Recent Michigan Business Tax Ruling Clarifies the Meaning of ‘Indirect’ Ownership
The Michigan Court of Appeals has held that Treasury cannot use the constructive ownership rules of IRC § 318 to determine whether a group of entities meets the threshold for mandatory combined reporting under the Business Privilege Tax. LaBelle Management v Department of Treasury, Docket No. 324062 (March 31, 2016). The opinion is binding state-wide precedent. Although the Court did not expressly invalidate the portion of RAB 2010-1 that discusses indirect ownership or control, its holding invalidates the RAB. The Court held that the term “indirect” ownership or control in MCL 208.1117(6) means actual ownership or control through an intermediary. Proof of indirect ownership or control is fact-specific to each case, and Treasury cannot require taxpayers to make the determination through rules of attribution.
In LaBelle Management, two brothers each owned 50% or slightly less of the outstanding stock of two corporations as well as interests in a family limited partnership throughout the periods in dispute. Neither brother held any additional ownership or control through an intermediary. Through the use of backwards attribution under the constructive ownership rules, Treasury concluded that each corporation owned 100% of the other corporation’s voting stock and that the family limited partnership owned greater than 50% of the voting stock of each corporation, as well. The Court rejected Treasury’s interpretation of the statute and held that Treasury could not require combined reporting, because there was no proof that any entity owned or controlled, directly or through an intermediary, total interests amounting to greater than 50%.
We will report any significant future developments. If you have clients who filed combined Business Privilege Tax returns or are filing combined Corporate Income Tax returns pursuant to the interpretation of the term "indirect" in RAB 2010 -1 or RAB 2013-1, please consider reviewing whether the Court of Appeals’ holding in LaBelle Management might reduce their liability. Under Treasury's all or none theory, clients may qualify for the small business credit if they do not have to file unitary.
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