1.1                          A bill for an act 
  1.2             relating to taxation; modifying taxable income; 
  1.3             amending Minnesota Statutes 2002, section 290.10; 
  1.4             Minnesota Statutes 2003 Supplement, section 290.01, 
  1.5             subdivisions 19a, 19c. 
  1.6   BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA: 
  1.7      Section 1.  Minnesota Statutes 2003 Supplement, section 
  1.8   290.01, subdivision 19a, is amended to read: 
  1.9      Subd. 19a.  [ADDITIONS TO FEDERAL TAXABLE INCOME.] For 
  1.10  individuals, estates, and trusts, there shall be added to 
  1.11  federal taxable income: 
  1.12     (1)(i) interest income on obligations of any state other 
  1.13  than Minnesota or a political or governmental subdivision, 
  1.14  municipality, or governmental agency or instrumentality of any 
  1.15  state other than Minnesota exempt from federal income taxes 
  1.16  under the Internal Revenue Code or any other federal statute; 
  1.17  and 
  1.18     (ii) exempt-interest dividends as defined in section 
  1.19  852(b)(5) of the Internal Revenue Code, except the portion of 
  1.20  the exempt-interest dividends derived from interest income on 
  1.21  obligations of the state of Minnesota or its political or 
  1.22  governmental subdivisions, municipalities, governmental agencies 
  1.23  or instrumentalities, but only if the portion of the 
  1.24  exempt-interest dividends from such Minnesota sources paid to 
  1.25  all shareholders represents 95 percent or more of the 
  2.1   exempt-interest dividends that are paid by the regulated 
  2.2   investment company as defined in section 851(a) of the Internal 
  2.3   Revenue Code, or the fund of the regulated investment company as 
  2.4   defined in section 851(g) of the Internal Revenue Code, making 
  2.5   the payment; and 
  2.6      (iii) for the purposes of items (i) and (ii), interest on 
  2.7   obligations of an Indian tribal government described in section 
  2.8   7871(c) of the Internal Revenue Code shall be treated as 
  2.9   interest income on obligations of the state in which the tribe 
  2.10  is located; 
  2.11     (2) the amount of income taxes paid or accrued within the 
  2.12  taxable year under this chapter and income taxes paid to any 
  2.13  other state or to any province or territory of Canada, to the 
  2.14  extent allowed as a deduction under section 63(d) of the 
  2.15  Internal Revenue Code, but the addition may not be more than the 
  2.16  amount by which the itemized deductions as allowed under section 
  2.17  63(d) of the Internal Revenue Code exceeds the amount of the 
  2.18  standard deduction as defined in section 63(c) of the Internal 
  2.19  Revenue Code.  For the purpose of this paragraph, the 
  2.20  disallowance of itemized deductions under section 68 of the 
  2.21  Internal Revenue Code of 1986, income tax is the last itemized 
  2.22  deduction disallowed; 
  2.23     (3) the capital gain amount of a lump sum distribution to 
  2.24  which the special tax under section 1122(h)(3)(B)(ii) of the Tax 
  2.25  Reform Act of 1986, Public Law 99-514, applies; 
  2.26     (4) the amount of income taxes paid or accrued within the 
  2.27  taxable year under this chapter and income taxes paid to any 
  2.28  other state or any province or territory of Canada, to the 
  2.29  extent allowed as a deduction in determining federal adjusted 
  2.30  gross income.  For the purpose of this paragraph, income taxes 
  2.31  do not include the taxes imposed by sections 290.0922, 
  2.32  subdivision 1, paragraph (b), 290.9727, 290.9728, and 290.9729; 
  2.33     (5) the amount of expense, interest, or taxes disallowed 
  2.34  pursuant to section 290.10; 
  2.35     (6) the amount of a partner's pro rata share of net income 
  2.36  which does not flow through to the partner because the 
  3.1   partnership elected to pay the tax on the income under section 
  3.2   6242(a)(2) of the Internal Revenue Code; ~~and~~ 
  3.3      (7) 80 percent of the depreciation deduction allowed under 
  3.4   section 168(k) of the Internal Revenue Code.  For purposes of 
  3.5   this clause, if the taxpayer has an activity that in the taxable 
  3.6   year generates a deduction for depreciation under section 168(k) 
  3.7   and the activity generates a loss for the taxable year that the 
  3.8   taxpayer is not allowed to claim for the taxable year, "the 
  3.9   depreciation allowed under section 168(k)" for the taxable year 
  3.10  is limited to excess of the depreciation claimed by the activity 
  3.11  under section 168(k) over the amount of the loss from the 
  3.12  activity that is not allowed in the taxable year.  In succeeding 
  3.13  taxable years when the losses not allowed in the taxable year 
  3.14  are allowed, the depreciation under section 168(k) is allowed; 
  3.15  and 
  3.16     (8) the amount of expenses disallowed under section 290.10, 
  3.17  subdivision 2. 
