Labelle Mgmt., Inc. v. Dep't of Treasury

315 Mich.App. 23

888 N.W.2d 260

LaBELLE MANAGEMENT, Inc.

v.DEPARTMENT of TREASURY.

Docket No. 324062.

Court of Appeals of Michigan.

Submitted Jan. 5, 2016, at Detroit.

Decided March 31, 2016, at 9:05 a.m.

Varnum, Riddering, Schmidt and Howlett LLP, Novi (by Thomas J. Kenny and Jack M. Panitch ) for LaBelle Management, Inc.

Bill Schuette, Attorney General, Aaron D. Lindstrom, Solicitor General, Matthew Schneider, Chief Legal Counsel, and Emily C. Zillgitt, Assistant Attorney General, for the Department of Treasury.

Before: SAAD, P.J., and WILDER and MURRAY, JJ.

PER CURIAM.

Plaintiff appeals the trial court's order that denied its motion for summary disposition and granted defendant's motion for summary disposition. At issue is the interpretation of MCL 208.1117(6), which defines the term "unitary business group."¹

Defendant determined that plaintiff is a member of a unitary business group and taxed plaintiff accordingly for two tax periods. Plaintiff filed suit and alleged that defendant improperly broadened its interpretation of "unitary business group" beyond the scope intended by the Legislature. The trial court agreed with defendant's interpretation. We however disagree, and for the reasons provided below, we reverse and remand.

I. BASIC FACTS

The underlying facts involve three different entities during the relevant tax periods:

plaintiff, The Pixie, Inc., and LaBelle Limited Partnership.

Plaintiff is a Michigan corporation that was primarily owned by brothers Barton and Douglas LaBelle. At no time during the tax periods did either brother own more than 50% of plaintiff's common stock.

The Pixie, Inc. (Pixie) is a Michigan corporation. Originally, plaintiff was a subsidiary of Pixie, but Pixie sold all of its interest in plaintiff to the LaBelle brothers on January 1, 2008, thus triggering the tax periods here at issue. Again, during the relevant tax periods, each of the LaBelle brothers never owned more than 50% of Pixie's common stock.

LaBelle Limited Partnership is a Michigan limited partnership. In forming the partnership, each of the LaBelle brothers contributed $50 ($1 for a 1% general partnership and $49 for a 49% limited partnership). The partnership was later amended to add the brothers' children as limited partners, thereby reducing the brothers' share of the limited partnership.

After being sold by Pixie, plaintiff reported its business tax as a separate company. During 2011 and 2012, defendant conducted an audit of plaintiff's tax returns for the two tax periods at issue. As a result of the audit, defendant determined that plaintiff, Pixie, and LaBelle Limited Partnership should be treated, together, as a "unitary business group" in light of MCL 208. 1117(6), which defines that term, and the interpretation of that statute provided by defendant's Revenue Administrative Bulletin 2010–1, describing a unitary business group control test. Applying the test outlined in the bulletin, defendant concluded that plaintiff indirectly owns 100% of Pixie and LaBelle Limited Partnership and that Pixie indirectly owns 100% of plaintiff and 90% of LaBelle Limited Partnership. Defendant calculated the sum owed under this treatment ($228,668), applied each entity's previous tax payments to the outstanding amount, and sent plaintiff a final bill for the remainder in the amount of $11,856.29. Plaintiff paid the bill under protest and commenced this lawsuit in the Court of Claims.

The parties brought cross-motions for summary disposition under MCR 2.116(C)(10). The key issue before the trial court was whether defendant correctly concluded that the three entities involved (plaintiff, LaBelle Limited Partnership, and Pixie) constituted a "unitary business group" as defined in MCL 208.1117(6), which requires one member of the group to directly or indirectly own or control more than 50% of the ownership interests of the other members. Because the parties agreed that no entity directly owned more than 50% ownership interest of any of the others, the trial court had to determine whether there was sufficient indirect ownership or control to satisfy the statutory definition.

The trial court recognized that it was permissible to refer to the federal Internal Revenue Code (IRC) for definitions in some circumstances and looked to 26 U.S.C. 957. The court explained that "[t]he provisions most contextually analogous to a state's determination of indirect ownership or control for combined return purposes are the IRC's international taxation provisions that require a U.S. shareholder to include in its return the income of a 'controlled foreign corporation.' " Like MCL 208.1117(6), the analogous federal provision, 26 U.S.C. 957, refers to "more than 50 percent" ownership. While citing Revenue Administrative Bulletin 2010–1, the trial court noted that 26 U.S.C. 957"applies the same attribution rules under [ 26 U.S.C. 318 ] as are applied by the Department to determine ownership interest under [ MCL 208.1117 ] of the MBT." The court opined that its interpretation "is also consistent with the legislative purpose" of reducing tax avoidance. Accordingly, the court denied plaintiff's motion and granted defendant's motion.

