Minnesota Tax Court Finds Lack Of Unitary Relationship; No Apportionment Required For Section 382 Limitation On NOLs

On August 20, the Minnesota Tax Court held that an out-of-state provider of pharmacy benefit management (PBM) and mail-order pharmacy services did not have a unitary business relationship with its one-third owned Minnesota joint venture partnership that created an electronic prescription and information routing service.1 The Court determined that there was no flow of value or sufficient control to establish a unitary relationship between the taxpayer and the joint venture partnership. Therefore, the taxpayer's income was not required to be combined with the joint venture partnership's income for combined reporting purposes. Separately, the Court held that a subsidiary of the taxpayer was not required to apportion its Internal Revenue Code (IRC) Section 382 limitation on net operating losses (NOLs).

Background

The taxpayer, a provider of PBM and mail-order pharmacy services, has increased the size of its business through a variety of methods, including organic growth, acquisitions and joint ventures, as displayed by the facts in this case. In 1999, the taxpayer acquired all of the stock of Diversified Pharmaceutical Services, Inc. (DPS). At the time of the acquisition, DPS had accumulated substantial federal NOLs during the 1995 through 1997 tax years.

In 2001, the taxpayer joined forces with two other entities providing PBM services to form RxHub,2 a limited liability company (LLC) headquartered in Minnesota. RxHub was designed to provide electronic prescription and information routing services, facilitating prescription benefit communications. Under the LLC agreement, the taxpayer and the other two members each contributed one third of RxHub's total capital. In addition, between 2002 and 2004, the taxpayer paid RxHub for the use of one of its products, which permitted the taxpayer to provide prescribing physicians with patientspecific medication histories and pharmacy benefits information at the point of care.3

The taxpayer and RxHub did not share employees. They maintained separate human resources personnel, separate employee benefit plans, separate legal and accounting departments, separate purchasing offices, separate bank accounts, and separate data processing systems, and neither entity licensed intellectual property to the other.

The Minnesota Commissioner of Revenue issued an assessment for additional corporate franchise tax and interest for the years 2001 to 2004. This assessment was based on the Commissioner's determination that the taxpayer and RxHub were part of a "unitary business" and thus, required to combine their income to be apportioned to Minnesota. The taxpayer appealed the assessment and argued that it was not unitary with RxHub. Also, the taxpayer argued that DPS was not...