Revenue Notice #11-02: Individual Income Tax and Corporate Franchise Tax - Job Opportunity Building Zone Exemptions - Patronage Dividends

This revenue notice addresses whether patronage dividends are exempt business income under Minnesota Statutes, section 469.316, subdivision 3, or exempt from the corporate franchise tax under Minnesota Statutes, section 469.317.

Introduction

Minnesota Statutes, section 469.316, subdivision 3, and Minnesota Statutes, section 469.317, exempt the net income from the operation of a qualified business from the individual income and corporate franchise taxes. A “qualified business” is a person that operates a trade or business in a job opportunity building zone and has executed a business subsidy agreement with the appropriate local unit of government. Minnesota Statutes, section 469.316, subdivision 3 applies to individuals, estates, and trusts: they may exempt the net income they receive from the operation of a qualified business. Minnesota Statutes, section 469.317 applies to corporations: corporations may exempt the net income from the operation of a qualified business if the corporation is the qualified business that earned the income.

Cooperatives are either C-corporations or pass-through entities. Minnesota Statutes, chapter 308A, supplies rules for cooperatives that are C-corporations (308A Cooperatives); Minnesota Statutes, chapter 308B, supplies rules for cooperatives that are pass-through entities (308B Cooperative Associations). Neither these chapters nor other chapters of Minnesota Statutes provide special rules for the characterization of patronage dividends.

Thus, the character of patronage dividends is determined under the general tax rules that dictate the character of a C-corporation’s distributions or a pass-through entity’s allocations of net income. Net income a C-corporation distributes does not retain is character after distribution; net income a pass-through entity allocates retains its character after allocation. Thus, the net income a 308A Cooperative distributes as a patronage dividend loses its character after distribution; while, the net income a 308B Cooperative Association allocates as a patronage dividend retains its character after allocation.

Department Position

The patrons of a 308A Cooperative that is a qualified business may not exempt patronage dividends from tax. The net income of a 308A Cooperative loses its character after distribution. Thus, for individuals, estates, and trusts, patronage dividends are not exempt business income under Minnesota Statutes, section 469.316, subdivision 3. And a corporation must itself be a qualified business before it can exempt income from the corporate franchise tax under Minnesota Statutes, section 469.317.

But patrons of a 308B Cooperative Association that is a qualified business may exempt patronage dividends from tax if the patron is (1) an individual, estate, or trust and (2) a member of the cooperative. Because the net income of a 308B Cooperative Association retains its character after allocation, patronage dividends are exempt business income under Minnesota Statutes, section 469.316, subdivision 3. Yet, corporations and non-member patrons are unable to exempt patronage dividends received from a 308B Cooperative Association. A corporation must itself be a qualified business before it can exempt income from the corporate franchise tax under Minnesota Statutes, section 469.317. And non-member patrons are like the cooperative’s other trade creditors; thus, the cooperative’s net income does not flow-through to them with its retained character.

 Signed by Assistant Commissioner Matt Massman and published in the Minnesota State Register on April 11, 2011.