DuPont v. Commissioner: Minnesota Endorses Net-Income Apportionment for Hedging Receipts and Allows Denominator-Only Distortion Showing Under § 290.20

DuPont v. Commissioner: Minnesota Endorses Net-Income Apportionment for Hedging Receipts and Allows Denominator-Only Distortion Showing Under § 290.20

Introduction

In E. I. duPont de Nemours and Company & Subsidiaries v. Commissioner of Revenue, A24-1601 (Minn. Aug. 27, 2025), the Minnesota Supreme Court affirmed the tax court’s approval of the Commissioner’s use of an alternative apportionment method under Minnesota Statutes § 290.20 (2024). The case addresses a first-of-its-kind question in Minnesota: how to apportion receipts arising from a multinational manufacturer’s foreign currency hedging with forward exchange contracts (FECs).

The dispute centered on whether DuPont’s extraordinary volume of FEC “gross receipts” could be included in the sales factor denominator under the general apportionment formula, Minn. Stat. § 290.191, or whether those receipts so distorted the sales factor that an alternative approach—excluding FEC gross receipts and substituting only the net income from FECs—was necessary to fairly reflect DuPont’s Minnesota-allocable income. The Court concluded that the Commissioner met his burden under § 290.20 by showing both qualitative differences between hedging activity and DuPont’s operating businesses and a quantitative distortion in the sales factor, and that the proposed net-income-based alternative fairly represented DuPont’s Minnesota activities.

Summary of the Opinion

  • The Court affirmed the tax court’s finding that the Commissioner rebutted the presumption that § 290.191 “fairly and correctly” determines Minnesota-allocable income by demonstrating that inclusion of FEC gross receipts in the sales factor denominator qualitatively and quantitatively distorted DuPont’s apportionment.
  • On the facts, FEC receipts accounted for roughly 71–74% of DuPont’s total gross receipts across 2013–2015, while net FEC gains represented only about 0.48%–4.49% of total income.
  • The Court approved an alternative method under § 290.20 that excludes FEC gross receipts from the sales factor and includes only net income from FECs—an approach that preserves nexus to the hedging activity without overwhelming the denominator.
  • The Commissioner can satisfy § 290.20 by demonstrating distortion in either the numerator (Minnesota sales) or the denominator (everywhere sales); a Minnesota-sales analysis is not always required. Denominator-only distortion suffices when proven by substantial evidence.
  • Performing hedging “in the ordinary course of business” under § 290.191 does not preclude a finding under § 290.20 that such receipts are qualitatively different from the taxpayer’s core business activities and may be treated differently to achieve a fair reflection.

Background and Statutory Framework

Minnesota imposes the corporate franchise tax on income attributable to the state. For unitary businesses operating within and outside Minnesota, the state uses an apportionment formula to determine the portion of net income taxable by Minnesota. For the years at issue, Minnesota relied almost exclusively on the sales factor—property and payroll factors are statutorily zero for 2014 forward—so the sales factor was outcome-determinative. See Minn. Stat. § 290.191, subd. 2.

Under § 290.191, “all sales, gross earnings, or receipts received in the ordinary course of the business” enter the sales factor (subject to exceptions not relevant here). Section 290.20, however, allows the Commissioner (or a taxpayer) to deviate from the general formula if it “does not fairly reflect all or any part of taxable net income allocable to this state,” by using “separate accounting,” “excluding any one or more of the factors,” “including one or more additional factors,” or “some other method.”

DuPont is a science and technology manufacturer with global markets. To manage foreign currency risk inherent in cross-border operations and reporting under GAAP, DuPont’s Delaware-based treasury used forward exchange contracts (FECs) to hedge foreign currency exposures. The parties stipulated that FEC receipts arose in the ordinary course of business and, under § 290.191, were included in the sales factor—producing massive everywhere-sales figures. The Department audited and invoked § 290.20 to exclude FEC gross receipts and include only net FEC income in the denominator, citing distortion. The tax court affirmed; the Supreme Court did too.

