E. F. MacDonald Co. v. Department of Treasury

• Decision Date: 22 July 1975
• Docket Number: Docket No. 20874
• Parties: The E. F. MacDONALD COMPANY, Plaintiff-Appellee, v. DEPARTMENT OF TREASURY, Defendant-Appellant.
• Court: Court of Appeal of Michigan — District of US

Page 678

233 N.W.2d 678

62 Mich.App. 626

The E. F. MacDONALD COMPANY, Plaintiff-Appellee, v. DEPARTMENT OF TREASURY, Defendant-Appellant.

Docket No. 20874.

Court of Appeals of Michigan.

July 22, 1975.

Released for Publication Oct. 21, 1975.

Frank J. Kelley, Atty. Gen., Robert A. Derengoski, Sol. Gen., Richard R. Roesch and Terry P. Gomoll, Asst. Attys. Gen., for defendant-appellant.

Shaman, Winer, Shulman & Ziegler by Dennis L. Hall, Dayton, Ohio, for plaintiff-appellee.

Before BASHARA, P.J., and J. H. GILLIS and CAVANAGH, JJ.

CAVANAGH, Judge.

The Department of Treasury appeals from a June 3, 1974, order of the Ingham County Circuit Court which affirmed a May 10, 1973, opinion and order of the State Board of Tax Appeals. The board had reduced plaintiff's intangibles tax assessment for the fiscal period of February 1, 1962, through February 2, 1969.

The E. F. MacDonald Company (hereafter 'MacDonald') was incorporated in Delaware and operates an international sales incentive and promotion business from its home office in Dayton, Ohio. MacDonald was admitted to do business in Michigan in June of 1961.

In 1967 MacDonald purchased a grocery store chain, which it incorporated as a subsidiary, E. F. MacDonald Shopping Bag Food Stores, Inc., also a Delaware corporation. The subsidiary operates from its headquarters in California and does not do business in Michigan. MacDonald acquired a $28,226,395 note receivable from the subsidiary. MacDonald also possesses receivables for advances to foreign subsidiaries in the amounts of $605,891.61 and $914,386.82 for the fiscal years ending in 1968 and 1969. MacDonald did not file intangible tax returns with Michigan from the time it began operating in the state through February 2, 1969.

On November 10, 1970, the Department of Treasury issued an assessment against MacDonald for $9,010.58 in taxes plus $1,305.48 in interest. The assessment was based on the receivables as intangible personal property pursuant to M.C.L.A. § 205.131 Et seq.; M.S.A. § 7.556(1) Et seq. The attempted taxation applied the statutory apportionment formula of M.C.L.A. § 205.142; M.S.A. § 7.556(12) to the total intangible assets of MacDonald.

MacDonald filed a timely petition with the State Board of Tax Appeals on December 4, 1970. In an opinion and order dated May 10, 1973, the board reduced the assessment to $1,276.97 by eliminating the receivables from the tax computations. The rationale for this holding was given in the opinion as follows:

'After careful deliberation of all contentions presented, there remains the key determination, whether the Appellant's Inter-company loans and receivables, were in any way used in the conduct of Appellant's business in Michigan. Appellee's efforts tend to prove that the income produced by these loans and notes receivable finds its way into the general cash fund utilized by the Michigan branch, as well as other branches. It is our opinion that the Appellee should not look to the use of income from the intangible, but to the use of the intangible asset itself, to determine if It was used in the conduct of business in Michigan. The record does not disclose that the intangible assets in question were used in the conduct of Appellant's business in Michigan, and therefore, fails to reflect any basis for a Michigan 'situs' as defined in Section 1(c) of the Intangible(s) Tax Act.' (Emphasis in the original.)

The Department of Treasury appealed as of right to the circuit court which, after oral arguments and briefs were submitted, rendered an opinion affirming the State Board of Tax Appeals on May 20, 1974. The circuit court, however, grounded its determination that the assessment was erroneous on its construction of M.C.L.A. § 205.131; M.S.A. § 7.556(1). Application for leave to appeal to this Court was granted November 19, 1974.

The Michigan intangibles tax act ¹ imposes a tax on the privilege of ownership of intangible personal property such as moneys on deposit, shares of stock, notes receivable, and bonds. The general rule for the imposition of a property tax is that the property must have a 'situs' within the taxing state. Wheeling Steel Corp. v. Fox, 298 U.S. 193, 208, 56 S.Ct. 773, 80 L.Ed. 1143 (1936). The situs of tangible personal property and real property is less difficult to establish than that of intangible personalty because of the absence of physical characteristics in the latter. See generally, 21 Michigan Law and Practice, Taxation §§ 22--25, pp. 270--274. Generally, the situs attributable to intangibles has been the domicile of their owner. Wheeling Steel Corp., supra, at 209, 56 S.Ct. 773. See also In re Truscon Steel Co., 246 Mich. 174, 224 N.W. 653 (1929). However, within constitutional limits, a state may establish statutory exceptions and thereby place a tax upon intangibles localized within the taxing jurisdiction even though the owner is domiciled in another state. Wheeling Steel Corp. v. Fox, supra.

