Armco Steel Corp. v. Department of Treasury, Corp. Franchise Fee Div.

• Decision Date: 03 December 1984
• Docket Number: Docket Nos. 68441 and 68983-68986,Nos. 9,10,s. 9
• Citation: 419 Mich. 582,358 N.W.2d 839
• 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, Upjohn Company, and Work Wear Corporation, Plaintiffs-Appellees, v. DEPARTMENT OF TREASURY, CORPORATION FRANCHISE FEE DIVISION, Defendant-Appellant. GREAT SCOTT SUPERMARKETS, INC., Allied Holding Company, Market Leasing Company, and Riley Land Company, Plaintiffs-Appellees, v. DEPARTMENT OF TREASURY, CORPORATION FRANCHISE FEE DIVISION, Defendant-Appellant. Calendar
• Court: Michigan Supreme Court

Page 839

358 N.W.2d 839

419 Mich. 582

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, Upjohn Company, and Work Wear Corporation, Plaintiffs-Appellees, v. DEPARTMENT OF TREASURY, CORPORATION FRANCHISE FEE DIVISION,

Defendant-Appellant.

GREAT SCOTT SUPERMARKETS, INC., Allied Holding Company, Market Leasing Company, and Riley Land Company, Plaintiffs-Appellees, v. DEPARTMENT OF TREASURY, CORPORATION FRANCHISE FEE DIVISION,

Defendant-Appellant.

Docket Nos. 68441 and 68983-68986.

Calendar Nos. 9, 10.

Supreme Court of Michigan.

Argued Oct. 5, 1983.

Decided Dec. 3, 1984.

Dickinson, Wright, Moon, Van Dusen & Freeman by Peter S. Sheldon and Anthony Ilardi, Jr., Lansing, for plaintiffs-appellees Armco Steel, et al.

Honigman Miller Schwartz & Cohn, by Michael B. Shapiro, Detroit, Mich., for plaintiffs-appellees Great Scott Supermarkets, et al.

Frank J. Kelley, Atty. Gen., Louis J. Caruso, Sol. Gen., Richard R. Roesch, Charles E. Liken, Asst. Attys. Gen., Lansing, for defendant-appellant.

RYAN, Justice.

In these consolidated cases, the Court is asked to interpret and adjudge the constitutionality of 1978 P.A. 392. ¹ Plaintiffs are domestic and foreign corporations seeking refunds of corporate franchise fee deficiencies paid by them for various tax years preceding 1975, under former 1921 P.A. 85, commonly referred to as the franchise fee act. ²

Act 392 is a legislative attempt to validate retroactively the Treasury Department's consistent refusal to grant the requested refunds. The Court of Appeals panels in each of these consolidated cases held that Act 392 has denied plaintiffs equal protection of the law.

I

The controversy in these cases emanates from this Court's decisions in Borden, Inc. v. Dep't of Treasury, 391 Mich. 495, 218 N.W.2d 667 (1974), and Clark Equipment Co. v. Dep't of Treasury, 394 Mich. 396, 230 N.W.2d 548 (1975). In Borden, an equally divided Court affirmed the decision of the Court of Appeals, holding that once the Department of Treasury computed a corporation's franchise fee upon the basis of the corporation's annual report, it exhausted its authority under the franchise fee act. The Court specifically held that the department had no authority either to conduct field audits of a corporation's books or to re compute a corporation's franchise fee if the department subsequently obtained, from whatever source, information about the corporation's affairs that it regarded as more accurate. The Court rested its holding upon the historical fact that, as originally enacted, the franchise fee was merely a licensing measure rather than a revenue-raising tax. When the fee was subsequently transformed into a major source of revenue, the statutory procedures for collecting it nevertheless remained unchanged. ³ The Court declined to permit the Department of Treasury to augment these existing procedures without legislative authorization. Although Borden was decided by an equally divided Court, Justice Levin's opinion for affirmance in Borden was subsequently expressly adopted by a majority of the Court in Clark Equipment, supra, p. 399, 230 N.W.2d 548.

The legislative response to the Borden and Clark decisions was the passage of 1975 P.A. 13, amending Secs. 9 and 10 of the franchise fee act. M.C.L. Secs. 450.309-450.310; M.S.A. Secs. 21.210-21.210(1). These amendments, in pertinent part, authorized the division to audit corporations subject to the franchise fee and provided a four-year limitations period within which deficiencies could be assessed. 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), the Court held that 1975 P.A. 13 would be given prospective effect only, finding no indication in the act of any legislative intent to make the act retroactive. Therefore, for those tax years preceding the passage of 1975 P.A. 13, the rule of Borden and Clark Equipment remained controlling. Acquiescing in these decisions only in part, the division cancelled or rescinded those deficiencies which remained unpaid, but refused to grant refunds to those corporate taxpayers who had paid their assessments and later sought repayment. Relying upon Borden and Clark Equipment, two Court of Appeals panels subsequently affirmed judgments awarding corporate litigants refunds of deficiencies paid by them following unauthorized audits and recomputations. St. Clair-Macomb Consumers Cooperative, Inc. v. Dep't of Treasury, 78 Mich.App. 287, 259 N.W.2d 462 (1977), lv. den. 402 Mich. 869 (1978); Giffels Associates, Inc. v. Dep't of Treasury, 81 Mich.App. 730, 265 N.W.2d 809 (1978), lv. den. 403 Mich. 808 (1978). Faced with a potential loss to the state treasury of up to $35 million in taxpayer refund actions, ⁴ the Treasury Department again sought remedial legislation. The Legislature responded with the passage of 1978 P.A. 392, the subject of these appeals.

