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A Better Partnership
June 25, 2013

MSC holds that the Michigan Income Tax Act allows collective apportionment of unitary-business income

In Malpass v. Department of Treasury and Wheeler Estate v. Department of Treasury, the Michigan Supreme Court considered the proper apportionment of business income under the Michigan Income Tax Act ('MITA'). Siding with the taxpayers, the Court held that an individual taxpayer may apportion all business income received from a unitary business collectively, regardless of entity structure. The Department of Treasury had argued that the MITA required the taxpayer to apportion the income of each business entity comprising a unitary business separately. The Court rejected the Department's interpretation. Instead, the Court stated that the MITA authorized both the taxpayers' approach (collective apportionment) and the Department's approach (separate apportionment). Thus, the taxpayers' returns complied with the MITA.

In the Wheeler case, the Court also held that the MITA required apportionment of income from a foreign business entity, and affirmed the lower courts' finding that the Wheeler taxpayers operated a unitary business. In upholding the unitary-business finding, the Court approved the use of five factors in determining whether a unitary business exits: (1) economic realities; (2) functional integration; (3) centralized management; (4) economies of scale, and (5) substantial mutual interdependence. However, the Court cautioned that other factors might be considered and no one factor should be dispositive. The courts should consider the totality of the circumstances in making the unitary-business determination.

Disclaimer: Warner Norcross & Judd represented the prevailing Appellants in Malpass v. Department of Treasury.

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