Friday, August 31 2012
Capital Gain on Sale of a Subsidiary Properly Included in Business Income
In TMW Enterprises, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 302870, August 14, 2012, the Michigan Court of Appeals, affirming the trial court, held that the calculation of an S corporation's business income under the single business tax (SBT) was correct. In an earlier appeal of the same case, the appellate court ruled that the S corporation was a corporation under the SBT and therefore was not entitled to the casual transaction exclusion.
On remand, the trial court determined that only that portion of the gain that represented built-in gains or excessive passive income was subject to the SBT. The Department of Treasury argued that it was improper for the calculation of tax liability issue to be revisited on remand. The court disagreed and noted that the trial court had the authority to take any action which was not inconsistent with the appellate court's first opinion. Thus, the trial court was required to treat the taxpayer like any other corporation, and that was what happened. The former SBT was imposed on a taxpayer's adjusted tax base. The tax base was "business income," which, for corporations, was federal taxable income. S corporations are subject to tax on built-in gains and excess passive income. Therefore, the amount of those built-in gains and excess passive income constituted "business income" and was subject to the SBT.
Thursday, August 30 2012
Payment of the Uncontested Portion of the Tax Assessment Requirement Upheld
In Anderson v. Department of Treasury, Michigan Court of Appeals, No. 303470, August 9, 2012, the Court of Appeals concluded that a Michigan personal income taxpayer's due process rights were not violated by the statute that required prepayment of the uncontested portion of the tax assessment. The applicable statute governing the appeals of tax assessments required that the uncontested portion of the assessment be paid as a prerequisite to the appeal.
The taxpayer challenged the penalties imposed, but not the tax liability itself. However, the taxpayer did not pay any part of the assessment and, instead, argued that this law deprived him of due process. The court noted that a promise to pay the debt or partial payment were not sufficient to satisfy the statute. The court held that the tax scheme satisfied due process requirements because the taxpayer was afforded a meaningful opportunity to be heard and the state had a legitimate interest in the prompt payment of taxes such that it could condition the hearing on the prepayment of uncontested taxes. Case law has noted that the post-deprivation process satisfies due process even though the individual taxpayer is not given the opportunity for a hearing before he is deprived of the property because of the significant interest states have in their own financial stability. The prepayment helped ensure that the state could collect taxes in a timely manner.
Wednesday, August 29 2012
Use Tax Due from Former Officer who had Control Over Filing of Tax Returns and Tax Payments
In Rolinski v. Department of Treasury, Michigan Tax Tribunal, No. 357830, July 23, 2012, the former president of the corporate taxpayer was held liable for unpaid Michigan use tax as a responsible corporate officer because he had presumptive control for filing returns and the authority over tax payment. In order for officer liability to attach, the officer must have a duty to file returns or pay taxes and breach one of these duties. Also, there should be a causal connection between the officer's breach and the corporation's failure to pay.
In the present case, the requisite authority was found, as the president's signature had appeared on tax returns and on checks remitted for purposes of tax payment. The president also established a bank account for payment of the tax assessment if the corporation's appeal failed. A causal link was shown, as the president participated in the decision to protest the assessment.
Furthermore, the fact that the president had left the corporation by the time the administrative remedies had been exhausted and the assessment was finally determined posed no obstacle to imposing officer liability, as the applicable statute does not require that the officer responsible for returns or payment continue to hold that responsibility when the tax is deemed collectible.
Though the former officer claimed that his due process rights were violated, he had notice of the corporate assessment as he initiated the corporation's protest of that assessment. Moreover, he had an avenue to protect his interests in the underlying lawsuit between the corporation and the Department of Treasury, but failed to file a motion to intervene.
The four-year statute of limitations period is inapplicable to the imposition of officer liability, as any limitations period would not have accrued until July 2007, when the taxes were finally determined and collectible. The Department of Treasury issued the final notice of assessment against the officer in December of 2008.
Tuesday, August 28 2012
Business Is Not Unitary and Currency Exchange Profits Properly Included in Sales Factor
In E I Du Pont De Nemours & Company v. Department of Treasury, Michigan Court of Appeals, No. 304758, August 7, 2012, the Court of Appeals affirmed a lower court's determination that a taxpayer and its subsidiary were not unitary and that certain profits were properly included in the sales factor under the former Michigan single business tax.
