D'Agostini Land Co. v. Dep't of Treasury

322 Mich.App. 545

912 N.W.2d 593

D'AGOSTINI LAND COMPANY LLC, Plaintiff-Appellant,

v.DEPARTMENT OF TREASURY, Defendant-Appellee.

No. 336599

Court of Appeals of Michigan.

Submitted January 4, 2018, at Lansing.

Decided January 9, 2018, at 9:20 a.m.

Plunkett Cooney (by Karen E. Beach ) for D’Agostini Land Company, LLC.

Bill Schuette, Attorney General, Aaron D. Lindstrom, Solicitor General, Laura Moody, Chief Legal Counsel, and Scott L. Damich and David W. Thompson, Assistant Attorneys General, for the Department of Treasury.

Before: O'Connell, P.J., and Hoekstra and Swartzle, JJ.

Swartzle, J.

This Court is asked again to determine the character of a rather protean actor under Michigan tax law, the "unitary business group." The group has no independent existence outside of tax law, unlike, for example, a partnership or corporation. It is a recent creation of tax law, and its definition has changed markedly since inception.

In this appeal, petitioner D'Agostini Land Company, LLC, as the representative member of a unitary business group, claims that it should be treated as a unified taxpayer for purposes of the Michigan Business Tax Act's small business alternative credit. Because "unitary business group" is not listed as a type of taxpayer subject to certain disqualifications, the group should be able to claim the credit notwithstanding the fact that one of its members would otherwise trigger one of the disqualifications. Respondent Department of Treasury disagrees and points to its published guidance that explains that each member of the unitary business group is subject to the disqualifying provisions. To grasp how to apply the credit and its disqualifying provisions to a unitary business group, the plain, ordinary meaning of the statutory text is sufficient, although our conclusion is strengthened by applying a common canon of statutory construction. As explained here, we agree with petitioner and reverse.

I. BACKGROUND

Central to this appeal is how the Michigan Business Tax Act's (MBT) small business alternative credit applies to a specific type of taxpayer—unitary business group.

It will be helpful, therefore, to review the credit's history under Michigan tax law, as well as the state's relatively recent adoption and modification of the unitary-business-group concept.

A. THE SMALL BUSINESS ALTERNATIVE CREDIT UNDER MICHIGAN TAX LAW

Given the importance of small businesses to the state's economy, Michigan has historically provided tax credits for qualifying small businesses. Beginning in the late 1970s, Michigan offered a form of the following credit under the state's Single Business Tax Act (SBT):

(2) The credit provided in this section shall be taken before any other credit under this act, and is available to any person whose gross receipts do not exceed ... $10,000,000.00 for tax years commencing after 1991, and whose adjusted business income minus the loss adjustment does not exceed $475,000.00 for tax years commencing on or after January 1, 1985, subject to the following:

(a) An individual, a partnership, or a subchapter S corporation is disqualified if the individual, any 1 partner of the partnership, or any 1 shareholder of the subchapter S corporation receives more than ... $115,000.00 for tax years commencing after December 31, 1997 as a distributive share of the adjusted business income minus the loss adjustment of the individual, the partnership, or the subchapter S corporation.

(b) A corporation other than a subchapter S corporation is disqualified if either of the following occur for the respective tax year: [various adjustments not relevant here]. [ MCL 208.36, repealed by 2006 PA 325 (emphasis added).]

Effective January 2008, Michigan repealed the SBT and replaced it with the MBT. The MBT also included a small business alternative credit in substantially the same form as the prior one, though it was updated, among other ways, to include limited liability companies among those taxpayers that may be disqualified from taking the credit:

(1) The credit provided in this section shall be taken after the credits under sections 403 and 405 and before any other credit under this act and is available to any taxpayer with gross receipts that do not exceed $20,000,000.00 and with adjusted business income minus the loss adjustment that does not exceed $1,300,000.00 as adjusted annually for inflation using the Detroit consumer price index and subject to the following:

(a) An individual, a partnership, a limited liability company, or a subchapter S corporation is disqualified if the individual, any 1 partner of the partnership, any 1 member of the limited liability company, or any 1 shareholder of the subchapter S corporation receives more than $180,000.00 as a distributive share of the adjusted business income minus the loss adjustment of the individual, the partnership, the limited liability company, or the subchapter S corporation.

