E. I. duPont de Nemours and Company & Subsidiaries, Relator v. Commissioner of Revenue
Opinion text
STATE OF MINNESOTA
IN SUPREME COURT
A24-1601
Tax Court McKeig, J.
Took no part, Thissen, J.
E. I. duPont de Nemours and Company & Subsidiaries,
Relator,
vs. Filed: August 27, 2025
Office of Appellate Courts
Commissioner of Revenue,
Respondent.
________________________
Nicole L. Johnson, Melanie L. Lee (pro hac vice), Blank Rome LLP, New York, New
York, for relator.
Keith Ellison, Attorney General, Jennifer A. Kitchak, Assistant Attorney General, Saint
Paul, Minnesota, for respondent.
________________________
SYLLABUS
The tax court correctly found that the Commissioner of Revenue satisfied his burden
under Minnesota Statutes section 290.20 (2024) by demonstrating that the general
apportionment method in section 290.191 (2024) misrepresented appellant’s Minnesota
activities, and that an alternative formula—excluding gross receipts but including net
income from forward exchange contracts—fairly represented appellant’s Minnesota
activities.
Affirmed.
1
OPINION
MCKEIG, Justice.
E. I. duPont de Nemours and Company & Subsidiaries (DuPont) is a multinational
company with lines of business in approximately 90 countries. Because DuPont conducted
some, but not all, of its business activities in Minnesota in 2013, 2014, and 2015 (the “years
in dispute”), DuPont’s sales attributable to Minnesota in those years must be apportioned.
Under Minnesota law, there is a default method for apportioning sales found in Minnesota
Statutes section 290.191 (2024), 1 but the Commissioner of Revenue (“Commissioner”)
may apply an alternative method under Minnesota Statutes section 290.20 (2024) if he
shows that the default method does not fairly attribute income to Minnesota and that the
alternative method does so. The question here is whether the Commissioner met the burden
necessary to use an alternative apportionment method. The main dispute is how to
apportion the receipts earned from forward exchange contract (“FEC”) transactions; a
hedging technique used by DuPont to protect its outstanding balances from foreign
currency exchange risks. We conclude that the tax court did not err, and we affirm.
1
Although Minnesota Statutes section 290.191 has been amended since the years in
dispute, we cite to the current version of the statute since none of those amendments have
any bearing on the tax dispute here.
2
FACTS
Minnesota Tax Apportionment Method
Minnesota’s corporate franchise tax applies to corporations that “engage in contacts
with this state that produce gross income attributable to sources within this state.” Minn.
Stat. § 290.02 (2024). When an entity conducts business partially within and partially
outside of Minnesota and that entity is a unitary business, 2 “the entire income of the unitary
business is subject to apportionment” for tax purposes. Minn. Stat. § 290.17, subd. 4(a)
(2024). Apportionment is “an approximation of a corporation’s income that is reasonably
related to the taxing state” to ensure that states collect taxes on only their “fair share” of
the business’s income. Caterpillar, Inc. v. Comm’r of Revenue, 568 N.W.2d 695, 696–97
(Minn. 1997).
Minnesota Statutes section 290.191 contains the general apportionment formula.
Apportionment is calculated using a company’s sales factor (“Sales Factor”). 3 Minn. Stat.
§ 290.191, subd. 2. The Sales Factor includes “all sales, gross earnings, or receipts
2
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.” Minn. Stat. § 290.17, subd.4(b) (2024).
3
The general apportionment formula in section 290.191 includes a sales factor, a
payroll factor, and a property factor. Minn. Stat. § 290.191, subd. 2. For taxable years
beginning in 2014 and later, however, by statute, the property and payroll factor
percentages are both zero. Id. Now the only component—and only component at issue—
is the Sales Factor. Id. Although one year in dispute, 2013, would have required
consideration of the property and payroll factors, the dispute here involves only the Sales
Factor.
3
received in the ordinary course of the business” except for enumerated exceptions not
relevant to this dispute. Id., subd. 5. Calculating the Sales Factor involves dividing the
company’s sales in Minnesota (“Minnesota Sales”) by total sales made in the given year
(“Everywhere Sales”), resulting in a percentage, also referred to as the apportionment
percentage. Id., subd. 2(a). The formula is:
Minnesota Sales
= Sales Factor / Apportionment Percentage
Everywhere Sales
The Sales Factor is then multiplied by the total net income of the business to calculate the
net income apportionable to Minnesota, which the State taxes. Id.
Section 290.20 states that section 290.191 (the general apportionment method)
creates a rebuttable presumption of “fairly and correctly [determining] the taxpayer’s
taxable net income allocable to this state.” Minn. Stat. § 290.20. Minnesota statutes
section 290.20, subdivision 1, allows the Commissioner to deviate (or a taxpayer to request
deviation) from the general apportionment method if it does not “fairly reflect all or any
part of taxable net income allocable to this state.” To rebut the presumption that
section 290.191 “fairly and correctly” calculated a taxpayer’s allocable income, the party
petitioning “must present substantial evidence that the [general] apportionment method
does not ‘fairly reflect all or any part of taxable net income allocable’ to Minnesota, and
that an alternative method does so.” Associated Bank, N.A. v. Comm’r of Revenue,
914 N.W.2d 394, 403 (Minn. 2018) (quoting Minn. Stat. § 290.20, subd. 1).
4
DuPont, Foreign Currency Risk, and FECs
DuPont is a multinational science and technology company that sells a wide range
of products to a wide range of markets, including nutrition, health care, pharmaceuticals,
agriculture, automotive, textile, home and construction, packaging, electronics, and
transportation markets. As of December 31, 2015, DuPont had operations in approximately
90 countries and 60 percent of its consolidated net sales were made outside of the United
States. DuPont is a unitary business that conducted some, but not all, of its business within
Minnesota, so its income must be apportioned under Minnesota law.