  3.18     <b>[EFFECTIVE DATE.]</b> This section is effective for taxable 
  3.19  years beginning after December 31, 2003. 
  3.20     Sec. 2.  Minnesota Statutes 2003 Supplement, section 
  3.21  290.01, subdivision 19c, is amended to read: 
  3.22     Subd. 19c.  [CORPORATIONS; ADDITIONS TO FEDERAL TAXABLE 
  3.23  INCOME.] For corporations, there shall be added to federal 
  3.24  taxable income: 
  3.25     (1) the amount of any deduction taken for federal income 
  3.26  tax purposes for income, excise, or franchise taxes based on net 
  3.27  income or related minimum taxes, including but not limited to 
  3.28  the tax imposed under section 290.0922, paid by the corporation 
  3.29  to Minnesota, another state, a political subdivision of another 
  3.30  state, the District of Columbia, or any foreign country or 
  3.31  possession of the United States; 
  3.32     (2) interest not subject to federal tax upon obligations 
  3.33  of:  the United States, its possessions, its agencies, or its 
  3.34  instrumentalities; the state of Minnesota or any other state, 
  3.35  any of its political or governmental subdivisions, any of its 
  3.36  municipalities, or any of its governmental agencies or 
  4.1   instrumentalities; the District of Columbia; or Indian tribal 
  4.2   governments; 
  4.3      (3) exempt-interest dividends received as defined in 
  4.4   section 852(b)(5) of the Internal Revenue Code; 
  4.5      (4) the amount of any net operating loss deduction taken 
  4.6   for federal income tax purposes under section 172 or 832(c)(10) 
  4.7   of the Internal Revenue Code or operations loss deduction under 
  4.8   section 810 of the Internal Revenue Code; 
  4.9      (5) the amount of any special deductions taken for federal 
  4.10  income tax purposes under sections 241 to 247 of the Internal 
  4.11  Revenue Code; 
  4.12     (6) losses from the business of mining, as defined in 
  4.13  section 290.05, subdivision 1, clause (a), that are not subject 
  4.14  to Minnesota income tax; 
  4.15     (7) the amount of any capital losses deducted for federal 
  4.16  income tax purposes under sections 1211 and 1212 of the Internal 
  4.17  Revenue Code; 
  4.18     (8) the exempt foreign trade income of a foreign sales 
  4.19  corporation under sections 921(a) and 291 of the Internal 
  4.20  Revenue Code; 
  4.21     (9) the amount of percentage depletion deducted under 
  4.22  sections 611 through 614 and 291 of the Internal Revenue Code; 
  4.23     (10) for certified pollution control facilities placed in 
  4.24  service in a taxable year beginning before December 31, 1986, 
  4.25  and for which amortization deductions were elected under section 
  4.26  169 of the Internal Revenue Code of 1954, as amended through 
  4.27  December 31, 1985, the amount of the amortization deduction 
  4.28  allowed in computing federal taxable income for those 
  4.29  facilities; 
  4.30     (11) the amount of any deemed dividend from a foreign 
  4.31  operating corporation determined pursuant to section 290.17, 
  4.32  subdivision 4, paragraph (g); 
  4.33     (12) the amount of any environmental tax paid under section 
  4.34  59(a) of the Internal Revenue Code; 
  4.35     (13) the amount of a partner's pro rata share of net income 
  4.36  which does not flow through to the partner because the 
  5.1   partnership elected to pay the tax on the income under section 
  5.2   6242(a)(2) of the Internal Revenue Code; 
  5.3      (14) the amount of net income excluded under section 114 of 
  5.4   the Internal Revenue Code; 
  5.5      (15) any increase in subpart F income, as defined in 
  5.6   section 952(a) of the Internal Revenue Code, for the taxable 
  5.7   year when subpart F income is calculated without regard to the 
  5.8   provisions of section 614 of Public Law 107-147; ~~and~~ 
  5.9      (16) 80 percent of the depreciation deduction allowed under 
  5.10  section 168(k) of the Internal Revenue Code.  For purposes of 
  5.11  this clause, if the taxpayer has an activity that in the taxable 
  5.12  year generates a deduction for depreciation under section 168(k) 
  5.13  and the activity generates a loss for the taxable year that the 
  5.14  taxpayer is not allowed to claim for the taxable year, "the 
  5.15  depreciation allowed under section 168(k)" for the taxable year 
  5.16  is limited to excess of the depreciation claimed by the activity 
  5.17  under section 168(k) over the amount of the loss from the 
  5.18  activity that is not allowed in the taxable year.  In succeeding 
  5.19  taxable years when the losses not allowed in the taxable year 
  5.20  are allowed, the depreciation under section 168(k) is allowed; 
  5.21  and 
  5.22     (17) the amount of expenses disallowed under section 
  5.23  290.10, subdivision 2. 
