Tuesday, February 28 2012
City Attempted to Develop Land for Economical Development
In City of Alpena v. State Tax Commission, Michigan Court of Appeals, No. 300833, February 14, 2012, property that was purchased by a city to expand its economic base by increasing commercial and industrial development was entitled to a local Michigan property tax exemption because it was used for a public purpose in the tax years at issue. The Tax Tribunal's decision which determined that the property was used for a public purpose was consistent with the rule articulated by the Michigan Supreme Court in Mt. Pleasant v. State Tax Commission, 729 N.W. 2d 833 (2007).
The city's efforts to ensure success of the property's economic development included partially improving the land, obtaining permits and samplings to make private investment less burdensome, creating plats, maps and varying development plans, conducting innumerable meetings to discuss future strategy, offering financial incentives to prospective purchasers, and actively marketing the property. These acts fell squarely within what the Mt. Pleasant court considered as relevant acts establishing that the property was used for a public purpose.
The State Tax Commission asserted that the property remained vacant and unimproved for one of the tax years and had not been put to any use whatsoever. However, nothing in Mt. Pleasant required that a city have succeeded in its plans for economic development by the time any dispute arose over the taxable status of property receiving the benefit of the tax exemption. In this case, the city's plan was not merely aspirational. The city made attempts to develop and improve the land, including obtaining estimates for roads and utilities and accepting a bid from a contractor to install utilities. The city also sold at least one parcel. Therefore, the property was properly listed as exempt.
Monday, February 27 2012
Profit Split Methodology Used in Federal Tax Law Used to Determine SBT Royalties
In Pfizer, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 301632, February 14, 2012, the court determined a taxpayer's submitted affidavits showed that all of the subtracted income was attributable to royalty payments and, thus, was subtracted properly in the calculation of the Michigan single business tax (SBT) liability.
Under the SBT law, a subtraction from the tax base was allowed for royalty income. The taxpayer figured its royalty income using the profit split methodology used in federal tax law. Under that method, half of the subsidiary's profits were deemed to be the intangible property income to the parent company (the taxpayer here). Under federal tax law, intangible property income may arise from types of intangible property in addition to royalties, such as invention and know-how. Although the SBT did not define "royalties," the state supreme court has stated that royalties are "payments received by the transferor in patent, copyright, mineral and oil and gas transactions." Even though it was possible that intangible property income included items that were not royalties, according to the taxpayer's affidavits, only true royalties were subtracted, as permitted under the SBT. Thus, the grant of summary disposition to the Department of Treasury was reversed.
Friday, February 24 2012
Procedural Errors Did Not Warrant Dismissal
In Carrigan v. City of Ann Arbor, Michigan Court of Appeals, No. 300381, February 2, 2012, the Michigan Tax Tribunal abused its discretion by dismissing the taxpayers' petition challenging the assessment of the value of their residential condominium for local property tax purposes because the Tax Tribunal was required to consider the factors summarized by the Michigan Court of Appeals in Vicencio v. Ramirez, MD, PC, 536 N.W. 2d 280 (1995), before imposing the drastic action of dismissal.
Although the Tax Tribunal's order of default was mailed to the taxpayers' address of record, the taxpayers advised the tribunal that they did not receive the order and so their failure to timely cure the default was not willful. The taxpayers' filing of the petition was timely and there was no showing of any history of noncompliance with orders or deliberate delay. Additionally, despite the fact that the taxpayers did not state a precise cash value, state equalized value (SEV), or taxable value (TV) for the property in the petition, they did indicate that they were seeking a 20% to 30% reduction in assessment. Therefore, the city was aware of the degree of difference between its assessment and the taxpayers' opinion regarding the value of the property and was not prejudiced by the absence of the taxpayers' precise statement of cash value, SEV, or TV on the petition form. Moreover, the taxpayers indicated that they were ready to provide the requested materials to cure the defect. Further, the tribunal did not consider and did not recognize that it had discretion to consider options other than dismissal when determining the appropriate sanction for the deficiency in the taxpayers' filing.
Thursday, February 23 2012
Value Was Predicated on Competent, Material, and Substantial Evidence
In Muskegon River Youth Home, Inc. v. Township of Sylvan, Michigan Court of Appeals, No. 301329, January 26, 2012 the Michigan Tax Tribunal's valuation of a taxpayer's male and female residential buildings on its property for the 2006 local property tax year was proper because the tribunal's findings were predicated on competent, material, and substantial evidence. The tribunal noted that the township's property record card was the only evidence of valuation presented during the hearing. The tribunal stated that the record card was supported by the testimony of the township's current assessor, who claimed that the township's economic condition factor was equally applied to all properties throughout the township based on their class. Further, the taxpayer did not present sufficient evidence that the township's economic condition factor was incorrect.
