Wheeler Estate v. Dep't of Treasury
| Decision Date | 31 July 2012 |
| Docket Number | 302261,302262.,Docket Nos. 302251,302259 |
| Parties | WHEELER ESTATE v. DEPARTMENT OF TREASURY Huzella v. Department of Treasury Wright v. Department of Treasury Wheeler v. Department of Treasury. |
| Court | Court of Appeal of Michigan — District of US |
OPINION TEXT STARTS HERE
Honigman Miller Schwartz and Cohn LLP, Lansing (by June Summers Haas and Eric J. Eggan), for petitioners.
Bill Schuette, Attorney General, John J. Bursch, Solicitor General, Richard A. Bandstra, Chief Legal Counsel, and Kevin T. Smith, Assistant Attorney General, for respondent.
Before: HOEKSTRA, P.J., and SAWYER and SAAD, JJ.
Respondent, the Department of Treasury, appeals an order of the Michigan Tax Tribunal that granted petitioners' motion for summary disposition and denied respondent's motion for summary disposition. For the reasons set forth in this opinion, we affirm.
Petitioners were shareholders of an S corporation called Electro–Wire Products that makes electrical systems for Ford Motor Company. Ford wanted Electro–Wire to establish a worldwide presence, so in 1994 Electro–Wire acquired all the business assets of a German business, Temic Telefunken Kabelsatz, GmbH,1 which was also engaged in the business of manufacturing and assembling electrical distribution systems. To accomplish the asset purchase, two general partnerships were created: (1) an operating company also named Temic Telefunken Kabelsatz, GmbH (TKG), which held all the purchased assets, and (2) a holding company named Electro–Wire Products, GmbH (EWG), which held a 99.5 percent partnership interest in TKG. Electro–Wire held a 99 percent partnership interest in EWG, as well as the remaining 0.5 percent partnership interest in TKG. As an S corporation and two general partnerships, Electro–Wire, EWG, and TKG were flow-through entities for tax purposes.
In 1994 and 1995, petitioners received flow-through income from Electro–Wire, which included Electro–Wire's distributive share of the partnership income from TKG. Petitioners reported this income by treating Electro–Wire and TKG as a unitary business and combining their apportionment factors. Respondent audited petitioners for those years and issued petitioners a tax bill. Respondent asserted that the unitary business principle (UBP) did not apply to individuals under the Income Tax Act (ITA), MCL 206.1 et seq., and that petitioners were required to apply Electro–Wire's apportionment factors to Electro–Wire's income alone and independently of TKG. A hearing referee found that the UBP applied to individuals like petitioners and that Electro–Wire and TKG were a unitary business entitled to combining apportionment factors for tax purposes, but respondent disagreed. Petitioners appealed to the Tax Tribunal and, as noted, the tribunal ruled in favor of petitioners.
Absent an allegation of fraud, this Court reviews a Tax Tribunal decision for misapplication of the law or adoption of a wrong legal principle. Briggs Tax Serv., LLC v. Detroit Pub. Sch., 485 Mich. 69, 75, 780 N.W.2d 753 (2010). We uphold the Tax Tribunal's findings of fact if they are supported by competent, material, and substantialevidence in the record as a whole. Canterbury Health Care, Inc. v. Dep't of Treasury, 220 Mich.App. 23, 28, 558 N.W.2d 444 (1996). We review de novo the grant or denial of a motion for summary disposition. Briggs Tax Serv., 485 Mich. at 75, 780 N.W.2d 753.
Respondent argues that the UBP does not permit individuals to combine the income from multiple entities for apportionment purposes.
Under the ITA, if a taxpayer's income-producing activities are confined solely to Michigan, then the taxpayer's entire income must be allocated to Michigan. MCL 206.102. If a taxpayer has income from activities that are taxable both inside and outside of Michigan, that income is allocated pursuant to MCL 206.115. MCL 206.103. In order to distinguish between multistate businesses that can allocate their income to specific geographic areas and multistate businesses that cannot, the United States Supreme Court has recognized the value of the UBP. Allied–Signal, Inc. v. Div. of Taxation Dir., 504 U.S. 768, 778, 112 S.Ct. 2251, 119 L.Ed.2d 533 (1992). Under the UBP, for a business or individual to exercise multistate apportionment, there must “be some sharing or exchange of value not capable of precise identification or measurement—beyond the mere flow of funds arising out of a passive investment or a distinct business operation—which renders formula apportionment a reasonable method of taxation.” Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 166, 103 S.Ct. 2933, 77 L.Ed.2d 545 (1983). This Court has also recognized the functionality of the UBP, applying it in a number of previous appellate decisions, including Holloway Sand & Gravel Co., Inc. v. Dep't of Treasury, 152 Mich.App. 823, 393 N.W.2d 921 (1986), Jaffe v. Dep't of Treasury, 172 Mich.App. 116, 431 N.W.2d 416 (1988), and the cases discussed next.
