1.1 	A bill for an act
1.2 	relating to taxation; corporate franchise; modifying
1.3 	the definition of foreign operating corporations;
1.4 	repealing the subtraction for foreign royalties;
1.5 	excluding certain intangible income from the deemed
1.6 	dividend deduction for foreign operating corporation
1.7 	income; amending Minnesota Statutes 2004, sections
1.8 	290.01, subdivision 6b, 19d; 290.17, subdivision 4.
1.9 	BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA:

1.10 	Section 1. Minnesota Statutes 2004, section 290.01,
1.11 	subdivision 6b, is amended to read:
1.12 		Subd. 6b.Foreign operating corporation.  The term
1.13 	"foreign operating corporation," when applied to a corporation,
1.14 	means a domestic corporation with the following characteristics:
1.15 	(1) it is part of a unitary business at least one member of
1.16 	which is taxable in this state;
1.17 	(2) it is not a foreign sales corporation under section 922
1.18 	of the Internal Revenue Code, as amended through December 31,
1.19 	1999, for the taxable year; and
1.20 	(3) either (i) the average of the percentages of its
1.21 	property and payrolls assigned to locations inside outside the
1.22 	United States and the District of Columbia, excluding the
1.23 	commonwealth of Puerto Rico and possessions of the United
1.24 	States,as determined under section 290.191 or 290.20, is 20 80 
1.25 	percent or less greater and it has at least $2,000,000 of
1.26 	property and $1,000,000 of payroll as determined under section
1.27 	290.191 or 290.20; or (ii) it has in effect a valid election
2.1 	under section 936 of the Internal Revenue Code.
2.2 	
EFFECTIVE DATE. This section is effective for taxable
2.3 	years beginning after December 31, 2004.

2.4 	Sec. 2. Minnesota Statutes 2004, section 290.01,
2.5 	subdivision 19d, is amended to read:
2.6 		Subd. 19d.Corporations; modifications decreasing federal
2.7 	taxable income.  For corporations, there shall be subtracted
2.8 	from federal taxable income after the increases provided in
2.9 	subdivision 19c:
2.10 	(1) the amount of foreign dividend gross-up added to gross
2.11 	income for federal income tax purposes under section 78 of the
2.12 	Internal Revenue Code;
2.13 	(2) the amount of salary expense not allowed for federal
2.14 	income tax purposes due to claiming the federal jobs credit
2.15 	under section 51 of the Internal Revenue Code;
2.16 	(3) any dividend (not including any distribution in
2.17 	liquidation) paid within the taxable year by a national or state
2.18 	bank to the United States, or to any instrumentality of the
2.19 	United States exempt from federal income taxes, on the preferred
2.20 	stock of the bank owned by the United States or the
2.21 	instrumentality;
2.22 	(4) amounts disallowed for intangible drilling costs due to
2.23 	differences between this chapter and the Internal Revenue Code
2.24 	in taxable years beginning before January 1, 1987, as follows:
2.25 	(i) to the extent the disallowed costs are represented by
2.26 	physical property, an amount equal to the allowance for
2.27 	depreciation under Minnesota Statutes 1986, section 290.09,
2.28 	subdivision 7, subject to the modifications contained in
2.29 	subdivision 19e; and
2.30 	(ii) to the extent the disallowed costs are not represented
2.31 	by physical property, an amount equal to the allowance for cost
2.32 	depletion under Minnesota Statutes 1986, section 290.09,
2.33 	subdivision 8;
2.34 	(5) the deduction for capital losses pursuant to sections
2.35 	1211 and 1212 of the Internal Revenue Code, except that:
2.36 	(i) for capital losses incurred in taxable years beginning
3.1 	after December 31, 1986, capital loss carrybacks shall not be
3.2 	allowed;
3.3 	(ii) for capital losses incurred in taxable years beginning
3.4 	after December 31, 1986, a capital loss carryover to each of the
3.5 	15 taxable years succeeding the loss year shall be allowed;
3.6 	(iii) for capital losses incurred in taxable years
3.7 	beginning before January 1, 1987, a capital loss carryback to
3.8 	each of the three taxable years preceding the loss year, subject
