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Jamie C. Yesnowitz
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On April 16, the Michigan Court of Appeals partially reversed and remanded a case to the Michigan Tax Tribunal after determining that the Tribunal had erred in disallowing a Single Business Tax (SBT) credit carryforward in calculating the franchise tax liability of a unitary business group (UBG) under the Michigan Business Tax (MBT).1
The taxpayer had merged with another UBG entity and the credit had previously been assigned. Further, the Court affirmed that the net capital for a UBG should be determined at the group level, rather than the member level.
The taxpayer, Comerica, Inc. (Comerica) is a bank holding corporation which owns many subsidiary financial corporations, including a Michigan chartered bank, Comerica-Michigan. On Oct. 31, 2007, Comerica converted Comerica-Michigan into a Texas banking association for what was characterized as strategic business reasons. To achieve this result, Comerica created a new subsidiary and Comerica-Michigan merged into Comerica-Texas. When Comerica-Michigan ceased to exist, all of its rights, privileges and property vested in Comerica-Texas.
For the 2008-2011 tax years, Comerica filed MBT returns including Comerica-Texas as a UBG member, but not Comerica-Michigan. In computing the group’s franchise tax base for the 2008 tax year, Comerica included Comerica-Texas’s net capital. Further, Comerica-Michigan’s historical net capital was included as effectively belonging to Comerica-Texas. Finally, in each tax year, Comerica claimed SBT credits originally earned by Comerica-Michigan, resulting in a net refund.
The Michigan Department of Treasury audited Comerica’s 2008-2011 MBT returns and adjusted the refund amount, recomputing net capital and disallowing the claimed tax credits. Specifically, the Department treated Comerica-Texas and Comerica-Michigan as separate legal entities with their own net capital based on the understanding that the MBT’s averaging provision required an accounting for the years prior to the merger when Comerica-Michigan had its own net capital. The Department disallowed the use of Comerica-Michigan’s SBT credits by Comerica-Texas because these credits had been previously assigned to Comerica-Michigan in 2005. According to the Department, the transfer of these credits via merger constituted a prohibited second assignment of the credits.
Comerica disputed the reduced refund. Following an unsuccessful informal conference with the Department, Comerica appealed to the Michigan Tax Tribunal. While the Tribunal ordered the recalculation of Comerica’s net capital tax base, it affirmed the Department’s disallowance of the tax credits. Comerica appealed, resulting in this dispute.
Michigan Single Business Tax and taxation of financial institutions
Michigan historically imposed the SBT, which took effect on Jan. 1, 1976, and governed business taxation in the state.2
The SBT was repealed eﬀective Dec. 31, 2007, and replaced by the MBT on Jan. 1, 2008.3
In conjunction with the transition, certain historic SBT credits existing as of the transition date were allowed against future MBT liability.4
Under the MBT, prior to 2012, financial institutions were subject to a franchise tax imposed on net capital.5
A “financial institution” was defined as: (i) a type of bank; (ii) an entity owned by a bank that is a member of the UBG; or (iii) a UBG made up of either or both of these types of entities.6
The franchise tax was imposed on the tax base of the financial institution after allocation or apportionment to the state.7
The tax base was the financial institution’s net capital, which was equity capital as computed under generally accepted accounting principles (GAAP) less goodwill and the average daily book value of federal and Michigan obligations.8
Net capital was determined by averaging the financial institution’s net capital over a five-year period.9
For a UBG of financial institutions, net capital did not include the investment of one member of the UBG in another member of that UBG.10
The MBT statutes further provided that a “unitary business group shall file a combined return that includes each United States person . . . that is included in the unitary business group.”11
Court of Appeals decision
The Court first considered the proper calculation of net capital for Comerica. Reviewing the UBG net capital provisions outlined in the recent TCF National Bank
the Court concluded that the averaging formula used to determine net capital must be applied to a UBG as a single taxpayer, rather than at the individual member level. The Court rejected the Department’s attempt to distinguish Comerica’s fact pattern from TCF
, as TCF
specifically considered the same statutory provision.13
Further, it found inadequate the argument that following the TCF
reasoning would result in the negation of billions of dollars’ worth of net capital for Comerica, noting that an unfavorable outcome for the Department is not a persuasive reason by itself to set aside binding precedent.