Key Findings of Fact

  • FEC receipts were enormous relative to DuPont’s operating revenue:
    • 2013: ~70.94% of total gross receipts
    • 2014: ~72.81% of total gross receipts
    • 2015: ~73.66% of total gross receipts
  • But net FEC gains were a small share of total income:
    • 2013: ~0.48%
    • 2014: ~4.49%
    • 2015: ~3.24%
  • DuPont’s own policies barred speculative use of derivatives; the purpose of FECs was to mitigate currency risk and reveal “true operating performance,” not to function as a standalone profit center.
  • All relevant treasury activity occurred outside Minnesota.

Analysis

Precedents Cited and Their Influence

The Court grounded its analysis in Minnesota apportionment jurisprudence and persuasive authority from other states addressing treasury and hedging receipts.

Minnesota Authorities

  • Associated Bank, N.A. v. Commissioner of Revenue, 914 N.W.2d 394 (Minn. 2018):
    • Established that to invoke § 290.20 the moving party must present substantial, credible evidence that the § 290.191 method does not “fairly reflect” the taxpayer’s Minnesota-allocable income, and that the alternative method does.
    • Clarified that “fairly reflect” means “show, to a full degree or extent, all or any part of the taxpayer’s income arising from taxable business activities in Minnesota.”
    • In Associated Bank, the distortion was in the numerator (Minnesota sales) via a corporate structure shifting interest income to out-of-state entities. The Court here built on that framework to recognize that distortion in the denominator alone can suffice.
  • HMN Financial, Inc. v. Commissioner of Revenue, 782 N.W.2d 558 (Minn. 2010):
    • Held that the Commissioner cannot use § 290.20 to attack mere results without challenging the method. Here, by contrast, the Commissioner specifically challenged the inclusion of FEC gross receipts as a method that distorted apportionment and proposed a statutorily authorized alternative.
  • Caterpillar, Inc. v. Commissioner of Revenue, 568 N.W.2d 695 (Minn. 1997):
    • Reaffirmed that apportionment aims to approximate the portion of income reasonably related to Minnesota—to capture only the state’s “fair share.”
  • Other Minnesota cases informed standards of review and statutory construction (e.g., MERC on deference to tax court fact-finding; Hohmann on scope of review; W. Union Tel. Co. v. Spaeth on the effect of prior judicial construction; Great Lakes Gas on GAAP as an accounting context but not controlling tax law).

Persuasive Authorities from Other States

  • Microsoft Corp. v. Franchise Tax Board, 139 P.3d 1169 (Cal. 2006):
    • California Supreme Court held that including gross proceeds from short-term investments in the sales factor produced severe distortion because such receipts comprised ~73% of total gross receipts but contributed under 2% of net income.
    • Adopted a qualitative/quantitative framework: are the receipts qualitatively different from core operations, and do they quantitatively distort apportionment?
  • General Mills, Inc. v. Franchise Tax Board, 146 Cal. Rptr. 3d 475 (Cal. Ct. App. 2012):
    • Applied Microsoft to hedging via futures contracts; held that gross receipts from hedging should be excluded to prevent distortion and that netting approaches can be appropriate.
  • Sherwin-Williams Co. v. Johnson, 989 S.W.2d 710 (Tenn. Ct. App. 1998):
    • Similarly found that treasury function receipts can “hyper-inflate” the sales factor and justify alternative apportionment to avoid absurd results.

The Minnesota Supreme Court expressly approved the tax court’s use of these authorities because Minnesota had not previously addressed hedging receipts in apportionment, and reliance on other jurisdictions is appropriate when state jurisprudence is undeveloped.