In 2001, the taxpayer sold its ownership interest in a subsidiary to an outside company; this sale resulted in a capital gain of about $2 billion.
Business Not Unitary
The taxpayer argued that the capital gains should not be included in the SBT tax base because the entities were not unitary. So long as the business activity is unitary, the state may tax the apportioned share of a taxpayer's multistate business. If the business activity involves the sale of an asset, including a subsidiary, the sale is considered unitary with the taxpayer's business if the two entities share functional integration, centralized management, and economies of scale.
Examining the evidence, the court agreed with the taxpayer and determined that the taxpayer and the subsidiary were not engaged in a unitary business. The two entities did not engage in the same line of business. All transactions were negotiated and performed at arm's-length. In addition, the initial flow of capital was for an investment (and not operational) function. The entities did not benefit from collective bargaining with suppliers. In sum, the management oversight was akin to that of an investor over a valuable asset.
Currency Exchange Profits
The taxpayer argued that the profits on currency exchanges from foreign exchange contracts should be included in the sales factor calculation. The SBT statute broadly defined "sales" to include the use of tangible and intangible property that constituted business activity. "Business activity," in turn, was similarly broadly defined to include activities performed with the object of gain or benefit to the taxpayer. As the contracts here involved exchanging U.S. dollars for foreign currency at fixed rates, the taxpayer received substantial revenue. Reasoning that the substantial revenue clearly benefited the taxpayer, the court agreed with the taxpayer and held that the profits on currency exchanges should be included in the sales factor calculation.
Monday, August 27 2012
Property Value Supported by Competent, Material, and Substantial Evidence
In WCY Realty, L.L.C. v. Township of Fairhaven, Michigan Court of Appeals, No. 296496, August 7, 2012, the Michigan Tax Tribunal's determination of the true cash value of a realty company's property for the 2006 and 2007 property tax years was proper because it was supported by competent, material, and substantial evidence and the Tax Tribunal committed no error of law in reaching its judgment.
Contrary to the company's assertion, the Tax Tribunal did not accept the purchase price evidence as conclusive of the property's true cash value. Rather, the Tax Tribunal considered the company's purchase price along with other relevant evidence to calculate the property's true cash value. The law did not preclude consideration of purchase price in reaching a valuation judgment. Moreover, the Tax Tribunal was not precluded from considering the company's purchase price even though the property was purchased at an auction.
The company also asserted that the property's value should have been reduced because the previous owners removed most of the personal property from the house and a pole barn. However, the company failed to support the position that any removed personal property affected its auction bid or the township's valuation of the real property and fixtures.
The Tax Tribunal accepted the township assessor's opinion that the property could have been used for residential purposes and, therefore, was of higher value than the company estimated. This was a reasonable choice because the property had been used as a vacation home for many years. The Tax Tribunal found that the assessor's comparable properties more accurately reflected the value of the residential/recreational lakefront land.
Friday, August 24 2012
Tax Tribunal Act Mandates that the Tax Tribunal make an Independent Determination
In Marston v. Township of Canton, Michigan Court of Appeals, No. 303924, August 8, 2012, the Michigan Tax Tribunal erred when it affirmed a local board of review's calculation of the property tax values of six properties for the years 2008 through 2010 because the Tax Tribunal had a duty to make an independent assessment of the properties' value.
The Tax Tribunal should not have concluded that the record demonstrated that the cost less depreciation method was properly applied in this case. The Tax Tribunal apparently woodenly affirmed the 2008 assessment after discrediting both the property owner's proposed market evidence and the township's market analysis, which actually differed from the 2008 assessment.
Michigan law was clear that the Tax Tribunal may not automatically accept the valuation on the tax rolls. The Tax Tribunal Act mandates that the Tax Tribunal make an independent determination.