The tribunal also satisfied its responsibility of making an independent determination. After discussing and weighing all the evidence, the tribunal was not persuaded that the taxpayer's property was misclassified or assessed over 50% of its true cash value. The tribunal did not automatically adopt the township's valuation, as evidenced by its modification of the valuation based on the recognition that the township's valuation included a nonexistent sprinkler system in the female facility.
Wednesday, February 22 2012
Taxpayer Must First Appeal to the Department of Treasury
In Garratt v. Township of Oakland, Michigan Court of Appeals, No. 300136, January 26, 2012, the Court of Appeals ruled a taxpayer was not entitled to a local principal residence property tax exemption for the 2004 tax year because he failed to appeal to the Department of Treasury before appealing to the Michigan Tax Tribunal, and, therefore, the tribunal did not have jurisdiction over the 2004 principal residence exemption. The taxpayer received notice from the county that his principal residence exemption for several tax years had been rescinded.
The taxpayer's appeal of the rescission of his principal residence exemption ended up before the December Board of Review. This was the correct next step in the process of appealing the loss of a principal residence exemption that was not present on the tax roll. After the December Board of Review affirmed the rescission, the next step should have been to appeal the board's decision to the Department of Treasury. The taxpayer did not receive notice of the board's decision until February of the following year, when the county treasurer's office sent him a letter stating that he owed additional taxes because his principal residence exemption had been denied. The taxpayer appealed this to the tribunal, but he was statutorily required to appeal to the department before appealing to the tribunal.
The tribunal erred in concluding that it did not have jurisdiction over the taxpayer's 2005, 2006, and 2007 tax years. The tribunal stated that an April 18, 2008, denial of the principal residence exemption by the county only provided the tribunal with jurisdiction over 2008 because the county did not have authority to grant a principal residence exemption for 2005, 2006, and 2007. The statutes governing this issue, however, consistently stated that the three preceding years may be included in a decision or appeal. The Michigan Court of Appeals noted that the preceding three years tend to be included, and the tribunal considered the April 18, 2008, denial valid for 2008. Therefore, the tribunal had jurisdiction over 2005, 2006, and 2007.
The tribunal also incorrectly concluded that it did not have jurisdiction over the taxpayer's 2009 tax year because a principal residence exemption for 2009 had not yet been denied and the applicable statutory provision required that a principal residence exemption be denied for a subsequent year in order for the tribunal to add it on to an appeal. However, at the time the taxpayer was appealing to the tribunal, the 2010 principal residence exemption had not been reinstated and so it was reasonable to assume that the board's finding that the taxpayer was not entitled to exempt status in one year would not be reversed in a subsequent year, particularly when the previous year's dispute was pending. Therefore, the court concluded that it would have been futile to apply for a principal residence exemption for 2009 and, therefore, the taxpayer was excused from this requirement.
Tuesday, February 21 2012
Leased Employee Cost Included In Apportionment Payroll Factor, But Not Tax Base
In Lason Systems, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 300267, January 26, 2012, the Michigan Court of Appeals concluded that work performed by leased employees was properly included in the sales factor for apportionment purposes under the single business tax (SBT).
The taxpayer provided record management services, document workflow reports and imaging systems and services, both within and without Michigan. It was these services for which the taxpayer received consideration.
An affiliated company provided non-executive staffing needs. Under the applicable state law, sales included the amount received for consideration for the performance of services and business activity included the performance of services in Michigan, but not the services by an employee for the employer or the services as a director of a corporation.
The court rejected the taxpayer's assertion that the business activities to calculate the sales factor were the work performed by the executives (e.g., marketing, identification of customer needs, customer retention). The applicable cost of performance here was the expenditures the taxpayer incurred to provide the services it promised to customers, not the payroll amount paid to executives. Thus, it was the amounts paid for the leased employees that was the cost of performance that should be included in the sales factor.
