Connors & Mack Hamburgers, Inc v. Department of Treasury

129 Mich. App. 627 (1983) 341 N.W.2d 846

CONNORS & MACK HAMBURGERS, INC.
v.
DEPARTMENT OF TREASURY

Docket No. 63174.

Michigan Court of Appeals.

Decided October 11, 1983.

Chirco, Donaldson, Herrinton & Runstadler (by J. Bruce Donaldson), for petitioner.

Frank J. Kelley, Attorney General, Louis J. Caruso, Solicitor General, and Richard R. Roesch and Curtis G. Beck, Assistants Attorney General, for respondent.

Before: MacKENZIE, P.J., and M.J. KELLY and S. EVERETT,^[*] JJ.

PER CURIAM.

The petitioner in this case is appealing from the affirmance by the Tax Tribunal of a deficiency assessment by the Department of Treasury. Petitioner was a franchisee of McDonald's Systems, Inc. As such a franchisee it was required to pay to McDonald's 11-1/2% of its gross income. According to the agreement of the parties, 3% was a service fee, the balance rent for the business building, which was owned by McDonald's.

In the preparation of its single business tax returns petitioner deducted the 3% service fee as a business expense and McDonald's included it as business income and paid the taxes involved. The Tax Tribunal determined that the payment was a "royalty" and, therefore, not deductible by the payor and consequently not to be included in the payee's income.

Where fraud is not alleged, this Court is bound by the factual determinations of the Tax Tribunal. First Federal Savings & Loan Ass'n of Flint v Flint, 104 Mich. App. 609; 305 NW2d 553 (1981). Review is limited to whether the Tax Tribunal committed an error of law or adopted a wrong principle. Const 1963, art 6, § 28. A decision of the Tax Tribunal that is not supported by competent, material, and substantial evidence is an error of law. Bridgewater Twp v Washtenaw County Bd of Comm'rs, 106 Mich. App. 103; 307 NW2d 429 (1981).

In the course of the hearing as well as in its brief, appellee admits that McDonald's performed services in exchange for the payment of the service fee. Appellee contends, however, that no exact breakdown of the cost of the services was submitted to the Tax Tribunal. Further, appellee admits that there is no tax avoidance involved as the state collects the same amount from McDonald's as it would from the franchisee. In Frank Lyon Co v United States, 435 U.S. 561, 583-584; 98 S. Ct. 1291; 55 L. Ed. 2d 550 (1978), the United States Supreme Court said:

"In short, we hold that where, as here, there is a genuine multiple-party transaction with economic substance which is compelled or encouraged by business or regulatory realities, is imbued with tax-independent considerations, and is not shaped solely by tax-avoidance features that have meaningless labels attached, the Government should honor the allocation of rights and duties effectuated by the parties."

While this rule was applied in the case of the federal income tax, we see no reason why its application should not also be extended to the instant case. It is clear that the agreement is between parties with antagonistic interests. What is good for the franchisee, the deduction of a business expense, is bad for the franchisor, the payment of a tax on business income. Further, it is clear that services are rendered for this payment. We see no reason not to honor the allocation of rights and duties effectuated by the parties.

Accordingly, we reverse the decision of the Tax Tribunal and set aside the deficiency assessed. No costs should be allowed.

NOTES

[*] Circuit judge, sitting on the Court of Appeals by assignment.