Great Scott Supermarkets, Inc. v. Michigan Dept. of Treasury, Corporate Franchise Fee Division

• Decision Date: 04 May 1982
• Docket Number: 49355,Docket Nos. 49354,49356 and 49357
• Citation: 113 Mich.App. 679,318 N.W.2d 537
• Parties: GREAT SCOTT SUPERMARKETS, INC., Allied Holding Company, Market Leasing Company, and Riley Land Company, Petitioners-Appellants, v. MICHIGAN DEPARTMENT OF TREASURY, CORPORATE FRANCHISE FEE DIVISION, Respondent-Appellee.
• Court: Court of Appeal of Michigan — District of US

Page 537

318 N.W.2d 537

113 Mich.App. 679

GREAT SCOTT SUPERMARKETS, INC., Allied Holding Company Market Leasing Company, and Riley Land Company Petitioners-Appellants, v. MICHIGAN DEPARTMENT OF TREASURY, CORPORATE FRANCHISE FEE DIVISION, Respondent-Appellee.

Docket Nos. 49354, 49355, 49356 and 49357.

Court of Appeals of Michigan.

Submitted Jan. 6, 1981.

Decided March 2, 1982.

Released for Publication May 4, 1982.

Honigman, Miller, Schwartz & Cohn by Michael B. Shapiro, Detroit, for petitioners-appellants.

Frank J. Kelley, Atty. Gen., Louis J. Caruso, Sol. Gen., and Richard R. Roesch and Charles E. Liken, Asst. Attys. Gen., for respondent-appellee.

Before HOLBROOK, P. J., and CAVANAGH and MacKENZIE, JJ.

MacKENZIE, Judge.

This case involves claims for refund of a portion of the corporate franchise taxes and interest paid to the state by appellants in 1973 and 1974. It is stipulated that appellants timely filed annual reports with the Michigan Department of Commerce and paid franchise fees as computed by them for each year in question. Appellee accepted the fees as filed. However, on January 31, 1977, appellee conducted a field audit and determined deficiencies in the fees paid. Appellants promptly paid the deficiencies claimed but filed a petition for refund with the Tax Tribunal on August 10, 1977. The Tax Tribunal, relying on 1978 P.A. 392, declined to order a refund in an opinion and order dated January 3, 1979. Appellants appeal by right.

The origins of this case may be traced to Borden, Inc. v. Dep't of Treasury, 391 Mich. 495, 218 N.W.2d 667 (1974). In that case an equally divided Court affirmed this Court's decision at 43 Mich.App. 106, 204 N.W.2d 34 (1972). The opinion for affirmance indicated that the Department had exhausted its authority when it computed Borden's franchise fee following the receipt of Borden's annual report. The Department had no authority to recompute the fee if it subsequently obtained what it regarded as more accurate information and no authority to utilize field audits to determine the correct fee. The basis for this result was historical. The franchise fee was originally a license fee for the privilege of doing business in the state, not a revenue-raising measure. The procedure followed was that, promptly after the filing of a corporation's annual report, the franchise fee would be computed by the responsible state official upon receipt of such additional information as he required. See, e.g., In re Appeal of Hoskins Manufacturing Co., 270 Mich. 592, 596-597, 259 N.W.2d 334 (1935):

"As a general proposition, we think the State is justified in holding that the tax is determined from the corporate books. The statute does not provide, in express language or by authorization of expense, for the impractical procedure of audit and appraisal of each corporation each year by the State. It contemplates that the tax shall be found from the annual report of the corporation to the Secretary of State, supplemented by the further facts demanded under Act No. 327, Pub.Acts 1931, Sec. 82(o), and the detailed and exact information provided for in 2 Comp.Laws 1929, Sec. 10143. Obviously, the source of information and facts is the corporate books, which the statute assumes, and requires, shall be kept correctly. Obviously, also, the books represent the action of the corporation in valuing its assets and it has little cause to complain of such book values".

When, in later years, the franchise fee became a revenue-raising measure, the statutory procedures for collecting the tax remained unchanged by the Legislature. The opinion for affirmance in Borden declined to permit the Department of Treasury to alter the statutory procedures absent legislative action. In Clark Equipment Co. v. Dep't of Treasury, 394 Mich. 396, 230 N.W.2d 548 (1975), the opinion for affirmance in Borden was adopted by the majority of the Court.

