On February 28, 2017, the Michigan Department of Treasury (the Department) issued a Notice to Taxpayers (the Notice) explaining its approach in administering the now final Michigan Court of Appeals decision in LaBelle Management, Inc. v. Department of Treasury, 888 N.W.2d 260 (Mich. Ct. App. 2016), leave to appeal denied by 889 N.W.2d 250 (Mich. 2017) (mem.) (LaBelle). The Court invalidated the Department’s position of indirect ownership rules for purposes of determining whether companies are more than 50% owned and included in a unitary business group under the Michigan Business Tax (MBT). According to the Notice, the Department will apply LaBelle retroactively and expects taxpayers to make corrective filings for all open tax years for purposes of both the MBT and the Michigan Corporate Income Tax (CIT).
Michigan’s Definition of “Unitary Business Group”
The MBT, which was repealed for most taxpayers effective for tax years ending after December 31, 2011, and the CIT each impose mandatory unitary combined returns for entities that are included in a unitary business group. Mich. Comp. Laws §§ 206.611(5), 206.691(1), 208.1117(5), 208.1511. A “unitary business group” includes entities that are greater-than-50-percent commonly owned or controlled, directly or indirectly, and are engaged in a unitary business. Mich. Comp. Laws §§ 206.611(6), 208.1117(6). Neither the MBT nor the CIT define “indirect ownership.” In published Revenue Administrative Bulletins, the Department interpreted indirect ownership to include “ownership through attribution,” or constructive ownership, similar to that required by Section 318 of the Internal Revenue Code (IRC). Mich. Dept. of Treasury Revenue Admin. Bulletin No. 2010-1, at 7-9 (Feb. 5, 2010) (applicable to the MBT), Mich. Dept. of Treasury Revenue Admin. Bulletin No. 2013-1, at 6-9 (Jan. 7, 2013) (applicable to the CIT).
The Court of Appeals’ Decision in LaBelle
In LaBelle, taxpayers challenged the Department’s application of Section 318-type attribution to find common “indirect ownership” under the statutory definition of a “unitary business group” contained within the MBT. Specifically, the taxpayer disputed whether two related corporations and a limited partnership, none of which owned more than 50 percent of any other entity, through an intermediary or otherwise, constituted a “unitary business group.”
Reversing the trial court, the Michigan Court of Appeals held that “indirect ownership” for purposes of determining membership in a unitary business group means ownership through an intermediary and does not include “ownership by operation of legal fiction,” such as the indirect attribution rules of the IRC. As a result, the Court of Appeals narrowed the scope of membership in MBT unitary business groups to only those members whose inclusion is based on a direct “parent-subsidiary” chain of ownership or control.
Subsequently, the Court of Appeals issued a stay of its decision until the Department’s appeal rights were exhausted. On January 24, 2017, the Michigan Supreme Court denied the Department’s application for leave to appeal, thus rendering the Department’s appeal rights exhausted and making the Court of Appeals decision final.
The Department’s Notice Explaining the Impact of LaBelle
According to the Notice, after LaBelle, membership in a unitary business group cannot be based on a “brother-sister” relationship or by a “mere” custodial or possessory interest. Consequently, portions of the Department’s Revenue Administrative Bulletins have been rescinded and taxpayers affected by LaB...
