KMART MICHIGAN PROPERTY SERVICES LLC V DEPT OF TREASURYAnnotate this Case
STATE OF MICHIGAN
COURT OF APPEALS
KMART MICHIGAN PROPERTY SERVICES,
May 12, 2009
LC No. 00-319617
DEPARTMENT OF TREASURY,
Advance Sheets Version
Before: Bandstra, P.J., and Whitbeck and Shapiro, JJ.
Respondent, Department of Treasury (the Department), appeals as of right from the order
of the Michigan Tax Tribunal granting petitioner Kmart Michigan Property Services, LLC
(KMPS), summary disposition. We affirm.
I. Summary of Facts and Proceedings
KMPS was a limited liability company (LLC) formed in Michigan and wholly owned by
its single member, Kmart Corporation (Kmart). During the period at issue, KMPS had three
employees and was responsible for winding up the business affairs of Builders Square, its former
subsidiary, whose assets were sold to a third party. KMPS filed a single business tax (SBT)
return for a fiscal year ending January 28, 1998. At some point, the Department audited KMPS
for that fiscal year in connection with an audit of Kmart and determined that KMPS should not
have filed a separate SBT return, but should have submitted its income, deductions, credits,
assets, and liabilities with those of Kmart, its parent corporation, for the tax year at issue. The
Department determined that it would not accept KMPS’s SBT return for the period at issue and
would “disregard the entity and treat it as a division of its owner.”
On March 2, 2005, an informal conference was held at which a referee heard arguments
from both parties. The referee determined that KMPS was not entitled to a refund for the tax
year at issue, which would have been the result if the Department had permitted KMPS to file a
separate SBT return. KMPS filed an appeal to the tribunal on August 3, 2005, and later filed a
motion for summary disposition.
In its summary disposition motion, KMPS argued that it met the definition of a “person”
under MCL 208.6(1) of the Single Business Tax Act (SBTA), MCL 208.1 et seq.,1 qualifying it
to file a separate SBT return for the period at issue. KMPS further argued that the Department
improperly applied retroactively the guidance of its Revenue Administrative Bulletin (RAB)
1999-9, and further that RAB 1999-9 lacked statutory authority and conflicted with the statute,
rendering it invalid. The Department argued before the tribunal that KMPS was not a person
under the SBTA, but rather a single-member LLC. In addition, the Department argued that
because KMPS elected to be a nonentity for federal tax purposes for tax year 1998, it could not
choose to be an entity for purposes of its state SBT filing.
The tribunal concluded that although it was logical for the Department to reason that
taxpayers should be categorized under the SBTA according to the entity classification they
elected for federal tax purposes, “[t]his rationale . . . is not the same as a legal requirement.” The
tribunal stated that revenue administrative bulletins deserve due deference from the courts, but
are not binding legal authority, particularly if they contravene the applicable statute. The
tribunal stated further that KMPS’s federal tax status was not determinative of whether it
satisfied the definition of “person” under the SBTA, because the SBTA filing requirements are
independent of the federal tax code and existed “long before the federal ‘check-the-box’
regulations” permitting a taxpayer to choose its entity status. Thus, the tribunal found that
KMPS was entitled to file a separate SBT return for the tax year at issue.
II. Standard of Review
We have limited review of Tax Tribunal decisions. Mt Pleasant v State Tax Comm, 477
Mich 50, 53; 729 NW2d 833 (2007). Where the facts are not disputed and there is no allegation
of fraud, our review is limited to whether the tribunal made an error of law or adopted a wrong
principle. Wexford Medical Group v City of Cadillac, 474 Mich 192, 201-202; 713 NW2d 734
(2006). However, because the decision involves issues of statutory interpretation and
application, our review is de novo. Id. at 202.
In statutory interpretation, our primary goal is to determine and give effect to the intent of
the Legislature. Mt Pleasant, supra at 53. We begin by reviewing the language of the statute.
Id. “If the statutory language is unambiguous, the Legislature is presumed to have intended the
meaning expressed in the statute and judicial construction is not permissible.” Id. “[A]
provision of the law is ambiguous only if it ‘irreconcilably conflicts’ with another provision or
when it is equally susceptible to more than a single meaning.” Lansing Mayor v Pub Service
Comm, 470 Mich 154, 166; 680 NW2d 840 (2004) (citation omitted; emphasis in original).
