Income/Franchise:
Minnesota Tax Court Holds Gain Involving Goodwill is Business Income Based on Unitary Principles

Case No. 9484-R, Minn. Tax Ct. (12/20/22). The Minnesota Tax Court (Court) held that a nonresident individual’s income stemming from goodwill generated by the sale of her stock ownership interests in two S corporations pursuant to an election under Internal Revenue Code section 338(h)(10) to treat the stock sales as sales of the underlying corporate assets constituted income of a unitary business subject to apportionment at the entity level under Minn. Stat. § 290.17, subds. 3 and 4. In doing so, the Court referenced a 2020 Minnesota Supreme Court decision involving an out-of-state taxpayer’s capital gain from its sale of a majority interest in the US operations of a subsidiary business and concluded that it was directly applicable to the case at hand, with the pertinent asset in the present case being the goodwill. The Court reasoned that, under the provided facts, the value of the goodwill was based, in part, on the success of one of the S corporation’s business operations, which included its revenue generated from Minnesota sales and was an integral asset of the S corporation’s unitary business. The Court also explained that even if the gains at issue had constituted nonbusiness income, the allocable amount would be based on the entity’s allocation percentage or ratio applied to the previous year’s business income, rather than to the actual dollar amount of the previous year’s income allocated to Minnesota. Please contact us with any questions.