The property owner also argued that the taxable values on his properties should not have been uncapped as the result of added alleyway land that ran adjacent to all six lots. The abandoned alleyway was previously existing tangible real property that was not included in the assessment. As such, the value of the omitted property should have been based on the value and ratio of taxable value to true cash value that the omitted real property would have had if the property had not been omitted. Although the omitted property could have been responsible in the jump in assessed value of the taxpayer's properties, the Michigan Court of Appeals was unable to find any evidence in the record to establish the value of the abandoned property in order to evaluate whether it constituted an increase in taxable value beyond what was statutorily permitted.
Thursday, August 23 2012
Rolling Stock Exemption Not Available to Subsequent Additions
In MLT, Inc. v. Department of Treasury, Michigan Tax Tribunal, No. 410946, July 26, 2012, an interstate motor carrier was subject to Michigan use tax on parts it had purchased because the exemption only applies to parts affixed to a qualified truck or trailer at the time of purchase. If a taxpayer acquires a part that is presumptively taxable, the part does not become exempt because the taxpayer subsequently affixes it to a truck or trailer. Furthermore, the use tax exemption for aircraft parts states that parts that are "affixed to or to be affixed to an aircraft ..." are exempt. The absence of similar language in the rolling stock exemption indicates that the statute cannot be interpreted in the same manner to allow parts later affixed to a truck or trailer to be exempt.
Wednesday, August 22 2012
Assessment Deemed a Fee Not a Property Tax
In Carman v. Village of Northport, Michigan Court of Appeals, No. 297059, July 31, 2012, a Michigan village's special sewage system assessment against a taxpayer's property was valid and the connection charge that was imposed when the taxpayer connected to the sewer system was a fee and not a property tax because the payment of the charge was based on a regulatory purpose, which was to implement the sewer system and connect it to homes in the village's special assessment district.
The fact that the connection charge was being used to cover the costs of the sewer system did not mean that it had to be characterized as a special assessment, because a fee may also raise money as long as it is in support of the underlying regulatory purpose. Only those property owners who connected to the new sewer system were asked to pay the fee even though the system otherwise existed to benefit the community as a whole and to protect surrounding bodies of water. The fee was also consistent with the actual cost of connecting to the sewer system. Although the connection charge was not entirely voluntary, the charge was properly considered to be a fee because its overall purpose was primarily regulatory.
The special assessment was also valid because the sewer project conferred a benefit on the taxpayer's property that was different from the benefit to the community as a whole. The sewer system increased the value of the taxpayer's property from having access to the sewer system, both in terms of his use of his property and its market value, and this was sufficient to support the special assessment against his property.
Tuesday, August 21 2012
Sales Taxes are Not Presumed to be Included in the Sales Price of a Retail Sale
The Michigan Department of Treasury has submitted a recertification letter and a revised Taxability Matrix and Certificate of Compliance to the Streamlined Sales Tax Governing Board.
The updated matrix reflects that state taxes on a retail sale that are imposed on the seller where the statute authorizing the tax provides that the seller may, but is not required to, collect the tax from the consumer are not included in the sales price.
Tribal taxes on a retail sale that are imposed on the seller where tribal law authorizing the tax provides that the seller may, but is not required to, collect the tax from the consumer are not included in the sales price.
Streamlined Sales and Use Tax Project, Michigan Department of Treasury, July 31, 2012
Monday, August 20 2012
Michigan Tax Tribunal Dismissed Late Petition Without Hearing
In Elian 2 Corp. v. Department of Treasury, Michigan Court of Appeals, No. 304353, July 24, 2012, the Michigan Tax Tribunal's dismissal of a corporation's petition contesting several tobacco products tax assessments, plus penalty and interest for failure to file or pay taxes, was proper because the corporation did not file its petition within the time provided by statute. The corporation filed a petition with the tribunal contesting the assessments 40 days after issuance of the final assessments.
The corporation moved the tribunal to set aside the dismissal, claiming that the Department of Treasury failed to provide it with due process because the information in the assessments precluded it from making a meaningful decision whether to appeal and that the tribunal failed to provide it with due process because it dismissed the petition without holding a hearing to determine whether its petition was in fact untimely.
The law was clear that the petition must be filed within 35 days. In this case, each of the final assessments issued to the corporation had an issuance date of September 29, 2010. The corporation did not file its appeal until November 8, 2010, more than 35 days after the issuance of the assessments. Therefore, on its face, the petition was untimely and the tribunal lacked jurisdiction.
