A recent development under the former Single Business Tax (SBT) may affect individuals with an interest in flow through entities, investment clubs and Family Limited Partnerships (FLPTs).
The Michigan Department of Treasury has begun sending "Letters of Inquiry" to individuals, fiduciaries, and banks and other entities that are partners in partnerships and that manage FLPTs and common trust funds asserting an SBT filing obligation for investment activity. These Notices are generated from the Department's Discovery Unit which indicates there is a specific audit project designed to discover individuals who hold an interest in flow through entities, FLPTs and trust funds and to collect tax, penalty and interest. Letters of Inquiry were sent to a large number of individuals, banks, partnerships, trusts and other family estate-planning entities earlier this year. The letters and follow-up correspondence are automated.
The SBT was around for 32 years. In the past the Department of Treasury has attempted to expand the tax to investment activities. The Single Business Tax Act did not exempt investment activities. However, there was an exclusion for casual sales. In recent years the Michigan Department of Treasury has held to a definition of "gross receipts" which covered only receipts from a regular trade or business and the Department never subjected passive investment income of individuals or from family estate-planning entities to the SBT.
Due to a statutory change in 2000, the Department now believes that investment activity meets the definition of business activity. Though historically the Department assessed few, if any, taxpayers for their passive investment activity, the Discovery Unit is now asserting that the individuals and family estate-planning entities are non-filers; that they are taxable for all prior years; and it is signaling that it will issue assessments to those who fail to respond to the Notices.
Taxpayer groups are approaching the legislature for a legislative fix to prohibit the Department of Treasury from assessing the SBT in investment activities. Hopefully, the Department of Treasury will back down. In the meantime, taxpayers should not pay the assessments and should appeal the assessments.