1.1                          A bill for an act 
  1.2             relating to taxation; corporate franchise; limiting 
  1.3             the tax benefits of lease-in lease-out transactions; 
  1.4             amending Minnesota Statutes 2003 Supplement, section 
  1.5             290.01, subdivisions 19c, 19d; proposing coding for 
  1.6             new law in Minnesota Statutes, chapter 290. 
  1.7   BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA: 
  1.8      Section 1.  Minnesota Statutes 2003 Supplement, section 
  1.9   290.01, subdivision 19c, is amended to read: 
  1.10     Subd. 19c.  [CORPORATIONS; ADDITIONS TO FEDERAL TAXABLE 
  1.11  INCOME.] For corporations, there shall be added to federal 
  1.12  taxable income: 
  1.13     (1) the amount of any deduction taken for federal income 
  1.14  tax purposes for income, excise, or franchise taxes based on net 
  1.15  income or related minimum taxes, including but not limited to 
  1.16  the tax imposed under section 290.0922, paid by the corporation 
  1.17  to Minnesota, another state, a political subdivision of another 
  1.18  state, the District of Columbia, or any foreign country or 
  1.19  possession of the United States; 
  1.20     (2) interest not subject to federal tax upon obligations 
  1.21  of:  the United States, its possessions, its agencies, or its 
  1.22  instrumentalities; the state of Minnesota or any other state, 
  1.23  any of its political or governmental subdivisions, any of its 
  1.24  municipalities, or any of its governmental agencies or 
  1.25  instrumentalities; the District of Columbia; or Indian tribal 
  1.26  governments; 
  2.1      (3) exempt-interest dividends received as defined in 
  2.2   section 852(b)(5) of the Internal Revenue Code; 
  2.3      (4) the amount of any net operating loss deduction taken 
  2.4   for federal income tax purposes under section 172 or 832(c)(10) 
  2.5   of the Internal Revenue Code or operations loss deduction under 
  2.6   section 810 of the Internal Revenue Code; 
  2.7      (5) the amount of any special deductions taken for federal 
  2.8   income tax purposes under sections 241 to 247 of the Internal 
  2.9   Revenue Code; 
  2.10     (6) losses from the business of mining, as defined in 
  2.11  section 290.05, subdivision 1, clause (a), that are not subject 
  2.12  to Minnesota income tax; 
  2.13     (7) the amount of any capital losses deducted for federal 
  2.14  income tax purposes under sections 1211 and 1212 of the Internal 
  2.15  Revenue Code; 
  2.16     (8) the exempt foreign trade income of a foreign sales 
  2.17  corporation under sections 921(a) and 291 of the Internal 
  2.18  Revenue Code; 
  2.19     (9) the amount of percentage depletion deducted under 
  2.20  sections 611 through 614 and 291 of the Internal Revenue Code; 
  2.21     (10) for certified pollution control facilities placed in 
  2.22  service in a taxable year beginning before December 31, 1986, 
  2.23  and for which amortization deductions were elected under section 
  2.24  169 of the Internal Revenue Code of 1954, as amended through 
  2.25  December 31, 1985, the amount of the amortization deduction 
  2.26  allowed in computing federal taxable income for those 
  2.27  facilities; 
  2.28     (11) the amount of any deemed dividend from a foreign 
  2.29  operating corporation determined pursuant to section 290.17, 
  2.30  subdivision 4, paragraph (g); 
  2.31     (12) the amount of any environmental tax paid under section 
  2.32  59(a) of the Internal Revenue Code; 
  2.33     (13) the amount of a partner's pro rata share of net income 
  2.34  which does not flow through to the partner because the 
  2.35  partnership elected to pay the tax on the income under section 
  2.36  6242(a)(2) of the Internal Revenue Code; 
  3.1      (14) the amount of net income excluded under section 114 of 
  3.2   the Internal Revenue Code; 
  3.3      (15) any increase in subpart F income, as defined in 
  3.4   section 952(a) of the Internal Revenue Code, for the taxable 
  3.5   year when subpart F income is calculated without regard to the 
  3.6   provisions of section 614 of Public Law 107-147; ~~and~~ 
  3.7      (16) 80 percent of the depreciation deduction allowed under 
  3.8   section 168(k) of the Internal Revenue Code.  For purposes of 
  3.9   this clause, if the taxpayer has an activity that in the taxable 
  3.10  year generates a deduction for depreciation under section 168(k) 
  3.11  and the activity generates a loss for the taxable year that the 
  3.12  taxpayer is not allowed to claim for the taxable year, "the 
  3.13  depreciation allowed under section 168(k)" for the taxable year 
  3.14  is limited to excess of the depreciation claimed by the activity 
  3.15  under section 168(k) over the amount of the loss from the 
  3.16  activity that is not allowed in the taxable year.  In succeeding 
  3.17  taxable years when the losses not allowed in the taxable year 
  3.18  are allowed, the depreciation under section 168(k) is allowed; 
  3.19  and 
  3.20     (17) the excess of deductions over income attributable to 
  3.21  tax exempt property, as provided under section 290.0711. 