Legal Reasoning

  • Two-part qualitative and quantitative analysis:
    • Qualitative: The Court held that DuPont’s FEC transactions were qualitatively different from DuPont’s core manufacturing businesses. They were a risk-management, non-speculative, supportive function executed by treasury to stabilize reported earnings—not an independent, profit-oriented product line (as confirmed by DuPont’s own policies and expert evidence).
    • Quantitative: Inclusion of FEC gross receipts created severe distortion: more than 70% of total gross receipts with only ~0.5–4.5% contribution to income. This “overwhelmed” the denominator, diluting Minnesota’s apportionment percentage in a way not reflective of Minnesota business activity.
  • Ordinary-course status is not dispositive:
    • Even though the parties stipulated FEC receipts were received in the ordinary course (and thus included under § 290.191), § 290.20 permits deviation when inclusion does not fairly reflect Minnesota-allocable income.
  • Method, not mere results:
    • Distinguishing HMN Financial, the Court found the Commissioner properly challenged the method (counting FEC gross receipts) and justified an alternative (counting only net FEC income), rather than simply complaining that the resulting percentage was too low.
  • Denominator-only distortion suffices:
    • The Court clarified that proof under § 290.20 need not always include a detailed Minnesota-sales (numerator) analysis. A demonstrated distortion in the everywhere-sales denominator can, by itself, establish that § 290.191 does not fairly reflect Minnesota-allocable income and justify an alternative method.
  • Appropriateness of the alternative method:
    • Excluding FEC gross receipts while including net income from FECs preserves a meaningful link between the hedging activity and the apportionment factor without allowing those receipts to swamp the denominator.
    • This approach also promotes interstate fairness, aligning with Delaware’s treatment of similar FEC activity and avoiding cross-border distortions.
  • Standards of review:
    • Factual findings are reviewed for clear error—deferential to the tax court’s credibility determinations. Legal conclusions are reviewed de novo. The Court found ample record support for the tax court’s findings on the purpose and effect of FECs.

Impact and Implications

Immediate Legal Effects

  • The “DuPont rule” for hedging receipts: For non-financial, unitary taxpayers, Minnesota now recognizes that gross receipts from hedging/treasury derivatives (like FECs) may be excluded from the sales factor and replaced with net income under § 290.20 when their inclusion qualitatively and quantitatively distorts apportionment.
  • Qualitative/quantitative framework adopted: Minnesota implicitly embraces Microsoft/General Mills’ two-part analysis for treasury/hedging receipts—an important guidepost for future cases involving cash management, short-term investments, futures, options, and other derivatives.
  • Denominator-only proof is enough: The state’s high court confirms that a taxpayer or the Commissioner can satisfy § 290.20 without a separate, exhaustive Minnesota-sales study if the distortion arises from the denominator.

Practical Compliance Consequences

  • For taxpayers:
    • Expect increased audit focus on sales-factor distortion from treasury and hedging transactions, especially in single-sales-factor regimes (2014+ in Minnesota).
    • Consider proactively evaluating whether including hedging gross receipts inflates the denominator; be prepared to petition under § 290.20 for an alternative method if warranted.
    • Maintain clear documentation of hedging objectives and non-speculative policies; evidence that derivatives are “supportive” risk-management tools was central to the Court’s qualitative analysis.
    • Model the effects of excluding gross and including net hedging income on apportionment across states to anticipate fairness and potential double-count issues.
  • For the Department of Revenue:
    • The decision offers a validated roadmap to combat distortion: (i) establish qualitative differences; (ii) quantify distortion; (iii) propose a net-based alternative that preserves nexus without swamping the denominator.
    • Expect more frequent invocation of § 290.20 in treasury/derivative contexts and beyond, where extraordinary gross receipts bear little relation to income production.
  • For litigation strategy:
    • Evidence thresholds are practical, not bright-line. The Court was persuaded by a 70%+ gross receipts share versus low-single-digit contribution to income, consistent with Microsoft and General Mills.
    • Expert testimony and internal policy documents can be decisive in establishing the non-speculative, supportive nature of hedging.

Open Questions and Limits

  • No bright-line threshold: The Court did not set numeric cutoffs for when gross receipts become distortive. Facts and context will control.
  • Scope across industries: For financial institutions or taxpayers whose core business includes dealing in financial instruments, hedge receipts could be qualitatively indistinguishable from main operations—potentially leading to a different outcome.
  • Other instruments: While the rationale is transferrable to futures, options, and short-term investments, courts will assess qualitative purpose and quantitative effects case-by-case.
  • Pre-2014 multi-factor years: Although 2013 still included property and payroll factors, this dispute centered on the sales factor; the opinion does not directly resolve how treasury receipts interact with multi-factor apportionment in other settings.

