Malpass v. Department of Treasury
295 Mich. App. 263
Mich. Ct. App.2011Background
- Plaintiffs own East Jordan Iron Works, Inc. (EJIW) and Ardmore Foundry, Inc. (Ardmore); Ardmore operates in Ardmore, Oklahoma, while EJIW operates in Michigan; both are S corporations for federal tax purposes and pass income to shareholders.
- In 2001–2003, plaintiffs reported Michigan income from EJIW and Ardmore as separate, non-unitary entities; Ardmore losses were attributed to Oklahoma and added back to Michigan AGI.
- Plaintiffs later amended returns to treat EJIW and Ardmore as a unitary business and sought refunds exceeding $1 million.
- Treasury denied the amended returns; three Court of Claims cases were consolidated; the Court granted summary disposition for plaintiffs on the unitary-entity theory, relying on MCL 206.110 and MCL 206.115.
- This Court reverses, holding the ITA requires separate-entity apportionment unless a true unitary business exists; income must be apportioned at the entity level, and combined-entity reporting is not authorized.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether unitary-business principle allows combining income of EJIW and Ardmore for Michigan ITA. | EJIW and Ardmore form a unitary business. | ITA does not authorize combined reporting for separate entities. | No; income must be apportioned at the entity level. |
| Whether the ITA permits combining separate entities’ income under MCL 206.115. | Combined apportionment should apply to unitary groups. | Apportionment applies to each entity separately. | Not permitted; must apportion at the entity level. |
| Whether due process/Commerce Clause considerations support multisource aggregation of income. | Unitary treatment aligns with constitutional principles. | Aggregation would risk unconstitutional taxation of non-Michigan income. | Aggregation not permitted; maintains entity-level apportionment. |
| Role of administrative rule R 206.12 in allocating vs. apportioning income. | Rules support unitary aggregation. | Rules require income attribution to where activity occurs (Ardmore in Oklahoma). | Ardmore losses not allocated to Michigan; Ardmore income allocated to Oklahoma and not combined. |
| Preston v. Treasury relevance to multi-entity apportionment. | Preston supports unitary apportionment. | Preston involved partnerships with centralized control, not separate corporations. | Distinguishable; Preston does not permit combining separate corporations. |
Key Cases Cited
- Allied-Signal, Inc. v. Dir. of Taxation, 504 U.S. 768 (U.S. Supreme Court 1992) (unitary apportionment permissible for multistate income)
- Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159 (U.S. Supreme Court 1983) (due process limits on taxing out-of-state income; unitary concept)
- Grunewald v. Dep’t of Treasury, 104 Mich. App. 601 (Mich. Ct. App. 1981) (definition and application of unitary business factors)
- Holloway Sand & Gravel Co., Inc. v Dep’t of Treasury, 152 Mich. App. 823 (Mich. Ct. App. 1986) (five-factor test for unitary business; economies of interdependence)
- Preston v Dep’t of Treasury, 292 Mich. App. 728 (Mich. Ct. App. 2011) (partnership context; distinguishes multi-entity apportionment from partnership flow)
- Jaffe v Dep’t of Treasury, 172 Mich. App. 116 (Mich. Ct. App. 1988) (unitary principles in single-entity contexts; distinguishable from multi-entity cases)