I was fortunate to be part of a special report on the Michigan Business Tax.  Peter Ross of TV 13 in Grand Rapids did a great job by adding a little humor to something that’s not very funny.  With tax season almost half over, we could use some humor.  You can link to the report titled Retooling Michigan: Fixing Michigan's Tax Monster with a CTRL + Click on the following:  http://bit.ly/dA29E2

The Michigan Court of Appeals in Taylor v. City of Traverse City, Michigan Court of Appeals, No. 287565, February 16, 2010 (Taylor) ruled the transfer of ownership of residential property that occurred when the owner died and ownership transferred solely to the taxpayer as the surviving joint tenant qualified for the statutory exemption from the provision that allowed the real property to be reassessed at a higher value.

The Court of Appeals referenced a previous case, Klooster v. Charlevoix, No. 286013, December 15, 2009, where it noted that the statutory exemption contained two requirements in order for the exemption to apply.  Both requirements were met in the Taylor case.

The taxpayer's father was an original owner of the property prior to quitclaiming his interest to himself and the taxpayer as joint tenants.  Additionally, both the taxpayer and his father were joint tenants at the time the joint tenancy was originally created and both remained joint tenants until the joint tenancy was dissolved upon the father's death.  The Michigan Court of Appeals also clearly held in Klooster that the joint tenant statutory exemption did not require a joint tenant to be an original owner for the exemption to apply.

The Michigan Supreme Court rejected the Michigan Department of Treasury (Treasury) appeal from the Court of Appeals decision in Alliance Obstetrics & Gynecology, PLC v. Department of Treasury, Michigan Court of Appeals, Docket No. 280125, August 4, 2009 (Alliance).  The Michigan Court of Appeals had ruled that a Limited Liability Company (LLC) is not disqualified from taking the Single Business Tax (SBT) Small Business Credit (SBC) because its officers exceeded the $115,000 disqualifying amount. 

A corporation other than an S Corporation is disqualified from taking the SBC if total compensation paid to an officer or shareholder exceeds $115,000.  A LLC is not a corporation. Therefore a LLC does not have shareholders or officers.  A LLC has members and managers.  This is the case even if the LLC elected to be taxed as a corporation for federal income tax purposes.

The Court of Appeals ruled a LLC is not treated as a corporation for purposes of calculating the SBT SBC and so the $115,000 income limitations under Single Business Tax Act (SBTA) Section 36(2) [MCL 208.36(2)] is not applicable and did not disqualify the LLC from claiming the credit.  Under SBTA Section 36(2)(b)(i) [MCL 208.36(2)(b)(i)], a corporation whose officer or officers earned more than $115,000 during the taxable year is not entitled to a SBC.

In Alliance, instead of electing to be classified as a disregarded entity, the taxpayer elected to be classified as an association, and under federal tax law, an association is a corporation.  The Court of Appeals previously ruled that how an entity elects to be classified under the federal “check-the-box” system does not determine how it will be classified for SBT purposes. [Kmart Michigan Prop Services, LLC v Department of Treasury, Michigan Court of Appeals, Docket No. 282058, May 12, 2009] 

The taxpayer is an LLC, and under Michigan law LLCs are not corporations.  Business entities such as the taxpayer that are neither a corporation nor a partnership should not be required to elect a classification inconsistent with its organization under state law.

There are a large number of cases being held in abeyance pending the final determination in the Alliance case.  There are also large potential refunds that the state may be required to pay as a result of this case.  Furthermore, taxpayers organized as a LLC and electing to be classified as a corporation for federal income tax purposes may have amended return refund opportunities if they were disqualified from the SBC because officer or shareholder compensation exceeded $115,000.

The following article was sent to me from Attorney Paul McCord.  I serve with Paul on a Michigan State Chamber of Commerce Task Force to study the problems with the Michigan Tax Tribunal.  A large part of my work is in the audit representation and appeals area.  Much of my time is spent with appeals at the Michigan Tax Tribunal.  That process has slowed down.

The Michigan Tax Tribunal is neither efficient nor effective in processing tax appeals, according to an Auditor General report released today, with some cases still pending scheduling for more than two years after their initial filing.  As of October 3, 2008, there were 7,428 appeals pending for a hearing, the Auditor General reported, with 60 percent of those six months old. 

Even after the cases are heard, a decision isn't necessarily made swiftly. As of October 3, 2008, there were 188 appeals that had been heard by the Tribunal that were awaiting only a judgment and a decision. Of those, 42 percent had been heard more than six months earlier and 31 percent had been heard more than a year earlier.  All the while, the Tribunal has not developed a plan to address its growing backlog of pending appeals, according to the audit.  In Fiscal Year 2006, the Tribunal received 8,898 appeals and resolved 8,291. In FY 2007, the number of appeals swelled to 12,421 with 7,449 resolved.  In FY 2008 there were 16,067 appeals filed and 10,173 resolved.

