Treasury’s Exercise of Discretion Upheld Because of Rational Basis
In CMS Energy Corporation v. Department of Treasury, Michigan Court of Appeals, No. 309172, October 15, 2013, the Michigan Court of Appeals in Affirming the Court of Claims held that a taxpayer’s portion of the business loss carryover deduction under the Single Business Tax (SBT) was properly disallowed on the consolidated return for the 1998 tax year.
Under state law, the Department of Treasury exercised its discretion to allow the taxpayer to file a consolidated SBT return. Citing its policy as explained in Revenue Administrative Bulletin 1989-49, the department limited the business loss. Permitting the taxpayer to deduct business loss carryovers from previous years after approval to consolidate was granted would allow the taxpayer to get around the department’s prohibition against retroactive consolidation. The department’s exercise of discretion is upheld unless there is no rational basis.
The court reasoned that there was a rational basis for the limit because the limit prevented a profitable corporation that is in an affiliated group with less profitable members to reduce the tax liability when filing a consolidated return. The department’s decision was within its discretionary authority. The court rejected the taxpayer’s arguments that limiting the business loss deduction violated the Equal Protection clause of the federal constitution and the Uniformity of Taxation clause of the state constitution. The court noted that the taxpayer did not meet its burden of proving that the department failed to treat similarly situated enterprises equally. Furthermore, the fact that the department settled previous cases with similar issues was not evidence of disparate treatment.