3.9 	to the provisions of Minnesota Statutes 1986, section 290.16,
3.10 	shall be allowed; and
3.11 	(iv) for capital losses incurred in taxable years beginning
3.12 	before January 1, 1987, a capital loss carryover to each of the
3.13 	five taxable years succeeding the loss year to the extent such
3.14 	loss was not used in a prior taxable year and subject to the
3.15 	provisions of Minnesota Statutes 1986, section 290.16, shall be
3.16 	allowed;
3.17 	(6) an amount for interest and expenses relating to income
3.18 	not taxable for federal income tax purposes, if (i) the income
3.19 	is taxable under this chapter and (ii) the interest and expenses
3.20 	were disallowed as deductions under the provisions of section
3.21 	171(a)(2), 265 or 291 of the Internal Revenue Code in computing
3.22 	federal taxable income;
3.23 	(7) in the case of mines, oil and gas wells, other natural
3.24 	deposits, and timber for which percentage depletion was
3.25 	disallowed pursuant to subdivision 19c, clause (11), a
3.26 	reasonable allowance for depletion based on actual cost.  In the
3.27 	case of leases the deduction must be apportioned between the
3.28 	lessor and lessee in accordance with rules prescribed by the
3.29 	commissioner.  In the case of property held in trust, the
3.30 	allowable deduction must be apportioned between the income
3.31 	beneficiaries and the trustee in accordance with the pertinent
3.32 	provisions of the trust, or if there is no provision in the
3.33 	instrument, on the basis of the trust's income allocable to
3.34 	each;
3.35 	(8) for certified pollution control facilities placed in
3.36 	service in a taxable year beginning before December 31, 1986,
4.1 	and for which amortization deductions were elected under section
4.2 	169 of the Internal Revenue Code of 1954, as amended through
4.3 	December 31, 1985, an amount equal to the allowance for
4.4 	depreciation under Minnesota Statutes 1986, section 290.09,
4.5 	subdivision 7;
4.6 	(9) amounts included in federal taxable income that are due
4.7 	to refunds of income, excise, or franchise taxes based on net
4.8 	income or related minimum taxes paid by the corporation to
4.9 	Minnesota, another state, a political subdivision of another
4.10 	state, the District of Columbia, or a foreign country or
4.11 	possession of the United States to the extent that the taxes
4.12 	were added to federal taxable income under section 290.01,
4.13 	subdivision 19c, clause (1), in a prior taxable year;
4.14 	(10) 80 percent of royalties, fees, or other like income
4.15 	accrued or received from a foreign operating corporation or a
4.16 	foreign corporation which is part of the same unitary business
4.17 	as the receiving corporation;
4.18 	(11) income or gains from the business of mining as defined
4.19 	in section 290.05, subdivision 1, clause (a), that are not
4.20 	subject to Minnesota franchise tax;
4.21 	(12) (11) the amount of handicap access expenditures in the
4.22 	taxable year which are not allowed to be deducted or capitalized
4.23 	under section 44(d)(7) of the Internal Revenue Code;
4.24 	(13) (12) the amount of qualified research expenses not
4.25 	allowed for federal income tax purposes under section 280C(c) of
4.26 	the Internal Revenue Code, but only to the extent that the
4.27 	amount exceeds the amount of the credit allowed under section
4.28 	290.068;
4.29 	(14) (13) the amount of salary expenses not allowed for
4.30 	federal income tax purposes due to claiming the Indian
4.31 	employment credit under section 45A(a) of the Internal Revenue
4.32 	Code;
4.33 	(15) (14) the amount of any refund of environmental taxes
4.34 	paid under section 59A of the Internal Revenue Code;
4.35 	(16) (15) for taxable years beginning before January 1,
4.36 	2008, the amount of the federal small ethanol producer credit
5.1 	allowed under section 40(a)(3) of the Internal Revenue Code
5.2 	which is included in gross income under section 87 of the
5.3 	Internal Revenue Code;
5.4 	(17) (16) for a corporation whose foreign sales
5.5 	corporation, as defined in section 922 of the Internal Revenue