Furthermore, the tribunal did not err by failing to hold an evidentiary hearing to establish a factual basis for dismissing the corporation's claims based on lack of jurisdiction. The corporation did not dispute that it received the assessments and did not affirmatively assert that it received them late such that it was deprived of adequate time in which to appeal. The corporation presented no evidence that created an issue of fact as to whether it had sufficient time to exercise its right of appeal. Therefore, the corporation was not denied due process by the tribunal's failure to hold an evidentiary hearing with regard to the sufficiency of the notice period.
Friday, August 17 2012
Property Tax Exemption Available Because Proceeds Were Donated to School
In Second Impressions Inc. v. City of Kalamazoo, Michigan Court of Appeals, No. 304608, July 24, 2012, a Michigan nonprofit corporation that operated a thrift shop was entitled to a charitable institution property tax exemption because it donated the net proceeds from the thrift shop to a Christian school association that used the proceeds to reduce the tuition of every student who attended a Christian school in grades kindergarten through 12. The corporation benefited any family that wanted to send their child to a local Christian school because a tuition reduction was available to every student.
The Michigan Tax Tribunal had found that the corporation offered its charity on a discriminatory basis and, therefore, was not a charitable institution. The reasoning was that the corporation offered its charity only to a select group and so it was properly denied a charitable exemption.
The corporation argued that the Tax Tribunal's conclusion was erroneous. The nonprofit corporation was unable to stipulate that the sole use of its donations was to reduce tuition.
The Michigan Court of Appeals recognized that even with a tuition reduction, the Christian school association still had to charge tuition and, therefore, not every student was financially able to attend an association school. The appellate court noted, however, that the Christian school association was legally distinct from the corporation. More importantly, a nonprofit corporation was not disqualified for a charitable exemption because it charged those who could afford to pay for its services as long as the charges approximated the cost of the services. Moreover, the corporation redonated items to various other charities. The corporation's redonating activity fit within one of its purposes as defined by its articles of incorporation. There was no evidence that any of the corporation's redonations were made on a discriminatory basis.
Monday, August 13 2012
MACPA Member Issues Relating to Practice with the Department of Treasury
I represent the MACPA on the Department of Treasury Business Tax Advisory Group. Following is a brief summary on my report to the MACPA State and Local Tax Task Force delivered last week Thursday, August 9, 2012.
1. Treasury says Public Act 211, which relates to the 10-year use tax audit, will not be applied retroactive. Revenue Act Section 22 precludes any further appeal after a final assessment has been issued. However, any use tax audits in progress, use tax audits in informal conference or at the Tax Tribunal/Court of Claims will be limited to four years if the return filing requirement is satisfied.
2. The Court of Appeals decision in Andrie was appealed to the Supreme Court on July 26, 2012. In Tulgestka, the Tax Tribunal applied the Andrie presumption on a very limited basis.
3. Several judicial decisions have established "unitary" for Individual Income Tax. There is a need for legislation to codify "unitary" for IIT and limit it to a waters edge approach identical to the CIT provisions. Also, the sourcing rules should be amended to mimic the CIT provisions. The MACPA may partner with Treasury to obtain such legislation into law.
4. Treasury is not providing the "Report of Audit Findings" to taxpayers. However, they are available through the disclosure officer or as part of discovery.
5. Treasury is not providing copies of the Final Assessment to the taxpayer's agent as identified on the Power of Attorney. Two cases are pending in the Court of Appeals: Fradco, Inc. and SMK, LLC.
6. On MBT audits, auditors are assuming "Unitary" to be automatic when the control test is satisfied in a small closely held group of businesses. To be unitary, a group of affiliated entities must independently satisfy both the "control test" and the "relationship test". A documented "unitary business group study" is advisable to support a tax return position.
7. HB 5146, which addresses out of state construction contracts, is moving through the legislature, but it is limited to only manufacturer contractors. The bill, if enacted into law would stop the Treasury from taxing material withdrawn from a Michigan inventory to be affixed to realty out of Michigan.
8. Several bills are in the Legislative Service Bureau (LSB) to address auditing procedures, sampling and sample projections.