Words and phrases are not read “discretely,” but rather within the context of the whole act. Id. at
Repealed by 2006 PA 325.
Additionally, “‘the construction given to a statute by those charged with the duty of
executing it is always entitled to the most respectful consideration and ought not to be overruled
without cogent reasons.’” In re Complaint of Rovas Against SBC Michigan, 482 Mich 90, 103;
754 NW2d 259 (2008), quoting and adopting the standard stated in Boyer-Campbell v Fry, 271
Mich 282, 296; 260 NW 165 (1935). Because the Department has legal responsibility to collect
taxes and is responsible for “[s]pecialized service for tax enforcement, through establishment and
maintenance of uniformity in definition, regulation, return and payment,” MCL 205.1, we accord
respectful consideration to its position. However, “the agency’s interpretation is not binding on
the courts, and it cannot conflict with the Legislature’s intent as expressed in the language of the
statute at issue.” In re Complaint of Rovas, supra at 103.
The Department argued before the Tax Tribunal that KMPS was not a “person” but a
single-member LLC, such that the SBTA required KMPS to file its SBT return as a disregarded
entity. As a “disregarded entity,” a single-member LLC is not taxed separately, but has its
income attributed to its owner and the owner is then responsible for paying all taxes due. Thus,
the Department argued, KMPS should have been included in Kmart’s SBT return rather than
filing its own.
Under the SBTA, “every person with business activity in the state” was required to pay
the SBT. MCL 208.31(1). “Person” was defined as, “an individual, firm, bank, financial
institution, limited partnership, copartnership, partnership, joint venture, association, corporation,
receiver, estate, trust, or any other group or combination acting as a unit.” MCL 208.6. As the
tribunal noted in its opinion, “[a] plain reading of the phrase ‘or any other group or combination
acting as a unit’ should be construed to cover the same kind, class, character or nature as those
entities specifically enumerated,” such that “[t]he concluding phrase . . . encompasses business
entities that are not enumerated or lack precise legal identification.” Under this interpretation,
the tribunal concluded, an LLC, though not identified in the SBTA, fits within the statutory
definition of “person” whether it has one or more members. The Department conceded that a
“person” with business activity in Michigan is subject to pay the SBT, but argues that KMPS’s
election for federal tax purposes overrides its legal status in Michigan for state tax purposes.
Federal Treasury Regulations 26 CFR 301.7701-1 through 301.7701-3 set forth the
classification of organizations for federal tax purposes. 26 CFR 301.7701-1(a)(4) states that
“[u]nder §§ 301.7701-2 and 301.7701-3, certain organizations that have a single owner can
choose to be recognized or disregarded as entities separate from their owners.” 26 CFR
301.7701-3(a) provides in relevant part:
A business entity that is not classified as a corporation under § 301.77012(b)(1), (3), (4), (5), (6), (7), or (8) (an eligible entity) can elect its classification
for federal tax purposes as provided in this section. An eligible entity . . . with a
single owner can elect to be classified as an association or to be disregarded as an
entity separate from its owner. Paragraph (b) of this section provides a default
classification for an eligible entity that does not make an election.
The default classification under 26 CFR 301.7701-3(b)(ii) provides that “unless the entity elects
otherwise,” a domestic eligible entity shall be “[d]isregarded as an entity separate from its owner
if it has a single owner.” The federal regulations make no special provision for domestic entities
that are LLCs or whose members are LLCs. Accordingly, under federal tax law, KMPS could
elect to be taxed as a separate entity from Kmart or to be a disregarded entity. The parties agree
that for the tax year 1998, KMPS elected to be a disregarded entity for federal tax purposes.
The Department argues that Michigan’s SBT utilizes the same “check-the-box”
regulations that the federal income tax rules use, relying on Revenue Administrative Bulletin
(RAB) 1999-9, which provides, in part:
Michigan conforms to federal check-the-box regulations [26 CFR] [§
301.7701-1 through § 301.7701-3] for SBT purposes. The entity election or
default classification for filing the federal income tax return is effective for all
components of the SBT return that are related to federal income tax. . . . A
taxpayer who elects entity classification at the federal level shall file the Michigan
SBT return on the same basis and reflect the same tax consequences.