'Situs' in Michigan for intangible personalty is defined by statute in M.C.L.A. § 205.131(c); M.S.A. § 7.556(1)(c):

'The 'situs' of intangible personal property for the purpose of taxation under the provisions of this act shall be the domicile of the owner thereof, except that any intangible personal property, not otherwise exempt under the laws of this state, owned by a person having his domicile outside of this state but used in connection with the conduct of his business in Michigan, or placed in the hands of a manager or agent in Michigan to the extent that such intangible personal property is invested in a course of repeated transactions in obligations of persons residing in Michigan or secured by property located in Michigan, shall be deemed to have a situs at the place of business, or where such manager or agent resides, as the case may be, within this state; and except that intangible personal property owned by a person domiciled in Michigan but used in connection with the conduct of his business outside of Michigan, or placed in the hands of a manager or agent outside of Michigan to the extent that such property is invested in a course of repeated transactions in obligations or persons residing outside of Michigan or secured by property located outside of Michigan, shall be deemed not to have a situs in Michigan: Provided, That in the case of intangible personal property used in connection with the conduct of the owner's business both within and outside the state of Michigan, all such property shall be deemed to have a 'situs' in this state to the extent of the percentage of the whole of such property as determined by the allocation formula set forth in section 12 of this act.'

The dispute in this case centers around the proviso clause in this statute which authorizes the use of the allocation formula of M.C.L.A. § 205.142; M.S.A. § 7.556(12) in order to determine the tax due from intangibles 'used in connection with the conduct of the owner's business both within and outside (of this) state'. The circuit court held that this clause is inapplicable, and hence that the statute does not authorize the tax under the circumstances for the property of a non-resident corporation. The court held that the proviso applied only to the second exception clause, namely, that the allocated tax on property used both within and outside of Michigan applied only to property owned by Michigan residents. This holding was based on the necessity for statutory taxation to be unequivocal ² and on the principle that a proviso clause should be applied only to the nearest preceding clause.

We cannot agree with the statutory construction imposed by the circuit court for two reasons. First, the modern rule of statutory construction is that a proviso clause is not limited to restricting only the section to which it is attached. A proviso is not presumed to apply only to preceding sections merely because of its location. See 2A Sands, Sutherland Statutory Construction, § 47.09, p. 84. See also Saginaw County Township Officers Association, Inc. v. City of Saginaw, 373 Mich. 477, 130 N.W.2d 30 (1964), and Melvin v. Reading, 346 Mich. 348, 78 N.W.2d 181 (1956).

Second, it is a rule of statutory construction that amending legislation should be liberally construed so as to correct defects in previous statutes. People v. Gould, 237 Mich. 156, 163, 211 N.W. 346 (1926). Amended statutes should be interpreted in light of the rationale of court decisions which prompted the amendment. See generally, 21 Michigan Law and Practice, Statutes, § 100, p. 118.

The original intangibles tax act ³ did not include a proviso for allocating situs. This was amended in 1945 ⁴ to add a proviso substantially similar to the one presently in M.C.L.A. § 205.131(c); M.S.A. § 7.556(1)(c). The proviso, however, was located after the first exception clause and thus was held to pertain only to personal property owned by non-residents and used in their Michigan business. This statutory scheme was ruled a violation of equal protection under the fourteenth amendment in Cleveland-Cliffs Iron Co. v. Department of Revenue, 329 Mich. 225, 45 N.W.2d 46 (1950). Thereafter the statute was amended ⁵ by eliminating a reference in the proviso clause which limited its application to an owner not domiciled in Michigan and by changing the position of the proviso clause so that it followed both exception clauses. ⁶ From this statutory and judicial history, it is clear that the proviso clause was intended to apply to both residents and nonresidents as to the allocation of situs. Thus, the circuit court's construction of the statute was erroneous.

M.C.L.A. § 205.131; M.S.A. § 7.556(1) establishes situs in three situations. First, situs is established for intangible property owned by persons domiciled in Michigan--if the property is not otherwise covered under the exception clauses of the statute. Second, a 'business situs' is deemed to exist for property used in connection with a nonresident...