On November 21, 2016, the Michigan Department of Treasury (Department) provided updated guidance on how to calculate the five-year average of net equity capital for financial institutions combining with other financial institutions. This rescinds guidance previously provided by the Department in MBT FAQ F5 and CIT Insurance Companies/Financial Institutions FAQ 6. The updated guidance has been given full retroactive effect by the Department and may be applied to all open tax years.

Financial institutions calculate their Michigan Business Tax (MBT) or Corporate Income Tax (CIT) net capital tax base by averaging net capital over five years (or the number of years in existence if fewer than five years).¹ When two or more financial institutions combine into one, the law requires the combined financial institution to be treated as if it had been a single financial institution for the entire tax year in which the combination occurs and for each tax year after the combination.² Under the Department's previous interpretation, a financial institution that combined with another financial institution had to consider the net capital for both the acquired and surviving entities for tax years prior to the year of combination when calculating the tax base. Now, however, the Department will no longer calculate net capital for years prior to the combination using both the acquired and surviving entities' net capital. Only the surviving financial institution's net capital for years prior to combination will be considered to calculate the five-year average.

Implications

Affected taxpayers should apply this guidance going forward. Because the policy applies retroactively, they also should consider filing amended MBT or CIT financial institution returns for all open periods. The statute of limitations on refunds under both the MBT and the CIT is generally four years from the date set for filing the original return.³

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ENDNOTES

¹ MCL Sections 208.1265(2) and 206.655(2).

² Id. Sections 208.1265(4)(b) and 206.655(4)(b).

³ Id. Section 205.27a(2).