Michigan Department of Treasury Issues its Revised Interpretation

Thomas J. Kenny

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Michigan Department of Treasury Issues its Revised Interpretation of Unitary Business Groups following LaBelle Decision

by: Thomas J. Kenny , John C. Ray of Varnum LLP - Varnum, etc.

Thursday, March 23, 2017

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On February 28, 2017, the Michigan Department of Treasury issued guidance in response to the Supreme Court's denial of Treasury's application to appeal LaBelle Management, Inc v Michigan Department of Treasury, 315 Mich App 23 (2016), app for lv to appeal denied January 24, 2017. The guidance explains how Treasury views the consequences of the Court of Appeals' opinion and how it will administer the control test in MCL 208.1117(6) (and MCL 206.611(6)) going forward. The guidance is a very dense, 3-page read. We offer the following bullet-point breakdown of the decision, but tax preparers should also read the original.

The "stay of effect" issued by the Court of Appeals is now lifted, and Treasury and taxpayers must follow the Court of Appeals' opinion as binding, state-wide precedent.
Treasury acknowledges the decision's retroactive effect and will apply it to all open tax years.
Under MCL 208.1117(6), indirect ownership or control cannot be established through attribution pursuant to the constructive ownership rules of IRC § 318.
While Treasury is not expressly saying that it will not relitigate the issue under the Corporate Income Tax, it says that it views the Court of Appeals' opinion as applicable to the Corporate Income Tax.
- Note: Litigation under the CIT is not foreclosed to the Department. This aspect of the Department's guidance seems to reflect practical recognition that: 1) administering the CIT inconsistently with the MBT would create difficulties for taxpayers and Treasury; and 2) litigation under the CIT would leave the law in a state of flux for several years and generate a compliance headache when the circumstances call for a different type of solution.
Treasury interprets the opinion as limiting Unitary Business Groups to corporations in a parent-subsidiary chain.
Treasury asserts that in keeping with the Court of Appeals' opinion, corporations in a brother-sister relationship cannot be part of the same Unitary Business Group.
- Note: Treasury provides no explanation for this assertion, but the assertion may be correct for the CIT. As relevant here, MCL 206.611(6) provides:
  - (6) "Unitary business group" means a group of United States persons that are corporations, insurance companies, or financial institutions, 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 members, and that has business activities or operations which result in a flow of value between or among members included in the unitary business group or has business activities or operations that are integrated with, are dependent upon, or contribute to each other. . .
- Under the CIT a corporation has to be the common owner; an individual, whether an investor or active business operator, will not meet the definitional requirements. So, under the CIT, without the use of backward attribution, UBG status is unachievable for a brother sister grouping with an individual at the top of the chain.
Treasury observes that custodial or possessory interests do not establish ownership or control.
Treasury expressly rescinds Sections III(B) (Brother-Sister Controlled Group of Entities), III(C) (Combined Controlled Group of Entities) and III(E) (Controlled Group of Entities Without Common Control), as well as Sections VI (Entity in More Than One Controlled Group of Entities) and VII (Indirect Ownership) of RAB 2010-1 and RAB 2013-1.
Treasury asserts that all UBGs affected by the Court of Appeals' decision must correct their filings for all open years: assuming that the designated member of a UBG remains the designated member of a group that no longer contains all of its previous members, it must file "amended returns."
Treasury will consider former group members non-filers but will require amended returns or original returns for new standalone filers only for periods within the period of limitations "prescribed by MCL 205.27a(2).
Treasury will eliminate penalties for these amended or standalone returns.
Written correspondence should accompany these returns and should designate them as "LaBelle" returns.
As long as all returns are mailed together, Treasury will honor a request to apply any refund due a former group member to the accounts of members of the former group.
If an overpayment is reflected on a combined return filed by a designated member, Treasury requires the designated member to attach written correspondence specifying the date and amount of the payment and the way the designated member wants the payment allocated among former or current members of the group. If no instructions accompany the returns, Treasury will either refund the overpayment or credit it to the account of the designated member.
Treasury will move any payment made by a former member to its own account, unless directed otherwise. Any written correspondence directing payment must specify the date and amount of the payment and the desired manner of application.
Designated members continue to have authority to discuss and receive information about any UBG return it filed prior to the Court of Appeals' decision, but to the extent that the decision results in a recombination, the affected entities should make sure they execute and submit to Treasury the forms needed to delegate authority to deal with Treasury on their behalf.
Treasury will waive interest for affected returns filed prior to December 31, 2017.