E. I. DuPont De Nemours & Co. v. Comm'r of Revenue

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER

This matter came on for trial before The Honorable Wendy S. Tien, Judge of the Minnesota Tax Court.

Nicole L. Johnson and Melanie L. Lee, Blank Rome LLP, represent Appellant E. I. duPont de Nemours and Company &Subsidiaries (collectively "DuPont").

Jennifer A. Kitchak and Jeremy D. Eiden, Assistant Minnesota Attorneys General, represent appellee Commissioner of Revenue (the "Commissioner").

The court, having heard and considered the evidence adduced at trial and the arguments of counsel, and upon all of the files, records, and proceedings herein, now makes the following:

FINDINGS OF FACT

1. DuPont has standing to maintain this appeal; all statutory and jurisdictional requirements have been fulfilled; and the court has jurisdiction over the parties to this appeal.

2. E. I. 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. Its principal place of business is in Delaware. As of December 31, 2015, DuPont had operations in approximately 90 countries worldwide, and 60 percent of its consolidated net sales were made to customers outside of the United States.

3. At all relevant times during the tax years ending December 31, 2013, December 31, 2014, and December 2015 (the "years at issue"), DuPont conducted significant international operations resulting in a large number of currency transactions from international sales, purchases, investments, and borrowings, including numerous subsidiaries engaged in business with foreign customers.

4. For U.S. financial reporting purposes, and in line with Generally Accepted Accounting Principles ("GAAP"), DuPont was required to report its global earnings in U.S. dollars, although it received payment for the sale of goods by E. I. DuPont (and its subsidiaries) in foreign currencies.

5. One important form of foreign currency risk that DuPont experienced is fluctuation in the reported book value of foreign-denominated payables or receivables between the original transaction date and its settlement date.

6. DuPont adopted a risk management policy (the "NMA Program") to address this type of risk (among others) and manage its foreign exchange exposure. The NMA Program buys and sells forward exchange contracts ("FECs") to offset DuPont's aggregate or "net" exposure from business transactions in the corresponding currency pairings.

7. E. I. DuPont's Treasury Department personnel in Delaware managed the NMA Program. None of DuPont's activities related to the NMA Program or the FECs were conducted in Minnesota during the years at issue.

8. The 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.

9. DuPont entered into FECs on a regular and recurring basis during the years at issue. Gross receipts from FECs were earned in the ordinary course of business, and the terms of FEC transactions were on a gross basis. DuPont's counterparties to FEC transactions were typically financial institutions.

10. DuPont's FEC transactions and DuPont's other business activities were qualitatively different from each other.

11. FEC transactions did not serve an independent profit-oriented purpose. Including FEC gross receipts in the Minnesota apportionment factor substantially distorted DuPont's income arising from taxable business activities in Minnesota during the years at issue, as it quantitatively distorts total sales, net income, and, ultimately, the apportionment factor by nearly threefold.

12. The general apportionment method in Minnesota Statutes, section 290.191, subdivision 2(a) (2022), as applied by DuPont, does not fairly reflect all of DuPont's taxable net income allocable to Minnesota for the years at issue.

13. The Commissioner's alternative apportionment method, excluding FEC gross receipts from the calculation of the apportionment factor but including net income from FEC transactions, fairly reflects DuPont's net income in Minnesota for the years at issue.

CONCLUSIONS OF LAW

1. The Commissioner presented sufficient evidence to rebut the statutory presumption that the general apportionment method in Minnesota Statutes, section 290.191, subdivision 2(a), as applied by DuPont, is correct with respect to each of tax years 2013, 2014, and 2015.

2. The Commissioner presented sufficient evidence to require the use of an alternative apportionment method as provided by Minnesota Statutes, section 290.20, subdivision 1(4) (2022) with respect to each of tax years 2013, 2014, and 2015.

