Armco Steel Corp. v. State, Dept. of Treasury

• Citation: 315 N.W.2d 158,111 Mich.App. 426
• Decision Date: 26 January 1982
• Docket Number: Docket No. 51354
• Parties: ARMCO STEEL CORPORATION, Continental Oil Corporation, Federal-Mogul Corporation, General Electric Credit Corporation, General Electric Corporation, Goodyear Tire & Rubber Company, Kraft, Inc., Phillips Petroleum Company, Simplicity Pattern Company, Upjohn Company, and Work Wear Corporation, Plaintiffs-Appellees and Cross-Appellants, v. STATE of Michigan, DEPARTMENT OF TREASURY, Corporation Franchise Fee Division, Defendant-Appellant and Cross-Appellee.
• Court: Court of Appeal of Michigan (US)

Page 158

315 N.W.2d 158

111 Mich.App. 426

ARMCO STEEL CORPORATION, Continental Oil Corporation Federal-Mogul Corporation, General Electric Credit Corporation, General Electric Corporation, Goodyear Tire &amp Rubber Company, Kraft, Inc., Phillips Petroleum Company Simplicity Pattern Company, Upjohn Company, and Work Wear Corporation, Plaintiffs-Appellees and Cross-Appellants, v. STATE of Michigan, DEPARTMENT OF TREASURY, Corporation Franchise Fee Division, Defendant-Appellant and Cross-Appellee.

Docket No. 51354.

Court of Appeals of Michigan.

Submitted May 5, 1981.

Decided Nov. 17, 1981.

Released for Publication Jan. 26, 1982.

Dickinson, Wright, McKean, Cudlip & Moon by T. Donald Wade and Benjamin O. Schwendener, Jr., Lansing, for plaintiffs-appellees and cross-appellants.

Frank J. Kelley, Atty. Gen., Robert A. Derengoski, Sol. Gen., and Richard R. Roesch and Charles E. Liken, Asst. Attys. Gen., for defendant-appellant and cross-appellee.

Before KELLY, P. J., and BRONSON and DANIELS, ^* JJ.

PER CURIAM.

Plaintiffs brought this action in the Ingham County Circuit Court seeking a declaratory judgment as to the scope and validity of M.C.L. § 450.321; M.S.A. § 21.213(1). The circuit court determined that the statutory provision in question denied plaintiffs equal protection of the law. From this determination defendant appeals as of right. Plaintiffs cross-appeal, claiming one portion of the order should be deleted.

The origins of this case can be traced to Borden, Inc. v. Dept. of Treasury, 391 Mich. 495, 218 N.W.2d 667 (1974). In that case, the Supreme Court held that once the Department of Treasury computed Borden's franchise fee based on the corporation's annual report, it had no authority to conduct an audit and recompute the fee or to recompute it if it subsequently obtained what it regarded as more accurate information. ¹ Borden was decided by an equally divided court. However, in Clark Equipment Co. v. Dep't. of Treasury, Revenue Division, 394 Mich. 396, 230 N.W.2d 548 (1975), the opinion for affirmance in Borden was adopted by a majority of the Court.

The legislative response to Borden and Clark was the passage of 1975 P.A. 13. Among other things, this act specifically authorized the Department of Treasury to audit those corporations which were subject to the franchise fee. M.C.L. § 450.309b; M.S.A. § 21.210b. ² However, in International Business Machines Corp. v. Dep't. of Treasury, 75 Mich.App. 604, 255 N.W.2d 702 (1977), lv. den. 401 Mich. 816 (1977), this Court held that 1975 P.A. 13 would be applied prospectively only since there was no clear indication that the Legislature intended the act to have retroactive effect.

Thereafter, this Court ordered refunds to taxpayers who had paid deficiencies based on unauthorized field audits and recomputations. St. Clair-Macomb Consumers Cooperative, Inc. v. Dep't. of Treasury, Corporation Franchise Fee Division, 78 Mich.App. 287, 259 N.W.2d 462 (1977), lv. den. 402 Mich. 869 (1978), Giffels Associates, Inc. v. Dept. of Treasury, 81 Mich.App. 730, 265 N.W.2d 809 (1978), lv. den. 403 Mich. 808 (1978). The Legislature again responded, this time with 1978 P.A. 392; M.C.L. § 450.321; M.S.A. § 21.213(1), which provides:

"All audits performed by or at the direction of the department of treasury for the purpose of determining liability for a corporate franchise fee levied pursuant to former Act No. 85 of the Public Acts of 1921, and all payments received and refunds made on the basis of those audits before the repeal of former Act No. 85 of the Public Acts of 1921 are declared to be valid and to have been in fulfillment of the legislative purpose to provide for fair administration and enforcement of that act."