II. STANDARDS OF REVIEW

The following standard applies for review of a summary-disposition motion:

Appellate review of the grant or denial of a summary-disposition motion is de novo, and the court views the evidence in the light most favorable to the party opposing the motion. Summary disposition is appropriate under MCR 2.116(C)(10) if there is no genuine issue regarding any material fact and the moving party is entitled to judgment as a matter of law. A genuine issue of material fact exists when the record, giving the benefit of reasonable doubt to the opposing party, leaves open an issue upon which reasonable minds might differ. [ West v. Gen. Motors Corp., 469 Mich. 177, 183, 665 N.W.2d 468 (2003) (citations omitted).]

Further, "[i]ssues of statutory construction present questions of law that are reviewed de novo." Atchison v. Atchison, 256 Mich.App. 531, 534–535, 664 N.W.2d 249 (2003).

III. ANALYSIS

Plaintiff argues, and we agree, that the trial court erred by using the IRC definition of "constructive" ownership when defining Michigan's "indirect" ownership requirement under MCL 208.1117(6).

A.

"If the language of [a] statute is unambiguous, the Legislature must have intended the meaning clearly expressed, and the statute must be enforced as written." US Fidelity & Guaranty Co. v. Mich. Catastrophic Claims Ass'n (On Rehearing), 484 Mich. 1, 13, 795 N.W.2d 101 (2009) (quotation marks and citations omitted). Tax laws generally will not be extended in scope by implication or forced construction, and when there is doubt, tax laws are to be construed against the government. Mich. Bell Tel. Co. v. Dep't of Treasury, 445 Mich. 470, 477–478, 518 N.W.2d 808 (1994). " '[A]gencies cannot exercise legislative power by creating law or changing the laws enacted by the Legislature.' " Detroit Edison Co. v. Dep't of Treasury, 498 Mich. 28, 46, 869 N.W.2d 810 (2015), quoting In re Complaint of Rovas Against SBC Mich., 482 Mich. 90, 98, 754 N.W.2d 259 (2008).

The statute at issue here is MCL 208.1117(6), which defines "unitary business group" as follows:

"Unitary business group" means a group of United States persons, other than a foreign operating entity, 1 of which owns or controls, directly or indirectly, more than 50% of the ownership interest with voting rights or ownership interests that confer comparable rights to voting rights of the other United States persons, and that has business activities or operations which result in a flow of value between or among persons included in the unitary business group or has business activities or operations that are integrated with, are dependent upon, or contribute to each other. For purposes of this subsection, flow of value is determined by reviewing the totality of facts and circumstances of business activities and operations.

There is no dispute that the dispositive issue here is what is meant by the phrase "owns or controls, directly or indirectly." There additionally is no dispute that there is insufficient direct ownership to give rise to a unitary business group. Thus, as the trial court correctly observed, the issue is how to define "owns or controls ... indirectly."

The Michigan Business Tax Act, MCL 208.1101 et seq. , does not define indirect ownership or control. But it does provide that "[a] term used in this act and not defined differently shall have the same meaning as when used in comparable context in the laws of the United States relating to federal income taxes in effect for the tax year unless a different meaning is clearly required." MCL 208.1103 (emphasis added). In Town & Country Dodge, Inc. v. Dep't of Treasury, 420 Mich. 226, 240, 362 N.W.2d 618 (1984), the Michigan Supreme Court emphasized that when employing federal tax laws to define a statutorily undefined term, the federal context must be comparable to the Michigan context. Because the Court in Town & Country did not find a comparable context, it concluded that "the Legislature intended that the word was to be construed according to its ordinary and primarily understood meaning." Id. Similarly, in Consumers Power Co. v. Dep't of Treasury, 235 Mich.App. 380, 385, 597 N.W.2d 274 (1999), this Court turned to a legal dictionary after it determined that federal tax law lacked a standard definition of "net income," which was undefined by Michigan tax law.

As the trial court noted, "No [federal income tax] provision is directly comparable to [ MCL 208.1117 ] of the MBT." Therefore, in the absence of a comparable context, the trial court should have resorted to normal rules of statutory construction to determine the meaning of the undefined term. See Town & Country, 420 Mich. at 240, 362 N.W.2d 618. Instead, the court sought out "contextually analogous" provisions, and of the numerous places in which indirect ownership or control is...