Michigan Explains New Combined Filing Requirements for Unitary Business Groups
As a result of a recent Court of Appeals decision that “indirect” ownership doesn’t include attributional or constructive ownership, Michigan taxpayers must amend affected returns.
On Feb. 28, 2017, the Michigan Department of Treasury released a taxpayer notice explaining how to apply its combined tax filing rules in light of the decision by the Michigan Court of Appeals in LaBelle Management Inc v Department of Treasury.  As a result of that decision, Michigan had to narrow its definition of which members of a unitary group of businesses were required to be included in a combined tax return.
Under the unitary business principle, a state may look beyond the activity that occurs within its particular borders to determine the amount of income taxable to that state. This is grounded in the concept that business conducted both within and outside the state may contribute to the economic activity attributable to the state and is the basis for the apportionment of overall income. When that unitary business activity is conducted by multiple entities – at least of one which has nexus with the state and that are sufficiently related – the state may require those members of the unitary business to file a combined return. Thirty-one states, including Michigan, have either elective or mandatory provisions for combined tax reporting. 
Although the U.S. Supreme Court has established certain factors that indicate when a unitary business relationship exists among separate businesses, this is ultimately a factual determination and the definitions and interpretations may vary by state. In general, a group of businesses is unitary when it has common ownership (the level of which may vary by state) and there is a flow of value among the group, which may be evidenced by certain factors such as centralized management, functional integration and economies of scale.
Michigan defines a unitary business group as a group of U.S. persons 1) where one member owns or controls, directly or indirectly, more than 50 percent of the voting rights of the other members and 2) that has activities which result in a flow of value among the members or has activities that are integrated with, dependent upon or contribute to each other.  The issue in LaBelle was whether “indirect” ownership under this definition should also include attributional or constructive ownership pursuant to Internal Revenue Code section 318. Attributional ownership means treating a person as owning stock that is owned by certain relatives or by entities in which the person has an interest. For example, in the case where two corporations are each owned 51 percent directly by an individual, those corporations are deemed to own each other by 51 percent under attributional or constructive ownership rules.
In LaBelle, the Michigan Court of Appeals held that “indirect” ownership merely means ownership through an intermediate entity and does not include attributional or constructive ownership. As a result, unitary business groups containing brother-sister corporations (where there is no common control apart from the attribution of stock ownership) will need to re-evaluate their combined Michigan tax filings. Pursuant to the notice, the state has instructed taxpayers to amend all affected tax returns that remain open under the four-year limitation period.  All affected returns, whether original or amended, should be identified as a “Labelle” return, and members may provide instructions designating overpayments to other former members who may now be required to file separately. No penalties will be imposed on any “Labelle” returns (whether an amended unitary group return or an original unitary group or stand-alone return) if additional tax is due. Further, all interest will be waived so long as the amendments are made by Dec. 31, 2017.
Although combined reporting for unitary business groups adds a layer of complexity to state income tax filings, combined filing does not necessarily mean that a taxpayer will owe more state tax. In some situations, it allows the losses of certain members to offset the profits of another. Aprio’s SALT group has experience in navigating the complex state income tax combined filing rules and can advise on tax planning opportunities for states where elections can be made with regard to combined filing and combined group participation. We constantly monitor these and other important state tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.
This article was featured in the April 2017 SALT Newsletter. Click here to view the full newsletter.
 Notice to Taxpayers Regarding LaBelle Management Inc v Department of Treasury, 2/28/2017.
 Technically, a combined tax return is a tax return of the entity or entities with nexus in the state where the liability of such entity or entities includes the income and apportionment factors of all of the members of the unitary business group. Thus, the tax liability shown on the return is a liability solely of the member or members of the group that have nexus with the state since the state does not have jurisdiction over the non-nexus members. In other words, combined reporting is really just a methodology for computing tax liability and does not alter which entities are subject to that liability.
 MI Comp. Laws Ann. §208.1117(6).
 MI Comp. Laws Ann. §205.27a(2). The statute of limitations for refunds is four years from the date due and the statute of limitations for assessments is four years from the later of the due date or actual date filed.
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