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A Better Partnership
June 13, 2017

MSC grants MOAA to determine whether merely claiming a debt as a “bad debt” is sufficient to entitle the lender to bad-debt tax deduction

In Ally Financial Inc. v. Department of Treasury, No. 154668-70, the Michigan Supreme Court granted mini-oral argument to consider, among other things, whether repossessed property is excluded for "bad debt" tax credit.  Specifically, the Court asked the parties to address four issues:
(1) Whether Plaintiffs’ election forms constitute “a written election designating which party may claim the deduction” for the purposes of the General Sales Tax Act;
(2) Whether the Department of Treasury may require a taxpayer to prove its right to a refund by submitting RD-108 documents to the exclusion of any other method of proof;
(3)  Whether the General Sales Tax Act prohibits partial or full tax refunds on bad debt accounts that include repossessed property; and
(4) Whether the Court of Appeals erred in giving deference to the Department of Treasury’s interpretation of the General Sales Tax Act.

The case concerns interpretation of MCL 205.54i of the Michigan General Sales Tax Act. Plaintiffs Ally Financial, Inc. and Santander Consumer USA, Inc., both financing companies, sought a sales tax refund from the Department of Treasury premised on certain bad debts.  When their request was denied, they filed suit.  The Court of Appeals held that merely claiming a debt as a bad debt under § 166 of the Internal Revenue Code is not the sole determining factor for whether a claimant is entitled to a bad-debt deduction under MCL 205.54i.  Instead, an entity claiming a refund must satisfy the election requirements set forth in MCL 250.54i.  Moreover, the Court of Appeals upheld the Department of Treasury’s request for proof that taxes had been paid, concluding that the legislature has explicitly placed this matter in the Department of Treasury’s discretion.  Lastly, the Court of Appeals held that a bad debt does not include repossessed property.

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