Opinion ID: 1905955
Heading Depth: 1
Heading Rank: 2

Heading: Operating Losses of Ness Investment Company:

Text: Section 290.17(3) provided that income from carrying on a trade or business shall be assigned    to other states if [the trade or business is] conducted wholly without this state, except that under § 290.17(1) income from a business consisting principally of the performance of personal or professional services    shall be assigned to this state. There is no evidence that the Ness Investment Company conducted any business in Minnesota. Its business consisted of the ownership and operation of the Apache Junction shopping center and the Superstition Ho Hotel, both located in Arizona. Thus, unless the business of the Ness Investment Company can be characterized as consisting principally of the performance of personal or professional services, income from the business would not be assignable to this state and expenses incurred in connection with the business could not be deducted from Ness' Minnesota income. The tax court found that the Ness Investment Company constituted a personal service business for Minnesota income tax purposes. It apparently reached this conclusion because [t]hroughout the years here in issue, appellant B. C. Ness devoted 80 to 90% of his time during the non-road construction season (October to April) of each year to the personal supervision and management of the affairs and operations of this venture enterprise. The tax court misinterpreted the statute. In Bechert v. Commissioner of Taxation, 221 Minn. 65, 21 N.W.2d 101 (1945), we held that a resident taxpayer's entire share of the profits of a national accounting partnership were assignable to Minnesota even though a large portion of partnership income was produced in other states. We stated:    An accounting business, a law firm, a medical or dental clinic, or an architectural or engineering firm all falls clearly within the group of businesses which are engaged in the rendering of personal or professional services. 221 Minn. 68, 21 N.W.2d 103. In Bolier v. Commissioner of Taxation, 233 Minn. 72, 79, 45 N.W.2d 802, 806 (1951), which held that a road construction business did not consist of the performance of personal or professional services, we noted:    The determinative question under § 290.17(1) is whether the particular business was engaged primarily in business activities which are generally recognized and accepted as rendering services of a personal or professional character. The latest case dealing with this issue is Charles W. Sexton Co. v. Hatfield, 263 Minn. 187, 116 N.W.2d 574 (1962), where we held that an incorporated insurance agency was not a business principally performing personal or professional services. Conceding that an individual insurance agent may perform personal services, we found that the corporation did not, and stated: It seems to us that the personal service concept as used in our statute must apply to income derived from personal activities of those who share in the income. Where the personal service is rendered wholly by employees, or only by those who are slightly interested in the corporation, it does not seem to us that the personal service concept is appropriate. If, as in the Bechert case and the recent Wisconsin case of Whitney v. Wisconsin Dept. of Taxation, 16 Wis.2d 274, 114 N.W.2d 445, the income was received primarily from the activities of the individual taxpayer, we could agree that the concept would apply. In the case before us, however, it cannot be said that those who derive income from the operation of the business are devoting their time and energies or activities in a substantial measure so as to characterize the income as being derived from a personal service. From the record it appears that the taxpayer corporation is obviously an impersonal corporate entity and not one in which the stockholders and directors are directly engaged in the activities which produce the income of the corporation. 263 Minn. 197, 116 N.W.2d 581. From the above decisions, two conditions must be met before a taxpayer's income can be deemed personal-or-professional-service income. First, the income-producing activity itself must be the rendition of personal or professional services; and, second, the taxpayer must personally render such services; it is not enough to employ others to render them. Ness' Arizona business enterprise satisfied neither of the above conditions. First, the income producing activities were the ownership and management of a shopping center and a hotel. These activities are primarily the furnishing of building space, not of personal service. Second, there is no indication that Ness performed any personal services himself. As was the case with the directors and shareholders in Charles W. Sexton Co. v. Hatfield, supra , Ness was engaged in running the corporation, not in directly producing income. Because the Ness Investment Company was not a business consisting primarily in the performance of personal or professional services, and because its business was conducted wholly outside Minnesota, income from the business was not assignable to Minnesota. Therefore, losses and expenses incurred in connection with the business were not deductible from B. C. Ness' Minnesota income. (3) Statute of Limitations: Ness' Minnesota tax returns for the years 1964 and 1965 were filed on or before April 15 of 1965 and 1966 respectively. Minn.St. 290.49, subd. 1, provides that all assessments shall, unless otherwise provided, be made within 3½ years of the filing of the return. Thus, unless the assessment period was extended, it expired on October 15, 1968 for the 1964 return and on October 15, 1969 for the 1965 return. Respondents contend, and the Tax Court held, that the assessment order of October 15, 1971, was entered and mailed after the expiration of the limitations period and was