International Business Machines Corp. v. State, Dept. of Treasury, Revenue Division, Docket No. 27120

Citation255 N.W.2d 702,75 Mich.App. 604
Decision Date16 May 1977
Docket NumberDocket No. 27120
PartiesINTERNATIONAL BUSINESS MACHINES CORPORATION, a New York Corporation, Plaintiff-Appellee, v. STATE of Michigan, DEPARTMENT OF TREASURY, REVENUE DIVISION and Franchise Fee Division, Defendants-Appellants.
CourtCourt of Appeal of Michigan (US)

Frank J. Kelley, Atty. Gen., Robert A. Derengoski, Sol. Gen., Charles E. Liken, Richard R. Roesch, Asst. Attys. Gen., for defendants-appellants.

Dickinson, Wright, McKean, Cudlip & Moon by Benjamin O. Schwendener, Jr., T. Donald Wade, Lansing, for plaintiff-appellee.

Before BASHARA, P. J., and CAVANAGH and RILEY, JJ.

CAVANAGH, Judge.

Defendant appeals from an order of the circuit court which permanently enjoined them from attempting to enforce claims for franchise tax deficiencies against plaintiff corporation for the years 1971 through 1973.

This dispute concerns the Michigan corporate franchise tax, M.C.L.A. § 450.304 et seq.; M.S.A. § 21.205 et seq. 1 The franchise fee is assessed annually against corporations organized or doing business in Michigan for the privilege of doing business in the state. The annual fee is based on the amount of paid up capital and surplus. M.C.L.A. 450.304; M.S.A. § 21.205.

For each of the privilege years 1971, 1972, and 1973, plaintiff sent an annual report and tendered payment of the franchise fee to the Department of Treasury (Treasury). These annual reports were marked either "filed" or "received" by the Treasury on August 16, 1971, August 17, 1972, and November 8, 1973, respectively. The annual report for 1971 was marked "accepted" on June 8, 1972. The reports for 1972 and 1973 were never marked "accepted".

On May 1, 1975, the Treasury issued a subpoena duces tecum to the plaintiff in order to examine plaintiff's records for franchise tax liability for the years 1971 through 1974. On May 23, 1975, plaintiff responded by filing suit requesting the circuit court to quash the subpoena and enjoin the defendant from attempting to enforce subpoenas to redetermine franchise taxes for the years 1971 through 1973.

On July 8, 1975, the Treasury issued determination No. 31191, which purported to redetermine plaintiff's franchise fees for 1971 through 1974 and disclosed a deficiency amounting to $377,335 plus interest.

The circuit court quashed defendant's subpoena on July 11, 1975, reasoning that the defendant's authority to assess deficiencies under the franchise tax had been exhausted by the defendant's computations of the tax and acceptance of the annual reports.

In response to the Treasury's order of redetermination, plaintiff filed an amended complaint seeking a permanent injunction against enforcement of the asserted deficiencies or recomputation of the franchise fees. Defendant moved for reconsideration of the July 11, 1975, decision, and plaintiff moved for summary judgment based on GCR 1963, 117.2(2), (3). After hearing both motions, the circuit court held that determination No. 31191 was a nullity, permanently enjoined the defendant from attempting to enforce claims for franchise fee deficiencies for 1971 through 1973, and reaffirmed its previous decision to quash the Treasury's subpoena.

On appeal, the defendant asserts reversible error on three grounds:

(1) The circuit court lacked jurisdiction to enjoin collection of the deficiencies in determination No. 31191 because the plaintiff had not yet exhausted its administrative remedies.

(2) Redetermination of the plaintiff's franchise fee liability for 1972 and 1973 was not precluded because the annual reports submitted for those years had not yet been "accepted" by the Treasury.

(3) Even if the annual reports were "accepted", the Legislature has given new statutory authority to the Treasury to reopen what were previously "final" franchise fee determinations.

We find no error and affirm.

I. EXHAUSTION OF ADMINISTRATIVE REMEDIES

The Treasury's assertion that the circuit court was deprived of subject matter jurisdiction is founded on the claim that the plaintiff was required to exhaust its administrative remedies in the dispute over determination No. 31191. We note at the outset that plaintiff has never challenged the merits of the claimed deficiencies; rather, it has consistently asserted that the Treasury lacked the power to reopen the issue of tax liability for years 1971-1973.