  3.22     <b>[EFFECTIVE DATE.]</b> This section is effective for leases and 
  3.23  service contracts or similar arrangements entered into after 
  3.24  February 5, 2004, and for taxable years beginning after December 
  3.25  31, 2003. 
  3.26     Sec. 2.  Minnesota Statutes 2003 Supplement, section 
  3.27  290.01, subdivision 19d, is amended to read: 
  3.28     Subd. 19d.  [CORPORATIONS; MODIFICATIONS DECREASING FEDERAL 
  3.29  TAXABLE INCOME.] For corporations, there shall be subtracted 
  3.30  from federal taxable income after the increases provided in 
  3.31  subdivision 19c:  
  3.32     (1) the amount of foreign dividend gross-up added to gross 
  3.33  income for federal income tax purposes under section 78 of the 
  3.34  Internal Revenue Code; 
  3.35     (2) the amount of salary expense not allowed for federal 
  3.36  income tax purposes due to claiming the federal jobs credit 
  4.1   under section 51 of the Internal Revenue Code; 
  4.2      (3) any dividend (not including any distribution in 
  4.3   liquidation) paid within the taxable year by a national or state 
  4.4   bank to the United States, or to any instrumentality of the 
  4.5   United States exempt from federal income taxes, on the preferred 
  4.6   stock of the bank owned by the United States or the 
  4.7   instrumentality; 
  4.8      (4) amounts disallowed for intangible drilling costs due to 
  4.9   differences between this chapter and the Internal Revenue Code 
  4.10  in taxable years beginning before January 1, 1987, as follows: 
  4.11     (i) to the extent the disallowed costs are represented by 
  4.12  physical property, an amount equal to the allowance for 
  4.13  depreciation under Minnesota Statutes 1986, section 290.09, 
  4.14  subdivision 7, subject to the modifications contained in 
  4.15  subdivision 19e; and 
  4.16     (ii) to the extent the disallowed costs are not represented 
  4.17  by physical property, an amount equal to the allowance for cost 
  4.18  depletion under Minnesota Statutes 1986, section 290.09, 
  4.19  subdivision 8; 
  4.20     (5) the deduction for capital losses pursuant to sections 
  4.21  1211 and 1212 of the Internal Revenue Code, except that: 
  4.22     (i) for capital losses incurred in taxable years beginning 
  4.23  after December 31, 1986, capital loss carrybacks shall not be 
  4.24  allowed; 
  4.25     (ii) for capital losses incurred in taxable years beginning
  4.26  after December 31, 1986, a capital loss carryover to each of the 
  4.27  15 taxable years succeeding the loss year shall be allowed; 
  4.28     (iii) for capital losses incurred in taxable years 
  4.29  beginning before January 1, 1987, a capital loss carryback to 
  4.30  each of the three taxable years preceding the loss year, subject 
  4.31  to the provisions of Minnesota Statutes 1986, section 290.16, 
  4.32  shall be allowed; and 
  4.33     (iv) for capital losses incurred in taxable years beginning
  4.34  before January 1, 1987, a capital loss carryover to each of the 
  4.35  five taxable years succeeding the loss year to the extent such 
  4.36  loss was not used in a prior taxable year and subject to the 
  5.1   provisions of Minnesota Statutes 1986, section 290.16, shall be 
  5.2   allowed; 
  5.3      (6) an amount for interest and expenses relating to income 
  5.4   not taxable for federal income tax purposes, if (i) the income 
  5.5   is taxable under this chapter and (ii) the interest and expenses 
  5.6   were disallowed as deductions under the provisions of section 
  5.7   171(a)(2), 265 or 291 of the Internal Revenue Code in computing 
  5.8   federal taxable income; 
  5.9      (7) in the case of mines, oil and gas wells, other natural 
  5.10  deposits, and timber for which percentage depletion was 
  5.11  disallowed pursuant to subdivision 19c, clause (11), a 
  5.12  reasonable allowance for depletion based on actual cost.  In the 
  5.13  case of leases the deduction must be apportioned between the 
  5.14  lessor and lessee in accordance with rules prescribed by the 
  5.15  commissioner.  In the case of property held in trust, the 
  5.16  allowable deduction must be apportioned between the income 
  5.17  beneficiaries and the trustee in accordance with the pertinent 
