Membership Interest is an Intangible Asset Not Eligible for the Investment Tax Credit
In Phillips Stevens Building Company, LLC v. Michigan Department of Treasury, Michigan Tax Tribunal, No. 433192, June 27, 2012, the Tax Tribunal ruled the taxpayer could not claim an investment tax credit (ITC) carryforward against the Michigan Single Business Tax (SBT) for the years 2006 and 2007 because the sale and purchase of an intangible membership interest does not qualify for the ITC.
In 2005, a 27.7% membership interest in the taxpayer was sold, and, subsequently, a 43.2% membership interest was sold by the taxpayer's member to two living trusts. Pursuant to IRC §708, as a result of the sale of more than 50% of the total interest in the partnership, a "technical" termination occurred. A partnership that terminates under the sale or exchange rule is considered to contribute all of its assets to a new partnership and make a liquidating distribution of its interests in the new partnership. Therefore, the trusts contributed the taxpayer's property to the new partnership, and the partnership property was not purchased by the taxpayer due to the technical termination. The transaction that occurred was the sale and purchase of the taxpayer's membership interest, which as an intangible asset did not qualify for the ITC.