A recent Michigan case, LaBelle Management Inc. v. Department of Treasury (LaBelle), has forced the Michigan Department of Treasury to abandon its previous position that IRC Section 318 be used to determine indirect ownership when identifying members of a unitary business group (UBG). As all appeals regarding LaBelle have lapsed, the Department of Treasury and taxpayers are bound by the decision. On Feb. 28, 2017, the Michigan Department of Treasury issued a notice indicating how it will administer the LaBelle decision. As a result, brother-sister entities under common control no longer will constitute a unitary business group.
For the former Michigan Business Tax (MBT) and current Michigan Corporate Income Tax (CIT) purposes, a unitary business group is a group of related U.S. persons, other than a foreign operating entity, whose business activities or operations are interdependent. These groups must satisfy two tests: a control test and one of two relationship tests. The control test is satisfied when one person owns or controls, directly or indirectly, more than 50 percent of the ownership interest of the other person or persons. The Michigan Department of Treasury promulgated Revenue Administrative Bulletin (RAB) 2010-1 to provide guidance on the determination of indirect ownership to include ownership through attribution. Notably, neither the RAB nor the underlying statute mention Section 318.
RAB 2010-1 provided an example in which two individuals each owned 50 percent of Corporation H and Corporation I. The RAB concluded Corporation H indirectly owns 100 percent of Corporation I and that Corporations H and I satisfied the control test. Under LaBelle and the new notice, Corporation H would not be treated as owning 100 percent of Corporation I, and the corporations would be required to file separate returns. The answer would be the same if one individual owned 100 percent of Corporation H and Corporation I.
The LaBelle decision eliminates constructive ownership or ownership through attribution as a means to satisfy the UBG control test. This control test is used by both the MBT and CIT, so the department considers LaBelle to be applicable to both taxes.
UBGs with members whose membership is based on a brother-sister relationship as described in RAB 2010-1 do not meet the necessary level of control under LaBelle. Consequently, the notice states UBGs and members affected by the LaBelle decision must correct their filings for all open years. This means affected taxpayers must file amended CIT and possibly amended MBT returns. A majority of MBT returns no longer are open under Michigan’s statute of limitations. However, MBT returns under audit or in litigation still may be open, and taxpayers who claim certificated credits still may be filing MBT returns.
Penalties will not be imposed for tax due on any amended or original returns that are a direct result of LaBelle. All returns filed as a result of LaBelle, whether amended or original, should be accompanied by written correspondence identifying it as a LaBelle return. Any entity entitled to a refund on a LaBelle return may direct the state to transfer the overpayment to the accounts of other members filing a LaBelle return. Any return requesting a transfer of funds to another member must be mailed together with the other member’s return. Additionally, interest will be waived for amended returns or original returns that are a direct result of LaBelle as long as those returns are filed by Dec. 31, 2017.