collateral estoppel and MN adjustments to federal items

Published On: 27th April 2011

Minnesota is perceptibly increasing audits of federal income tax items, e.g. passive activity losses from limited partnerships where the activity of the limited partnership is in a state different from the state residence of the taxpayer.  A question that often arises is the effect of the Minnesota adjustments on federal reporting.  Of course, a fully litigated Minnesota Tax Court or Minnesota District Court tax case likely causes collateral estoppel principles to apply at the federal level (against the taxpayer – in the event of a taxpayer ‘win’ in state court collateral estoppel of course would not run against the United States), but a Minnesota audit followed by simple acceptance by the taxpayer (or even a litigation settlement with Minnesota) likely does not create collateral estoppel effect.