On March 31, 2016, the Michigan Court of Appeals published its decision in Labelle Management Inc. v. Michigan Department of Treasury. The case addressed the state’s definition of a unitary business group under the Michigan Business Tax (MBT), and more specifically the meaning of “indirectly” for purposes of determining the unitary business group ownership test.
The unitary business group ownership test requires there to be “a group of United States persons, other than a foreign operating entity, one of which owns or controls, directly or indirectly, more than 50 percent of the ownership interest with voting rights or ownership interests that confer comparable rights to voting rights of the other United States persons.”
Both Labelle Management, Inc. (Labelle) and the Michigan Department of Treasury (Department) agreed that no entity directly owned more than 50 percent interest in any of the other entities. However, the Department determined under audit that Labelle and affiliated businesses should be treated together as a “unitary business group” based on its interpretation of “indirect” ownership described in Revenue Administrative Bulletin 2010-1. Applying the test outlined in the bulletin, the Department concluded that plaintiff indirectly owned more than 50 percent of the affiliated businesses constructively through attribution.
Labelle disagreed with the Department’s determination and appealed the decision to the Michigan Court of Claims, which upheld the determination. However, on further appeal, the Michigan Court of Appeals overturned the lower court’s holding and held that the Department misinterpreted the unitary business group definition. The Court of Appeals held that indirect ownership means ownership through an intermediary and not through the legal fiction of constructive ownership via attribution from a related person.
The Court of Appeal’s ruling provides a potential refund opportunity for taxpayers that filed as or were included as a member of a unitary business group due to applying the Department’s constructive ownership rules contained in Revenue Administrative Bulletin 2010-1.
For most taxpayers, the only MBT year still open is 2011. For taxpayers that filed a 2011 MBT return by April 30, 2012, the statute of limitations will close for the 2011 tax year at the end of this month. Thus, time is of the essence for those taxpayers. Taxpayers who filed a 2011 MBT return under an approved extension will have until December 31 to file an amended return. The 2011 and earlier MBT years may be open beyond April 30 if the taxpayer was subject to an IRS audit or an MBT audit for that year.
If you have any questions regarding your Michigan Business Tax filings, please contact your tax advisor.