DuPont conducted business in foreign currencies, but in line with Generally
Accepted Accounting Principles (GAAP), 4 it must report all global earnings in U.S. dollars.
Converting unrealized or outstanding payments into U.S. dollars subjects DuPont to
foreign currency fluctuation risks that are based solely on the volatility of the foreign
currency exchange market. This creates foreign currency risk, which can also obfuscate
review of an international company’s true value and business operations.
To mitigate fluctuations from foreign currencies (along with other risks), DuPont
adopted a Corporate Financial Risk Management Policy and Corporate Financial Risk
Management Guidelines. The Corporate Financial Risk Management Policy specifically
associated with foreign currency risks states that “[t]he business objective of this [foreign
currency] risk management program shall be to maintain an approximately balanced
4
GAAP are “the conventions, rules and procedures that define approved accounting
principles at a particular time.” Great Lakes Gas Transmission L.P. v. Comm’r, 638
N.W.2d 435, 439 n.6 (Minn. 2002). The source of GAAP is the Financial Accounting
Standards Board. Id.
5
position in foreign currencies in order to minimize exchange gains and losses resulting
from exchange rate changes, net of related tax effects.” And the Corporate Financial Risk
Management Guidelines state that “[d]erivatives may not be used for speculative purposes.
Accordingly, such instruments are not authorized for use with intention to profit from
expected changes in the fair value of the derivative . . . .” In line with these policies,
DuPont’s treasury department, headquartered in Delaware, engages in risk management
strategies. None of the relevant treasury department conduct occurred in Minnesota.
One of DuPont’s risk management derivatives for foreign currency risk is FECs.
FECs are legally binding contracts whereby one party agrees to sell a currency in exchange
for a different currency at an agreed future date at a fixed, negotiated exchange rate.
DuPont typically contracts with financial institutions for FECs to protect income against
foreign currency exposure. On the day the FEC settles—meaning the agreed-upon date on
which the parties fulfill their obligations under the contract—DuPont gives the financial
institution a set amount of foreign currency, and the institution provides a set amount of
dollars according to the negotiated forward exchange rate, regardless of the daily market
rate (the daily market rate is also called the spot exchange rate). To satisfy the FEC with
the institution, DuPont often buys the foreign currency it owes from a second financial
institution at the spot rate the day the contract is due. This exchange can result in a net
zero, loss, or gain.
The parties do not dispute that DuPont engaged in FEC transactions in the ordinary
course of business and the Sales Factor under the general apportionment formula in
section 290.191 includes the gross receipts from FEC transactions. Minn. Stat. § 290.191,
6
subds. 2, 5. The parties disagree, however, on whether to use the general apportionment
method including gross receipts from FEC transactions under section 290.191 or an
alternative apportionment method under section 290.20 that allows DuPont only to record
its net income from FEC transactions. DuPont’s FEC transactions for the years in dispute
are summarized below:
A B C D
(column C divided by
column B equals column D)
Tax Year Total Gross Receipts Gross Receipts FEC Gross Receipts as a
Ended (including gross receipts from FEC Percentage of DuPont Total
from FECs during the Transactions Gross Receipts
tax years ending
12/31/2013 –
12/31/2015)
December 31, 2013 $91,096,500,130 $64,622,559,835 70.94%
December 31, 2014 $88,736,926,488 $64,607,697,993 72.81%
December 31, 2015 $64,657,573,794 $47,626,900,571 73.66%
A B C D
(column C divided by column
B equals column D)
Tax Year Ended DuPont Total Income Net FEC FEC Receipts as a Percentage
Gains/Income of DuPont Total Income
December 31, 2013 $12,436,356,842 $59,950,407 0.48%
December 31, 2014 $14,421,114,276 $647,489,427 4.49%
December 31, 2015 $12,566,223,064 $407,355,440 3.24%
7
Department of Revenue Proceedings
DuPont timely submitted its corporate franchise tax returns for the years in dispute
using the general apportionment method under section 290.191, meaning it included gross
receipts from FEC transactions to calculate DuPont’s taxes owed to Minnesota. The
Minnesota Department of Revenue (the Department) conducted an audit of DuPont’s
corporate franchise tax returns and adjusted the returns, including using an alternative
apportionment formula under section 290.20 that considered only net income, rather than
gross receipts, from FEC transactions.
The Department issued a Tax Order on March 8, 2019, explaining the newly
assessed tax due to these adjustments, and DuPont appealed on May 31, 2019. 5 An
administrative appeals conference was held on May 21, 2020, and the Commissioner issued
a Notice of Determination on Appeal on May 4, 2021, affirming the Department’s
assessment, less penalties. The Notice assessed DuPont’s tax at $9,187,623 with interest
of $2,275,722 (totaling $11,463,345).
Tax Court Proceedings
DuPont appealed to the tax court. The tax court held a hearing, and three expert
witnesses (one for the Commissioner and two for DuPont) testified about whether gross
receipts from FEC transactions should be included in calculating DuPont’s Sales Factor
and, if not, whether the alternative formula should be used.
5
To be clear, the parties call the Department of Revenue’s order a “tax order” in their
stipulation of facts. It is different from the tax court’s Order for Judgment and Findings of
Fact, Conclusions of Law, and Order.
