Newcor Inc v. Department of Treasury ( 2014 )

STATE OF MICHIGAN
COURT OF APPEALS
NEWCOR, INC., UNPUBLISHED
December 18, 2014
Plaintiff-Appellant,
v No. 317702
Court of Claims
DEPARTMENT OF TREASURY, LC No. 12-000027-MT
Defendant-Appellee.
Before: M. J. KELLY, P.J., and CAVANAGH and METER, JJ.
PER CURIAM.
Plaintiff appeals as of right from a trial court order that granted summary disposition to
defendant pursuant to MCR 2.116(C)(10) (no genuine issue of material fact). The dispute
between the parties concerns the amount of tax plaintiff owed under the Single Business Tax Act
(SBTA), MCL 208.1 et seq.,1 for the tax years 2003 through 2006. Defendant assessed plaintiff
additional taxes it determined plaintiff owed, and plaintiff challenged the assessment in the Court
of Claims. We affirm.
I. FACTUAL BACKGROUND
Plaintiff is a holding company that oversees eight different subsidiaries, all of which are
involved in manufacturing for the automotive and heavy truck industry. Plaintiff provides
administrative services and centralized functions for the subsidiaries.
Plaintiff was selected for a SBTA audit for the years 2003 through 2006. While
comparing plaintiff’s state tax returns with its federal returns and internal books, the auditor
noticed that plaintiff had characterized approximately $25 million as “management fees” in its
internal books, included virtually all of this as income on its federal return, but had not included
it as gross receipts on its state return. Plaintiff claimed that this amount did not need to be
1
This act was repealed for tax years that begin after December 31, 2007. 2006 PA 325.
However, the repeal did not affect the enforcement of the tax for previous years, and “[t]he
obligation of taxpayers and the state for taxes levied or collected on business activity on or
before December 31, 2007 is affirmed.” MCL 208.153.
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reported on its state return because it was “reimbursement costs” and, therefore, was exempted
from “gross receipts” under MCL 208.7(3)(b). The auditor determined that plaintiff did not have
sufficient records to conclusively establish that the $25 million met the statutory requirements of
MCL 208.7(3)(b) and added this amount back into plaintiff’s gross receipts.
The auditor also noticed that plaintiff had repurchased some of its outstanding bonds in
2004 and 2005 for less than face value, realizing a gain that was reported as income in its federal
return. It was deducted, however, by plaintiff from its tax base on its state filing. Plaintiff
claimed that this gain was interest income that was allowed to be deducted from its tax base
under MCL 208.9(7)(b). The auditor determined that plaintiff did not have sufficient records to
conclusively establish that the gain was interest income as defined in MCL 208.9(7)(b) and
added this amount back into plaintiff’s tax base.
Plaintiff filed a complaint in the Court of Claims challenging the reassessment. The first
count claimed that defendant incorrectly disallowed plaintiff to deduct the $25 million in
management fees from its gross receipts. The second count claimed that defendant incorrectly
disallowed plaintiff to deduct the gain realized on the bond purchases from its tax base. The
third count alleged defendant violated plaintiff’s equal protection rights in its audit and
assessment.
After the initial hearing on defendant’s motion, the trial court granted defendant’s motion
with respect to Count I (the management fees) and Count III (the equal protection claim).
Several days after the hearing, the court sua sponte reversed its decision with respect to Count I.
Defendant filed a motion for reconsideration, which was denied. Defendant then filed a motion
to revise, arguing that the trial court was under the mistaken assumption that discovery was
ongoing, when in fact discovery had closed. The trial court granted this motion and another
hearing on the merits of defendant’s motion was held. During the second hearing, the trial court
stated that it had been under the incorrect assumption that discovery was ongoing, and that this
assumption underlay its reversal of the grant of summary disposition on Count I. The trial court
then granted defendant’s motion on all counts.