Complex Concepts Simplified

  • Sales factor apportionment: Minnesota apportions a multistate company’s income using a fraction: Minnesota sales (numerator) divided by everywhere sales (denominator). The result, multiplied by total net income, is Minnesota-allocable income. Since 2014, Minnesota relies almost entirely on the sales factor.
  • Forward exchange contracts (FECs): A contract to exchange currencies at a set rate on a future date. Companies use FECs to hedge exposure to exchange-rate movements between the contract date and settlement.
  • Gross receipts versus net income from FECs:
    • Gross receipts can be very large because each leg of currency exchange involves big nominal flows, even when overall profit impact is small.
    • Net income is the actual gain/loss from the hedge after offsetting the cost of buying/selling currency at spot and forward rates.
  • Qualitative versus quantitative distortion:
    • Qualitative: Does the receipt arise from activities qualitatively different from the taxpayer’s business model (e.g., treasury hedging versus manufacturing)?
    • Quantitative: Do those receipts disproportionately inflate the sales factor relative to their contribution to income?
  • Alternative apportionment under § 290.20: A safety valve allowing separate accounting, inclusion/exclusion of factors, or “some other method,” when the general formula does not fairly reflect Minnesota-allocable income.

Why the Court Rejected DuPont’s Arguments

  • No “two categories of income” problem: The Court emphasized it was not rewriting § 290.191. It applied § 290.20 to modify the method because the general formula’s inclusion of FEC gross receipts produced a distortion not reflective of Minnesota activity.
  • No rigid requirement to analyze Minnesota sales: The statute does not require a numerator analysis in every case; distortion in the denominator may alone establish unfair reflection of Minnesota-allocable income.
  • Not merely disputing results: The Commissioner challenged the method (counting FEC gross receipts) and offered a permissible alternative (counting net income). This fits HMN Financial’s command to dispute methods, not just outcomes.
  • Ordinary-course status not controlling: Being “ordinary course” under § 290.191 does not immunize receipts from § 290.20’s corrective mechanism when they qualitatively differ from core operations and quantitatively distort the apportionment fraction.

Practical Checklist for Taxpayers and Advisors

  • Inventory and quantify treasury/hedging receipts versus their contribution to income.
  • Document hedging policies, risk objectives, and prohibitions on speculation.
  • Model apportionment effects with and without gross hedging receipts; assess whether an alternative method (e.g., net-income inclusion) better reflects Minnesota activity.
  • Consider consistency across states (e.g., if the state of the treasury center uses a net approach) to mitigate interstate inequities.
  • When petitioning under § 290.20, marshal both qualitative (purpose, function) and quantitative (percentage distortion) evidence; expert testimony and internal controls matter.

Conclusion

DuPont cements a significant apportionment principle in Minnesota: when gross receipts from hedging or treasury functions swamp the sales-factor denominator while contributing minimally to income—and the activity is qualitatively distinct from the taxpayer’s core business—the Commissioner (or a taxpayer) may invoke § 290.20 to exclude those gross receipts and include only net income from the hedges. The Court’s adoption of a qualitative/quantitative framework, its acceptance of denominator-only distortion as sufficient proof, and its validation of a net-income alternative placement collectively align Minnesota with persuasive authorities like Microsoft and General Mills while tailoring the doctrine to the state’s single-sales-factor regime.

The decision offers both clarity and a caution: clarity that Minnesota courts will look past nominal cash flows to economic substance in apportionment, and caution that extraordinary treasury receipts, even when “ordinary course,” may not be allowed to dictate state tax outcomes. For multinationals with active treasury operations, DuPont is a roadmap for designing, documenting, and defending apportionment that fairly reflects Minnesota’s “fair share” of income.

Case Details

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