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Jamie C. Yesnowitz
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The Michigan Court of Appeals held that the Michigan Department of Treasury could disallow a taxpayer’s overpayment credit beyond the statute of limitations because the action did not constitute the assessment of a deficiency.1
As the Department’s adjustment of the taxpayer’s 2011 tax year overpayment credit in 2018 did not directly result in additional tax being owed, the court concluded that the adjustment was not a deficiency assessment subject to the four-year statute of limitations.
In 2017, the Department completed an audit of the 2008-2010 Michigan Business Tax (MBT) returns of the taxpayer, a supply chain services company that provides solutions to retailers and restaurants. One of the audit issues concerned an MBT overpayment credit of $711,415 that the taxpayer claimed on its 2010 MBT return. In November 2012, the taxpayer timely filed its 2011 MBT return and claimed the prior year overpayment credit of $711,415. In February 2017, the Department issued a final audit determination that reflected a total net credit of $966,462 and sent the taxpayer a check for this amount. The taxpayer cashed the check without realizing that it reflected the prior overpayment credit.
After apparently recognizing that the taxpayer received the benefit of the same overpayment credit on its 2011 return as well as the check issued in 2017, the Department adjusted the taxpayer’s 2011 return. In February 2018, the Department sent the taxpayer a formal notice that it was disallowing the $711,415 overpayment credit on its 2011 return. This disallowance did not require the taxpayer to pay an additional amount related to the 2011 return, but it resulted in a much lower overpayment credit that could be carried forward. Thus, no bill was issued for additional tax due.
At an informal conference, the taxpayer argued that the state’s four-year statute of limitations prevented the Department from adjusting the overpayment on the 2011 return. The referee rejected the taxpayer’s argument after determining that the Department’s February 2018 notice did not result in a “deficiency.” The referee’s order upheld the determination that the taxpayer’s credit carryforward for the 2011 return was $273,596 following the removal of the disallowed overpayment credit. The taxpayer appealed this determination to the Michigan Court of Claims.
Court of Claims allows Department’s disallowance of credit
In September 2020, the Court of Claims granted the Department’s motion for summary disposition after determining that the Department could disallow the taxpayer’s 2011 overpayment credit in 2018.2
According to the taxpayer, the reduction of the credit carryforward for the 2011 tax year caused a “rolling reduction” of the carryforward for the tax years through 2017. The Department issued numerous refund adjustments to the taxpayer for these tax years. Also, the Department issued intents to assess and final assessments that were influenced by the 2018 adjustment.
The taxpayer’s complaint contained two separate counts. Count I asserted that the taxpayer’s 2011 MBT return was “final and closed” and the Department’s 2018 notice was beyond the four-year statute of limitations. The taxpayer argued that the reduction in a credit carryforward is a “deficiency” subject to the statute of limitations. Count II alleged that the 2010 MBT year was “final and closed” so that the Department could not adjust the credit carryforwards arising from the taxpayer’s 2010 MBT payments. As a result, the taxpayer contended that the 2018 notice was an improper collateral attack on the final audit determination for the 2008-2010 tax years.
Statute of limitations did not apply
In granting the Department’s motion for summary disposition of Count I of the taxpayer’s complaint, the court held that the Department’s adjustment in 2018 did not violate the statute of limitations. Under Michigan tax law, a “deficiency, interest, or penalty shall not be assessed after the expiration of 4 years after the date set for the filing of the required return or after the date the return was filed, whichever is later.”3
Also, “[t]he taxpayer shall not claim a refund of any amount paid to the department after the expiration of 4 years after the date set for the filing of the original return.”4
The critical issue in this case was whether the 2018 notice was an “assessment” of a “deficiency” subject to the statute of limitations. Because the term “deficiency” is not defined by Michigan tax law, the court considered the dictionary definitions and statutory context to determine the plain and ordinary meaning of the term. The court decided that “deficiency” as used in the statute of limitations “connotes a determination that there is a deficit in what the taxpayer paid and that something additional is owed.” As a result, the court concluded that a deficiency does not refer to a reduction in a credit claimed. This interpretation was further supported by a Michigan tax statute that describes a “deficiency” and an “excessive claim for credit” as separate concepts.5
Because the legislature did not separately reference credits in the statute of limitations, the court decided not to apply the statute to an excessive claim for credit. Furthermore, the court determined that no “assessment” was issued in this case.
The taxpayer argued that accepting the Department’s construction of the statute would lead to absurd and inconsistent results. As explained by the taxpayer, if the adjustment of the credit claimed on the 2011 return had produced an amount owed, rather than a reduction in the amount of credit to be claimed, such adjustment would have been subject to the statute of limitations. The court explained that the absurd results doctrine can “only be invoked when it is quite impossible that the Legislature could have intended the result.”6
In this case, it was not “quite impossible” for the Michigan legislature to intend to treat these two situations differently.