  5.24     <b>[EFFECTIVE DATE.]</b> This section is effective for taxable 
  5.25  years beginning after December 31, 2003. 
  5.26     Sec. 3.  Minnesota Statutes 2002, section 290.10, is 
  5.27  amended to read: 
  5.28     290.10 [NONDEDUCTIBLE ITEMS.] 
  5.29     Subdivision 1.  [EXPENSES, INTEREST, AND TAXES.] Except as 
  5.30  provided in section 290.17, subdivision 4, paragraph (i), in 
  5.31  computing the net income of a taxpayer no deduction shall in any 
  5.32  case be allowed for expenses, interest and taxes connected with 
  5.33  or allocable against the production or receipt of all income not 
  5.34  included in the measure of the tax imposed by this chapter, 
  5.35  except that for corporations engaged in the business of mining 
  5.36  or producing iron ore, the mining of which is subject to the 
  6.1   occupation tax imposed by section 298.01, subdivision 4, this 
  6.2   shall not prevent the deduction of expenses and other items to 
  6.3   the extent that the expenses and other items are allowable under 
  6.4   this chapter and are not deductible, capitalizable, retainable 
  6.5   in basis, or taken into account by allowance or otherwise in 
  6.6   computing the occupation tax and do not exceed the amounts taken 
  6.7   for federal income tax purposes for that year.  Occupation taxes 
  6.8   imposed under chapter 298, royalty taxes imposed under chapter 
  6.9   299, or depletion expenses may not be deducted under this clause.
  6.10     Subd. 2.  [FINES, PENALTIES, DAMAGES, AND EXPENSES.] (a) No 
  6.11  deduction from taxable income for a trade or business expense 
  6.12  under section 162(a) of the Internal Revenue Code shall be 
  6.13  allowed for any fine, penalty, damages, or expenses paid to: 
  6.14     (1) the government of the United States, a state, a 
  6.15  territory or possession of the United States, the District of 
  6.16  Columbia, or the Commonwealth of Puerto Rico; 
  6.17     (2) the government of a foreign country; or 
  6.18     (3) a political subdivision of, or corporation or other 
  6.19  entity serving as an agency or instrumentality of, any 
  6.20  government described in clause (1) or (2). 
  6.21     (b) For purposes of this subdivision, "fine, penalty, 
  6.22  damages, or expenses" include, but are not limited to, any 
  6.23  amount: 
  6.24     (1) paid pursuant to a conviction or a plea of guilty or 
  6.25  nolo contendere for any crime in a criminal proceeding; 
  6.26     (2) paid as a civil penalty imposed by federal, state, or 
  6.27  local law, including additions to tax penalties and interest; 
  6.28     (3) paid in settlement of the taxpayer's actual or 
  6.29  potential liability for a civil or criminal fine or penalty; 
  6.30     (4) forfeited as collateral posted in connection with a 
  6.31  proceeding that could result in imposition of a fine or penalty; 
  6.32  or 
  6.33     (5) legal fees and related expenses paid or incurred in the 
  6.34  defense of a prosecution or civil action arising from a 
  6.35  violation of the law imposing the fine or civil penalty, court 
  6.36  costs assessed against the taxpayer, or stenographic and 
  7.1   printing charges, compensatory damages, punitive damages, or 
  7.2   restitution.  If the final determination of a criminal or civil 
  7.3   proceeding is in favor of the taxpayer, legal fees, related 
  7.4   expenses, and court costs may be deducted. 
  7.5      <b>[EFFECTIVE DATE.]</b> This section is effective for taxable 
  7.6   years beginning after December 31, 2003.