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STATE OF MINNESOTA IN SUPREME COURT A09-1164

Minnesota Tax Court

Anderson, Paul H., J.

HMN Financial, Inc., and Affiliates, Relators, vs. Commissioner of Revenue, Respondent. ________________________ Walter A. Pickhardt, Adam B. Thimmesch, Faegre & Benson LLP, Minneapolis, Minnesota, for relator. Lori Swanson, Attorney General, Rita Coyle DeMeules, Assistant Attorney General, St. Paul, Minnesota, for respondent. ________________________ SYLLABUS The Minnesota Commissioner of Revenue does not have the authority to attribute income and assess taxes to a business on the ground that the business structured itself to comply with the relevant tax statutes and was motivated to do so solely by tax avoidance. Reversed. Filed: May 20, 2010 Office of Appellate Courts

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OPINION ANDERSON, Paul H., Justice. This appeal arises out of a tax-change notice issued by the Minnesota Commissioner of Revenue to relators HMN Financial, Inc. and its affiliates. In the notice, relating to tax years 2002 through 2004, the Commissioner concluded that relators' business structure--a "captive REIT"1--lacked "economic substance" and "business purpose." Based upon this conclusion, the Commissioner disregarded relators' captive-REIT structure and attributed a substantial amount of additional income to them, raising their corporate franchise tax for 2002 through 2004 by approximately $2.5 million. The Minnesota Tax Court upheld the Commissioner's decision, and

relators appealed to our court. On appeal, we must decide a single issue: whether the tax court erred when it held that the Commissioner had the statutory or common-law authority to disregard relators' captive-REIT strategy when they organized their businesses in compliance with relevant statutes but were motivated solely by a desire to reduce their taxes. We reverse. HMN Financial, Inc., Home Federal Savings Bank, Osterud Insurance Agency, Inc., Home Federal REIT, Inc., and Home Federal Holding, Inc. (collectively HMN) were all members of the same unitary business under Minn. Stat.

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