The taxpayer also argued that a recent unpublished opinion from the Michigan Court of Appeals supported its position. In Federated Financial Corp. v. Department of Treasury
, the court considered whether a taxpayer’s claim for a credit was subject to the statute of limitations.7
The court in Federal Financial
noted that the statute of limitations prohibits a taxpayer from claiming a “refund” of any amount paid after the four-year period. The court determined that the statute of limitations applied to “credits” although the statute only mentioned “refunds.” In the instant case, the taxpayer argued that taxpayers and the Department should be treated equally with respect to the statute of limitations when a taxpayer claims or the Department reduces the size of a credit. The court rejected this argument because it ignored the plain language of the statute of limitations.8
Adjustment was not impermissible collateral attack
The court also granted the Department’s motion for summary disposition for Count II of the taxpayer’s complaint. Under Count II, the taxpayer argued that the Department should be precluded from reducing the overpayment. Michigan law provides that a “taxpayer aggrieved by an assessment, decision, or order of the department may appeal the contested portion . . . to the tax tribunal within 60 days, or to the court of claims within 90 days after the assessment, decision, or order.”9
Further, Michigan law prohibits collateral attacks by providing the “assessment, decision, or order of the department, if not appealed in accordance with this section, is final and is not reviewable in any court.”10
The taxpayer unsuccessfully argued that the Department’s decision to disallow the credit carryforward, which originated in 2010, on the 2011 return was done more than 90 days after the Department finalized the audit. According to the taxpayer, the 2018 notice adjusting the 2011 return was an impermissible collateral attack on the audit. The court rejected this argument and noted that the taxpayer received the prior year overpayment when the Department issued the refund check in 2017. The adjustment of the carryforward credit on the 2011 return acknowledged that the $711,415 credit carryforward was not available because it had been paid to the taxpayer. Also, the prohibition on collateral attacks does not prevent the Department from taking necessary action to impose the correct tax liability.11
Michigan Court of Appeals affirms decision
In a brief unpublished opinion, the Michigan Court of Appeals affirmed the lower court and agreed that the 2018 adjustment did not result in a “deficiency” that would be subject to the statute of limitations.12
The court focused on the primary effect versus secondary effect of the Department’s action. As explained by the court, the primary effect was the disallowance of the claimed credit. The secondary effect of the disallowance could result in additional tax being owed. In the instant case, the taxpayer was not required to issue a check to pay a tax deficit. Therefore, the Department’s action was not the assessment of a deficiency because the existence of a tax deficit is a potential secondary effect of the credit disallowance.
The court acknowledged that the taxpayer’s “frustration with how the department handled this matter is understandable.” As noted by the court, the Department had a lengthy delay in finishing the 2008-2010 audit and, “most egregiously,” failed to explain that the check for $966,462 reflected the total net credit from the audit and included the overpayment credit from the 2011 return. The court further supported its decision with the lower court’s “thorough and well-reasoned opinion.”
This case should raise concern to taxpayers, as it reflects the Department’s apparent trend of interpreting the statute of limitations to allow “one-way” adjustments that may be available to the Department but not to taxpayers. As argued by the taxpayer in this case, the statute of limitations applies to credit claims made by taxpayers but does not apply to credit adjustments made by the Department if the taxpayer is not required to pay a tax deficiency. Furthermore, this interpretation of how the statute of limitations provisions work may result in the Department itself being required to apply such provisions inconsistently. For example, a credit adjustment may be subject to the statute of limitations if such adjustment requires the taxpayer to make a payment, but it may not be subject to the statute of limitations if such adjustment does not produce a direct deficiency. The statutory language in the statute of limitations does not expressly provide for this inconsistent treatment. However, due to judicial and administrative interpretation of the statute of limitations, the uncertainty over whether the statute of limitations applies to certain situations has increased. Additional clarity may be provided in the future, as this case has been appealed to the Michigan Supreme Court.13
One example of a judicial interpretation that has led to the disparity between the Department and taxpayers with respect to the statute of limitations is found in Tyson Foods, Inc. v. Department of Treasury
in which the Michigan Court of Appeals allowed the Department to issue second Michigan Single Business Tax assessments but the statute of limitations was held open only for the Department. This 2007 decision is significant because it is available for the Department to cite as support that the statute of limitations does not apply to the Department in certain situations.15
Also, in Active Aero Group, Inc. v. Michigan Department of Treasury
the Michigan Court of Claims held that the taxpayer’s overpayment or credit claims were barred by the statute of limitations. As far as administrative interpretations on this issue, a Revenue Administrative Bulletin (RAB) notes that there is no provision in the law for the extension of the statute of limitations for refund claims due to a pending Department audit.17
This decision stands in contrast to a recent New Jersey Tax Court decision holding that a net operating loss (NOL) adjustment from a closed tax year was precluded by the statute of limitations.18
The court ruled that the New Jersey Division of Taxation could not disallow NOLs generated in closed tax years and carried forward to an open tax year under an audit examination. According to the court, the Division’s adjustment of NOL carryforwards created in closed years was tantamount to the adjustment of income reported in those years, thus constituting an impermissible “audit” for closed years outside the state’s four-year statute of limitations. Finding the Division’s NOL audit adjustment to be time-barred, the court granted the taxpayer’s motion for partial summary judgment.
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