"The Tribunal cannot address the increasing number of backlogged and pending appeals as long as it continues to take in substantially more cases each year than it is able to resolve," the audit reads.

The Tax Tribunal is a seven-member quasi-judicial agency consisting of two attorneys, one assessor, one real estate appraiser and a public accountant.  The Tribunal hears property tax appeals relating to assessments and other such matters.  Tax Tribunal Chair Patti HALM said the bad economy is causing a flood of cases during a time when the Tribunal is having trouble filling vacancies.

Typically, the Tribunal handles between 6,000 and 7,000 cases a year, but with people seeing higher property tax bills at a time when their home values are going down, case numbers are hitting "overwhelming" levels.  "We're just inundated with cases and paper," Halm said. "We had to get 15 more filing cabinets in the office and we don't know if that is even going to be enough."   Meanwhile, vacancies on the Tribunal remain open for up to a year to two years because qualified applicants can make much more in the private sector than they can working at the Tax Tribunal.  "It's like a tsunami of bad events," she said.

The Auditor General suggested the Tribunal and its 18 employees set goals to getting cases finished in a more timely matter, but Tribunal officials responded that without additional money, staff and resources, it's unlikely any of the Auditor General's goals could be met.  Representative Paul Opsommer (R-DeWitt) said today's news was not good and was a signal that while state government is stretched thin, its leaders are not prioritizing how taxpayer money is spent.

"If the government passes laws requiring people to pay taxes it only makes sense that we then put the resources forward that allow people to get their tax questions answered, their appeals processed in a timely manner, and to provide an adequate interest rate on any refunds the state owes them," he said, adding that some property owners in his district have being waiting up to three years for their case to be heard.  Adding insult to injury, there is also confusion over whether these people must continue to pay more fees to keep the claim going year after year due to no fault of their own, he added.

The Michigan Court of Appeals in Klevorn v. City of Boyne City, Michigan Court of Appeals, Docket Nos. 286870 and 286872, February 2, 2010 overturned a Michigan Tax Tribunal decision allowing the uncapping of the property.  A taxpayer was entitled to the no-transfer-of-ownership Michigan property tax exemption when his mother and joint tenant died, because her death was not a conveyance. 

At the time the joint tenancy was initially created through a warranty deed, at least one of the persons, the taxpayer's mother, was an original owner of the property.  Therefore, one of the statutory requirements for claiming the exemption was satisfied.  Further, based on the rule of law that the death of a joint tenant did not constitute a transfer for purposes of the exemption, the death of the mother and the subsequent transfer of ownership to the taxpayer did not constitute a conveyance.  Because there was no conveyance, the second half of the statutory exemption was not triggered and the taxpayer's property value should not have been uncapped as a result of the termination of his mother's interest in the property.

The Michigan Department of Treasury (Treasury) has recently filed approximately 10,000 new appeals in the Michigan Tax Tribunal’s Small Claims Division contesting the classification of the property subject to those appeals.  The Michigan Tax Tribunal will begin sending copies of Treasury’s completed Petition forms with any attachments and Answer forms to both the assessing officer for the appropriate local unit of government and the taxpayers for each property under appeal.  Both the local unit and the taxpayer are considered to be parties (i.e., Respondents) in such cases. 

Both the assessing officer and the taxpayer are required to complete and return the Answer forms by the date indicated on the Answer form.  Failure to complete and timely return the Answer forms may result in a default hearing or a hearing in which only one Respondent will be permitted to participate.

The Governor’s budget message, which was presented in front of a joint House and Senate appropriations committee panel this morning, included her recommendation that the sales tax be expanded to tax services.  She is also recommending the sales tax rate be lowered to 5.5% and the Michigan Business Tax (MBT) surcharge be phased out.

This will be the third attempt by the administration to tax services.  The last attempt, the use tax on services, lasted only one day before its ultimate repeal.  Ironically, it was replaced with the MBT surcharge.

The Governor wants to cut the MBT surcharge in half in 2011 and completely eliminate it in 2012. She's also phasing down the gross receipts tax rate from .8% to .6% (.1 percent in 2012 and another .1 percent in 2013).

Stay tuned, there will be more on these developments in the months ahead.

The Michigan Department of Treasury (Treasury) has provided guidance for Michigan business taxpayers on the application of the control test for unitary business groups (UBG).  In order to be an UBG, taxpayers must meet both the control test as well as one of two relationship tests; the relationship tests are not discussed.  A separate Revenue Administrative Bulletin (RA on the relationship test is expected out later this month. 

The control test is satisfied when one taxpayer owns or controls, directly or indirectly, more than 50% of the ownership interests with voting (or comparable) rights of the other taxpayer(s).  A taxpayer owns or controls more than 50% of the ownership interests with voting rights (or ownership interests that confer comparable rights to voting rights) of another taxpayer if that taxpayer owns or controls, directly or indirectly, (1) more than 50% of the total combined voting power of all ownership interests with voting (or comparable) rights or (2) more than 50% of the total value of all ownership interests with voting (or comparable) rights. Examples are provided.