therefore void. The commissioner contends that the statutory period was extended by operation of Minn.St.1967, § 290.56, and Minn.St. 290.56, subd. 5, and that the order of October 15, 1971 was therefore timely. Minn.St.1967, § 290.56, provided, in part, as follows: (B) If the amount of net income for any year of any taxpayer as returned to the United States Treasury Department is changed or corrected by the commissioner of internal revenue or other office of the United States or other competent authority, or where a renegotiation of a contract or subcontract with the United States results in a change in net income, such taxpayer shall report such changed or corrected income, or the results of such renegotiation, within 90 days after the final determination of such change or correction or renegotiation, or as required by the commissioner of taxation and shall concede the accuracy of such determination or state wherein it is erroneous. Any taxpayer filing an amended return with such department shall also file within 90 days thereafter a copy of such amended return with the commissioner of taxation. Any taxpayer who consents to an extension of time for the assessment of taxes with the internal revenue service shall within 90 days notify the commissioner of taxation of the execution of such consent. (C) Failure to report such changed or corrected federal net income or to file a copy of such amended federal return or notify the commissioner of the execution of such consent as set forth above and within the time stated shall suspend the running of the period of limitation until such report or copy has been furnished to the commissioner of taxation, or until such six months following the expiration of the federal period of limitation where no change is made or amended return is filed. Ness consented to extensions of the assessment period with respect to his 1964 and 1965 Federal tax returns in January 1968, January 1969, and February 1970. No notice of such consent was given to the commissioner of taxation. Thus, under Minn.St.1967, § 290.56, the 3½-year limitation period of Minn.St. 290.49, subd. 1, was suspended in April 1968, at the end of the 90 day notification period. At the time of the suspension, approximately 6 months remained of the assessment period for the 1964 return. In June 1969, L.1969, c. 1042, § 1 (Minn.St. 290.56), modified the effect of consents to extension of the Federal assessment period in pertinent part as follows: Subd. 5. Any taxpayer who consents to any extension of time for the assessment of federal income taxes shall within 90 days of the execution of such consent notify the commissioner and the period of time in which the commissioner may recompute the tax is also extended notwithstanding any period of limitations to the contrary as follows: (a) For the periods provided in subdivisions 3 and 4   . (Italics supplied.) Subdivisions 3 and 4 of § 290.56 provide extensions of the assessment period for 6 years where the taxpayer fails to notify the commissioner of changes in or amendments to his Federal return, and 1 year from the filing of the report where the taxpayer does not fail to notify the commissioner of such changes or amendments. Section 290.56, as amended by L.1969, c. 1042, § 1, applied only to final federal changes and corrections made, amended returns filed, or extensions of time agreed upon (L.1969, c. 1042, § 2) after its effective date, June 7, 1969. On March 5, 1971, Ness filed with the commissioner of taxation reports of the final result of the recomputation of his 1964 and 1965 Federal returns. Since this filing would have been sufficient to end the suspension of the limitations period under Minn.St.1967, § 290.56, the 3½-year assessment period would, under that provision, have expired in September 1971. The commissioner's order of assessment was not mailed until October 15, 1971, and thus would not have been timely under that provision with respect to Ness' 1964 return. It would have been timely with respect to the 1965 return since, when the running of the limitations period was suspended, approximately 1½ years of the period remained. The 1969 amendment, however, did not provide that the running of the assessment period was merely suspended. Rather, it extended that period for, in this case, 1 year after Ness filed the report of changes in his Federal return with the commissioner. Thus, under § 290.56, subd. 5, the commissioner had until March 5, 1972 to make additional assessments against Ness' 1964 return. Section 290.56, subd. 5, clearly applies to this case because Ness consented to an extension of the Federal assessment period with respect to his 1964 return in February 1970, which was after the effective date of the amendment. The taxpayer argues that Minn.St. 1967, § 290.56, left a loophole by failing to cover the situation where a taxpayer fails to notify the commissioner of his consent to extension of the Federal assessment period and a change is made in his Federal return. The statute refers to failure to report changed Federal income, to file a copy of amended returns, and to notify the commissioner of the execution of a consent to extension. It states that such failures shall suspend the running of the period of limitation until such report or copy has been furnished to the commissioner. (Italics supplied.) This language clearly states where the taxpayer fails to notify the commissioner of the execution of consent to extension of time and a change in Federal income is made or an amended return filed the running of the statute is suspended until a report of changed Federal income or a copy of an amended return is furnished to the commissioner. Thus, the taxpayer's contention that the statute did not cover the situation of this case must fail. The tax court is reversed and the case remanded for the purpose of determining the tax and interest due.