8
The tax court affirmed the Commissioner’s use of the alternative apportionment
formula. E. I. duPont de Nemours and Co. & Subsidiaries v. Comm’r of Revenue, No.
9485-R, 2024 WL 3152928, at *2 (Minn. T.C. June 24, 2024). Because neither this court
nor the tax court had addressed tax apportionment for hedging activities like FEC
transactions, the tax court began by summarizing the two most apposite Minnesota tax
cases: HMN Financial, Inc. v. Commissioner of Revenue, 782 N.W.2d 558 (Minn. 2010),
and Associated Bank, 914 N.W.2d at 394. Then the tax court reviewed cases from other
jurisdictions that evaluated whether that state’s general apportionment formula “fairly
represent[ed]” the taxpayer’s business activities in the state. See Microsoft Corp. v.
Franchise Tax Bd., 139 P.3d 1169, 1178–79 (Cal. 2006); Gen. Mills, Inc. v. Franchise Tax
Bd., 146 Cal.Rptr.3d 475, 489 (Cal. Ct. App. 2012); Sherwin-Williams Co. v. Johnson,
989 S.W.2d 710, 715 (Tenn. Ct. App. 1998). Specifically, the two California cases,
Microsoft and General Mills, reviewed whether the disputed transactions—marketable
security investments in the case of Microsoft and futures contracts in the case of General
Mills—were “qualitatively different” from the company’s main business and if inclusion
of the gross receipts resulted in a substantial “quantitative distortion.” Microsoft, 139 P.3d
at 1179; Gen. Mills, 146 Cal.Rptr.3d at 484. 6
6
Sherwin-Williams followed a similar analysis to Microsoft and General Mills but
used different language than the qualitative and quantitative factors. Sherwin-Williams
989 S.W.2d at 713, 714 (using terms such as “hyper-inflated sales factor” and “absurdity”
in describing the tax apportionment of similar inter-business treasury department
techniques from cases in New Jersey and Indiana). Regardless, all three relevant out-of-
state jurisdiction cases relied on by the tax court affirmed the use of an alternative
apportionment formula, which allowed the Sales Factor to include net income but not gross
9
The tax court analogized the current dispute to Microsoft and General Mills,
applying the qualitative and quantitative assessment used in those cases to DuPont. It
determined that the general apportionment method did not fairly reflect DuPont’s income
allocable to Minnesota because (1) FEC transactions are qualitatively different from
DuPont’s other business activities, and (2) including gross receipts from FEC transactions
quantitatively distorted DuPont’s Everything Sales and, therefore, its apportionment factor.
DuPont, 2024 WL 3152928, at *17, *20.
As to the qualitative assessment, the tax court determined that “[t]he purpose of FEC
transactions was to protect DuPont’s earnings, and to enable investors to see the true
operating performance of DuPont, unaffected by currency fluctuations” and that these FEC
transactions “did not serve an independent profit-oriented purpose.” 7 Id. at *1. This, the
tax court determined, was different from DuPont’s other business activities since DuPont
is a science and technology company—not a financial institution—“whose principal
business activities comprise chemical, agricultural, electronic, manufacturing, and
consumer products-related sales to many different markets worldwide” and not “the sale
of securities or financial instruments” or “transacting in FECs with customers.” Id. at *17.
receipts from disputed treasury department techniques. That is, all three cases cited
followed the same method the tax court employed. The parties did not identify an
analogous case that denied the use of an alternative apportionment method under similar
circumstances. That said, it also appears no court has directly addressed the issue of FEC
transactions in state tax apportionment before.
7
The tax court noted that FEC transactions “serve an important and even a critical
supportive function” to DuPont’s business, but they would be “economically meaningless”
if “removed from their underlying purpose.” DuPont, 2024 WL 3152928, at *17 (internal
quotation marks omitted).
10
Regarding the quantitative inquiry, the tax court evaluated the impact that the
inclusion of gross receipts from FEC transactions had on DuPont’s tax liability in
Minnesota. Other jurisdictions have found that when a high volume of gross receipts
inflates the Everywhere Sales denominator of the apportionment formula without adding
to overall income and shifts the allocability of profits to other states, it creates a substantial
distortion. See Microsoft, 139 P.3d at 1182 (finding a substantial quantitative distortion
when the gross receipts constituted 73 percent of total gross receipts but under 2 percent of
net income); Gen. Mills, 146 Cal.Rptr.3d at 491 (agreeing that gross receipts from hedging
activities created a substantial distortion in apportionment when 8 to 30 percent of all gross
receipts came from a hedging technique that netted at most 2 percent of income). The tax
court similarly concluded that there was a substantial distortion here since FEC transactions
produced between 1.7 and 4.5 percent of income and generated over 70 percent of gross
receipts, which “quantitatively distorts total sales, net income, and, ultimately, the
apportionment factor by nearly threefold.” DuPont, 2024 WL 3152928, at *20.