II. STANDARD OF REVIEW
“This court reviews the grant or denial of summary disposition de novo to determine if
the moving party is entitled to judgment as a matter of law.” Maiden v Rozwood, 461 Mich. 109,
118; 597 NW2d 817 (1999).
III. ANALYSIS
“A motion under MCR 2.116(C)(10) tests the factual sufficiency of the complaint.”
Maiden, 461 Mich. at 120. The court considers affidavits, pleadings, depositions, admissions,
and other evidence in the light most favorable to the non-moving party. Id. When the evidence
presented “fails to establish a genuine issue regarding any material fact, the moving party is
entitled to judgment as a matter of law.” Id. “A litigant’s mere pledge to establish an issue of
fact at trial cannot survive summary disposition under MCR 2.116(C)(10).” Maiden, 461 Mich.
at 121. A reviewing court must consider the “substantively admissible evidence actually
proffered in opposition to the motion.” Id.
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When interpreting provisions of the tax laws, “the power to tax must be expressly stated,
not inferred.” Menard v Dep’t of Treasury, 302 Mich. App. 467, 472; 838 N.W.2d 736 (2013).
Nonetheless, “[t]axation is the rule, and exemptions are the exception.” Id. at 473. “[S]tatutory
exemptions are strictly construed against the taxpayer.” Id.
A. THE EXEMPTION OF THE MANAGEMENT FEES FROM GROSS RECEIPTS
The SBTA defines the term “gross receipts” as “the entire amount received by the
taxpayer from any activity whether in intrastate, interstate, or foreign commerce carried on for
direct or indirect gain, benefit, or advantage to the taxpayer or to others . . . .” MCL 208.7(3).
The act then exempts certain items from “gross receipts,” such as:
(b) Amounts received by the taxpayer as an agent solely on behalf of the
principal that are expended by the taxpayer for any of the following:
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(ii) The performance of a service by a third party for the benefit of the
principal that the taxpayer has not undertaken a contractual duty to perform.
[MCL 208.7(3).]
Michigan tax laws also state that a taxpayer must “keep accurate and complete records
necessary for the proper determination of tax liability as required by law or rule of the
department.” MCL 205.28(3). Because “[s]tatutes that address the same subject matter or share
a common purpose are in pari materia and must be read collectively as one law, even when there
is no reference to the other,” Menard, 302 Mich. App. at 472, the provisions of the SBTA must be
interpreted consistently with the provisions of the tax laws that require taxpayers to maintain
proper records. If the taxpayer maintains insufficient records, defendant has the power to assess
the taxpayer on the basis of the records that the taxpayer does maintain. Vomvolakis v Dep’t of
Treasury, 145 Mich. App. 238, 244-245; 377 NW2d 309 (1985).
Plaintiff claims that it is entitled to exclude from its tax base the $25 million in
management fees that it received from its subsidiaries because those fees were merely
reimbursement for amounts that plaintiff had already paid third parties who performed services
for the subsidiaries. Defendant does not dispute that plaintiff would be entitled to the exemption
if the underlying transactions between plaintiff, its subsidiaries, and third parties were as plaintiff
claims and could be supported by plaintiff’s internal records. However, defendant argues that in
order for plaintiff to exclude the $25 million in management fees under MCL 208.7(3)(b)(ii) it
must have documentary evidence establishing (1) that the relationship between plaintiff and its
subsidiaries is what plaintiff says it is, (2) that the amount it wishes to exempt was expended on
behalf of a principal, and (3) that the amount it wishes to exclude was received from the principal
solely as a reimbursement. We agree.
The records that defendant examined during the audit showed that plaintiff included the
$25 million as management fees in its internal books and that it reported this amount as income
on its federal return. On the basis of these records, defendant concluded that this $25 million
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met the definition of gross receipts that were not exempt under MCL 208.7(3)(b)(ii) because
there was no other record or information presented.
