United States

Michigan: State Supreme Court Declines to Review Decision Invalidating Department’s Guidance on Unitary Group Composition

Jan 30, 2017
From KPMG TaxWatch

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On January 24, 2017, the Michigan Supreme Court declined to review the LaBelle Management case. In LaBelle Management, the Michigan Court of Appeals invalidated the ownership test applied by the Department of Treasury in determining when entities are included in a unitary group. Recall, guidance issued by the Department for both the Michigan Business Tax (MBT) and Corporate Income Tax adopted an IRC section 318-type constructive ownership requirement in determining when a U.S. person indirectly owned other members of the group. Under the constructive ownership requirement, for example, brother/sister entities owned by a foreign parent were considered to indirectly own each other for purposes of satisfying the control test. Thus, assuming all other indicia of a unitary business were present, the brother/sister entities were a single Michigan unitary group. In LaBelle, the appellate 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.

The appellate court’s decision had been stayed pending the exhaustion of the Department’s appeal rights. However, now that the Department’s review petition has been denied by the Michigan Supreme Court and there does not appear to be an issue that could be heard by the U.S. Supreme Court, the stay may be lifted shortly.  It has been estimated that the holding will affect 30,000 unitary filings. Please contact Mike Bozimowski at (313) 230-3183 or 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.