Because the tax court agreed that the Commissioner met his burden to demonstrate
that the general apportionment method did not fairly reflect DuPont’s income allocable to
Minnesota, the final step was evaluating whether the alternative formula—removing gross
receipts from FEC transactions from the apportionment factor calculation and substituting
net income from FEC transactions—did fairly reflect DuPont’s activities in the state. The
tax court, again, turned to other jurisdictions that all included a similar alternative
apportionment method. See Sherwin-Williams, 989 S.W.2d at 715–16; Microsoft,
139 P.3d at 1182; Gen. Mills, 146 Cal.Rptr.3d at 496. The tax court found that the
11
Commissioner met his burden. DuPont, 2024 WL 3152928, at *20–21. The tax court
concluded that, by including net income, the alternative formula “maintain[ed] a
connection between that income [generated from FEC transactions] and the apportionment
factor” without overwhelming the Everywhere Sales denominator. Id. at *20 (internal
quotation marks omitted). This approach also ensured that the apportionment of DuPont’s
income was fair across multiple states, since Delaware (where these transactions occurred
and thus are allocated) uses an FEC net income approach. 8 Id.
The tax court issued an Order for Judgment on August 12, 2024, ordering DuPont
to pay the assessed taxes plus interest. E. I. duPont de Nemours and Co. & Subsidiaries v.
Comm’r of Revenue, No. 9485-R, 2024 WL 3765118, at *1 (Minn. T.C. Aug. 12, 2024).
DuPont appealed.
ANALYSIS
Our review of a tax court’s decision “is limited and deferential.” Minn. Energy Res.
Corp. v. Comm’r of Revenue (MERC), 886 N.W.2d 786, 792 (Minn. 2016). It is limited
“to determin[ing] whether the tax court lacked subject matter jurisdiction, whether the tax
court’s decision is supported by evidence in the record, and whether the tax court made an
8
DuPont offered an alternative apportionment method that “includes only those FEC
gross receipts that relate to the international transactions” reported by those subsidiaries
included in its Minnesota’s returns, but the tax court did not find this to be a reasonable
alternative because most of the transactions occurred in Delaware, and the tax court
concluded that DuPont had “not explained how treating some Delaware-sited transactions
differently than others would fairly reflect DuPont’s net income allocable to Minnesota.”
DuPont, 2024 WL 3152928, at *21 (internal quotation marks omitted).
12
error of law.” Hohmann v. Comm’r of Revenue, 781 N.W.2d 156, 157 (Minn. 2010); see
also Minn. Stat. § 271.10, subd. 1 (2024).
This case involves the application of Minnesota Statutes section 290.20’s alternative
apportionment method. The statute provides as follows:
Subdivision 1. Statutory methods to determine; petition for use of
other methods. The methods prescribed by section 290.191 shall be
presumed to determine fairly and correctly the taxpayer’s taxable net income
allocable to this state. If the methods prescribed by section 290.191 do not
fairly reflect all or any part of taxable net income allocable to this state, the
taxpayer may petition for or the commissioner may require the determination
of net income by the use of another method, if that method fairly reflects net
income. These other methods may include:
(1) separate accounting;
(2) excluding any one or more of the factors;
(3) including one or more additional factors; or
(4) some other method.
Minn. Stat. § 290.20, subd. 1. In Associated Bank, we determined that the phrase “do[es]
not fairly reflect” in this context means “that the method prescribed under section 290.191
does not show, to a full degree or extent, all or any part of the taxpayer’s income arising
from taxable business activities in Minnesota.” 914 N.W.2d at 405; see also W. Union Tel.
Co. v. Spaeth, 44 N.W.2d 440, 441 (Minn. 1950) (standing for the principle that the
“judicial construction of a statute, so long as it is unreversed, is as much a part thereof as
if it had been written into it originally” (citation omitted) (internal quotation marks
omitted)); Curtis v. Altria Group, Inc., 813 N.W.2d 891, 900 (Minn. 2012) (same).
The question before us is whether the tax court correctly determined that the
Commissioner met his burden to prove that the general apportionment method does not
fairly reflect DuPont’s taxable income allocable to Minnesota and that the applied
13
alternative apportionment method—which included net income but not gross receipts from
FEC transactions—does so. DuPont argues that the tax court made both factual and legal
errors, which, if true, would require reversal or a remand. We address these in turn below.
Because we conclude that the tax court did not err, we affirm.
A.
We first address the alleged factual errors raised by DuPont. Factual findings are
reviewed for clear error, MERC, 886 N.W.2d at 792, meaning they are upheld when “there
is sufficient evidence in the record for the tax court to reasonably reach its conclusion.”
Associated Bank, 914 N.W.2d at 400 (citation omitted) (internal quotation marks omitted).
“[T]he tax court typically determines the weight and credibility of . . . testimony, including
that of the expert witnesses.” Menard, Inc. v. Cnty. of Clay, 886 N.W.2d 804, 813 (Minn.
2016) (alteration in original) (citation omitted) (internal quotation marks omitted); see also
In re Objection to Real Prop. Taxes, 353 N.W.2d 525, 534 (Minn. 1984) (“The
determination of whether the taxpayer has met this burden of establishing the true market
value of property rests with the trial court’s resolution of the evidence and the weight and
creditability of the testimony, including the opinions of expert witnesses.” (citation
omitted) (internal quotation marks omitted)). We defer to the tax court’s credibility
determinations. Eden Prairie Mall, LLC v. Cnty. of Hennepin, 830 N.W.2d 16, 21 (Minn.
2013).
The tax court concluded “that FEC transactions and DuPont’s other business
activities were qualitatively different from each other,” that the purpose of FEC
transactions is “only a supportive function” and “a risk management tool that directly
14
supports [DuPont’s] main line of business,” and that “FEC transactions did not serve an
independent profit-oriented purpose.” DuPont, 2024 WL 3152928, at *17, *20 (alteration
in original) (citation omitted) (internal quotation marks omitted). The tax court relied on
these findings to conclude that the Commissioner met his burden of proving that the general
apportionment method under section 290.191 did not fairly reflect DuPont’s income
allocable to the State. Id. at *16. Specifically, the tax court determined that because gross
receipts from FEC transactions were included in the apportionment calculation but not
included among the type of profit-oriented businesses DuPont engaged in, the resulting
Sales Factor did not fairly reflect DuPont’s business activities. Id. at *20.
