LaBelle Management, Inc. v Michigan Department of Treasury
Docket No. 324062
Court of Appeals, State of Michigan
April 05, 2016
Hеnry William Saad, Presiding Judge; Kurtis T. Wilder, Christopher M. Murray, Judges
LC No. 13-000095-MT
ORDER
The Court orders that the 03/31/2016 opinion is hereby AMENDED. The opinion contained the following clerical error: the word “issue” was omitted after the word “dispositive” in the first sentence of the last paragraph on page 3. The sentence should now read:
There is no dispute that the dispositive issue here is what is meant by the phrase “owns or controls, directly or indirectly.”
In all other respects, the 03/31/2016 opinion remains unchanged.
A true copy entered and certified by Jerome W. Zimmer Jr., Chief Clerk, on APR 05 2016
Chief Clerk
LABELLE MANAGEMENT, INC., Plaintiff-Appellant, v MICHIGAN DEPARTMENT OF TREASURY, Defendant-Appellee.
No. 324062
STATE OF MICHIGAN COURT OF APPEALS
March 31, 2016
FOR PUBLICATION; 9:05 a.m.; Court of Claims LC No. 13-000095-MT
Before: SAAD, P.J., and WILDER and MURRAY, JJ.
PER CURIAM.
Plaintiff appeals from the trial court‘s order that denied its motion for summary disposition and granted defendant‘s motion for summary disposition. At issue is the interpretation of
I. BASIC FACTS
The underlying facts involve three different entities during the relevant tax periods:
Plaintiff is a Michigan corporation, which was primarily owned by brothers Barton and Douglas LaBelle. At no time during the tax periods did either brother own more than 50% of plaintiff‘s common stock.
The Pixie, Inc., (Pixie) is a Michigan corporation. Originally, plaintiff was a subsidiary of Pixie, but Pixie sold аll of its interest in plaintiff to the LaBelle brothers on January 1, 2008, thus triggering the tax periods here at issue. Again, during the relevant tax periods, each of the LaBelle brothers never owned more than 50% of Pixie‘s common stock.
LaBelle Limited Partnership is a Michigan limited partnership. In forming the partnership, each of the LaBelle brothers contributed $50—$1 for a 1% general partnership and $49 for a 49% limited рartnership. The partnership was later amended to add the brothers’ children as limited partners, thereby reducing the brothers’ share of the limited partnership.
After being sold by Pixie, plaintiff reported its business tax as a separate company. During 2011 and 2012, defendant conducted an audit of plaintiff‘s tax returns for the two tax periods at issue. As a result of the audit, defendant determined that plaintiff, Pixie, and LаBelle Limited Partnership should be treated, together, as a “unitary business group” based on
The parties brought cross-motions for summary disposition under
While recognizing that it was permissible to refer to the federal income tax code for definitions in some circumstances, the trial court looked to
II. STANDARDS OF REVIEW
Appellate review of the grant or denial of a summary-disposition motion is de novo, and the court views the evidence in the light most favorable to the party opposing the motion. Summary disposition is appropriate under
Further, “[i]ssues of statutory construction present quеstions of law that are reviewed de novo.” Atchison v Atchison, 256 Mich App 531, 534-535; 664 NW2d 249 (2003).
III. ANALYSIS
Plaintiff argues, and we agree, that the trial court erred in using the federal income tax definition of “constructive” ownership when defining Michigan‘s “indirect” ownership requirement in
A.
“If the language of [a] statute is unambiguous, the Legislature must have intended the meaning clearly expressed, and the statute must be enforced as written.” United States Fidelity Ins & Guaranty Co v Mich Catastrophic Claims Ass‘n, 484 Mich 1, 13; 795 NW2d 101 (2009) (quotation marks and citations omittеd). Tax laws generally will not be extended in scope by implication or forced construction, and when there is doubt, tax laws are to be construed against the government. Mich Bell Tel Co v Dep‘t of Treasury, 445 Mich 470, 477-478; 518 NW2d 808 (1994). ” ‘[A]gencies cannot exercise legislative power by creating law or changing the laws enacted by the Legislature.’ ” Detroit Edison Co v Dep‘t of Treasury, 498 Mich 28, 46; 869 NW2d 810 (2015), quoting In re Complaint of Rovas Against SBC Mich, 482 Mich 90, 98, 754 NW2d 259 (2008).
The statute at issue here is
“Unitary business group” means a group of United States persons, other than a foreign operating еntity, 1 of which owns or controls, directly or indirectly, more than 50% of the ownership interest with voting rights or ownership interests that confer comparable rights to voting rights of the other United States persons, and that has business activities or operations which result in a flow of value between or among persons included in the unitary business group or has business activities or operations that are integrated with, are dependent upon, or contribute to each other. For purposes of this subsection, flow of value is determined by reviewing the totality of facts and circumstances of business activities and operations.
There is no dispute that the dispositive issue here is what is meant by the phrase “owns or controls, directly or indirectly.” There additionally is no dispute that there is insufficient direct ownership to give rise to a unitary business group. Thus, as the trial court correctly observed, the issue is how to define “owns or controls . . . indirectly.”
As the trial court noted, “No [federal income tax] provision is directly comparable to § 117 of the MBT.” Thus, in the absence of a comparable context, the trial court should have resorted to normal rules of statutory construction to determine the meaning of the undefined term. See Town & Country, 420 Mich at 240. Instead, the court sought out “contextually analogous” provisions, and of the numerous places where indirect ownership or control is considered, the court found most appropriate the provisions relating to international taxation that define a “controlled foreign сorporation,” specifically
§ 958. Rules for determining stock ownership.