In the case of a disregarded entity, the single member files the return and
indicates its legal organization. The member filing the return should attach a
statement to the return listing the single member entity(s) included in the return.
[RAB 1999-9, ¶ I, p 2.]
RAB 1999-9 also notes the following:
Under Treas Reg § 301.7701-2, if a single member entity is disregarded
for federal income tax purposes, its activities are included as a part of the owner’s
activities in the respective sole proprietorship, branch, or division of the owner.
Therefore, income, deductions, credits, assets and liabilities of a single member
entity having nexus with Michigan, who elects to be disregarded as an entity for
federal income tax purposes, are deemed to be those of the owner. . . . [RAB
1999-9, ¶ IV, p 3.]
Thus, under the guidelines outlined in the RAB 1999-9, KMPS was required to use the same
entity status it had chosen for federal tax purposes with respect to its SBT filing. If KMPS had
followed the guidance of the RAB 1999-9, it would not have filed a separate SBT return but
would have accounted for its “income, deductions, credits, assets and liabilities” in its owner’s
SBT filing, i.e., as a disregarded entity. See RAB 1999-9, ¶ IV, p 3.
However, as the tribunal noted in its opinion and the Department conceded at oral
argument, the Department’s policies as described in RAB 1999-9 do not have the force of a legal
requirement. MCL 205.3(f) provides that the Department “may periodically issue bulletins that
index and explain current department interpretations of current state tax laws.” Significantly, the
statute makes a separate provision for rules issued by the Department: “After reasonable notice
and public hearing, the department may promulgate rules consistent with this act in accordance
with the administrative procedures act . . . , MCL 24.201 to 24.328, necessary to the enforcement
of the provisions of tax and other revenue measures that are administered by the department.”
MCL 205.3(b). Under MCL 24.207(h), explanatory guidelines are distinguished from rules that
have the force of law: rules do not include “[a] form with instructions, an interpretive statement,
a guideline, an informational pamphlet, or other material that in itself does not have the force and
effect of law but is merely explanatory.” The Department indicated to this Court that bulletins
are considered “interpretative statements.” Accordingly, we agree with the tribunal that KMPS
was not legally required to follow RAB 1999-9.
We note that even though RAB 1999-9 is not legally binding, it reflects the Department’s
interpretation of a statute it is charged with enforcing, entitling it to respectful consideration. In
re Complaint of Rovas, supra at 103. However, we conclude that the Department’s legal
rationale is inconsistent with the plain language of the SBTA.
Neither the SBTA nor the federal regulations require an entity to be consistent in its selfclassification with respect to its state and federal tax filings for a given year. Indeed, the federal
regulations expressly state that entity classification under the Internal Revenue Code “is a matter
of federal tax law and does not depend on whether the organization is recognized as an entity
under local law.” 26 CFR 301.7701-1(a)(1). In response, the Department argues that the
Legislature “adopt[ed] federal categories consistently” in the SBTA, “indicated in the statute by
its adoption . . . of terminology from the Internal Revenue Code.”
MCL 208.2(2) provides that any “term used in this act and not defined differently shall
have the same meaning as when used in comparable context in the laws of the United States
relating to federal income taxes in effect for the tax year unless a different meaning is clearly
required.” However, nothing in this subsection indicates that entity classification elections in the
federal tax code must be carried over to an entity’s SBT filing. Rather, it simply provides that
terms defined in the federal regulations have the same meaning when used in the SBTA. There
is no specific term at issue in this case and, therefore, no definition to find in the federal
regulations. Consequently, the SBTA’s provisions regarding who must pay the SBT stand alone.
Looking simply at the provisions of the SBTA, KMPS was required to file an SBT return,
regardless of its classification as a disregarded entity for federal tax purposes, because KMPS fit
within the statutory definition of a “person” conducting business activity and the SBTA required
all persons conducting business activity in the state to file an SBT return. Therefore, the SBTA
does not support the requirement of RAB 1999-9 that an organization that is a disregarded entity
for federal tax purposes for a given taxable period must also file as a disregarded entity for state
tax purposes. Accordingly, we conclude that the tribunal made no error of law. Wexford
Medical Group, supra.
/s/ Richard A. Bandstra
/s/ William C. Whitbeck
/s/ Douglas B. Shapiro