DuPont claims that these findings were erroneous for three reasons: (1) gross
receipts from FEC transactions are earned in the ordinary course of business and thus are
a part of DuPont’s business, (2) the tax court mischaracterized the testimony of the expert
witnesses, and (3) FEC transactions create profit and thus are a profit center. We disagree.
1.
First, DuPont argues that the tax court’s determination “that FEC transactions and
DuPont’s other business activities were qualitatively different from each other,” id. at *17,
overlooks the parties’ stipulation that the gross receipts from FEC transactions were earned
in the ordinary course of business. Because DuPont engages in FEC transactions in the
ordinary course of business, DuPont asserts that they are inherently a part of its general
operating scheme and should be considered part of DuPont’s business activities.
While it is true that FEC transactions were conducted in the ordinary course of
business, that does not preclude the tax court’s finding that FEC transactions are
15
qualitatively different from DuPont’s other business activities. DuPont rests heavily on
the joint stipulation of facts, yet those same facts work against its argument. The stipulation
states that “DuPont is a science and technology company whose businesses manufacture
and sell a wide range of products to many different markets, including the nutrition, health
care, pharmaceuticals, agriculture, automotives, textiles, home and construction,
packaging, electronics, and transportation markets.” Nothing in that enumerated list
includes FEC transactions, and there is no mention of currency exchange, financial
instruments, or hedging techniques. DuPont is not a hedge fund firm or financial
institution, and FEC transactions do not naturally fit into the general categories of “science”
or “technology.” Nothing in the parties’ joint stipulation convinces us that FEC
transactions must be considered part of DuPont’s business activities.
DuPont maintains that the phrase “sell a wide range of products to many different
markets” incorporates FEC transactions by reference as part of the company’s international
operations. We are not persuaded. If anything, the fact that DuPont lists a string of markets
and acknowledges that it engages in business in approximately 90 countries supports the
premise that FEC transactions serve a primarily supportive position to allow DuPont to
access international markets, rather than justifying the position that FEC transactions are
their own business activity. The record supports the finding that FEC transactions and
DuPont’s other business activities were qualitatively different from each other, and the tax
court did not clearly err in so concluding.
Additionally, DuPont argues that the joint stipulation contains a “non-exhaustive
list” that does not identify DuPont’s principal business activities such that one could
16
conclude FEC transactions are excluded. That is, by failing to designate lines of business
as “principal business activities” in the joint stipulation of facts, it is impossible to say FEC
transactions are not included in the category. Again, DuPont is correct that the joint
stipulation did not designate activities as “principal,” but that is irrelevant. The main
consideration is that DuPont, in a stipulation of facts, self-identified its business areas and,
in doing so, did not include FEC transactions. Context provides, and the tax court
concluded, that FEC transactions are different from the listed business areas. Additionally,
because the standard of review for factual findings is clear error, the tax court’s decision
will be disturbed only if there is not “sufficient evidence in the record for the tax court to
reasonably reach its conclusion.” Associated Bank, 914 N.W.2d at 400 (citation omitted)
(internal quotation marks omitted). We find that the record supports the tax court’s
conclusions that the stipulated list of markets named—nutrition, health care,
pharmaceuticals, agriculture, automotives, textiles, home and construction, packaging,
electronics, and transportation—are DuPont’s business activities and FEC transactions are
qualitatively different than those business activities, even though FEC transactions were
earned in the ordinary course of business.
This conclusion is bolstered by FECs’ operating structure. FECs are a risk
management strategy employed by DuPont to protect its already-existing, though not paid,
profits. An internal hedging program run by DuPont to mitigate foreign currency risk is
categorically different than, for example, the automotive or health care markets. The joint
stipulation and DuPont’s operating procedure support the tax court’s findings of qualitative
differences, and the tax court did not commit clear error.
17
2.
DuPont next challenges the tax court’s characterization of expert witnesses’
testimony regarding the purpose of FEC transactions. The tax court noted that both parties’
experts agreed that the purpose of FEC transactions is to reduce foreign currency risk,
protect the value of DuPont’s earnings, and enable investors to see the true operating
performance of DuPont, rather than serve as “a standalone profit center.” DuPont, 2024
WL 3152928, at *17. DuPont argues that this is a mischaracterization of the evidence
because the Commissioner’s expert did not evaluate the profitability of DuPont’s other
lines of business and could not opine on whether FEC transactions were a standalone profit
center or whether DuPont regularly included other business operations like FEC
transactions in its apportionment factor. Further, DuPont points out that its expert testified
that because DuPont is a for-profit company and FEC transactions increase profits, FEC
transactions share the same purpose as the rest of the business, and there should be no
difference in the apportionment of profits from FEC transactions and other lines of
business’s profits.
DuPont’s arguments are not compelling because the tax court’s findings are not
inconsistent with the testimony of the expert witnesses. What the tax court found is that
FEC transactions serve a “supportive risk management function,” in which FEC
transactions aim “to protect DuPont’s earnings, and to enable investors to see the true
operating performance of DuPont, unaffected by currency fluctuations.” Id. at *16–17
(emphasis added). Protecting outstanding earnings is not tied to the creation of incidental
18
profit, DuPont’s overall goal to make profit, or the profitability of other sectors. That
means DuPont’s arguments, even if true, do not demonstrate that the tax court clearly erred.
