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Michigan Issues Revenue Advisory Bulletin on Alternative Apportionment Post-Vectren

A summary of Michigan’s administrative publication in response to a critical Michigan Supreme Court decision.
  • The Michigan Supreme Court’s decision in Vectren, denying the taxpayer alternative apportionment, prompted the Department of Treasury (“Treasury”) to issue updated guidance on seeking alternative apportionment
  • The Revenue Administrative Bulletin issued by Treasury serves as a reminder of the narrow grounds under which the Department will allow alternate apportionment

Background

Taxpayers may seek alternative apportionment when the traditional apportionment factor does not fairly represent the extent of the taxpayer’s activities in the state. Likewise, a state, such as Michigan, may seek to impose alternative apportionment for similar reasons.

Vectren

The Michigan Supreme Court’s decision in Vectren Infrastructure Servs Corp v Dep't of Treasury, 999 N.W.2d 748 (Mich. 2023) was the genesis for issuing the RAB. While a detailed discussion of Vectren is beyond the scope of this piece, the case involved a taxpayer that sold its business in a transaction described in Section 338(h)(10) of the Internal Revenue Code. This resulted in a short tax year whereby, under the requirements of 338(h)(10), the sale of the taxpayer’s stock was treated as an asset sale. During the short tax year, the taxpayer had an unusual amount of business in Michigan. Under Michigan law, the gain on the deemed sale of the assets was excluded from apportionment factor calculations. As a result, the taxpayer owed a large amount of tax because of its unusually large business activity in Michigan during the short year. The taxpayer nonetheless sought to include the gain on the assets in the apportionment factor, but was rejected by the Supreme Court.

Procedure for Seeking Alternate Apportionment Under The RAB

Taxpayers seeking alternative apportionment must submit a request in writing ninety days prior to the due date of the return (including extensions) or ninety days prior to the filing of an amended return. It must be clearly labelled as a “Request for Alternative Apportionment,” identify the tax type and period for which it is requested and must meet the requisite burdens of proof. It must also lay out an alternative apportionment method and certain information about the taxpayer’s apportionment methods in other states.

Treasury has sixty days to respond to the request. The request will be considered denied if Treasury does not respond to the request within this time frame. Approved requests only apply to the tax period for which the approval was requested, and a copy of the approval letter and a schedule supporting the calculation must be filed with the return.

Forvis Mazars Insight: In certain instances, for example, when a taxpayer seeks to allocate a gain, it is common for states to ask about how that gain is being treated in other states. Such an inquiry, however, at a basic level fails to appreciate the differences between the laws in the various states.

The Burden of Proof

The party seeking alternative apportionment bears the burden of proof. It must prove, by clear and cogent evidence, that the statutory method of apportionment results in a gross distortion of the business activity in Michigan or that the imposition of tax is unconstitutional. It must also prove, by the same evidentiary standard that the alternative proposed fairly represents the nature of the business activity in Michigan.

Forvis Mazars Insight: It is interesting that, at this administrative level, the burden of proof – clear and cogent evidence – is higher than a taxpayer would face in litigation in Michigan state courts over the issue.

Examples Given in the RAB

The RAB cites two examples of instances where alternative apportionment would be appropriate. The first example is one of unconstitutional extraterritorial taxation. In that example, a member of a combined group of Michigan taxpayers held a minority interest in an unrelated business, in which it had no common management, business, or operations, nor intercompany transactions. The sale of the business interest gave rise to business income under Michigan law. Nonetheless, according to the example, Treasury would allow alternate apportionment in this case by excluding the income from the tax base and allocating it, as the income was not unitary business income nor did the income serve an operational function under applicable constitutional principles. 

The second example addressed gross distortion by reference to a 1968 Supreme Court case, whereby the statutory apportionment formula was 165% higher than what the taxpayer claimed, and proved, fairly represented its apportionment formula in the state. According to Treasury, such gross distortion would be entitled to alternative apportionment relief.

Forvis Mazars Insight: These examples are exceedingly narrow. The constitutional example cited seems to address a situation whereby the Michigan statute is overbroad and treats as apportionable business income that otherwise would be considered allocable. Based upon this example, taxpayers may only be able to meet this implied standard only when their facts fall four square within settled constitutional jurisprudence.

The gross distortion example comes close to implying some sort of numerical threshold after which increased apportionment/tax will be considered distortive. The issue that arises with these thresholds is the question of how much distortion is too much distortion, and whether the standards will be applied consistently across taxpayers.

How Forvis Mazars Can Help

Forvis Mazars can help you consider your options with respect to alternative apportionment formulas, both in Michigan and elsewhere, in instances where the traditional apportionment formulas may operate to unfairly overestimate the nature of your business in the state or states at issue.

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