  5.18  provisions of the trust, or if there is no provision in the 
  5.19  instrument, on the basis of the trust's income allocable to 
  5.20  each; 
  5.21     (8) for certified pollution control facilities placed in 
  5.22  service in a taxable year beginning before December 31, 1986, 
  5.23  and for which amortization deductions were elected under section 
  5.24  169 of the Internal Revenue Code of 1954, as amended through 
  5.25  December 31, 1985, an amount equal to the allowance for 
  5.26  depreciation under Minnesota Statutes 1986, section 290.09, 
  5.27  subdivision 7; 
  5.28     (9) amounts included in federal taxable income that are due 
  5.29  to refunds of income, excise, or franchise taxes based on net 
  5.30  income or related minimum taxes paid by the corporation to 
  5.31  Minnesota, another state, a political subdivision of another 
  5.32  state, the District of Columbia, or a foreign country or 
  5.33  possession of the United States to the extent that the taxes 
  5.34  were added to federal taxable income under section 290.01, 
  5.35  subdivision 19c, clause (1), in a prior taxable year; 
  5.36     (10) 80 percent of royalties, fees, or other like income 
  6.1   accrued or received from a foreign operating corporation or a 
  6.2   foreign corporation which is part of the same unitary business 
  6.3   as the receiving corporation; 
  6.4      (11) income or gains from the business of mining as defined 
  6.5   in section 290.05, subdivision 1, clause (a), that are not 
  6.6   subject to Minnesota franchise tax; 
  6.7      (12) the amount of handicap access expenditures in the 
  6.8   taxable year which are not allowed to be deducted or capitalized 
  6.9   under section 44(d)(7) of the Internal Revenue Code; 
  6.10     (13) the amount of qualified research expenses not allowed 
  6.11  for federal income tax purposes under section 280C(c) of the 
  6.12  Internal Revenue Code, but only to the extent that the amount 
  6.13  exceeds the amount of the credit allowed under section 290.068; 
  6.14     (14) the amount of salary expenses not allowed for federal 
  6.15  income tax purposes due to claiming the Indian employment credit 
  6.16  under section 45A(a) of the Internal Revenue Code; 
  6.17     (15) the amount of any refund of environmental taxes paid 
  6.18  under section 59A of the Internal Revenue Code; 
  6.19     (16) for taxable years beginning before January 1, 2008, 
  6.20  the amount of the federal small ethanol producer credit allowed 
  6.21  under section 40(a)(3) of the Internal Revenue Code which is 
  6.22  included in gross income under section 87 of the Internal 
  6.23  Revenue Code; 
  6.24     (17) for a corporation whose foreign sales corporation, as 
  6.25  defined in section 922 of the Internal Revenue Code, constituted 
  6.26  a foreign operating corporation during any taxable year ending 
  6.27  before January 1, 1995, and a return was filed by August 15, 
  6.28  1996, claiming the deduction under section 290.21, subdivision 
  6.29  4, for income received from the foreign operating corporation, 
  6.30  an amount equal to 1.23 multiplied by the amount of income 
  6.31  excluded under section 114 of the Internal Revenue Code, 
  6.32  provided the income is not income of a foreign operating 
  6.33  company; 
  6.34     (18) any decrease in subpart F income, as defined in 
  6.35  section 952(a) of the Internal Revenue Code, for the taxable 
  6.36  year when subpart F income is calculated without regard to the 
  7.1   provisions of section 614 of Public Law 107-147; ~~and~~ 
  7.2      (19) in each of the five tax years immediately following 
  7.3   the tax year in which an addition is required under subdivision 
  7.4   19c, clause (16), an amount equal to one-fifth of the delayed 
  7.5   depreciation.  For purposes of this clause, "delayed 
  7.6   depreciation" means the amount of the addition made by the 
  7.7   taxpayer under subdivision 19c, clause (16).  The resulting 
  7.8   delayed depreciation cannot be less than zero; and 
  7.9      (20) amounts allowed as carryover subtractions attributable 
  7.10  to tax exempt property, as provided under section 290.0711. 