Further, DuPont’s own policies and documents support the idea that FEC
transactions are supportive tools, not independent profit centers. For example, DuPont’s
Corporate Financial Risk Management Policy states that the “business objective” of the
foreign currency risk management program (which FECs are a part of) is “to maintain an
approximately balanced position in foreign currencies in order to minimize exchange gains
and losses resulting from exchange rate changes, net of related tax effects.” (Emphasis
added.) Additionally, DuPont’s Corporate Financial Risk Management Guidelines states
that derivatives, which include FECs, are explicitly not “used for speculative purposes”
and are not “authorized for use with intention to profit from expected changes in the fair
value of the [FEC].” (Emphasis added.) Not only was the tax court within its discretion
to find the expert witness’ testimony credible regarding the purpose of FEC transactions,
but documents in the record also provide sufficient evidence to affirm that the tax court did
not clearly err.
3.
Third, DuPont argues that the tax court’s determination that FEC transactions “did
not serve an independent profit-oriented purpose,” id. at *1, *20, is not supported by the
record because FEC transactions did, in fact, earn profit. FEC transactions produced
somewhere between 0.48 percent to 4.49 percent of DuPont’s total net income for the years
in dispute and, as DuPont emphasized, in 2014 and 2015, the net income from FEC
transactions was higher than three of DuPont’s business segments (Electronics &
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Communications, Industrial Biosciences, and Nutrition & Health). While these facts show
that FEC transactions can result in profit, profitability does not indicate purpose. It is
undisputed that FEC transactions can create net income depending on the spot rate (this is
why the alternative apportionment formula includes net income in the Everywhere Sales).
What DuPont is trying to dispute is the tax court’s finding that the purpose of FEC
transactions as a hedging technique is qualitatively different than DuPont’s other lines of
business as a science and technology company. Nothing in the record, including incidental
profit, disturbs the tax court’s findings here. Thus, its determination that FEC transactions
serve a different purpose from DuPont’s other business activities was not clearly erroneous.
The tax court determined that FEC transactions served a qualitatively different
function than the rest of DuPont’s lines of business, and their inclusion in the general
apportionment formula created a quantitative distortion of DuPont’s business activities
within the state. There is ample evidence in the record to support these findings, and we
therefore conclude that the tax court did not clearly err in its factual findings.
B.
We next turn our attention to DuPont’s arguments that the tax court erred as matter
of law by finding that the Commissioner met his burden to demonstrate that the general
apportionment formula did not fairly reflect DuPont’s business activities in Minnesota, and
that an alternative formula including net income but excluding gross receipts from FEC
transactions did. We review legal conclusions by the tax court de novo. Associated Bank,
914 N.W.2d at 400.
20
Under section 290.191’s general apportionment formula, DuPont may include all
gross receipts, including gross receipts from FEC transactions, in calculating its Sales
Factor. Minn. Stat. § 290.191, subd. 5. The tax court found that the Commissioner met
his burden to demonstrate that the inclusion of gross receipts from FEC transactions did
not fairly reflect DuPont’s business activities in Minnesota because FEC transactions
served a qualitatively different purpose than DuPont’s business activities. DuPont, 2024
WL 3152928, at *16-17. And the tax court further agreed with the Commissioner that
including the extraordinary volume of gross receipts from FEC transactions in the
Everywhere Sales denominator would produce a quantitative distortion. Id. at *20. That
is, the inclusion of gross receipts from FEC transactions was inappropriate because FEC
transactions are meant to manage risks associated with business activities rather than
independently be a business activity. Further, the routine practice of exchanging foreign
currencies used by DuPont produced over 70 percent of all gross receipts while netting less
than 5 percent of profits. The result of including gross receipts from FEC transactions in
the sales factor was an inflated Everywhere Sales denominator and, inversely, a diluted tax
liability. See id. at *9 (“Any increase in the denominator of the sales factor (‘everywhere
sales’) decreases the percentage of the taxpayer’s business income that is taxable in the
state. That is, it reduces the taxpayer’s state franchise taxes.”). Stated otherwise, including
gross receipts from FEC transactions did not “show, to a full degree or extent, all or any
part of the taxpayer’s income arising from taxable business activities in Minnesota.”
Associated Bank, 914 N.W.2d at 405.
21
The tax court also determined that the Commissioner met his burden to demonstrate
that his alternative apportionment formula under section 290.20—including net income but
not gross receipts from FEC transactions—fairly reflected DuPont’s business activities in
Minnesota because it proportionally accounted for the profit and business generated by
FEC transactions. DuPont, 2024 WL 3152928, at *20.
DuPont argues the tax court legally erred in three respects: (1) that the tax court
impermissibly created “two categories of income” in separating FEC transactions from
other business activities, (2) that the Commissioner failed to analyze whether the Sales
Factor was “allocable to Minnesota” as required by statute, and (3) that the Commissioner
improperly disputes the results of section 290.191’s apportionment formula, rather than the
methods used to reach those results. As explained below, we are not persuaded.
1.
First, DuPont argues that treating gross receipts from FEC transactions differently
than the gross receipts earned from DuPont’s other business activities contradicts
Minnesota Statutes section 290.191. Under the general apportionment formula found in
section 290.191, the Sales Factor includes “all sales, gross earnings, or receipts received in
the ordinary course of the business.” Minn. Stat. § 290.191, subd. 5(a) (emphasis added).
