Capital Gain on Sale of a Subsidiary Properly Included in Business Income
In TMW Enterprises, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 302870, August 14, 2012, the Michigan Court of Appeals, affirming the trial court, held that the calculation of an S corporation's business income under the single business tax (SBT) was correct. In an earlier appeal of the same case, the appellate court ruled that the S corporation was a corporation under the SBT and therefore was not entitled to the casual transaction exclusion.
On remand, the trial court determined that only that portion of the gain that represented built-in gains or excessive passive income was subject to the SBT. The Department of Treasury argued that it was improper for the calculation of tax liability issue to be revisited on remand. The court disagreed and noted that the trial court had the authority to take any action which was not inconsistent with the appellate court's first opinion. Thus, the trial court was required to treat the taxpayer like any other corporation, and that was what happened. The former SBT was imposed on a taxpayer's adjusted tax base. The tax base was "business income," which, for corporations, was federal taxable income. S corporations are subject to tax on built-in gains and excess passive income. Therefore, the amount of those built-in gains and excess passive income constituted "business income" and was subject to the SBT.