Capital Gain Excluded from SBT Tax Base
In Reynolds Metals Company, LLC v. Department of Treasury, Michigan Court of Appeals, No. 300001, March 20, 2012, affirming the lower court, the Court of Appeals held that a taxpayer was not a unitary business with a joint venture that was sold; therefore, the capital gain on the sale was properly excluded from the taxpayer's tax base under the Michigan Single Business Tax (SBT).
The court noted that the unitary business principles applied to the SBT because, like income taxes, the value added under a value-added tax (such as the SBT) often cannot be assigned to a single source. The court examined whether the taxpayer, through its ownership of the subsidiary, operated a unitary business with the subsidiary's joint venture. The factors to determine if a business is unitary are: functional integration, centralization of management, and economies of scale.
The taxpayer did not participate in the day-to-day management decisions, employees did not overlap, and the joint venture had its own autonomy to determine policies. Even though there was a limited exchange of technology and services, these were done at arm's-length terms. With regard to economies of scale, the taxpayer did not benefit from central purchasing of materials or services. Similarly, there was no joint production or sale of products. Accordingly, the court held that the companies were insufficiently connected to be a unitary business. As such, the capital gain from the sale of the subsidiary was properly excluded from the SBT base.