Single Business Tax Small Business Credit Case Decided By The Court of Appeals In Favor of Taxpayer
The Michigan Court of Appeals ruled on Tuesday 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 the $115,000 disqualifying amount. [Alliance Obstetrics & Gynecology, PLC v. Department of Treasury, Michigan Court of Appeals, Docket No. 280125, August 4, 2009]
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.
Because of the large number of cases and the large potential refunds that the state may be required to pay as a result of this ruling, one might expect the Department of Treasury (Treasury) to appeal to the Michigan Supreme Court. Because the SBT is a dead tax Treasury may let the ruling stand. However, Treasury is appealing the Kmart Michigan property Services case cited above.
keep us posted
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In arriving at business income (line 9) the members guaranteed payments are added in on the business income worksheet (line h) -will this court case possibly eliminate the guaranteed payments add back? If so, this court case could generate large amended sbt refunds
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Mark,
The Alliance case merely said that a LLC election to be taxed as a corporation does make the LLC a corporation. It did not rule out any use of the IRC. It just limited such use to situations where its used in a compariable context with the same meaning.
We are waiting to see if the Treasury will appeal to the Michigan Supreme Court.
Ed
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Due to possible appeal and the ticking of the statue of limitations - are you recommending that at a minimum we file protective claims for refunds based on this case for any open years?
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Last week Wednesday, the Michigan Department of Treasury filed an appeal in the Alliance case to the Michigan Supreme Court. If the Supreme Court agrees to hear the case, it may be a year before a decision is rendered. In the meantime, we are recommending that taxpayers who have potential refunds to file protective refund claims.
The protective claim, the amended return, should clearly state that it is being filed pursuant to the Alliance case.
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Taxpayer is always right! That's the main principle of our country I think. Oh no, it only have to be like that, but it won't be like that ever. Moreover if we are talking about world wide crisis. However we must be happy with our taxes, because I have heard that in other countries people are paying much more because government had raised taxes because of crisis. Thanks for the article though. Keep writing them in the same mood in the future too.
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Are there any updates on this case? Has Treasury made a decision to Appeal, or are they letting it go?
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It appears there will be no appeal on this one.
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