The parties stipulated that gross receipts from FEC transactions are earned in the ordinary
course of business and therefore, under the plain language of section 290.191, DuPont
argues that gross receipts from FEC transactions should be included in calculating
Everywhere Sales. DuPont claims that the tax court “subverted the plain language of the
22
law . . . by distinguishing between categories of ordinary income” and removing gross
receipts from FEC transactions from the general apportionment formula.
DuPont focuses on the wrong statute. Both parties agree that, under the general
apportionment formula in section 290.191, gross receipts from FEC transactions are
included in calculating the Sales Factor. The dispute here concerns the application of an
alternative apportionment formula under section 290.20. Stated differently, the tax court
did not remove receipts from FEC transactions from the general apportionment formula
but applied an alternative apportionment formula under section 290.20 that excluded gross
receipts from FEC transactions and included net income from FEC transactions. Therefore,
section 290.20—not section 290.191—provides the relevant language to interpret.
Section 290.20 empowers the Commissioner to use an alternative apportionment
method when the general apportionment formula does not fairly reflect the taxpayer’s
allocable income to the State. The clear language of section 290.20 allows this alternative
apportionment formula to be created by “(1) separate accounting; (2) excluding any one or
more of the factors; (3) including one or more additional factors; or (4) some other
method.” Minn. Stat. § 290.20, subd. 1.
The Commissioner’s alternative apportionment approach uses net income from FEC
transactions, rather than gross receipts from FEC transactions, which is a modification
explicitly allowed under section 290.20. In finding this alternative apportionment method
applicable, the tax court did not rewrite the general apportionment method to create
“separate categories of ordinary income,” “usurp[] the role of the legislature,” or “add
elements to clarify an ambiguity” in interpreting section 290.191. That is because the tax
23
court did not interpret section 290.191. It simply acted under its authority under
section 290.20 to allow the Commissioner to use an alternative apportionment method
because it found he met his statutory burden. See Associated Bank, 914 N.W.2d at 396,
400–02 (allowing the Commissioner to apply an alternative apportionment formula under
section 290.20 even when the taxpayer correctly calculated its apportionment under
section 290.191 because the Commissioner met her burden under section 290.20). There
was no error by the tax court in its application of the plain language of section 290.20, and
DuPont’s emphasis on section 290.191 is misplaced. 9
2.
Second, DuPont argues that because the Commissioner failed to analyze DuPont’s
Minnesota Sales, he cannot make conclusions about whether the general or alternative
9
DuPont argues that because section 290.191 unambiguously includes gross receipts
from FEC transactions in calculating the Sales Factor, the tax court’s reliance on case law
from other jurisdictions was improper. Because this case involves section 290.20 (not
290.191) and is an issue of first impression, the tax court did not err by looking to other
jurisdictions for guidance. See State ex rel. Swanson v. 3M Co., 845 N.W.2d 808, 814
(Minn. 2014) (citing Gordon v. Microsoft Corp., 645 N.W.2d 393, 402 n.9 (Minn. 2002))
(“When our jurisprudence is undeveloped in an area, as it is here, we often consider case
law from other jurisdictions for guidance.”).
Additionally, to the extent that DuPont argues that the California cases the tax court
relied on—Microsoft and General Mills—were distinguishable, we disagree. In each case,
the company employed an economic technique found to be qualitatively different from the
main sectors of the business and resulted in a high volume of gross receipts but low net
income which, when apportioned, failed to fairly reflect the net income allocable to the
State. Microsoft, 139 P.3d at 1171,1178–79; Gen. Mills, 146 Cal.Rptr.3d at 478–79. The
result of this incongruity was the application of an alternative formula where net income
or net receipts were included and gross receipts excluded; just as the tax court applied here.
Microsoft, 139 P.3d at 1182–83; Gen. Mills, 146 Cal.Rptr.3d at 495–96. In essence, these
cases dealt with similar tax problems and came to similar conclusions. It was proper for
the tax court to reference them.
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apportionment formula “fairly reflect[s]” the income allocable to Minnesota, and it was
legal error for the tax court to find he met that burden.
The burden under section 290.20 is “[i]f the methods prescribed by section 290.191
do not fairly reflect all or any part of taxable net income allocable to this state, the taxpayer
may petition for or the commissioner may require the determination of net income by the
use of another method, if that method fairly reflects net income.” Minn. Stat. § 290.20,
subd. 1 (emphasis added). We have interpreted this to mean the requesting party must
prove by substantial—meaning credible—evidence “that the method prescribed under
section 290.191 does not show, to a full degree or extent, all or any part of the taxpayer’s
income arising from taxable business activities in Minnesota.” Associated Bank,
914 N.W.2d at 403, 405.
DuPont argues that the Commissioner did not meet his burden—to prove either that
the general apportionment method under section 290.191 did not produce a fair reflection
of income allocable to Minnesota or that his alternative apportionment method did produce
such a reflection—because he did not independently analyze DuPont’s business activities
within the State, and, therefore, he had no reference point from which to argue that the
Sales Factor was an unfair representation of DuPont’s Minnesota connections. We are not
persuaded. Apportionment involves fairly allocating taxable income among the states in
which a multistate or multinational company operates. It is governed by a formula, which
generates a percentage. That percentage is then applied to a company’s net income and the
result is the income allocable to the State. Any fluctuations or distortions within either the
numerator (Minnesota Sales) or denominator (Everywhere Sales) will influence the Sales
25
Factor, which determines the income allocable to the State. The plain language of section
290.20 does not always compel an articulated analysis of the Minnesota Sales activity; the
burden can be met by proving a distortion in either the numerator or denominator.
