Client Alert: State Supreme Court Decision Creates Limited Tax Refund Opportunities

Fraser Trebilcock

Fraser Trebilcock

Taxpayers who filed as, or were included as a member of, a unitary business group could qualify for a refund following a decision by the Michigan Court of Appeals that the Michigan Supreme Court chose to let stand on January 24, 2017.

“We are not persuaded that the question presented should be reviewed,” said the court.

Left in place is the Michigan Court of Appeals decision in LaBelle Management, Inc. v Department of Treasury that provides a potential refund opportunity for taxpayers that filed as, or were included  as a member of, a unitary business group based on the Department’s interpretation of the constructive ownership rules contained in Revenue Administrative Bulletin (“RAB”) 2010-1.

In LaBelle, the Court of Appeals reversed a Michigan Court of Claims decision upholding the Department’s conclusion that two related entities should be treated as members of a unitary business group because Labelle “indirectly” owned the other entities. The forced combination was based, in part, on the Department’s interpretation of constructive ownership rules. Citing Revenue Administrative Bulletin 2010-1, the Court of Claims looked to “contextually analogous” provisions in the Internal Revenue Code to find that indirect ownership includes situations involving “constructive ownership”.

The Court of Appeals, in a “take-the-language-of-the-statute-seriously” opinion, took issue with the trial court’s interpretation of “indirect ownership” as used in the definition of a unitary business group under the Michigan Business Tax (MBT).  LaBelle challenged the Department’s reliance upon IRC Sec. 318 to define indirect ownership to include constructive ownership or ownership through attribution. The Court of Appeals found in favor of LaBelle, holding that indirect ownership as used in the MBT definition of a unitary business group means “ownership through an intermediary” while “constructive ownership” means “ownership as a result of a legal fiction.” “Indirect ownership and constructive ownership are two different concepts,” according to the Court of Appeals.

In reversing the lower court, the Court of Appeals opined that if the Department’s interpretation, were to be accepted, it would expand the definition of the term “unitary business group” beyond what the Legislature intended.  The end result being that none of the entities involved owned more than 50 percent of any other entity, through an intermediary or otherwise, thus, neither Labelle nor any of its related entities constituted a unitary business group.

Now, as a published decision, LaBelle is binding upon the Department. Taxpayers who filed unitary Michigan Business Tax returns or who are filing combined Corporate Income Tax returns based on the interpretation of the term “indirect” in RAB 2010-1 or RAB 2013-1, should consider reviewing whether the Court of Appeals’ holding in LaBelle might reduce their liability. Taxpayers should consider amending their unitary business group returns where appropriate to do so.  Under the Treasury’s all or none theory, taxpayers may qualify for the small business credit if they do not have to file unitary.

A word of caution, taxpayers should be aware of the impact of the statute of limitations.  Normally, a taxpayer has 4 years from the date that the return was due to claim for refund.  As the last MBT year for most taxpayers was 2011, most tax years are now closed (closing in 2016).  As with most things with tax there are a number of exceptions to the running of the statute of limitations.

However, following the Court of Appeals in Labelle, the Department took the unusual measure of filing a motion to stay the effect of the court’s published opinion until the Department had exhausted all of its appellate rights. The Court of Appeals granted the Department’s motion placing the binding effect of the decision in a sort-of limbo, until the Supreme Court’s recent denial of review.  Not to suggest anything sinister, but while the binding effect of the Labelle decision was stayed, the statute of limitations to amend returns and possibly make refund claims continued to run.  As a result, only a small handful of taxpayer may still have viable refund claims based on Labelle.

The control test under Michigan’s corporate Income Tax requires “direct or indirect” ownership.  In RAB 2013-1, the Department opined that “[i]indirect ownership includes ownership through attribution” and “an ownership interest is indirectly owned by a person when that person constructively owns such an interest.” As a result of the Labelle decision, the Department’s interpretation of indirect ownership for CIT purposes is questionable.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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