The Michigan Department of Treasury has provided further guidance on how they see the use of Internal Revenue Code (IRC) provisions to define the meaning of "indirect" control as provided in Section 117 of the Michigan Business Tax Act (MBTA). Frequently Asked Question (FAQ) U34 references IRC Section 318 to define constructive ownership and IRC Section 1563 for excluded ownership interests. FAQ U34 discusses the control test in terms of a parent-subsidiary controlled group of entities, a brother-sister controlled group of entities and a combined controlled group of entities.

Generally, a unitary business group is a group of related persons whose business activities or operations are interdependent. More specifically, a unitary business group is two or more persons that satisfy both a control test and one of two relationship tests. [MCL 208.1117(6)] A unitary business group is a single taxpayer under the MBT and must file a combined return. [MCL 208.1117(5) 208.1511] Foreign persons and foreign operating entities cannot be part of a unitary business group.

Control Test. The control test is satisfied when one person owns or controls, directly or indirectly, more than 50 percent of the ownership interest with voting or comparable rights of the other person or persons. In particular:

"Unitary business group" means a group of United States persons, other than a foreign operating entity, 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 . . . . [MCL 208.1117]

A person owns or controls more than 50 percent of the ownership interest with voting rights or ownership interest that confer comparable rights to voting rights of another persons if that person owns (1) more than 50 percent of the total combined voting power of all ownership interests with voting (or comparable) rights or (2) more than 50 percent of the total value of all ownership interests with voting (or comparable) rights.

Indirect ownership is generally determined using IRC 318 or analogous authority, except that the Department will apply IRC 318 to all forms of ownership interests, such as partnership and membership interests, and not just corporate stock. For example, attribution to and from a partnership may be determined under IRC 318(a)(2)(A) and 318(a)(3)(A). However, the attribution will be of ownership interests, including – but not limited to – partnership interests, stock and membership interests; attribution will not be limited to corporate stock.

Parent-Subsidiary Controlled Group of Entities. A parent-subsidiary controlled group of entities satisfies the control test. A parent-subsidiary controlled group of entities means any group of one or more chains of entities connected through ownership with a common parent if (1) the common parent directly owns more than 50 percent of the ownership interest with voting or comparable rights of at least one other entity, and (2) more than 50 percent of the ownership interest with voting or comparable rights of each entity other than the common parent is owned directly by one or more of the other entities.

Brother-Sister Controlled Group of Entities. A brother-sister group of entities may also satisfy the control test. An individual that is not a sole proprietor or owner of a disregarded entity or otherwise engaged in a trade or business resulting in business income or gross receipts under the MBT is not unitary with the entities in which that individual has a controlling interest. However, brother-sister group of entities may satisfy the control test through the indirect ownership rules of IRC 318 - this is referred to as a brother-sister controlled group of entities.

Combined Controlled Group of Entities. Finally, a combined controlled group of entities satisfies the control test. A combined controlled group of entities means three or more entities each of which is a member of a parent-subsidiary controlled group of entities or brother sister controlled group of entities and one of which is a common parent entity of a parent subsidiary controlled group of entities and also is included in a brother-sister controlled group of entities.

Excluded Ownership Interests. For purposes of determining ownership or control under the control test, the Department will apply IRC 1563 to exclude certain ownership interests from determination of ownership and control, except that the Department will apply IRC 1563 to all forms of ownership interests and not just corporate stock.

About the Author
Ed Kisscorni, CPA MBA is director of state and local taxation with Echelbarger, Himebaugh, Tamm & Co., PC. He serves as a member of the MACPA Board of Directors and is a member of the State and Local Tax Task Force. Read his blog at www.michiganstateandlocaltax.com.

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