  7.11     <b>[EFFECTIVE DATE.]</b> This section is effective for leases and 
  7.12  service contracts or similar arrangements entered into after 
  7.13  February 5, 2004, and for taxable years beginning after December 
  7.14  31, 2003. 
  7.15     Sec. 3.  [290.0711] [TAX EXEMPT PROPERTY; LIMITS ON TAX 
  7.16  BENEFITS.] 
  7.17     Subdivision 1.  [DEFINITIONS.] (a) For purposes of this 
  7.18  section, the following terms have the meanings given. 
  7.19     (b) "Tax exempt use property" has the meaning given in 
  7.20  section 168(h) of the Internal Revenue Code, except the 
  7.21  provisions of clause (2)(c)(ii) and paragraph (3) do not apply.  
  7.22  If tangible property is subject to a service contract or other 
  7.23  similar arrangement between a taxpayer or any related person and 
  7.24  any tax exempt entity, the contract or arrangement must be 
  7.25  treated in the same manner as if it is tax exempt property under 
  7.26  this subdivision. 
  7.27     (c) "Taxpayer" means a corporation, subject to the 
  7.28  corporate franchise tax under this chapter, that is claiming the 
  7.29  deduction on the federal return and any member of its unitary 
  7.30  group. 
  7.31     Subd. 2.  [ADDITION OF EXCESS DEDUCTIONS.] In computing 
  7.32  Minnesota taxable income, the taxpayer must add to federal 
  7.33  taxable income the excess of: 
  7.34     (1) the aggregate amount of deductions claimed in computing 
  7.35  federal taxable income with respect to tax exempt use property; 
  7.36  over 
  8.1      (2) the aggregate amount of income includable in federal 
  8.2   gross income of the taxpayer for the taxable year with respect 
  8.3   to tax exempt use property. 
  8.4      Subd. 3.  [CARRYOVER SUBTRACTION.] Unless otherwise 
  8.5   provided in this section, any addition under subdivision 2 may 
  8.6   be carried to a later taxable year and claimed as a subtraction 
  8.7   reducing the federal taxable income of the taxpayer to the 
  8.8   extent that income with respect to tax exempt use property 
  8.9   exceeds the amount of deductions claimed with respect to tax 
  8.10  exempt properties in computing federal taxable income for that 
  8.11  taxable year. 
  8.12     Subd. 4.  [SPECIAL RULES.] (a) The following rules apply to 
  8.13  the computation of the addition under subdivision 2. 
  8.14     (b) Subdivision 2 applies to deductions directly allocable 
  8.15  to any tax exempt use property and to a proper share of other 
  8.16  deductions that are not directly allocable to tax exempt. 
  8.17     (c) If property of a taxpayer ceases to be tax exempt use 
  8.18  property in the hands of the taxpayer, any unused carryover 
  8.19  under subdivision 3 with respect to the property is only 
  8.20  allowable as a subtraction for any taxable year to the extent of 
  8.21  any net income of the taxpayer that is allocable to the property 
  8.22  that ceased to be tax exempt property. 
  8.23     (d) If during the taxable year, a taxpayer disposes of the 
  8.24  taxpayer's entire interest in tax exempt use property, the 
  8.25  taxpayer may claim a subtraction for the lesser of: 
  8.26     (1) the amount of gain realized on the disposition and 
  8.27  includable in federal taxable income; or 
  8.28     (2) the amount of additions under subdivision 2 
  8.29  attributable to the property and not claimed in a later year 
  8.30  under subdivision 3. 
  8.31     <b>[EFFECTIVE DATE.]</b> This section is effective for leases and 
  8.32  service contracts or similar arrangements entered into after 
  8.33  February 5, 2004, and for taxable years beginning after December 
  8.34  31, 2003.