II

In various tax years preceding 1975, plaintiffs were issued deficiency assessments following unauthorized audits and recomputations. Plaintiffs were among those corporate taxpayers who first paid their deficiencies and subsequently filed refund requests with the Franchise Fee Division. The division denied the requests, prompting plaintiffs to file suit. Plaintiffs in Armco Steel first filed suit either in the Michigan Tax Tribunal or the Michigan Court of Claims, or both. Later, however, they filed the instant action in the Ingham Circuit Court ⁵ seeking a declaratory judgment concerning the interpretation and constitutionality of 1978 P.A. 392. The circuit court held that 1978 P.A. 392 constituted a denial of equal protection as to those plaintiffs who timely requested refunds for tax years prior to 1975. The Court of Appeals affirmed. 111 Mich.App. 426, 315 N.W.2d 158 (1981). We granted leave to appeal. 417 Mich. 886 (1983).

Plaintiffs in Great Scott filed an action for refund in the Michigan Tax Tribunal. Although the tribunal declined to order a refund, the Court of Appeals reversed, also holding that 1978 P.A. 392 unconstitutionally denied plaintiffs equal protection of the law. 113 Mich.App. 679, 318 N.W.2d 537 (1982). Again, we granted leave to appeal. 417 Mich. 887 (1983).

III

The circumstances prompting the institution of these suits is not disputed. The division admits that following the decision in IBM, holding that 1975 P.A. 13 would be given prospective effect only, it refused to rescind deficiency assessments which remained unpaid, but carried out a considered policy to refuse refunds to corporate taxpayers who had requested them. Moreover, it appears that even after the enactment of 1978 P.A. 392, the division continued its disparate treatment of these two groups of taxpayers. In at least one instance of which we have been made aware, plaintiff Upjohn Company filed a written request with the division for a refund in 1974, even before Clark Equipment was decided. However, no response was received from the division until 1978, after Act 392 had passed, when Upjohn's request for a refund was denied on the basis of the new act. Appellees' Appendix, p. 38b. By contrast, in an order of redetermination issued to another corporate taxpayer, not a party to this litigation, deficiencies which had been assessed for the tax year 1974 and which remained unpaid were rescinded on the basis of the Borden and Clark Equipment decisions, notwithstanding the fact that this redetermination was made two months after the date of the letter to Upjohn Company, and four months following the effective date of Act 392. Appellees' Appendix, p. 36b.

Again, these facts are not disputed by the division. It contends instead that a lawful tax need not be refunded simply because its levy and collection were irregular; that plaintiffs have paid only what was legally owed by them under the franchise fee act; and that since the Legislature was empowered to validate retroactively anything which it initially had the power to authorize, the passage of Act 392 terminated plaintiffs' rights to refunds. The division argues that plaintiffs were simply "caught" through the division's use of unauthorized audits, and were asked to pay only what was legally required of all corporate taxpayers under the franchise fee act. They should not now be heard to complain.

We think these arguments fail to address adequately plaintiffs' challenge to the constitutionality of Act 392. Plaintiffs have alleged that the act, as applied to them, violates the Equal Protection Clause of the United States Constitution, and the Equal Protection and Uniformity of Taxation Clauses of the Michigan Constitution. U.S. Const., Am. XIV; Const.1963, art. 1, Sec. 2, and art. 9, Sec. 3. This Court has held that the rights provided under the Michigan Constitution are coextensive with those provided under the United States Constitution. Fox v. Employment Security Comm., 379 Mich. 579, 588, 153 N.W.2d 644 (1967); Wolodzko v. Wayne Circuit Judge, 382 Mich. 528, 534, 170 N.W.2d 9 (1969). In Allied Stores of Ohio v. Bowers, 358 U.S. 522, 527, 79 S.Ct. 437, 441, 3 L.Ed.2d 480 (1959), the United States Supreme Court stated:

"[T]here is a point beyond which the State cannot go without violating the Equal Protection Clause. The State must proceed upon a rational basis and may not resort to a classification that is palpably arbitrary. The rule has often been stated to be that the classification 'must rest upon some ground of difference having a fair and substantial relation to the object of the legislation.' "

These principles are equally applicable to cases involving taxing statutes. In Beauty Built Construction Corp. v. City of Warren, 375 Mich. 229, 134 N.W.2d 214 (1965), the City of Warren imposed a special water tax fee upon all new homes in response to the...