This Court has recently issued two published opinions addressing the application of the UBP to business income derived from multiple entities: Preston v. Dep't of Treasury, 292 Mich.App. 728, 815 N.W.2d 781 (2011), and Malpass v. Dep't of Treasury, 295 Mich.App. 263, 815 N.W.2d 804 (2012).
In Preston, a taxpayer was the sole partner in a Tennessee limited partnership, Life Care Affiliates II (LCA II), that owned a 99 percent share in 22 lower-level limited partnerships. Preston, 292 Mich.App. at 730, 815 N.W.2d 781. Those lower-level partnerships in turn owned 27 nursing homes nationwide. Id. One of those lower-level partnerships owned a pair of nursing homes that operated in Michigan, while the remaining 21 lower-level partnerships had no Michigan business activities. Id. at 730–731, 815 N.W.2d 781.
All 22 partnerships distributed gains and losses to LCA II, which in turn distributed the combined income to the taxpayer. Id. When reporting his Michigan income, the taxpayer offset the gains produced by the partnership operating his Michigan-based nursing homes with losses suffered by other partnerships. Id. at 731, 815 N.W.2d 781. Upon a challenge from respondent, this Court concluded that LCA II operated the lower-level partnerships as a unitary business and that the taxpayer was entitled to apportion the income he received from LCA II. Id. at 733–737, 815 N.W.2d 781.
In Malpass, however, this Court reached a different result under different facts. The taxpayers owned two separate S corporations, one operating in Michigan and one operating in Oklahoma. Malpass, 295 Mich.App. at 265–266, 815 N.W.2d 804. The taxpayers initially filed their individual income tax returns by treating the S corporations as separate, nonunitary businesses, but later filed amended returns seeking to treat them as a unitary business. Id. at 266, 815 N.W.2d 804. Upon a challenge by respondent, this Court, while acknowledging that the S corporations in question had many characteristics of a unitary business, rejected the taxpayers' application of the UBP because the S corporations were “separate and legally distinct business entities, and nothing in the ITA allows for combined-entity reporting.” Id. at 270, 815 N.W.2d 804.
Malpass also distinguished its facts from those in Preston, concluding that, although each of the 22 partnerships was a separate entity, all were joined by LCA II, which owned 99 percent of each of the 22 lower-level partnerships. Malpass, 295 Mich.App. at 274–275, 815 N.W.2d 804. By contrast, the taxpayers in Malpass received business income from two separate businesses. Id. at 275, 815 N.W.2d 804. Given this distinction, it appears that Michigan law does not allow separate entitiesto be treated as a unitary business in the absence of some common ownership at the entity level and that being owned by the same individual taxpayers is insufficient to trigger this relationship requirement.
We hold that the facts in the cases at issue here are more analogous to those of Preston than Malpass. TKG is 99 percent owned by EWG, which is in turn 99.5 percent owned by Electro–Wire. Electro–Wire and TKG are not “separate and legally distinct business entities,” but stand in what amounts to a parent/subsidiary relationship. Like Preston, the income to petitioners flowed through one source, in this case Electro–Wire, and not through two separate sources as in Malpass. Therefore, Electro–Wire and TKG should be permitted to avail themselves of multistate apportionment under the ITA.
Accordingly, because the UBP permits individuals to combine the income of multiple entities that are legally associated and unitary businesses for apportionment purposes, the Tax Tribunal did not err by awarding summary disposition to petitioners.
We also disagree with respondent that the ITA excludes foreign entities from consideration under the UBP for apportionment purposes.
The goal of statutory interpretation is to determine the intent of the Legislature. AFSCME Council 25 v. State Employees' Retirement Sys., 294 Mich.App. 1, 8, 818 N.W.2d 337 (2011). “The starting place for the search for intent is the language used in the statute.” Bio–Magnetic Resonance, Inc. v. Dep't of Pub. Health, 234 Mich.App. 225, 229, 593 N.W.2d 641 (1999). Although this Court affords respectful consideration to the construction given a statute by an agency and ought not overrule an agency's construction, if persuasive, without cogent reasons, the agency's interpretation is not binding on this Court and cannot conflict with the plain meaning of the statute. In re Rovas Complaint Against SBC Mich., 482 Mich. 90, 103, 108–109, 754 N.W.2d 259 (2008). Nonetheless, when tax statutes are construed, any ambiguities are resolved in favor of the taxpayer. Int'l Business Machines v. Dep't of Treasury, 220 Mich.App. 83, 86, 558 N.W.2d 456 (1996).
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