Apportionment of a Unitary Tax Base Ruled Proper for a Unitary Business
In The Estate of Thomas M. Wheeler, et al., v. Department of Treasury, Michigan Court of Appeals, No. 302251, May 15, 2012, the Michigan Court of Appeals has held that an S corporation and a lower-tier general partnership were unitary, so that the shareholders/taxpayers properly apportioned their income to Michigan under the personal income tax laws. The S corporation made automotive electrical systems and acquired all the business assets of a German business, which was also a manufacturer and assembler of electrical distribution systems. The German business's operating assets were moved into a partnership as part of the acquisition. The taxpayers received flow-through income from the S corporation and the partnership, which they apportioned.
Under the unitary business principle, for a taxpayer to use apportionment, there must be some sharing or exchange of value not capable of precise identification or measurement (beyond the mere flow of funds arising out of a passive investment or a distinct business operation) that makes apportionment reasonable. Reviewing applicable case law, the court observed that Michigan law does not allow separate entities to be treated as a unitary business in the absence of some common ownership at the entity level and that being owned by the same individual taxpayer is insufficient to trigger this relationship requirement. In this case, the court determined that the taxpayer could use the unitary business principle to apportion income. Furthermore, the unitary business principle does not exclude foreign entities. The personal income tax definition of "state" specifically includes foreign countries.
Finally, the two businesses met the test to be considered unitary: (1) under the economic realities, the regularly conducted activities of the businesses were related as they were both engaged in manufacturing and assembling electrical distribution systems; (2) under functional integration, the business functions were blended to promote a unitary relationship as component engineering, manufacturing and industrial engineering, cost estimating, business development, finance, and executive administration were shared; (3) management was centralized; (4) economies of scale were achieved with an expanded customer base, sharing of unique and proprietary processes, and improved financing terms; and (5) under substantial mutual interdependence, acquisition of the German business was essential for the S corporation to remain a Ford supplier. Accordingly, the lower court properly found that the taxpayers apportioned their income under the unitary business principle.