During discovery plaintiff submitted two single-sided sheets of paper labeled “P&L
Statement,” and in response to defendant’s motion for summary disposition plaintiff submitted a
large stack of documents referred to as intercompany billing statements. Plaintiff asserts that its
CEO will testify and explain how these records show that the $25 million of management fees
meets the exemption language in MCL 208.7(3)(b)(ii). However, a motion for summary
disposition under MCR 2.116(C)(10) is a test of the complaint’s factual sufficiency. Maiden,
461 Mich. at 120. It is not sufficient for plaintiff to promise its CEO will provide such testimony
at trial. Rather, plaintiff was required to submit some form of admissible evidence, such as a
sworn affidavit, “at the time of the motion.” Id. at 120-121. Plaintiff did submit an affidavit
from its CEO, but it merely uses conclusory terms that mirror the allegations made in its
complaint that the documents show it is entitled to exempt the $25 million from gross receipts.
This is not sufficient to survive a motion for summary disposition under MCR 2.116(C)(10). See
Maiden, 461 Mich. at 120-121.
The records also cannot be said to speak for themselves. The intercompany billing
statements have no explanations regarding how they relate to the $25 million recorded as
management fees in plaintiff’s internal records and on plaintiff’s federal tax return. The “P&L
Statement” has no explanation, other than conclusory statements, regarding how it relates to the
$25 million recorded as management fees in plaintiff’s internal records and on plaintiff’s federal
tax return.
B. THE DEDUCTION OF THE GAINS REALIZED FROM THE BOND PURCHASE FROM
PLAINTIFF’S TAX BASE
MCL 208.9(7)(b) states, in relevant part, that a taxpayer may “[d]educt the following, to
the extent included in arriving at federal taxable income: . . . [a]ll interest except amounts paid,
credited or reserved by an insurance company as amounts necessary to fulfill the policy and
other contract liability requirements . . . .” The Michigan Supreme Court has defined interest as
“compensation allowed by law or fixed by the respective parties for the use or forbearance of
money, ‘a charge for the loan or forbearance of money,’ or a sum paid for the use of money, or
for the delay in payment of money.” Town & Country Dodge, Inc v Dep’t of Treasury, 420 Mich.
226, 242; 362 NW2d 618 (1984), quoting Balch v Detroit Trust Co, 312 Mich. 146, 152; 20
NW2d 138 (1945).
Plaintiff argues that when it bought back some of its own debt instruments at a discount,
the gain it realized on this should not be included in its tax base because it is interest income.
Plaintiff claims that this is interest income because by purchasing the bonds at a discount,
plaintiff paid less interest than it otherwise would have, had it simply kept paying on the bonds at
their face value. Plaintiff argues that this savings or gain should be considered interest income.
Town & Country is instructive. At issue in Town & Country, see 420 Mich. at 239, was
whether portions of interest received by financial institutions from the monthly payments of
automobile purchasers that was then refunded to the dealer who sold the automobile was interest
income to the car dealer. The Michigan Supreme Court held that just because interest had to be
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credited on the dealer’s accounting books as an “interest refund,” this did not mean the amount
could be deducted as interest income under MCL 208.9(7)(b). Town & Country, 420 Mich. at
244. In other words, just because the money was interest in the hands of the financial institution
did not mean that it was interest in the hands of the dealers. Id. “In the ordinary sense of the
word, money paid as interest does not retain that characteristic (of being interest) unless it too,
when it is returned or rebated, is paid for the use of or forbearance or delay of use of money.” Id.
Here, plaintiff did not receive this gain in exchange for the use of or forbearance or delay of use
of money. It received this gain because by essentially pre-paying its debt obligations at a
discount, it saved with respect to the total amount of interest it otherwise would have had to pay.
Even if the money was reflected as interest income on plaintiff’s balance sheet, the principles
remain the same. See id. Reversal is unwarranted.
Affirmed.
/s/ Michael J. Kelly
/s/ Mark J. Cavanagh
/s/ Patrick M. Meter
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