The tax court did not err in its determination that the Commissioner proved such a
distortion. The Commissioner alleged—and demonstrated—that DuPont’s gross receipts
from FEC transactions were qualitatively different from other business income and
including those receipts would result in quantitative distortion. Because he demonstrated
that there was a distortion in the Everywhere Sales denominator, the Sales Factor
percentage was affected, and the resulting income allocable to the State was not a fair
reflection of DuPont’s business activities within Minnesota. The Commissioner argued,
and the tax court agreed, that inclusion of net income from FEC transactions rather than
gross receipts from FEC transactions fairly reflects DuPont’s income allocable to
Minnesota because it corrected the distortion while retaining a nexus to the income created
by FEC transactions. The tax court correctly decided that this alternative apportionment
method satisfied the Commissioner’s burden under section 290.20.
DuPont also argues that Associated Bank requires an evaluation of the Minnesota
Sales numerator to meet section 290.20’s burden. In Associated Bank, we approved the
Commissioner’s use of an alternative apportionment formula because a bank’s corporate
structure removed over $140 million in taxable interest income across two years (and thus
approximately $5 million in additional taxes) from the general apportionment statute by
transferring it to out-of-state LLCs. 914 N.W.2d at 397, 399, 406–07. The issue was that
the general apportionment formula was not fairly reflecting the bank’s Minnesota Sales
26
numerator because of a corporate structure loophole. Id. at 399. Part of the substantial
evidence the Commissioner produced in that case to meet her burden under section 290.20
was an audit of the bank that found that applying the general apportionment formula to the
LLCs failed to account for the bank’s business activities. Id. at 399. We determined that
the Commissioner met her burden of proof under the specific circumstances argued; we
did not, as DuPont suggests, hold that an analysis of Minnesota activities is required to
meet the substantial evidence burden in every case in which the Commissioner applies (or
a taxpayer requests) an alternative apportionment method under section 290.20.
Determining whether an alternative apportionment formula under section 290.20 is
appropriate is done case by case. We have never adopted a bright-line test for what
constitutes substantial evidence that shows a fair reflection of allocable income. We
disagree with DuPont’s arguments that this case-by-case analysis must always include an
evaluation of the Minnesota Sales numerator to prove what is or is not a fair reflection of
income allocable to the State. Accordingly, the tax court did not commit legal error in
concluding that the Commissioner met his burden to show that the general apportionment
formula under section 290.191 did not fairly reflect DuPont’s business activities in
Minnesota and that the alternative apportionment formula, including net income instead of
gross receipts from FEC transactions, as allowed under section 290.20, did fairly reflect
DuPont’s business activities.
3.
Finally, DuPont asserts that the Commissioner failed to meet his burden to prove
that the general apportionment method did not “fairly reflect” DuPont’s net income
27
allocable to Minnesota because he is disputing the results (Sales Factor) and not the
calculations or methods of the general apportionment formula. See HMN Fin., Inc.,
782 N.W.2d at 567 (stating that the moving party must meet the burdens under
section 290.20 and cannot merely “take issue with the result rather than the methods [the
taxpayer] used to reach that result”). DuPont contends that the Commissioner
impermissibly argues that the final apportionment percentage is too low, not that the
general apportionment method failed to fairly reflect DuPont’s income allocable to
Minnesota.
DuPont’s argument does not fairly characterize the Commissioner’s position. This
case is about the application of the general apportionment method to DuPont which resulted
in a distorted Sales Factor percentage that does not “fairly reflect” DuPont’s allocable
income to Minnesota. The resulting Sales Factor percentage is not the basis of the claimed
distortion. Instead, the arguments revolve around the quantitative and qualitative factors
that indicate why including gross receipts from FEC transactions does not fairly reflect
DuPont’s business activities.
Alluding to our decision in HMN Financial, DuPont asserts the Commissioner must
challenge the method used, “not merely the results of the applied method.” Associated
Bank, 914 N.W.2d at 402 (citing HMN Fin., 782 N.W.2d at 567). This language is taken
out of context. In HMN Financial, the Commissioner claimed he had a broad grant of
authority to “close statutory tax loopholes” based on four tax provisions, one of which was
section 290.20. Id. Importantly, the Commissioner did not attempt to meet his burden to
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rebut the presumption that the general apportionment formula in section 290.191 produced
fair and correct results. Id.
Under those circumstances, we determined that section 290.20’s alternative
apportionment formula was inapplicable because the Commissioner was not disputing the
methods used in the general apportionment formula but only the results of those
calculations. Id. Here, the Commissioner asserts that the general apportionment method
includes gross receipts from FEC transactions, and that those gross receipts are distortive
and do not “fairly reflect” the income allocable to Minnesota. Thus, the Commissioner
properly challenged the apportionment methods used to reach the disputed result, and not
merely the results alone.
* * *
The question presented to us is whether the tax court committed legal or factual
error in determining that the Commissioner met his statutory burden in demonstrating that
the general apportionment method under section 290.191 did not fairly represent DuPont’s
business activities in the State and that under section 290.20, the Commissioner’s
alternative apportionment formula—which included net income but not gross receipts from
FEC transactions—did. We conclude that the tax court did not err, and we therefore affirm.
CONCLUSION
For the foregoing reasons, we affirm.
Affirmed.
Thissen, J., took no part in the consideration or decision of this case.
29