In the wake of passage of the so called Kmart fix last month, the Michigan Department of Treasury (Department) has rescinded their notice to taxpayers which would have required all former disregarded entities to file tax returns for all applicable years. RAB 99-1, which promulgated the state's position in regard to disregarded entities, was effective January 1, 1097. A significant administrative burden and tax burden was lifted from Michigan taxpayers.
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 would have been required to file returns under the former Michigan Single Business Tax (SBT) if they had gross receipts in excess of $350,000.
The Department's Notice reads as follows:
2010 PA 38 was signed into law on March 31, 2010. 2010 PA 38 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 SBT] that may have been caused by the [Kmart decision]." In other words, 2010 PA 38 reinstates the law governing disregarded entities under the SBT in effect prior to Kmart.
Therefore, the Department rescinds Notice to Taxpayer Regarding Kmart Michigan Property Services LLC v Dep't of Treasury, the Single Business Tax, RAB 1999-9, and RAB 2000-5. Furthermore, the Department concludes that RAB 1999-9 and RAB 2000-5 reflect the correct interpretation of the law regarding the treatment of disregarded entities under the SBT. Returns, assessments, refunds, and voluntary disclosure agreements involving disregarded entities will be administered consistent with 2010 PA 38, RAB 1999-9, and RAB 2000-5.
This Notice was issued on April 12, 2010.
The downside to the K-Mart fix legislation, is that taxpayers entitled to a refund under the K-Mart ruling would no longer be entitled to the refund. 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.
Finally, both the original Kmart Michigan Properties, the legislative fix and the Departments rescission notice all were in reference to the now repealed Single Business Tax. it is unknown what the effect, if any, will be on the Michigan Business Tax.