(b) A corporation other than a subchapter S corporation is disqualified if either of the following occur for the respective tax year: (i) Compensation and directors' fees of a shareholder or officer exceed $180,000.00. (ii) The sum of the following amounts exceeds $180,000.00: [various adjustments not relevant here]. [ MCL 208.1417 (emphasis added).]

The MBT was not long for the tax world, and the state replaced it just four years later with the Corporate Income Tax (CIT). 2011 PA 38, effective January 2012.¹ As with prior tax acts, the current CIT includes a credit for qualifying small businesses:

(1) The credit provided in this section shall be taken before any other credit under this part and is available to any taxpayer, other than those taxpayers subject to the tax imposed under chapter 12 or 13, with gross receipts that do not exceed $20,000,000.00 and with adjusted business income minus the loss adjustment that does not exceed $1,300,000.00 as adjusted annually for inflation using the Detroit consumer price index, and subject to the following:

(a) A corporation or unitary business group is disqualified if either of the following occurs for the respective tax year:

(i) Compensation and directors' fees of a shareholder or officer exceed $180,000.00.

(ii) The sum of the following amounts exceeds $180,000.00: [various adjustments not relevant here]. [ MCL 206.671 (emphasis added).]

B. UNITARY BUSINESS GROUP AS A "TAXPAYER" UNDER MICHIGAN TAX LAW

One key difference between the CIT's small business alternative credit and those in the SBT and MBT is the CIT’s inclusion of the term "unitary business group" among the taxpayers that may be disqualified from taking the credit. A unitary business group is not a separate and distinct legal entity, like a corporation, limited liability company, or partnership; rather, the group is purely a creation of tax law. In general, a unitary business group is a group of related U.S. persons whose business activities are sufficiently interdependent. MCL 206.611(6) (CIT) ; MCL 208.1117(6) (MBT). To qualify as a unitary business group, one member of the proposed group must own or control more than 50% of the other members and there must be a sufficient connection between the members to meet one of two relationship tests. MCL 206.611(6) (CIT) ; MCL 208.1117(6) (MBT). If a group of businesses qualifies as a unitary business group in a particular tax year, then the group must file a unitary tax return for that year. MCL 206.691(1) (CIT) ; MCL 208.1511 (MBT). Michigan, like several other states, has adopted the unitary-business-group concept in an effort to measure more accurately the related group's taxable activities in the state.

Unitary business groups were not taxed as such under the SBT. When it enacted the MBT, the Legislature added "unitary business group" to the list of persons who qualify as a "taxpayer" under state law. MCL 208.1117(5). Membership in a unitary business group was open to individuals as well as a wide range of legal entities, including corporations, limited liability companies, and partnerships. MCL 208.1117(6) and (7). With the CIT, the Legislature retained the concept of a "unitary business group" in the definition of a "taxpayer," but it restricted membership in such a group to corporations, insurance companies, and financial institutions. MCL 206.611(6).

C. TREASURY DISALLOWS CREDIT CLAIMED BY UNITARY BUSINESS GROUP

In this tax dispute, the unitary-business-group taxpayer (represented by petitioner D'Agostini Land Company, LLC (D'Agostini)) and the Department of Treasury (Treasury) disagree on whether a unitary business group is subject to the disqualifying provision of the MBT's small business alternative credit. The following facts are not in dispute: D'Agostini is the designated representative of a unitary business group that filed returns under the MBT in 2009, 2010, and 2011. The group claimed a small business alternative credit under the MBT in 2009 and 2010. In neither year did the group's gross receipts exceed $20,000,000, nor did the group's adjusted net income exceed $1,300,000. One of its members, a Subchapter S corporation, did receive more than $180,000 as a distributive share of the adjusted net business income. Consistent with its then-published guidance, Treasury disallowed the credit because, in its view, no member of a unitary business group could violate the disqualifying provision in MCL 208.1417(1)(a) and (b) and claim the credit, even though the term "unitary business group" is not itself listed as a type of taxpayer that may be disqualified from taking the credit. See Treasury's MBT FAQs, at C41.² Treasury adjusted the group's 2009 and 2010 returns, which resulted in an adjustment to the 2011 return as well; the adjustments added taxes due by the group as well as late penalties and interest.

On behalf of the group, D'Agostini appealed Treasury's decision to the Tax Tribunal (the Tribunal). On cross-motions for summary disposition, the Tribunal affirmed Treasury's decision with respect to the adjustments as well as to the late...