Michigan courts have long recognized the importance of the doctrine of exhaustion of administrative remedies. Our Legislature has incorporated that requirement into the Administrative Procedures Act, § 64 and § 101; M.C.L.A. §§ 24.264, 24.301; M.S.A. §§ 3.560(164), 3.560(201), although the former section is not directly applicable to this case. 2

M.C.L.A. § 24.301; M.S.A. § 3.560(201) provides:

"When a person has exhausted all administrative remedies available within an agency, and is aggrieved by a final decision or order in a contested case, whether such decision or order is affirmative or negative in form, the decision or order is subject to direct review, by the courts as provided by law. Exhaustion of administrative remedies does not require the filing of a motion or application for rehearing or reconsideration unless the agency rules require the filing before judicial review is sought. A preliminary, procedural or intermediate agency action or ruling is not immediately reviewable, except that the court may grant leave for review of such action if review of the agency's final decision or order would not provide an adequate remedy." (Emphasis supplied.)

Although neither party devoted much attention to this issue in the circuit court proceedings (the circuit court did not even discuss it), the statute makes it clear that the circuit court's subject matter jurisdiction in this case depends upon exhaustion of administrative remedies. Even if this issue is not raised by the parties, the circuit court is duty bound to restrict its operations to be within the limits of its statutorily fixed jurisdiction.

Plaintiff seeks judicial review of "preliminary" and "procedural" action or rulings of the Treasury. Even though the trial court apparently concluded erroneously that the Treasury's actions were reviewable as of right, we hold that the circumstances of this case justify a grant of leave for judicial review, rendering the circuit court's error harmless.

Exhaustion of administrative remedies serves several policies: (1) an untimely resort to the courts may result in delay and disruption of an otherwise cohesive administrative scheme; (2) judicial review is best made upon a full factual record developed before the agency; (3) resolution of the issues may require the accumulated technical competence of the agency or may have been entrusted by the Legislature to the agency's discretion; and (4) a successful agency settlement of the dispute may render a judicial resolution unnecessary. See Judges of 74th Judicial District v. Bay County, 385 Mich. 710, 727-728, 190 N.W.2d 219, 226 (1971).

Exhaustion of administrative remedies is not an inflexible condition precedent to judicial consideration, however, and will not be required if review of the agency's final decision would not provide an adequate remedy, M.C.L.A. § 24.301; M.S.A. § 3.560(201), i. e., if it would run counter to the policies which underlie the doctrine. That is the case here. Plaintiff's suit seeks to avoid the expenses of litigation and disclosure which would be incurred by submitting to the agency's procedures for redetermination. The very harm that plaintiff seeks to avoid would inevitably occur if plaintiff were required to exhaust administrative remedies before access to judicial review. Moreover, the issue of the agency's statutory authority is clearly framed for the court. Extensive fact findings are unnecessary, and the decision does not demand special technical expertise. Under these circumstances, the circuit court's failure to recognize that judicial review of the Treasury's actions required a

grant of leave was harmless error. II.

FINALITY OF THE PLAINTIFF'S FRANCHISE FEE REPORTS
FOR THE YEARS 1971-1973

The defendant asserts that since the annual reports for 1972 and 1973 were not stamped "accepted", those reports did not represent "final determinations" of the franchise fee for those years.

The issue of the power of the Treasury to unilaterally redetermine a corporation's franchise fee has been conclusively settled by the Supreme Court in Borden, Inc. v. Department of Treasury, 391 Mich. 495, 218 N.W.2d 667 (1974), and Clark Equipment Co. v. Department of Treasury, Revenue Division, 394 Mich. 396, 230 N.W.2d 548 (1975):

"When, following receipt of the annual report of a corporation, the Franchise Fee Division 'computes' the franchise fee of the corporation, it exhausts its authority under the statute. The Division is not authorized to re -compute the fee if it subsequently obtains what it regards as more accurate information." (Emphasis in original). Borden, Inc., supra, 391 Mich. at 500, 218 N.W.2d at 668.

Though the Supreme Court stated that the reports at issue in Clark Equipment Co., supra, had been "accepted", it expressly reaffirmed the rationale contained in Justice Levin's opinion in Borden, Inc. That opinion rests on the reasoned conclusion that the Treasury's statutory authority is limited to computation of the franchise fee, 391 Mich. 506-507, 218 N.W.2d 672-673, not on the fact that some of the Borden reports had been stamped "accepted". 3

The trial court found that all of the reports had been "accepted" prior to March, 1975. We read the trial court's two opinions to mean that the trial court found that the franchise fees for all three years had been computed and accepted by the Treasury, even if the "acceptance" was not noted in that exact language on the documents. Our own review of these reports convinces us of the accuracy of the trial court's findings: these reports are in important...

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