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April 06, 2016

COA – Indirect ownership under MCL 208.1117(6) means ownership through an intermediary, not ownership by operation of legal fiction

In LaBelle Management, Inc. v. Michigan Department of Treasury, No. 324062, the Michigan Court of Appeals held that under MCL 208.1117(6), “indirect ownership” means ownership through an intermediary, not ownership by operation of legal fiction.
 
Barton and Douglas LaBelle owned The Pixie, Inc. and LaBelle Limited Partnership, and during the relevant tax periods, neither man owned more than 50% of the common stock or each entity.  In 2011 and 2012, the defendant, Michigan Department of Treasury, audited plaintiff’s tax returns and as a result, determined that plaintiff, Pixie and LaBelle Limited Partnership should be treated as a “unitary business group.”  The defendant found that plaintiff indirectly owned 100% of Pixie and LaBelle Limited Partnership and that Pixie indirectly owned 100% of plaintiff and 90% of LaBelle Limited Partnership.  A bill in the amount of $11,856.29 was sent to plaintiff which it paid under protest.  Plaintiff then filed this lawsuit challenging the defendant’s finding that it was a “unitary business group.”  The trial court granted defendant’s motion for summary disposition and determined that, under provisions of the federal income tax code that were most contextually analogous to Michigan’s determination of indirect ownership or control, plaintiff was a “unitary business group.”  Plaintiff appealed.
 
 The Court of Appeals held that the trial court erred in using the federal income tax definition of “constructive ownership” when defining Michigan’s “indirect” ownership requirement in MCL 208.1117(6).  The main issue for the Court to determine was how to define “owns or controls . . . indirectly.”  Under the Michigan Business Tax Act, MCL 208.1101 et seq., there is no definition provided for “indirect ownership or control,” thus, it requires the term to have the same meaning as when used in comparable context in federal income tax law.  Here, the Court noted, there was no federal income tax provision directly comparable, thus, “the trial court should have resorted to normal rules of statutory construction to determine the meaning of the undefined term.”  The Court turned to the dictionary definition of “indirectly,” and held that indirect ownership under MCL 208.1117(6) means ownership through an intermediary, not ownership by operation of legal fiction.  The Court reversed the trial court’s decision and remanded for entry of summary disposition in favor of plaintiff. 

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