivision 19c, clause (1), in a prior taxable year;

(10) 80 percent of new text begin the lesser of (i) new text end royalties, fees, or
other like income accrued or received from a foreign operating
corporation or a foreign corporation which is part of the same
unitary business as the receiving corporation new text begin , or (ii) the
income from foreign sources, as defined in sections 861 through
865 and related provisions of the Internal Revenue Code, of the
paying corporation new text end ;

(11) income or gains from the business of mining as defined
in section 290.05, subdivision 1, clause (a), that are not
subject to Minnesota franchise tax;

(12) the amount of handicap access expenditures in the
taxable year which are not allowed to be deducted or capitalized
under section 44(d)(7) of the Internal Revenue Code;

(13) the amount of qualified research expenses not allowed
for federal income tax purposes under section 280C(c) of the
Internal Revenue Code, but only to the extent that the amount
exceeds the amount of the credit allowed under section 290.068;

(14) the amount of salary expenses not allowed for federal
income tax purposes due to claiming the Indian employment credit
under section 45A(a) of the Internal Revenue Code;

(15) the amount of any refund of environmental taxes paid
under section 59A of the Internal Revenue Code;

(16) for taxable years beginning before January 1, 2008,
the amount of the federal small ethanol producer credit allowed
under section 40(a)(3) of the Internal Revenue Code which is
included in gross income under section 87 of the Internal
Revenue Code;

(17) for a corporation whose foreign sales corporation, as
defined in section 922 of the Internal Revenue Code, constituted
a foreign operating corporation during any taxable year ending
before January 1, 1995, and a return was filed by August 15,
1996, claiming the deduction under section 290.21, subdivision
4, for income received from the foreign operating corporation,
an amount equal to 1.23 multiplied by the amount of income
excluded under section 114 of the Internal Revenue Code,
provided the income is not income of a foreign operating
company;

(18) any decrease in subpart F income, as defined in
section 952(a) of the Internal Revenue Code, for the taxable
year when subpart F income is calculated without regard to the
provisions of section 614 of Public Law 107-147; and

(19) in each of the five tax years immediately following
the tax year in which an addition is required under subdivision
19c, clause (16), an amount equal to one-fifth of the delayed
depreciation. For purposes of this clause, "delayed
depreciation" means the amount of the addition made by the
taxpayer under subdivision 19c, clause (16). The resulting
delayed depreciation cannot be less than zero.

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for taxable
years beginning after December 31, 2004.
new text end

Sec. 3.

Minnesota Statutes 2004, section 290.17,
subdivision 4, is amended to read:

Subd. 4.

Unitary business principle.

(a) If a trade or
business conducted wholly within this state or partly within and
partly without this state is part of a unitary business, the
entire income of the unitary business is subject to
apportionment pursuant to section 290.191. Notwithstanding
subdivision 2, paragraph (c), none of the income of a unitary
business is considered to be derived from any particular source
and none may be allocated to a particular place except as
provided by the applicable apportionment formula. The
provisions of this subdivision do not apply to business income
subject to subdivision 5, income of an insurance company, or
income of an investment company determined under section 290.36.

(b) The term "unitary business" means business activities
or operations which result in a flow of value between them. The
term may be applied within a single legal entity or between
multiple entities and without regard to whether each entity is a
sole proprietorship, a corporation, a partnership or a trust.

(c) Unity is presumed whenever there is unity of ownership,
operation, and use, evidenced by centralized management or
executive force, centralized purchasing, advertising,
accounting, or other controlled interaction, but the absence of
these centralized activities will not necessarily evidence a
nonunitary business. Unity is also presumed when business
activities or operations are of mutual benefit, dependent upon
or contributory to one another, either individually or as a
group.

(d) Where a business operation conducted in Minnesota is
owned by a business entity that carries on business activity
outside the state different in kind from that conducted within
this state, and the other business is conducted entirely outside
the state, it is presumed that the two business operations are
unitary in nature, interrelated, connected, and interdependent
unless it can be shown to the contrary.

(e) Unity of ownership is not deemed to exist when a
corporation is involved unless that corporation is a member of a
group of two or more business entities and more than 50 percent
of the voting stock of each member of the group is directly or
indirectly owned by a common owner or by common owners, either
corporate or noncorporate, or by one or more of the member
corporations of the group. For this purpose, the term "voting
stock" shall include membership interests of mutual insurance
holding companies formed under section 60A.077.

(f) The net income and apportionment factors under section
290.191 or 290.20 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. A foreign corporation or other foreign entity
which is required to file a return under this chapter shall file
on a separate return basis. The net income and apportionment
factors under section 290.191 or 290.20 of foreign operating
corporations shall not be included in the net income or the
apportionment factors of the unitary business except as provided
in paragraph (g).

(g) The adjusted net income of a foreign operating
corporation shall be deemed to be paid as a dividend on the last
day of its taxable year to each shareholder thereof, in
proportion to each shareholder's ownership, with which such
corporation is engaged in a unitary business. Such deemed
dividend shall be treated as a dividend under section 290.21,
subdivision 4. new text begin The dividends received deduction for a foreign
operating corporation is allowed on dividends, interest,
royalties, capital gains, or other like income only to the
extent they are derived from foreign sources, as defined in
sections 861 through 865 and related provisions of the Internal
Revenue Code.
new text end

Dividends actually paid by a foreign operating corporation
to a corporate shareholder which is a member of the same unitary
business as the foreign operating corporation shall be
eliminated from the net income of the unitary business in
preparing a combined report for the unitary business. The
adjusted net income of a foreign operating corporation shall be
its net income adjusted as follows:

(1) any taxes paid or accrued to a foreign country, the
commonwealth of Puerto Rico, or a United States possession or
political subdivision of any of the foregoing shall be a
deduction; and

(2) the subtraction from federal taxable income for
payments received from foreign corporations or foreign operating
corporations under section 290.01, subdivision 19d, clause (10),
shall not be allowed.

If a foreign operating corporation incurs a net loss,
neither income nor deduction from that corporation shall be
included in determining the net income of the unitary business.

(h) For purposes of determining the net income of a unitary
business and the factors to be used in the apportionment of net
income pursuant to section 290.191 or 290.20, there must be
included only the income and apportionment factors of domestic
corporations or other domestic entities other than foreign
operating corporations that are determined to be part of the
unitary business pursuant to this subdivision, notwithstanding
that foreign corporations or other foreign entities might be
included in the unitary business.

(i) Deductions for expenses, interest, or taxes otherwise
allowable under this chapter that are connected with or
allocable against dividends, deemed dividends described in
paragraph (g), or royalties, fees, or other like income
described in section 290.01, subdivision 19d, clause (10), shall
not be disallowed.

(j) Each corporation or other entity, except a sole
proprietorship, that is part of a unitary business must file
combined reports as the commissioner determines. On the
reports, all intercompany transactions between entities included
pursuant to paragraph (h) must be eliminated and the entire net
income of the unitary business determined in accordance with
this subdivision is apportioned among the entities by using each
entity's Minnesota factors for apportionment purposes in the
numerators of the apportionment formula and the total factors
for apportionment purposes of all entities included pursuant to
paragraph (h) in the denominators of the apportionment formula.

(k) If a corporation has been divested from a unitary
business and is included in a combined report for a fractional
part of the common accounting period of the combined report:

(1) its income includable in the combined report is its
income incurred for that part of the year determined by
proration or separate accounting; and

(2) its sales, property, and payroll included in the
apportionment formula must be prorated or accounted for
separately.

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective for taxable
years beginning after December 31, 2004.
new text end