The authority and jurisdiction of the Michigan Tax Tribunal was asserted recently in a dispute between Compuware Corporation and the Attorney General, who was acting on behalf of the Michigan Department of Treasury.

The dispute in this case began at the culmination of an audit in which the Department assessed single business tax (SBT) in excess of $12,000,000 against Compuware. In response to this assessment, Compuware appealed to the Michigan Tax Tribunal.

The assessment was based, in large part, on the treatment of royalty income. The issue that gave rise to the specific item in controversy was the Department’s change in audit policy that prompted its inclusion of systems software royalty income in both the numerator and denominator of Compuware’s sales apportionment factor.

During discovery, Compuware’s representatives requested a memorandum, which set forth the Department’s audit policy with respect to royalty income and apportionment during the relevant time period, 1997-2000. The Michigan Attorney General’s office refused to produce the requested memorandum and claimed the document was exempt from disclosure under MCL § 205.28(1)(f) because the memorandum contained information related to Departmental “audit selection” or “processing criteria.”

Compuware filed a motion to compel the Department to produce the memorandum. The Michigan Tax Tribunal ordered the Attorney General to produce the document for an in camera inspection. With an in camera inspection, the Tax Tribunal would have reviewed the document privately to decide whether (1) the entire document was confidential and could not be disclosed, (2) parts of the document were confidential and only a redacted version could be disclosed, or (3) no part of the document was confidential and the entire document must be disclosed.

In response to the Tax Tribunal’s order, the Attorney General again refused, repeated its claim that the memorandum was exempt from disclosure, and challenged the authority of the Michigan Tax Tribunal to enforce the discovery order.

To address this refusal to comply with its Order to produce the memorandum, the Tax Tribunal sanctioned the Department for failing to produce the memorandum. At a subsequent hearing before the entire Tax Tribunal, both the Attorney General and Compuware filed briefs and presented oral arguments focusing on the authority of the Tax Tribunal to enforce a discovery order, the proper statutory construction of the language contained in the confidentiality provisions of MCL 205.28(1)(f), and whether the Tax Tribunal can properly be classified as a “court” in the context of the judicial orders it issues in tax cases.

Following oral argument, the entire Tribunal issued an Order on April 15, 2005 holding:

1. The Tax Tribunal possesses the authority to enforce an Order to produce a document for in camera inspection;
2. The Tax Tribunal possesses the authority to sanction a party for failure to comply with its discovery order; and
3. The Tax Tribunal acted within its authority in the instant case when it imposed a sanction on the Department. The Tax Tribunal further held that the proper sanction in the instant case was that Compuware’s Request for Admission related to royalties and apportionment was deemed admitted (i.e., The Department was deemed to admit that it erred by including royalty income in the numerator and denominator of the sales factor).

The Tax Tribunal Order – and sanction – could have been rendered ineffective if the Attorney General would have produced the memorandum for in camera inspection. The document was never produced.

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