The Michigan Department of Treasury (Department) announced that the Michigan Court of Appeal (COA) decision in LaBelle Management, Inc. (LaBelle)¹ is now binding precedent and it will give the decision full retroactive effect to all open tax years.²

In LaBelle, the COA held that a group of three entities — two corporations and a limited partnership — did not constitute a "unitary business group" (UBG) as defined in MCL 208.117(6) for purposes of the Michigan Business Tax (MBT) because no one member of the group owned, through an intermediary or otherwise, more than 50% of any other entity (i.e., the control test). 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.

The Department takes the position that, since the same control test is used for the MBT and the Corporate Income Tax (CIT), the decision in LaBelle applies to both. Further, the Department interprets the "decision as narrowing the UBG groups to those in which ownership or control is based upon a parent-subsidiary chain of relationships." If the UBG's membership is based upon brother-sister relationships as described in RAB 2010-1, the Department's position is that it does not meet the required level of control under LaBelle.³ The mere custodial or possessory interest also does not reach the requisite level of ownership or control.

Implications

UBG members should review their UBG determinations for all tax years open under statute and correct their filing to conform to the control test holding in the LaBelle decision. If, after applying LaBelle, the UBG does not include all of its prior members, the designated member of an affected UBG must file amended returns to reflect the activities only of those members that meet the control test under LaBelle. Those members that are determined to no longer be part of a UBG must determine whether they meet the control test for inclusion in a new UBG or should file a stand-alone return. The Department deems these affected members as non-filers for the years they filed in compliance with RAB 2010-1 and 2013-1, and requires these entities to file amended returns or an original return as a stand-alone filer for all open years. These returns should be accompanied by written correspondence identifying the return as a "LaBelle" return. The statute of limitations is generally four years as prescribed by MCL 205.27a(2).

The Department will not impose penalties on amended UBG returns and stand-alone returns filed as a result of complying with its instructions in response to the ruling in LaBelle. Nor will it impose interest on any tax or additional tax due and reported on such returns, provided that such LaBelle returns are filed by December 31, 2017.

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ENDNOTES

¹ LaBelle Management, Inc. v. Department of Treasury, No. 324062 (Mich. Ct. App. March 31, 2016), review denied, No. 154016 (Mich. S. Ct. Jan. 24, 2017).

² Mich. Dept. of Treas., Notice to Taxpayers Regarding LaBelle Management Inc. v. Department of Treasury (Feb. 28, 2017).

³ The Department rescinds the following sections of RAB 2010-1 and RAB 2013-1: Sections III(B), (C), and (E), Section VI, and Section VII.