(a) Direct and indirect ownership.
(1) General rule. For purposes of this subpart (other than section 960(a)(1)), stock оwned means—
(A) stock owned directly, and
(B) stock owned with the application of paragraph (2).
(2) Stock ownership through foreign entities. For purposes of subparagraph (B) of paragraph (1), stock owned, directly or indirectly, by or for a foreign corporation, foreign partnership, or foreign trust or foreign estate (within the meaning of section 7701(a)(31)) shall be considered as being owned proportionately by its shareholders, partners, or beneficiaries. Stock considered to be owned by a person by reason of the application of the preceding sentence shall, for purposes of applying such sentence, be treated as actually owned by such person.
(3) Special rule for mutual insurance companies. For purposes of applying paragraph (1) in the case of a foreign mutual insurance compаny, the term “stock” shall include any certificate entitling the holder to voting power in the corporation.
(b) Constructive ownership
. For purposes of sections 951(b), 954(d)(3), 956(c)(2), and 957, section 318(a) (relating to constructive ownership of stock) shall apply to the extent that the effect is to treat any United States person as a United States shareholder within the meaning of section 951(b), to treat a person as a related pеrson within the meaning of section 954(d)(3), to treat the stock of a domestic corporation as owned by a United States shareholder of the controlled foreign corporation for purposes of section 956(c)(2), or to treat a foreign corporation as a controlled foreign corporation under section 957, except that—(1) In applying paragraph (1)(A) of section 318(a), stock owned by a nonresident alien individual (other than a foreign trust or foreign estate) shall not be considered as owned by a citizen or by a resident alien individual.
(2) In applying subparagraphs (A), (B), and (C) of section 318(a)(2), if a partnership, estate, trust, or corporation owns, directly or indirectly, more than 50 percent of the total combined voting power of all classes of stоck entitled to vote of a corporation, it shall be considered as owning all the stock entitled to vote.
(3) In applying subparagraph (C) of section 318(a)(2), the phrase “10 percent” shall be substituted for the phrase “50 percent” used in subparagraph (C).
(4) Subparagraph (A), (B), and (C) of section 318(a)(3) shall not be applied so as to consider a United States person as owning stock which is owned by a person who is not a United States person.
Paragraphs (1) and (4) shall not apply for purposes of section 956(c)(2) to treat stock of a domestic corporation as not owned by a United States shareholder.
Clearly, the statute identifies three distinct kinds of ownership: direct, indirect, and constructive ownership, the last of which is not true ownership but “considered as owned,” i.e., a legal fiction. Assuming
Moreover, the federal tax statutes and regulations are replete with examples that illustrate the proposition that indirect ownership and constructive ownership are two different concepts. We recognize that there are federal regulations directing that constructive ownership rules—including
However, there are regulations that more clearly delineate between indirect ownеrship and constructive ownership.
Indeed, the constructive-ownership statute used by the trial court as the “definition” of indirect ownership includes language which indicates that, rather than defining the term at issue, it instead applies to “stock owned, directly or indirectly“—a phrase that appears in no less than nine of the statute‘s subdivisions.
All of this serves to illustrate several points: federal statutes and regulations are careful never to say that indirect ownership means constructive ownership and, in fact, at times expressly distinguish between the two; rules of constructive ownership are not broadly applied any time indirect ownership is involved, but only when the statute or regulation expressly mandates applying those rules; and rules of constructive ownership are applied in some contexts, but in other contexts only direct and indirect ownership are considered.
In sum, at the point the trial court acknowledged that the federal tax laws do not address a “comparable context,” under Michigan law, it should have used the ordinary rules of statutory construction. Mere similarity between the language used in Revenue Admin Bull 2010-1 and that of
B.
Accordingly, because there is no comparable federal context in the IRC, we now turn our attеntion to the plain and ordinary meaning of
The primary goal of statutory interpretation is to ascertain the legislative intent that may reasonably be inferred from the statutory language. The first step in that determination is to review the language of the statute itself. Unless statutorily defined, every word or phrase of a statute should be accorded its plain and ordinary meaning, taking into account the context in which the words are used. We may consult dictionary definitions to give words their common and ordinary meaning. When given their common and ordinary meaning, [t]he words of a statute provide the most reliable evidence of its intent . . . . [Krohn v Home-Owners Ins Co, 490 Mich 145, 156-157; 802 NW2d 281 (2011) (quotation marks and citations omitted).]
The statutory language at issue in
Black‘s Law Dictionary (10th ed) does not define “indirect ownership,” but under “possession,” it points from “indirect possession” to “mediate possession,” which means: “Possession of a thing through someone else, such as an аgent. [] In every instance of mediate possession, there is a direct possessor (such as an agent) as well as a mediate possessor (the principal).—Also termed indirect possession.” In accord with this, 11 Fletcher Cyclopedia of the Law of Corporations, § 5090, p 55, begins its description of “Indirectly held shares” thusly, “Most investors who hold publicly traded shares hold them indirectly through a broker-dеaler or bank, which in turn holds its customers’ shares indirectly through a clearing house or central depository.”
Therefore, consistent with the above definitions and descriptions, we hold that indirect ownership in
While federal law often substitutes rules of constructive ownership when addressing stock indirеctly owned, it does not do so consistently, and constructive rules only apply when the statute specifically so directs, which
Applying
/s/ Henry William Saad
/s/ Kurtis T. Wilder
/s/ Christopher M. Murray