ORDER

1. Not later than 60 days from the date of this Order, the parties must file a stipulation as to the tax amounts due under Minnesota Statutes chapter 290, consistent with this Order, and the parties' earlier Joint Stipulation Narrowing Issues for Decision, filed October 5, 2023.

2. Upon receipt of the parties' stipulation, this court will file a final order for judgment in the correct amount of tax for each of the years at issue, per the parties' stipulation. If the parties are unable to reach agreement within that period of time, they must contact the court administrator for a post-trial conference.

IT IS SO ORDERED.

MEMORANDUM

WENDY S. TIEN, JUDGE

This appeal concerns the apportionment of DuPont's multistate income to the State of Minnesota, as set forth in the Order of the Commissioner dated May 4, 2021 (the "Commissioner Order") for the periods December 31, 2013, December 31, 2014, and December 31, 2015 (collectively the "years at issue"). Specifically, this case presents two questions for the court's decision. First, has the Commissioner presented substantial evidence that DuPont's use of the

general statutory apportionment method in Minnesota Statutes section 290.191, subdivision 2(a), does not "fairly reflect all or any part of taxable net income allocable" to Minnesota? Second, if so, has the Commissioner presented substantial evidence to require the use of his alternative method under Minnesota Statutes section 290.20, subdivision 1(4)? The Commissioner asks the court to apply an alternative apportionment method that includes the net income from DuPont's transactions in forward exchange contracts ("FECs"), and not gross receipts, when calculating the apportionment factor.

This case came on for trial on December 6, 2023.^[1] The parties previously entered into a stipulation^[2] that consensually resolved Counts I, IV, V, and VI of its Notice of Appeal, leaving for trial only the issues in Counts II and III. In addition, the parties stipulated to material facts, and provided the trial testimony of expert witnesses only.^[3] The Commissioner Order^[4] affirmed the Department's assessment, less penalties, for the years at issue, in the amount of $9,187,623 and interest in the amount of $2,275,722.^[5] On June 22, 2021, DuPont timely filed a Notice of Appeal from the Commissioner Order with the court.^[6] In 2022, DuPont and the Commissioner agreed to a Joint Stipulation Narrowing Issues for Decision before the court, leaving only the issues concerning tax treatment of DuPont's use of FECs.^[7]

At trial, the parties each presented case-in-chief and rebuttal expert testimony.^[8] The parties filed post-trial briefs,^[9] and the Court heard closing arguments on March 29, 2024.^[10]

I. Factual and Procedural Background

A. DuPont Operations

E. I. DuPont was founded in 1802 and incorporated in Delaware in 1915.^[11] It 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.^[12] As of December 31, 2015, DuPont had operations in approximately 90 countries worldwide, and 60 percent of its consolidated net sales were made to customers outside of the United States.^[13]

DuPont conducts significant international operations resulting in a large number of currency transactions from international sales, purchases, investments, and borrowings,^[14]including numerous subsidiaries engaged in business with foreign customers.^[15] DuPont received

payment for goods in foreign currencies,^[16] and its business and operating results are subject to exposure from foreign currency, interest rate, and commodity price risks,^[17] as described more fully below. Generally, each of the DuPont entities keeps its books and records in either the primary currency of its headquarters location or in U.S. dollars,^[18] For U.S. financial reporting purposes, and in line with Generally Accepted Accounting Principles ("GAAP"), however, DuPont was required to report its global earnings in U.S. dollars.^[19]

Changes in the value of monetary assets and liabilities that are denominated in foreign currencies create risks of exchange gains or losses that are recorded in DuPont's income statement.^[20] As stated above, DuPont was required to report its global earnings in U.S. dollars,^[21]although it received payment for the sale of goods by E. I. DuPont (and its subsidiaries)^[22] in foreign currencies.^[23] The U.S. dollar-denominated value of these foreign currency-denominated transactions fluctuates with the value of the foreign currency^[24] between the time of the original transaction and when that transaction settles, i.e., when payment is received.^[25] Accordingly, one important form of foreign currency risk...