5.6 	Code, constituted a foreign operating corporation during any
5.7 	taxable year ending before January 1, 1995, and a return was
5.8 	filed by August 15, 1996, claiming the deduction under section
5.9 	290.21, subdivision 4, for income received from the foreign
5.10 	operating corporation, an amount equal to 1.23 multiplied by the
5.11 	amount of income excluded under section 114 of the Internal
5.12 	Revenue Code, provided the income is not income of a foreign
5.13 	operating company;
5.14 	(18) (17) any decrease in subpart F income, as defined in
5.15 	section 952(a) of the Internal Revenue Code, for the taxable
5.16 	year when subpart F income is calculated without regard to the
5.17 	provisions of section 614 of Public Law 107-147; and
5.18 	(19) (18) in each of the five tax years immediately
5.19 	following the tax year in which an addition is required under
5.20 	subdivision 19c, clause (16), an amount equal to one-fifth of
5.21 	the delayed depreciation.  For purposes of this clause, "delayed
5.22 	depreciation" means the amount of the addition made by the
5.23 	taxpayer under subdivision 19c, clause (16).  The resulting
5.24 	delayed depreciation cannot be less than zero.
5.25 	
EFFECTIVE DATE. This section is effective for taxable
5.26 	years beginning after December 31, 2004.

5.27 	Sec. 3. Minnesota Statutes 2004, section 290.17,
5.28 	subdivision 4, is amended to read:
5.29 		Subd. 4.Unitary business principle.  (a) If a trade or
5.30 	business conducted wholly within this state or partly within and
5.31 	partly without this state is part of a unitary business, the
5.32 	entire income of the unitary business is subject to
5.33 	apportionment pursuant to section 290.191.  Notwithstanding
5.34 	subdivision 2, paragraph (c), none of the income of a unitary
5.35 	business is considered to be derived from any particular source
5.36 	and none may be allocated to a particular place except as
6.1 	provided by the applicable apportionment formula.  The
6.2 	provisions of this subdivision do not apply to business income
6.3 	subject to subdivision 5, income of an insurance company, or
6.4 	income of an investment company determined under section 290.36.
6.5 	(b) The term "unitary business" means business activities
6.6 	or operations which result in a flow of value between them.  The
6.7 	term may be applied within a single legal entity or between
6.8 	multiple entities and without regard to whether each entity is a
6.9 	sole proprietorship, a corporation, a partnership or a trust.
6.10 	(c) Unity is presumed whenever there is unity of ownership,
6.11 	operation, and use, evidenced by centralized management or
6.12 	executive force, centralized purchasing, advertising,
6.13 	accounting, or other controlled interaction, but the absence of
6.14 	these centralized activities will not necessarily evidence a
6.15 	nonunitary business.  Unity is also presumed when business
6.16 	activities or operations are of mutual benefit, dependent upon
6.17 	or contributory to one another, either individually or as a
6.18 	group.
6.19 	(d) Where a business operation conducted in Minnesota is
6.20 	owned by a business entity that carries on business activity
6.21 	outside the state different in kind from that conducted within
6.22 	this state, and the other business is conducted entirely outside
6.23 	the state, it is presumed that the two business operations are
6.24 	unitary in nature, interrelated, connected, and interdependent
6.25 	unless it can be shown to the contrary.
6.26 	(e) Unity of ownership is not deemed to exist when a
6.27 	corporation is involved unless that corporation is a member of a
6.28 	group of two or more business entities and more than 50 percent
6.29 	of the voting stock of each member of the group is directly or
6.30 	indirectly owned by a common owner or by common owners, either
6.31 	corporate or noncorporate, or by one or more of the member
6.32 	corporations of the group.  For this purpose, the term "voting
6.33 	stock" shall include membership interests of mutual insurance
6.34 	holding companies formed under section 60A.077.
