SALT Alert: Michigan Department of Treasury Issues Notice Regarding the Meaning of “Indirect Ownership” to Define a Unitary Business Group After LaBelle Management

August 2017

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Summary

The Michigan Department of Treasury (“Treasury”) recently issued a “Notice to Taxpayers Regarding LaBelle Management Inc v Department of Treasury.” The Notice discusses the impact of the LaBelle case on the meaning of “indirect ownership” for purposes of the control test of the definition of a “unitary business group” or “UBG.” Treasury also announced it would apply LaBelle retroactively and instructed taxpayers affected by LaBelle to file amended returns to conform to LaBelle by December 31, 2017. The Department will not impose penalties and will waive interest on any late payments received on or before December 31, 2017.t.

Details

Under the former Michigan Business Tax (“MBT”), which was applicable in tax years 2011 and prior, and the current Corporate Income Tax (“CIT”), a group of U.S. corporations and other taxable entities under common control that are engaged in a unitary business, or a UBG, were required to file a Michigan unitary combined return.
 
On March 31, 2016, the Michigan Court of Appeals issued a decision in LaBelle Management Inc. v Department of Treasury, 315 Mich. App. 23 (2016). In LaBelle, an MBT case, the issue was whether the term “indirect ownership” for purposes of the control test to determine the members of a UBG means “constructive ownership,” or “ownership through attribution.” Before LaBelle, Treasury broadly interpreted indirect ownership to include ownership through attribution, or constructive ownership, similar to that required by IRC § 318. The Court of Appeals rejected Treasury’s interpretation and held that indirect ownership means ownership “through an intermediary,” and it does not include “ownership by operation of legal fiction,” such as by the stock ownership attribution rules of IRC § 318 or constructive ownership.
 
On January 24, 2017, the Michigan Supreme Court denied Treasury’s Application for Leave to Appeal, making the Court of Appeals’ decision final and binding precedent. The Supreme Court’s denial also lifted the stay on the effect of the Court of Appeals’ decision. 
 
The Notice indicates that Treasury’s position is that the decision applies to both MBT and CIT since the control test is the same. As detailed in the Notice, a group of commonly owned corporations with ownership based on a “brother-sister” relationship or “mere custodial or possessory interests” does not meet the requisite level of control for purposes of defining a Michigan UBG. 
 
The Notice also rescinds portions of RAB 2010-1 and 2013-1 to conform to LaBelle. According to the Notice, UBGs and members affected by the LaBelle decision must correct their filings for all open years under Michigan’s four-year statute of limitations to conform to the decision. The Notice specifies the following:
 

  • If the designated member of a UBG remains the designated member of a UBG that no longer contains all of its previous members after applying LaBelle, then the designated member must file amended returns for all open years, including only those members that meet the control test under LaBelle in the new UBG amended returns.
  • Members that do not meet the control test under LaBelle must determine (1) whether they meet the control test for inclusion in a separate UBG, or (2) whether they are a Michigan stand-alone filer for the open years. However, Treasury will only require original returns for new stand-alone filers as if such entity had previously filed Michigan returns (i.e., a four-year look-back period).
  • Penalties will not be imposed on amended UBG returns or original stand-alone returns resulting from LaBelle. Treasury will also waive interest on returns resulting from LaBelle, if those returns are filed by December 31, 2017. Any return filed as a result of LaBelle should be labeled as a “LaBelle return.”

W&G Insights

  • Although Treasury’s Notice primarily addresses the retroactive effect of LaBelle on taxpayers and the filing of amended returns, the effect of LaBelle also could impact Michigan UBG combined returns, and UBG members, with respect to 2016 original returns.
  • Michigan UBG returns (MBT or CIT) filed for the last four tax years should be reviewed to determine whether all of the members meet the control test under LaBelle. Even though Michigan changed from the MBT to the CIT effective January 1, 2012, for most taxpayers, any MBT returns currently under audit should be reviewed, as they are also still open (as well as MBT returns for which audits were completed in the past year that may still be open).
  • There will be situations where filing amended or original stand-alone returns will favor the taxpayer, and situations that do not favor the taxpayer. However, as currently interpreted, amended or original stand-alone returns must be filed regardless of whether the change affects the taxpayer favorably.
  • Taxpayers affected by LaBelle and Treasury’s Notice should consult with their financial statement auditor and tax advisor to evaluate and determine the potential financial statement implications under ASC 740, including the impact on current and deferred taxes, uncertain tax benefits, and disclosures.

Please contact your W&G advisor at This email address is being protected from spambots. You need JavaScript enabled to view it. for additional information or guidance about this alert.

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