Various types of controlled groups are discussed, including parent-subsidiary, brother-sister, and groups without common control. How to determine control in nonstock nonprofit organizations is covered. Treasury also sets forth the presumptions it will make with respect to voting agreements. The rules for indirect ownership are detailed, including ownership through attribution in families, attribution to/from partnerships, corporations, trusts, and estates, and options.

An entity may elect to be treated as a member of only one UBG. The election will remain in effect until the unitary relationship between the taxpayer and the rest of the members of the elected controlled group is discontinued, or until the taxpayer is in more than one group under the control test, then the taxpayer is in the UBG where the relationship test is met. 

The entire RAB is available on the Treasury website.  The Michigan Association of Certified Public Accountants (MACPA) will present a series of four seminars in the spring and fall of 2010 where both the control test RAB and the relationship test RAB will be discussed in detail with extensive examples.

The Michigan Department of Treasury has issued guidance in the wake of the Supreme Court rejection of its appeal of the Court of Appeals decision in Kmart Michigan Property Services.  The Court of Appeals ruled that there is no language in the Single Business Tax Act that requires a taxpayer to file the same way as it did for federal income tax purposes.  The Department of Treasury had issued Revenue Administration Bulletin 1999-9 (RAB 99-9) which stated its position that they would follow the federal check-the-box rules.  The Court of Appeals in stating that RABs do not have the force and effect of law allowed a single member Limited Liability Company (LLC) to file a separate single business tax return.

Previously disregarded entities may be required to file returns under the former Michigan Single Business Tax (SBT) if they had gross receipts in excess of $350,000.  As a result of the decision in the Kmart Michigan Property Services case, a single-member limited liability company that was disregarded for federal income tax purposes was nevertheless allowed to file a separate return from its owner. The Kmart decision applies to all open tax years, according to the Michigan Department of Treasury.  Therefore, SBT returns may need to be filed back to 1997, the effective date of RAB 99-9.

Accordingly, persons that are disregarded entities for federal income tax purposes that filed as a division of the owner for SBT purposes must file a separate SBT return for all open tax periods.  Previously disregarded entities are considered non-filers for statute of limitations purposes.  Similarly, persons that filed earlier SBT returns that included one or more previously disregarded entities must file amended SBT returns for all open periods. These returns are due September 30, 2010.

The Kmart decision may also have an effect on the nexus and apportionment provisions of the SBT.  The decision could result in refund applications for overpayments.  Entities that filed a return with a disregarded entity must file an amended return within fours years from the later of the due date of the return or the filed date of the return if granted an extension.

Interest will be due on deficiencies. However, the failure to file penalty will be waived until September 30. A previously disregarded entity is required to register with the Department of Treasury if it has no federal employer identification number (FEIN) or Michigan Treasury assigned number (TR). The filing threshold is $350,000, although there are special provisions for group members under common control.

Taxpayers are reminded to include an organization type; generally, the one under which the parent filed the return should be chosen. Attach a pro forma federal income tax return and mail returns to PO Box 30059, Lansing, MI 48909.

There are a handful of Michigan Business Tax (MBT) items to consider regarding pass-through entities and Form 4700.  Also, if pass-through entities are part of a unitary combined return.

The first issue is when a pass-through entity is receiving pass-through income from another member of a unitary business group.  The eliminations between unitary members should eliminate the doubling up of the income.   The designated member will pass along the SE income to a partner / LLC member who will pay the self-employment tax on the SE earnings.

If two pass-through entities are not part of a unitary group, each will be required to file their own MBT return whether with another unitary group or by themselves.   In this instance, the company receiving the pass through income will exclude from gross receipts amounts received or otherwise attributed to eliminate double taxation, per MCL 208.1111(bb).

For the business income tax, add the loss or subtract the income from a flow-through entity to the extent included in federal taxable income, from the business income tax base that is attributable to another entity whose business activities are taxable under the MBT or would be subject to the tax if the business activities were in Michigan, per MCL 208.1201(2)(e).  The subtraction is found on line 25b Form 4567 for 2008, for 2009 Form 4567, the subtraction is found on Line 39.

Form 4700 for 2008 returns does not take the adjustment into account.  Form 4700 for 2009 is much more detailed.  Line 69 would provide for this exclusion for proper reconciliation from the Federal to the Michigan Business Tax return.  We suggest you create your own reconciliation schedule taking into account the pass through income, scan and attach as a pdf to the e-filed return.

Assuming neither partnership is part of the same unitary group, the entity generating the SE income would be entitle to the deduction.  The MBT act states, “Deduct any earnings that are net earnings from self-employment, to the extent included in the federal taxable income of the taxpayer, partner or limited liability company member.  Net earnings from self-employment are as defined under Section 1402 of the Internal Revenue Code except to the extent that those net earnings represent a reasonable return on capital” [MCL 208.1201(2)(h)].

Remember the SE earnings are added to the computation base for the Compensation Credit.