The legislative response to Borden and Clark was 1975 P.A. 13, which, among other things, added M.C.L. Sec. 450.309b; M.S.A. Sec. 21.210b to authorize the Department of Treasury to audit those corporations which were subject to the franchise fee. 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 Treasury argued that 1975 P.A. 13 authorized it to audit and redetermine franchise fees for 1971-1973. The Court disagreed and held that the statute would be given prospective effect only.

This Court ordered refunds to the taxpayer based on unauthorized recomputation and field auditing in St. Clair-Macomb Consumers Co-operative v. Dep't of Treasury, 78 Mich.App. 287, 259 N.W.2d 462 (1977) and in Giffels Associates, Inc. v. Dep't of Treasury, 81 Mich.App. 730, 265 N.W.2d 809 (1978). Again the Legislature responded. 1978 P.A. 392 enacted M.C.L. 450.321; M.S.A. Sec. 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."

In Chesapeake & Ohio R. Co. v. Dep't of Treasury, 87 Mich.App. 740, 276 N.W.2d 854 (1979), the Court held that the Corporation Tax Appeal Board had incorrectly reversed the 1972 deficiency assessment against the taxpayer, because the record revealed that the Department had never accepted the corporation's annual report and franchise fee for that year. The Court noted in passing that the issue of the Department's authority to conduct audits had recently been "definitely resolved" by the passage of 1978 P.A. 392.

Note that the Corporate Franchise Fee Statute, M.C.L. 450.304 et seq.; M.S.A. Sec. 21.205 et seq. was repealed by 1975 P.A. 230. Thus, the issues in this appeal are confined to franchise fees for years before repeal.

I

Appellants argue that 1978 P.A. 392 denied them due process because it attempted to retroactively cure appellee's lack of authority to collect the fees in question. The rule applicable to such an argument was explained in Graham v. Goodcell, 282 U.S. 409, 426-427, 51 S.Ct. 186, 192-193, 75 L.Ed. 415, 439 (1931):

"There is no question here as to the original liability of the taxpayers. The tax was a valid one, and the fact that the taxpayers had been indebted to the government for the amount which was subsequently collected is not now open to dispute. Delay in collection had followed upon the taxpayers' request for a consideration of their claim that the tax should be abated, and, in the mistaken belief on the part of the administrative authorities that the statute of limitations did not bar collection by the appropriate proceeding of distraint, the delay had been continued until after the statute had run. On the discovery of the mistake, as pointed out by the decision of this court, the Congress sought to prevent a refund of the amount thus collected. The question is whether these circumstances remove the case from the operation of the general rule that it is not consistent with due process to take away from a private party a right to recover the amount that is due when the act is passed. * * *

"This rule is well illustrated by the case of Forbes Pioneer Boat Line v. Everglades Drainage Dist [258 U.S. 338, 42 S.Ct. 325, 66 L.Ed. 647 (1922) ] where the suit was brought to recover tolls unlawfully collected for passage through the lock of a state canal. The passage was free under the law as it stood at the time, and the subsequent legislation of the state which attempted to validate the illegal collection was held to be in violation of the 14th Amendment. The court said that the legislature in 1919 could not compel plaintiff to pay for a passage made in 1917 without promise of reward, 'any more effectively than it could have made a man pay a baker for a gratuitous deposit of rolls.' But while the legislature could not in such a case retroactively create a liability, the court recognized that there is a class of cases in which defects in the administration of the law may be cured by subsequent legislation without encroaching upon constitutional right, although existing causes of action may thus be defeated."

Here, the Legislature did not seek to retroactively create a liability for franchise fees. For the purposes of this action, appellants do not contend that the Department was factually incorrect when it determined that appellants had not paid large enough franchise fees. The defect the Legislature sought to cure was a defect in the administration of the law: namely, the improper procedures followed by the Department in collecting the fees which appellants owed. Under the rule stated in Graham v. Goodcell, supra, the Legislature had the power to pass such a retroactive curative statute.

Appellants point out that they...