Sale of Interest Generated Apportionable Business Income in Minnesota

September 27, 2020

A recent Minnesota Supreme Court decision highlights the principle that when a taxpayer receives income from the sale of an equity interest or of assets in an entity with which it conducts a unitary business, it is difficult to argue successfully that the income is not apportionable business income.

By:  Jess Johannesen, SALT Senior Manager

On August 12, 2020, the Minnesota Supreme Court issued an opinion in which it concluded that a taxpayer’s sale of a majority interest in the business generated apportionable business income for Minnesota income tax purposes.[1]

The taxpayer, YAM Special Holdings, Inc. (YAM) was an Arizona corporation, treated as an S-corporation for income tax purposes. YAM, through its sole ownership of numerous limited liability companies (LLC) that were disregarded for income tax purposes, operated the business.  In 2011, YAM sold 71.39% of its membership interest in one of the LLCs – that essentially functioned as a holding company to the operating LLCs – to strategic investors.

YAM did not own real or tangible personal property in Minnesota, did not employ any person based in Minnesota, and did not have an interest in any business entities or assets that were physically located in Minnesota. However, about 1% of YAM’s revenue came from transactions with Minnesota customers. The opinion does not specifically explain the exact reasons that YAM had nexus in Minnesota and filed an income tax return.[2]  Nonetheless, YAM did not dispute that it and its subsidiary LLCs constituted a unitary business and conducted business in Minnesota.

On its 2011 federal income tax return, YAM treated the transaction as a sale of a share of the operating assets resulting in $1.35 billion long-term capital gain, which was offset in part by a long-term capital loss of $1.67 million. On its 2011 Minnesota corporate income tax return, YAM treated the gain as nonbusiness income sourced outside Minnesota and instead apportioned roughly 1% of its loss to Minnesota. The Minnesota Department of Revenue determined that the gain constituted apportionable business income and issued an assessment for approximately $1.25 million.

YAM argued that the income from the sale of the LLC interest was not subject to tax in Minnesota based on two theories. First, YAM claimed that under Constitutional due process principles, Minnesota did not have sufficient connection with the sale. Alternatively, YAM argued that the sale of the LLC interest represented nonbusiness income that was not subject to apportionment.

The Court dismissed both arguments for essentially the same reason – that YAM and its subsidiary LLCs conducted a unitary business, and that the business had a connection with Minnesota. Specifically, with respect to the nonbusiness income position, the Court noted that under Minnesota statutes, income from a trade or business is not apportioned if “it is derived from a capital transaction that solely serves an investment function.”[3] In cases such as this, where the taxpayer and the entity whose interest was sold are conducting a unitary business, the Court generally will not find that the capital transaction solely serves an investment function. Therefore, YAM was required to treat the gain as business income and apportion it to Minnesota.

This case illustrates the importance of considering these positions if your business is considering a sale of assets or equity interests. Depending upon your facts and circumstances, would such sale generate business or nonbusiness income? If you’re operating as a C-corporation, how much state income tax may be due among the states in which your business operates? If you’re a pass-through entity, will there be nonresident withholding or composite tax obligations as a result of the transaction? Aprio’s SALT team has experience researching and analyzing these types of state tax issues, and we can assist your business to minimize its state tax obligations and risks with respect to these transactions. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jess Johannesen, SALT Manager at or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at for more information.

This article was featured in the September 2020 SALT Newsletter.

[1] YAM Special Holdings, Inc. v. Commissioner of Revenue, Minnesota Supreme Court, A20-0021, 08/21/2020.

[2] Perhaps the business had independent sales representatives that solicited business in the state, or it filed based purely on its economic presence in the state.

[3] Minn. Stat. § 290.17, subd. 6.

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About the Author

Jess Johannesen

Jess Johannesen, Senior Tax Manager at Aprio, is a state and local tax advisor with expertise in sales/use tax and state income tax matters, state tax credits and incentives, and state and local tax M&A due diligence. Known for quick response times and technical expertise, Jess helps business leaders and decision makers in an array of industries maximize state tax benefits, and minimize risks and exposures while keeping in compliance. Defined by kindness and passion for Georgia sports, Jess is a thoughtful, curious and detail-oriented advisor.