ANR Pipeline Co. v. TREASURY DEP'T

• Decision Date: 05 July 2005
• Docket Number: Docket No. 249056.
• Citation: 266 Mich. App. 190,699 N.W.2d 707
• Parties: ANR PIPELINE COMPANY, Petitioner-Appellant, v. DEPARTMENT OF TREASURY, Respondent-Appellee.
• Court: Court of Appeal of Michigan — District of US

699 N.W.2d 707

266 Mich. App. 190

ANR PIPELINE COMPANY, Petitioner-Appellant, v. DEPARTMENT OF TREASURY, Respondent-Appellee.

Docket No. 249056.

Court of Appeals of Michigan.

Submitted April 5, 2005, at Lansing.

Decided May 3, 2005, at 9:10 a.m.

Released for Publication July 5, 2005.

Mika Meyers Beckett & Jones, PLC (by Jeffrey A. DeVree and Elizabeth K. Bransdorfer), and D. Glen Eisen, Grand Rapids; Houston, TX, for the petitioner.

Michael A. Cox, Attorney General, Thomas L. Casey, Solicitor General, and Kevin T. Smith, Assistant Attorney General, for the respondent.

Before: MARK J. CAVANAGH, P.J., and JANSEN and GAGE, JJ.

PER CURIAM.

Petitioner ANR Pipeline Company appeals as of right an opinion and judgment of the Michigan Tax Tribunal. Petitioner unsuccessfully sought to exclude certain portions of its income in fiscal years 1989 through 1994 from taxation pursuant to the Single Business Tax Act (SBTA), MCL 208.1 et seq. We affirm.

I. Facts

Petitioner is a Michigan corporation engaged in the interstate transportation, storage, and sale of natural gas. This claim arose from petitioner's attempt to exclude from its single business tax (SBT) base certain charges to its customers that it characterized as "interest income." In three separate final assessments, respondent asserted that the amounts in question were not interest income to petitioner, but were more akin to "carrying charges," which should be included in the SBT base. The Tax Tribunal agreed with respondent.

Petitioner's gas sales services generally involves the purchase of gas, the transportation of that gas through petitioner's pipelines, and the sale of that gas to local distribution companies and large industrial customers. Petitioner also maintains storage fields, and sells stored gas to customers during periods of peak demand. This industry is regulated by the Federal Energy Regulatory Commission (FERC).¹ The maximum allowable rates, as well as general conditions of service, are determined through general rate case proceedings and set out in FERC-approved tariffs. Customers and other interested parties may intervene in these proceedings.

In the 1970s, gas shortages existed, and the FERC instituted policies designed to provide some guarantee of a gas inventory at a time when the commodity was difficult to obtain. In response, pipeline companies executed long-term "take-or-pay" contracts that required them to either "take" a specified amount of gas or "pay" for the equivalent amount whether taken or not. Pipeline companies could, and did, pass increased costs along to their customers. However, because of further FERC intervention, pipeline companies lost the ability to pass on these costs. At the same time, a "spot" market developed, whereby gas customers could buy gas for much cheaper than they could purchase it from the pipeline companies. The pipeline companies were then forced to transport this gas. As a result, some companies, including petitioner, were placed at a considerable competitive disadvantage. These companies could not take the minimum quantities of gas for which they had contracted, and were forced to breach the take-or-pay contracts with producers. This led to litigation.

Ultimately, the natural gas producers and pipeline companies settled the take-or-pay claims. In order to avoid a catastrophe in the industry, in a series of rulings, the FERC allowed the pipeline companies to recover some of these settlement costs by passing them on to future (volumetric-surcharge) customers or by billing the costs back to previous (direct-billing) customers. Different amounts could be recovered depending on the system or systems used. Petitioner chose to utilize both methods of recovery. As a result, the direct-billing customers, who had a preexisting contractual relationship with petitioner (and who continued to be petitioner's customers), were "back-billed" for their share of the payments, which were apparently based on the fact that their past reduced gas purchases had contributed to the take-or-pay liability. For volumetric-surcharge customers, who now included all new and preexisting customers, a "volumetric surcharge" was added to the sales price of additional gas sold or transported by petitioner as a set amount per unit of gas transported or sold.² The FERC allowed this volumetric-surcharge payment to include what petitioner describes as an interest component, with interest tied to FERC-controlled rates. See 18 CFR 2.104. For the direct-billing customers who elected not to pay their preexisting obligations in full, the invoices sent to the customers contained an actual breakdown of the principal and interest components.³ However, petitioner admits that it did not similarly "break out" the VSCC included in each new gas invoice "because customers did not request the information and an inordinate amount of work would have been required to calculate the carrying charges for each invoice to each of [its] many customers." Instead, the customers who were charged volumetric-surcharge amounts were only provided with a total charge, which consisted of a multiplication of the decatherms of gas used by a rate per decatherm rather than separate "principal" and "interest" charges.⁴ The volumetric surcharge borne by a customer bore no relation to the amount of gas that customer previously purchased from petitioner. Even new purchasers were required to pay the charge. There was also no obligation on the part of former customers to make any volumetric-surcharge payments, either in terms of principal or VSCC, if they elected to make arrangements with someone other than petitioner for their gas requirements.

