The "unitary" concept is somewhat new to Michigan although the Michigan Corporate Income Tax, repealed after 1975, used the "unitary" concept. However, the Michigan Single Business Tax (SBT) did not use the "unitary' concept and required separate filing. The separate filing requirement for the SBT provided numerous opportunities for tax planning to avoid the SBT or minimize the tax paid. For these reasons, the Michigan legislature adopted the "unitary" concept for the Michigan Business Tax (MBT).
Under the MBT, a unitary business group is defined as:
a group of United States persons, other than a foreign operating entity, 1 of which owns or controls, directly or indirectly, more than 50% of the ownership interest with voting rights or ownership interests that confer comparable rights to voting rights of the other United States persons, and that has business activities or operations which result in a flow of value between or among persons included in the unitary business group or has business activities or operations that are integrated with, are dependent upon, or contribute to each other. For purposes of this subsection, flow of value is determined by reviewing the totality of facts and circumstances of business activities and operations. [MCL 208.1117(6)]
A group of U.S. persons must meet both a control test and one of two relationship tests before that group will be a unitary business group. [RAB 2010-1, Page 2]
"Taxpayer" is defined to mean "a person or a unitary business group liable for a tax, interest, or penalty under this act". [MCL 208.1117(5)]
"Person" is defined to mean an individual, firm, bank, financial institution, insurance company, limited partnership, limited liability partnership, copartnership, partnership, joint venture, association, corporation, subchapter S corporation, limited liability company, receiver, estate, trust, or any other group or combination of groups acting as a unit. [MCL 208.1113(3)]
The combination of these three definitions makes a unitary filing mandatory. The definition of "person" significantly broadens those individuals or entities that may be included in a unitary filing. The definition of "taxpayer" means a "unitary business group" is one taxpayer and will file one tax return for the entire group.
The United States Supreme Court described a unitary business as a functionally integrated enterprise whose parts are mutually interdependent such that there is a flow of value between them. There must exist 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. In determining whether a flow of value exists, a relevant question in the inquiry is whether contributions to income resulted from "functional integration," "centralization of management," and "economies of scale." No one fact is determinative of whether functional integration, centralization of management or economies of scale exist. Rather, the statute requires that the totality of facts and circumstances surrounding the business activities and operations be weighed and examined for cumulative effect. [RAB 2010-2, Page 2]
Under the Michigan Business Tax ("MBT"), a unitary business group is two or more persons that satisfy both a control test and one of two relationship tests. A unitary business group is a single taxpayer under the MBT and must file a combined return. Foreign persons and foreign operating entities cannot be included in a unitary business group. [RAB 2010-1, Page 1]
The control test is satisfied when one person owns or controls, directly or indirectly, more than 50% of the ownership interests with voting or comparable rights of the other person or persons. A person owns or controls more than 50% of the ownership interests with voting rights or ownership interests that confer comparable rights to voting rights of another person if that person owns or controls, directly or indirectly, (1) more than 50% of the total combined voting power of all ownership interests with voting (or comparable) rights or (2) more than 50% of the total value of all ownership interests with voting (or comparable) rights. "Ownership interest with voting rights" includes all classes of stock in a corporation entitled to vote that possess the power to elect the membership of the board of directors of the corporation. "Ownership interests that confer comparable rights to voting rights" includes instruments, contracts, agreements, or other authority demonstrating an ownership interest in that entity that confers power in the owner to vote in the selection of the management of that entity. [RAB 2010-1, Page 2]
The definition of a unitary business group requires, in addition to satisfying the control test, that the group of persons have business activities or operations that either:
1. Result in a flow of value between or among persons in the group, or
2. Are integrated with, dependent upon, or contribute to each other.
A taxpayer need only meet one of the two alternative tests to satisfy the relationship test. [RAB 2010-2, Page 2]
Section 511 of the MBTA mandates that a "unitary business group" must file a combined return and provides for elimination of transactions between entities within the group.
A unitary business group shall file a combined return that includes each United States person, other than a foreign operating entity, that is included in the unitary business group. Each United States person included in a unitary business group or included in a combined return shall be treated as a single person and all transactions between those persons included in the unitary business group shall be eliminated from the business income tax base, modified gross receipts tax base, and the apportionment formula under this act. If a United States person included in a unitary business group or included in a combined return is subject to the tax under chapter 2A or 2B, any business income attributable to that person shall be eliminated from the business income tax base, any modified gross receipts attributable to that person shall be eliminated from the modified gross receipts tax base, and any sales attributable to that person shall be eliminated from the apportionment formula under this act. [MCL 208.1511
The "unitary business group" concept and the combined return are new to Michigan taxpayers. The statutory provisions are extremely complicated and the underlying rules and regulations are difficult to work with. The control test for indirect ownership, constructive ownership and the attribution rules are somewhat objective but very complicated. The relationship test is mostly based on judicial interpretations and consequently very subjective.
A unitary filing of a combined return can be advantageous to a Michigan based group of entities. In a unitary combined return, losses of one entity can be immediately used against the profits of he other entities; intercompany gross receipts derived from sales within the group can be eliminated thereby eliminating pyramiding; and credit limitations apply to the entire group thereby maximizing the utilization of credits. For some group of entities, especially for non-Michigan based entities, a unitary combined return filing my result in additional tax.
The Michigan Business Tax Unitary Review is designed to identify the good and the bad associated with a unitary combined filing so as to present tax planning ideas for tax minimization. The statutory provisions and the guidance provided in RAB 2010-1 on the Control Test and RAB 2010-2 on the Relationship Test are applied.