Monday, February 20 2012
Sourcing of Sales Were to the Ultimate Destination
In Uniloy Milacron USA, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 300749, January 26, 2012, a manufacturer of molds used in blow-molding machines was entitled to a refund of single business tax because all of the manufacturer's sales could not be apportioned to Michigan as a matter of law. The Department of Treasury was incorrect in determining that all of the manufacturer's sales were Michigan sales for purposes of the sales apportionment factor and, therefore, should not have assessed additional single business tax and interest.
Under a distributor agreement, the manufacturer and an affiliate corporation agreed that the affiliate corporation would both market the manufacturer's products and purchase the manufacturer's products for resale. The affiliate corporation, however, never obtained possession of the products. Moreover, the distributor agreement was silent as to the transfer of title.
For purposes of the repealed single business tax, a sale by the manufacturer was only sourced to Michigan for purposes of the sales apportionment factor if the manufacturer's product was shipped or delivered to a customer within Michigan. However, there was no documentary evidence to support the assertion that the products were shipped or delivered by the manufacturer to its affiliate. Neither the affiliate corporation nor its employees took possession of the products, and they were not involved in the packaging, loading, and shipping of the products. Rather, the manufacturer's employees loaded the products onto common carriers for delivery to the affiliate's customers.
The Michigan Court of Appeals held that just because the manufacturer sold the products to its affiliate corporation, this did not necessarily mean that the manufacturer delivered the products to its affiliate. The manufacturer's sales were not sourced to Michigan merely because the manufacturer sold its products to its affiliate in Michigan for resale.
Saturday, February 18 2012
Petition Was Untimely Filed
In Bell v. County of Berrien, Michigan Court of Appeals, No. 300148, February 9, 2012, a property owner's appeal to the Michigan Tax Tribunal of a county's denial of local principal residence property tax exemptions on two parcels of property was untimely because the taxpayers' petition was not received within 35 days of the receipt of the actual notice of an assessment change.
The taxpayers received a notice of denial for each parcel of property on June 8, 2009. Each notice explained that the taxpayers' exemptions were being denied because the owner was not a Michigan resident. The notices also informed the taxpayers of their right to appeal the decision to the tribunal within 35 days after the date of the notice. Both notices complied with statutory requirements and clearly stated that the taxpayers' principal residence exemptions had been denied. The 35-day appeal period began to run at this point. The taxpayers did not file their petition until October 13, 2009, which was well beyond the 35-day period.
Friday, February 17 2012
Underlying Sales Tax Assessments Had Become Final and Were Not Appealed
In Baas v. Department of Treasury, Michigan Tax Tribunal, No. 385112, January 13, 2012, assessments for unpaid Michigan sales tax were upheld against the taxpayer's corporate officer because the underlying assessments against the taxpayer were not appealed and had become final. The corporate officer did not dispute that he was indeed a responsible officer during the relevant period. His challenge concerned the amount of the underlying assessments. However, the assessments against the taxpayer were final and therefore were not open to challenge. The officer's liability was derivative of the liability of the corporate taxpayer.
Thursday, February 16 2012
General Motors Corporation Sought Retroactive Refund
In General Motors Corp. v. Michigan Department of Treasury, U.S. Supreme Court, Docket 11-532, petition for certiorari denied January 23, 2012, the U.S. Supreme Court has denied a request by an automobile manufacturer to decide whether an eleven-year retroactive application of a Michigan use tax amendment unconstitutionally impairs the manufacturer's rights in violation of the Takings and Due Process Clauses of the U.S. Constitution.
General Motors sought a refund of use tax it had paid on the interim business use of vehicles held for resale after the Michigan Supreme Court held that the vehicles were exempt from use tax under the resale exemption. However, while the refund request was pending, the Michigan Legislature amended the use tax statute to make the temporary business use of inventory taxable on a retroactive basis for any open tax year.
Subsequently, the Michigan Court of Appeals denied the refund request. It held that the period of retroactivity of the amendment did not violate the manufacturer's constitutional rights because the amendment was rationally related to a legitimate legislative purpose: limiting an interpretation of the use tax statutes that might have caused significant and unanticipated loss of tax revenue that had been collected in good faith. The Michigan Supreme Court denied review.
Wednesday, February 15 2012
Below Market Lease Rates and Transactions Not at Arms-Length Tainted the Leases
In Heidrich Aviation LLC v. Department of Treasury, Michigan Tax Tribunal, No. 358557, December 9, 2011, the Michigan Tax Tribunal determined an assessment for Michigan use tax based on the purchase price of the subject aircraft was upheld because the taxpayer was not a "lessor" qualifying for the rental receipts election. The taxpayer reported and paid use tax based on rental receipts derived from leases entered into between itself and both related and unrelated parties. However, its overall business activities showed that it was not truly "engaged in the business of renting or leasing tangible personal property to others."