Petitioner filed federal income tax returns for 1989 through 1994. In 1989 and 1990, petitioner reported the direct billing carrying charges as gross receipts, but in later years reported them as interest income. In 1989, 1990, and 1991, petitioner reported all or portions of the volumetric-surcharge payments as gross receipts, but in later years reported them as interest income as well. Because both alleged interest and principal components were treated as ordinary income for federal income tax purposes, no federal income tax consequences to petitioner resulted from the change. However, the SBT base consequences were another matter, as more fully discussed in part II. As a result, petitioner attempted to exclude from its SBT base "the carrying charges component of the direct billings and volumetric surcharges", but only after "reclassifying" its own books to separate out the "interest component" from the rest of the volumetric-surcharge payments that were recorded as one total payment in its revenue accounts.⁵ Following respondent's discovery that one of petitioner's major customers did not add the "interest" payments back into its own SBT base for purposes of its SBT calculation, respondent's auditor questioned why petitioner was subtracting the payments from its SBT base. Ultimately, respondent issued "Notices of Intent to Assess" or "Proposed Assessments" seeking to recover the additional taxes due as a result of the inclusion of the VSCC and PGACC payments into petitioner's SBT base for the years in question. Petitioner contested the assessments. Initially, a referee recommended a determination that the interest portion of the volumetric-surcharge payments were properly excluded from the SBT returns on the basis of a finding that the "unique status of the taxpayer" was controlling and that a "legal fiction" had been created of a debtor-creditor relationship between the current customers and petitioner. The Revenue Commissioner subsequently rejected the referee's recommendation. Focusing on the lack of a preexisting debtor-creditor relationship and the treatment of interest under the SBTA, he found that the payments did not "constitute money paid for the use of or forbearance of using money," and thus could not be excluded from the SBT base.

Following this decision, petitioner sought review before the Tax Tribunal. The matter was tried on stipulated facts. The tribunal found in favor of respondent. It held that, despite their designation as "interest," the VSCC payments were different substantively from traditional interest payments. Instead, the sums were intended as a means to correct a competitive imbalance in the regulated gas transmission industry, and they actually performed as "revenue" in the hands of petitioner, the economic actor. The tribunal found that it was this substantive reality that controlled the question whether the VSCC payments were to be considered interest for SBT purposes. Like the Revenue Commissioner, the tribunal focused on the lack of a preexisting debtor-creditor relationship between petitioner and its newly billed customers to find that no present customer was "using" petitioner's money and, thus, the payments did not actually constitute interest. It further found that petitioner's characterization was hampered by the fact that (i) the VSCC payments were not evidenced by a fixed contract, (ii) the amounts of principal and interest were not set forth separately on petitioner's books or billed separately to customers, (iii) there was no opportunity to escape the interest component by immediate payment of the principal amount, and (iv) petitioner was not in the principal business of lending money.

II. Treatment of charges under the Single Business Tax Act

Petitioner first argues that the Tax Tribunal erred when it refused to allow petitioner to treat the VSCC payments as "interest" for purposes of exclusion from petitioner's SBT base. It maintains that these payments are interest as defined under Town & Country Dodge, Inc v. Dep't of Treasury, 420 Mich. 226, 362 N.W.2d 618 (1984). We disagree.

"In the absence of fraud, review of a Tax Tribunal decision is limited to determining whether the tribunal erred in applying the law or adopted a wrong principle. The Tax Tribunal's factual findings are...