On January 24, 2017, the Michigan Supreme Court denied an appeal by the Michigan Department of Treasury (Department) of the ruling by the Michigan Court of Appeal (COA) in LaBelle Management, Inc. regarding the definition of "unitary business group" (UBG).¹

Previously, the COA reversed a ruling of the Michigan Court of Claim and determined that a group of three entities — two corporations and a limited partnership — did not constitute a "unitary business group" as defined in MCL 208.117(6) because no one member of the group owned, through an intermediary or otherwise, more than 50% of any other entity. In reaching this conclusion, the COA held that the Department, in applying the federal income tax law definition of "constructive" ownership when defining Michigan's "indirect" ownership requirement, improperly broadened its interpretation of "unitary business group" beyond the scope intended by the Legislature.²

Implications

Since May 5, 2016, the effectiveness of the COA's decision was stayed pending the exhaustion of the Department's appeal rights. With the Michigan Supreme Court's ruling, it is likely that the Department will make no further appeals, the COA's decision will be final and the stay should be lifted shortly. The COA's decision provides clarification on how a Michigan UBG is determined. Taxpayers affected by this decision should review their UBG determinations for all tax years open under statute to understand how they are impacted and whether additional or amended filings are required. The statute of limitations is generally four years as prescribed by MCL 205.27a(2).

A UBG member that does not meet the control test under the COA'S decision must determine if it meets the control test for inclusion in a separate UBG or whether it should file its returns on a stand-alone basis for all tax years open under the applicable statute of limitations. In either case, a member that was previously, incorrectly, included in a UBG is considered a non-filer. It is likely that the Department will require all non-filers to file amended returns, or original returns only for those tax periods open under the applicable statute of limitations. Penalties should not be assessed due to reliance on the Department's guidance under previously issued Revenue Administration Bulletins (2010-1 and 2013-1), portions of which will have to be rescinded once all appeals of the COA's Labelle decision are exhausted.

For additional details on this case please see Tax Alert 2016-867.

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ENDNOTES

¹ LaBelle Management, Inc. v. Department of Treasury, No. 154016 (Mich. S. Ct. Jan. 24, 2017).

² LaBelle Management, Inc. v. Department of Treasury, No. 324062 (Mich. Ct. App. March 31, 2016).