House Bill 5937 (HB 5937) was introduced in the Michigan House of Representatives by Representative Brian Kandrevas and Representative Brian Cally. The intent of the legislation is to reverse the effect of the Kmart decision of the Michigan Court of Appeals, except for Kmart. If enacted, the Michigan Department of Treasury would be barred from assessing taxpayers who relied on Revenue Administrative Bulletin 1999-1. The bill would also block refund claims for all taxpayers other than Kmart.
Following is the amendatory language as introduced:
(8) Notwithstanding any other provision in this act, for a taxpayer that filed a tax return under former 1975 PA 228 that included in the tax return an entity disregarded for federal income tax purposes under the internal revenue code, both of the following shall apply:
(a) The department shall not assess the taxpayer an additional tax or reduce an overpayment because the taxpayer included an entity disregarded for federal income tax purposes on its tax return filed under former 1975 PA 228.
(b) The department shall not require the entity disregarded for federal income tax purposes on the taxpayer's tax return filed under former 1975 PA 228 to file a separate tax return.
(9) Notwithstanding any other provision in this act, if a taxpayer filed a tax return under former 1975 PA 228 that included in the tax return an entity disregarded for federal income tax purposes under the internal revenue code, then the taxpayer shall not claim a refund based on the entity disregarded for federal income tax purposes under the internal revenue code filing a separate return as a distinct taxpayer.
Enacting section 1. This amendatory act is curative, shall be retroactively applied, and is intended to correct any misinterpretation concerning the treatment of an entity disregarded for federal income tax purposes under the internal revenue code under former 1975 PA 228 that may have been caused by the decision of the Michigan court of appeals in Kmart Michigan Property Services v Michigan Department of Treasury, No. 282058, May 12, 2009. However, this amendatory act is not intended to affect a refund resulting from a final order of a court of competent jurisdiction for which all rights of appeal have been exhausted prior to February 12, 2010 to a taxpayer who is a party to that proceeding.
The Michigan Department of Treasury issued guidance in the wake of the Supreme Court rejection of its appeal of the Court of Appeals decision in Kmart Michigan Property Services. The Court of Appeals ruled that there is no language in the Single Business Tax Act that requires a taxpayer to file the same way as it did for federal income tax purposes. The Department of Treasury had issued Revenue Administration Bulletin 1999-9 (RAB 99-9) which stated its position that they would follow the federal check-the-box rules. The Court of Appeals in stating that RABs do not have the force and effect of law allowed a single member Limited Liability Company (LLC) to file a separate single business tax return.
Previously disregarded entities may be required to file returns under the former Michigan Single Business Tax (SBT) if they had gross receipts in excess of $350,000. As a result of the decision in the Kmart Michigan Property Services case, a single-member limited liability company that was disregarded for federal income tax purposes was nevertheless allowed to file a separate return from its owner. The Kmart decision applies to all open tax years, according to the Michigan Department of Treasury. Therefore, SBT returns may need to be filed back to 1997, the effective date of RAB 99-9.
Accordingly, persons that are disregarded entities for federal income tax purposes that filed as a division of the owner for SBT purposes must file a separate SBT return for all open tax periods. Previously disregarded entities are considered non-filers for statute of limitations purposes. Similarly, persons that filed earlier SBT returns that included one or more previously disregarded entities must file amended SBT returns for all open periods. These returns are due September 30, 2010.
The Kmart decision may also have an effect on the nexus and apportionment provisions of the SBT. The decision could result in refund applications for overpayments. Entities that filed a return with a disregarded entity must file an amended return within fours years from the later of the due date of the return or the filed date of the return if granted an extension.
Interest will be due on deficiencies. However, the failure to file penalty will be waived until September 30. A previously disregarded entity is required to register with the Department of Treasury if it has no federal employer identification number (FEIN) or Michigan Treasury assigned number (TR). The filing threshold is $350,000, although there are special provisions for group members under common control.
Taxpayers are reminded to include an organization type; generally, the one under which the parent filed the return should be chosen. Attach a pro forma federal income tax return and mail returns to PO Box 30059, Lansing, MI 48909.
If HB 5937 becomes law, the above guidance from the Department of Treasury can be ignored.
Initially the Department of Treasury refused to refund amended returns based on the Kmart case. However, after the above guidance was promulgated, they started to issue refunds.
To complicate matters more, there is litigation on the issue of legislative reversal of judicial decisions. It is anticipated that the Michigan Supreme Court and maybe the US Supreme Court may have an opportunity to review this issue.
Stay tuned, there may be more to report on this issue.