6.35 	(f) The net income and apportionment factors under section
6.36 	290.191 or 290.20 of foreign corporations and other foreign
7.1 	entities which are part of a unitary business shall not be
7.2 	included in the net income or the apportionment factors of the
7.3 	unitary business.  A foreign corporation or other foreign entity
7.4 	which is required to file a return under this chapter shall file
7.5 	on a separate return basis.  The net income and apportionment
7.6 	factors under section 290.191 or 290.20 of foreign operating
7.7 	corporations shall not be included in the net income or the
7.8 	apportionment factors of the unitary business except as provided
7.9 	in paragraph (g).
7.10 	(g) The adjusted net income of a foreign operating
7.11 	corporation shall be deemed to be paid as a dividend on the last
7.12 	day of its taxable year to each shareholder thereof, in
7.13 	proportion to each shareholder's ownership, with which such
7.14 	corporation is engaged in a unitary business.  Such deemed
7.15 	dividend shall be treated as a dividend under section 290.21,
7.16 	subdivision 4. The dividends received deduction is not allowed
7.17 	on dividends, interest, royalties, capital gains, or other like
7.18 	income received by the foreign operating corporation.
7.19 	Dividends actually paid by a foreign operating corporation
7.20 	to a corporate shareholder which is a member of the same unitary
7.21 	business as the foreign operating corporation shall be
7.22 	eliminated from the net income of the unitary business in
7.23 	preparing a combined report for the unitary business.  The
7.24 	adjusted net income of a foreign operating corporation shall be
7.25 	its net income adjusted as follows:
7.26 	(1) any taxes paid or accrued to a foreign country, the
7.27 	commonwealth of Puerto Rico, or a United States possession or
7.28 	political subdivision of any of the foregoing shall be a
7.29 	deduction; and
7.30 	(2) the subtraction from federal taxable income for
7.31 	payments received from foreign corporations or foreign operating
7.32 	corporations under section 290.01, subdivision 19d, clause (10),
7.33 	shall not be allowed.
7.34 	If a foreign operating corporation incurs a net loss,
7.35 	neither income nor deduction from that corporation shall be
7.36 	included in determining the net income of the unitary business.
8.1 	(h) For purposes of determining the net income of a unitary
8.2 	business and the factors to be used in the apportionment of net
8.3 	income pursuant to section 290.191 or 290.20, there must be
8.4 	included only the income and apportionment factors of domestic
8.5 	corporations or other domestic entities other than foreign
8.6 	operating corporations that are determined to be part of the
8.7 	unitary business pursuant to this subdivision, notwithstanding
8.8 	that foreign corporations or other foreign entities might be
8.9 	included in the unitary business.
8.10 	(i) Deductions for expenses, interest, or taxes otherwise
8.11 	allowable under this chapter that are connected with or
8.12 	allocable against dividends, deemed dividends described in
8.13 	paragraph (g), or royalties, fees, or other like income
8.14 	described in section 290.01, subdivision 19d, clause (10), shall
8.15 	not be disallowed.
8.16 	(j) Each corporation or other entity, except a sole
8.17 	proprietorship, that is part of a unitary business must file
8.18 	combined reports as the commissioner determines.  On the
8.19 	reports, all intercompany transactions between entities included
8.20 	pursuant to paragraph (h) must be eliminated and the entire net
8.21 	income of the unitary business determined in accordance with
8.22 	this subdivision is apportioned among the entities by using each
8.23 	entity's Minnesota factors for apportionment purposes in the
8.24 	numerators of the apportionment formula and the total factors
8.25 	for apportionment purposes of all entities included pursuant to
8.26 	paragraph (h) in the denominators of the apportionment formula.
8.27 	(k) If a corporation has been divested from a unitary
8.28 	business and is included in a combined report for a fractional
8.29 	part of the common accounting period of the combined report:
8.30 	(1) its income includable in the combined report is its
8.31 	income incurred for that part of the year determined by
8.32 	proration or separate accounting; and
8.33 	(2) its sales, property, and payroll included in the
8.34 	apportionment formula must be prorated or accounted for
8.35 	separately.
8.36 	
EFFECTIVE DATE. This section is effective for taxable
9.1 	years beginning after December 31, 2004.