The Department also alleged that application of TCF
would render irrelevant the rules for computing net capital for a UBG in which certain changes occur.14
In response, the Court noted that its reasoning in TCF
does not apply to changes to non-UBG financial institutions. Thus, the statute at issue would be relevant, for example, in the case of combination of two non-UBG financial institutions. As a result, the Court rejected that argument and remanded the case to the Tax Tribunal to recalculate Comerica’s net capital in a matter consistent with TCF
(i.e., eliminating double-counting of net capital from both Comerica-Michigan and Comerica-Texas).
Both Comerica and the Department agreed that the SBT statutes allow for a single assignment of tax credits, and that the credits were assigned to Comerica-Michigan, two years before the merger of Comerica-Michigan and Comerica-Texas. Comerica and the Department disagreed, however, as to whether the credits could be transferred by any means other than assignment (i.e., whether they were transferred by operation of law through the merger of the entities). Specifically, the assignment statute provides that a qualified taxpayer may assign all or a portion of a credit to its partners, members or shareholders. Assignment is irrevocable and a subsequent assignment is prohibited.15
Michigan statutes address only transfers by assignment and are otherwise silent as to transfers made by any other mechanism, such as by operation of law in the case of a merger. Relying upon the plain language of the statute and legislative intent based on the use of the single term “assignment,” the Court found the statute inapplicable to Comerica’s historic SBT credit. Instead, the Court relied on previous decisions to conclude that transfers by assignment are distinct from transfers by operation of law.16
Further, the statutes’ failure to reference transfers of credits that occur by operation of law did not prohibit such transfers. Instead, one must presume the legislature intentionally omitted limiting language.
Under Michigan law, when a merger occurs, the consolidated bank possesses all the rights, interests, and privileges, as well as the restrictions and liabilities of, each of the consolidating organizations, and receives title to all property.17
While the Department argued that the SBT credits transferred through the Comerica group are privileges, rather than property interests, the Court disagreed. Instead, property, as ordinarily understood, extends to every kind of valuable right and interest.18
Distinguishing the instant case from a previous decision in which it found that a claim for a tax refund is a mere expectation, not a vested right subject to due process,19
the Court focused on the certified tax credits at issue, finding them quite different from a mere expectation that tax credits could be obtained in the future. Thus, the Court found the credits in controversy to be property interests within the meaning of the merger statute. As qualified statutory property, they necessarily transferred by operation of law when Comerica-Michigan merged into Comerica-Texas and precluded application of the statutory single-assignment provisions at issue. Thus, the Court reversed the Tribunal’s decision to disallow the tax credits and remanded the case for disposition accordingly.
The extension of the analysis in the recent TCF
decision to Comerica’s facts is not surprising, given that both cases concern the computation of the financial institution franchise tax under the MBT. Also, that decision is a published opinion with precedential effect under the rule of stare decisis
Thus, it will remain controlling authority even if a subsequent Court of Appeals decision reaches a different conclusion, and unless the Michigan Supreme Court rules to the contrary. It will be interesting to watch future decisions for potential broader ramifications of this interpretation of UBG tax liabilities.
The decision of the Court to allow an automatic transfer of tax credits between two separate entities upon merger, distinguishing this transfer from a direct assignment of such credits, provides newfound flexibility for taxpayers. While the terms and benefits of available credits often differ substantially from year to year and across the several Michigan tax regimes that have been in place over the past two decades, the analysis and conclusion in the decision could result in the availability of tax credits once considered unusable by taxpayers. Taxpayers who believed their ability to claim any credit was lost due to a merger should examine their Michigan tax position or potential applicability.
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