Plaintiffs contend that this remedial statutory provision is unconstitutional as a violation of equal protection of the law, U.S. Const. Am. XIV; Const. 1963, art. 1, § 2, and as violative of Michigan's constitutional provision requiring uniformity of taxation, Const. 1963, art. 9, § 3. The trial court agreed with plaintiffs. We, in turn, affirm the lower court for the reasons stated in its excellent opinion as follows:

"Clearly 1978 P.A. 392 unconstitutionally discriminated between two groups of taxpayers who are in reality but one class. Both groups are Corporations doing business in Michigan subject to liability for the payment of franchise fees. In both instances a field audit and/or a recomputation resulted in a deficiency tax assessment. However, in one group, the taxpayer chose not to pay and as a result of Appellate Court interpretation was deemed to have no such tax liability. Therefore, the assessment determination was held null and void. In the other group were the taxpayers-presumably of the group plaintiffs comprise-who paid the deficiency assessments when notified and subsequently learned of the unlawfulness of the deficiency. 1978 PA 392 is therefore used as a shield to avoid the constitutional right of equal protection of the laws.

"Defendant cites the recent Court of Appeals decisions in American Amusement v. Department of Revenue (91 Mich.App. 573, 283 N.W.2d 803 (1979), lv. den. 407 Mich. 942 (1979), app. dis. 446 U.S. 931, 100 S.Ct. 2145, 64 L.Ed.2d 783 (1980) ) * * * for the proposition that the legislature is given wide latitude in classifying taxpayers. But these cases reiterated the principle that the classification must bear a rational basis and not be palpably arbitrary; That the classification according to Allied Stores of Ohio v. Bowers, 358 U.S. 522 at 528, 79 S.Ct. 437 (at 441), 3 L.Ed.2d 480 (1959).

" 'must rest upon some ground of difference having a fair and substantial relation to the object of the legislation * * *. That statute may discriminate in favor of a certain class does not render it arbitrary if the discrimination is founded upon a reasonable distinction, or difference in state policy.'

This court searches in vain for any reasonable distinction between the two groups at issue. Both parties to this lawsuit appear to concede that the designed purpose of 1978 PA 392 was to save the state money; that without 1978 PA 392 Defendant department would have been liable for a return of all monies properly and timely requested which had previously been paid as a result of an unlawful assessment of deficiency. Therefore, the inescapable conclusion is that 1978 PA 392 was enacted for the specific purpose of terminating a judicially created right to refund thereby creating an arbitrary and unreasonable distinction between said two groups which, but for its passage, would have been one classified group of taxpayers.

"Defendant repeatedly argues that Plaintiffs owed the money and haven't contested they owed the money. Therefore, Defendant concludes Plaintiffs paid all they owed and can now not be heard to complain. This Court believes that argument is frivolous and shallow just as is the argument of the Defendant that the appellate Courts said the means only of collecting the tax was illegal but the tax was legal. Such distinctions are meaningless and if adopted would prohibit any judicial inquiry into a question of due process. The question here is far more than whether Plaintiffs 'legally owe' the taxes paid.

"Defendant's most serious inconsistency is its repeated argument that the appellate Courts created the 'unequal class' and it was the wisdom of the legislature in 1978 PA 392 which tried to 'uncreate the unequal classes'. Defendant completely misses the point made in Borden Inc. v. Department of Treasury (supra) and Clark Equipment v. Department of Treasury (supra). The Court quite obviously in those cases interpreted the statutory authority given the Defendant department and concluded it had exceeded such authority. Therefore, the Defendant's repeated references in their brief to the Court of Appeals 'surrendered meekly' and 'abrogated their responsibilities and the legislature was forced to step in and take the necessary steps to correct a grave injustice' (brief p. 19) is an affront to the judicial process of the State of Michigan by the Attorney General."

The only conceivable rational basis for distinguishing the two groups in question is administrative convenience. See, for instance, Carmichael v. Southern Coal & Coke Co., 301 U.S. 495, 57 S.Ct. 868, 81 L.Ed. 1245 (1937), New York Rapid Transit Corp. v. City of New York, 303 U.S. 573, 58 S.Ct. 721, 82 L.Ed. 1024 (1938). It would undoubtedly be easier for defendant to retain the funds in its hands than to collect deficiencies from unwilling taxpayers. Nonetheless, defendant has never argued that the class differentiation created by enactment of M.C.L. § 450.321; M.S.A. § 21.213(1) is justifiable on the basis of administrative convenience. Moreover, the mere fact that a distinction between groups promotes some administrative convenience is not always sufficient to sustain a classification. Thus, in Simpson v. Warren, 106 Fla 688, 143 So. 602 (1932), the Florida Supreme Court struck down as invalid a statute which repealed another tax act and provided that those who had not paid the tax had no liability while those who had already paid were not entitled to a refund. In Simpson, the Court said:

"Where a statute which provides for the collection of a particular tax is valid, and taxes from some have been collected under it, the Legislature is without power to unconstitutionally discriminate against, and deny the equal protection of the laws to, the class of taxpayers who have already paid such tax while the statute was in force, by arbitrarily remitting or wiping out by repeal of the statute or otherwise the liability of those who have by their delinquency evaded or postponed payment for the time being." 143 So. at 603.

See, also, Sheppard v. Hidalgo County, 126 Tex. 550, 83 S.W.2d 649, 653 (1935), City of Raleigh v. Jordon, 218 N.C. 55, 9 S.E.2d 507, 508-510 (1940) (Stacy, C. J., Barnhill and Winborne, JJ. dissenting).

In both Carmichael, supra, a...