On January 28, 2005, the MACPA’s State and Local Tax Task Force held its annual Question and Answer session with the Michigan Department of Treasury at the James B. Henry Center in Lansing. The meeting provided its usual assortment of valuable insights from Department officials regarding recent state tax matters, as well as a few surprises regarding some Single Business Tax (SBT) technical issues.

Among those in attendance representing the Department of Treasury were Julie Croll, chief deputy state treasurer; Jim Montgomery, director, Audit and Compliance Bureau; Ron Rhoda, director, Tax Processing Bureau; Steve Hilker, director, Customer Service Bureau; and Elizabeth Oyen, director, Tax Policy Bureau.

Advisory Groups
One of the first items addressed was the resurrection of the Tax Advisory Groups (formerly known as the Commissioner Advisory Groups).

An Income Tax Advisory Group has been formed and held its first meeting in December 2004 to develop a charter and objectives, as well as discuss technical issues. For more information regarding this Group, please e-mail Task Force member Larry Larmee or call him at 248.646.6044.

Formation of a Business Tax Advisory Group is anticipated within the next few months. The group will be small with a broad cross section of interests, in hopes of efficiently dealing with issues facing the business community.

SBT Surprises
One of the first “surprise” Department responses came with a question about “business activity.” The question was in regard to financial transactions (e.g., trading in a long-term investment portfolio of stocks, bonds and mutual funds) engaged in by an individual or a husband and wife. The Department’s answer was that these transactions are, in fact, “business activity” under MCL § 208.3(2) and subject to the SBT. This answer triggered a flurry of clarifying questions by Task Force members.

In summary, the Department’s position is that an individual who sells appreciated intangible personal property has “business activity” subject to SBT and if their gross receipts from this and other business activity exceed the filing requirement, a return is due. The Department noted that under the revised definition of “gross receipts” only capital gain is included in the calculation.

Therefore, it is the Department’s view that federal Form 1040, Schedule D activity is subject to SBT if the capital gains exceed the gross receipts filing threshold. Furthermore, the Department takes a very narrow view of the “casual transaction” exception, stating that neither the nature nor the frequency of the transactions would alter its conclusion.

Practitioners with wealthy individual clients trading in appreciated intangible property should review this activity carefully to determine if any SBT is due. A close reading of the definition of “business activity” may show that the Department’s interpretation is consistent with the statute.

The other question that elicited substantial dialogue involved the definition of “gross receipts” for SBT purposes. The question dealt with whether distributive income reported on federal Form K-1 issued to a partner or an S-Corporation shareholder is included in “gross receipts.” The Department’s response was that while they were continuing to look at the issue, their conclusion at this time is that such income is includable in gross receipts.

The Department’s view is that the expansive definition of “gross receipts” found in MCL § 208.7(3) must lead to the conclusion that even constructively received income, such as distributive income from a flow-through entity, is included in gross receipts. Actual receipt of the income is apparently not required in the Department’s reading of the statute. The Department takes the view that a distributive loss does not serve to reduce gross receipts.

When preparing SBT returns for entities with distributive income, practitioners should take careful note of such income and its impact on the various aspects of the SBT base impacted by gross receipts (e.g., filing threshold, gross receipts reduction, ITC rate determination).

The balance of the questions discussed at the meeting provided insight into areas such as sales and use, income tax, discovery, audit and administrative. Practitioners are encouraged to review in detail the Department’s written responses to Task Force questions on the MACPA web site.

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