Apr 11, 2016
From KPMG TaxWatch
Recently, the Michigan Court of Appeals addressed whether, in the context of a unitary group, indirect ownership was the same as “constructive ownership” under federal law. The case involved two corporate entities and a limited partnership. Under the Michigan Business Tax (MBT) test for a unitary group―which is also applied for purpose of the corporate income tax that became effective in 2012—one member of the group must directly or indirectly own or control more than 50 percent of the ownership interests of the other members. In Revenue Administrative Bulletin 2010-01, which addressed the unitary business group control test, the Department of Treasury adopted IRC §318 type-attribution rules to determine whether a group of persons met the requisite ownership and control tests. Applying the tests outlined in RAB 2010-01, the Department determined that the parties at issue constituted a unitary group. The taxpayer protested this determination.
Because the parties agreed that no entity directly owned more than 50 percent of any of the others, the issue before the court was whether there was sufficient indirect ownership or control. Although indirect ownership was not defined in the MBT Act, a term used in the Act and not defined differently was to be given the same meaning as when used in a comparable context in federal tax law. The trial court, while noting that there was no directly comparable federal provision, nevertheless held that the most contextually analogous rules were the international tax rules that required a U.S. shareholder to include in its return the income of a controlled foreign corporation. These federal provisions adopted the same attribution rules under IRC § 318 that the Department applied in its RAB, thus, the trial court held that the parties were a unitary group. The taxpayer appealed.
The appeals court rejected the Department’s application of IRC §318 in determining whether the indirect ownership test was met. The court emphasized that although the MBT law mandated that federal tax laws must be applied to define a statutorily undefined term, the federal context must be comparable to the Michigan context. The appeals court determined that “constructive ownership”—a legal fiction—was not a “comparable context” to “indirect ownership.” Moreover, the federal tax statutes and regulations were replete with examples illustrating that indirect ownership and constructive ownership were two different concepts. Because there was no comparable federal context in the IRC, the court applied the “ordinary and primarily understood meaning” of “indirect ownership” and ultimately defined indirect ownership to mean ownership through an intermediary, not ownership by operation of legal fiction. The court concluded that the parties were not unitary and granted the taxpayer’s summary judgment motion. Please contact Dale Kim at (212) 954-3920 with questions on Labelle Management Inc. v. Dep’t of Treasury.
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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.