The leases between the taxpayer and related parties reflected below-market rates and were not arm's-length transactions. The taxpayer also failed to make substantial efforts to advertise itself as a leasing business. Rather, the advertisements the taxpayer did place referenced opportunities for partial ownership. Furthermore, the number of hours that the aircraft was leased to related parties far outnumbered the hours leased to unrelated parties. Overall, the taxpayer's actions reflected a fractional or joint ownership arrangement as opposed to a leasing business.
Tuesday, February 14 2012
Spouse Owned Residential Property in Illinois
In Levenfeld v. County of Berrien, Michigan Court of Appeals, No. 300358, January 12, 2012, a Michigan taxpayer was denied a local Michigan principal residence property tax exemption because her husband owned residential property in Illinois and received an exemption in Illinois that was similar to the Michigan principal residence exemption, and the taxpayer and her husband did not file separate income tax returns for the tax years at issue. The Michigan Tax Tribunal found that the exemptions in the two states were substantially similar despite the large discrepancy between the resulting tax savings.
The taxpayer argued that her husband's Illinois homestead exemption resulted in a property tax savings that was substantially less with respect to his separately titled home in Illinois than the tax savings to which she would have been entitled if she received a principal residence exemption on her Michigan house. The taxpayer contended that the Illinois exemption applied automatically to her husband's property, nominally reducing his tax burden, unlike in Michigan where a property owner must affirmatively elect a principal residence exemption, resulting in a substantial monetary gain. According to the taxpayer, the tax tribunal's interpretation of the principal residence exemption provision effectively read out the language "substantially similar." The taxpayer believed that this language reflected an intention to have a quantitative analysis performed.
The Michigan Court of Appeals noted that the Illinois homestead exemption simply operated differently than the Michigan principal residence exemption because the Illinois exemption reduced a property's equalized assessed value, resulting in a tax savings that typically was fairly minimal. On the other hand, Michigan's principal residence exemption did not reduce a property's tax value. Instead, it more directly reduced the tax liability on a home by lowering the mills. In this case, the dramatic difference in tax savings, when the Michigan principal residence exemption was compared to the Illinois homestead exemption, resulted because of the fairly high taxable value of the taxpayer's house in Michigan.
According to the court, the question was whether the two states' exemption provisions were substantially similar, not whether the application of the provisions resulted in tax savings that were substantially similar. The court noted that each state used different methodologies in calculating the tax benefit. The court held that substantial similarity did not equate with comparative monetary benefit because that would result in varying conclusions depending on the particular value of the homes being examined.
Monday, February 13 2012
Treasury Explains New Filing Rules
The Michigan Department of Treasury has issued a notice explaining the Michigan Business Tax (MBT) filing requirements for federally disregarded entities. The notice discusses Public Act 305 of 2011. In Notice to Taxpayers Regarding Federally Disregarded Entities and the Michigan Business Tax, Michigan Department of Treasury, January 26, 2012, an entity that is disregarded for federal income tax purposes is classified as a disregarded entity for MBT purposes.
There are two exceptions:
· An entity disregarded for federal income tax purposes that filed separate from its owner for the 2008, 2009, and 2010 tax years in original returns filed before 2012 or in amended returns filed before December 1, 2011, is not required to amend those returns.
· An entity disregarded for federal income tax purposes that filed separate from its owner for the 2010 MBT tax year in an original return filed before 2012 or in an amended return filed before December 1, 2011, may file separate from its owner for the 2011 tax year.
Therefore, if a federally disregarded entity did not file as a separate entity, then it may not file as a separate entity for the 2008?2011 MBT tax years. However, if the federally disregarded entity did file as a separate entity for the 2008?2010 MBT tax years, it may file an amended MBT return as a disregarded entity if the return is within the statute of limitations.
2011 MBT Returns for Disregarded Entities Filing Separately
If a disregarded entity is eligible to file as a separate entity for the 2011 MBT tax year and does file separately, it must file all required forms and schedules. The disregarded entity must select the organization type under which the parent filed its tax return. Both the disregarded entity and the parent must prepare corresponding pro forma federal returns and attach them to the MBT returns.