Thursday, August 2, 2012

Michigan ITC Partnership

Phillips Stevens Building Company, LLC Petitioner, v. Michigan Department of Treasury, Respondent.


Case Information:



Docket/Court: 433192, Michigan Tax Tribunal



Date Issued: 06/27/2012



Tax Type(s): Corporate Income Tax



OPINION

Tribunal Judge Presiding, Steven H. Lasher



ORDER GRANTING PETITIONER'S MOTION TO EXTEND TIME

ORDER GRANTING RESPONDENT'S MOTION FOR SUMMARY DISPOSITION

FINAL OPINION AND JUDGMENT

Petitioner, Phillips Stevens Building Company, LLC, is appealing Final Assessment No. S198906 issued by Respondent, Michigan Department of Treasury, on March 9, 2012. The Final Assessment established that Petitioner owes Single Business Tax (SBT) in the amount of $7,215, plus interest. Respondent audited Petitioner's SBT returns for tax years 2006 and 2007 and disallowed an Investment Tax Credit (ITC) carry forward. Respondent concluded that the sale and purchase of an intangible membership interest in Petitioner does not qualify for the ITC, as set forth in MCL 208.35a. As a result, Respondent filed a Motion for Summary Disposition, under MCR 2.116(C)(10), on May 17, 2012, arguing that no genuine issues of fact remain for the Tribunal to decide.



Petitioner filed an untimely response and corresponding Motion to Extend Time to file the response on June 12, 2012. Petitioner maintains that the transaction was actually the acquisition of its only tangible asset, a building, which qualifies for the ITC.



The Tribunal disagrees. The transaction involved resulted in the purchase and sale of a membership interest, which the Tribunal concludes is an intangible asset and therefore does not meet the statutory requirements for claiming an ITC. As such, Petitioner is not entitled to the ITC carry forward and Respondent's Final Assessment is affirmed.



RESPONDENT'S ARGUMENT

In support of its Motion, Respondent contends that it is entitled to summary disposition in its favor as there remain no genuine issues of material fact for the Tribunal to decide. Respondent states that:



In February of 2005 Petitioner's member, the Phillip D. Stevens Living Trust, sold its 43.2% membership interest in Petitioner to Debora Stevens and Gary Andrus.... Stevens and Andrus, Purchasers, contributed cash to the partnership in exchange for the membership interest. Petitioner made a federal IRC Section 754 election for the 2005 tax year. Petitioner claimed an ITC on its 2005 SBT tax return for this transaction and claimed carryforward amounts from that credit on its 2006 and 2007 returns. The Department denied the ITC because the credit is not available on an intangible asset.

Motion for Summary Disposition, p 1. Respondent contends that the “... legal question to be addressed is thus whether the purchase and sale of a membership interest in Petitioner qualifies for the ITC.” Id. at 2. Respondent argues that the statute provides a credit for the purchase of tangible assets; thus, the subject transaction does not qualify as it was a purchase of intangible assets, by definition.



Respondent rebuts Petitioner's argument that its federal 754 election alters the underlying nature of the sale and purchase at issue by stating that “... if the purchase at issue was actually the purchase of a tangible asset as petitioner argues, the 754 election would not be available.” Id.



PETITIONER'S ARGUMENT

First, Petitioner filed a Motion for Extension of Time to File Written Opposition to Respondent's Motion. Petitioner states that reasonable cause exists to justify the extension of time to file a response because Petitioner's accountant contracted pneumonia and could not communicate with Petitioner until June 11, 2012.



In response to Respondent's Motion, Petitioner maintains that the transactions involved qualified for the SBT ITC. Petitioner cites Internal Revenue Code, Section 708, which provides that if there has been a sale or exchange of 50 percent or more of the total interest in partnership capital and profits within a 12-month period, the taxable year of the partnership closes; thus a “technical” termination occurs. 1 Petitioner argues that the partnership terminated after the February 2005 sale of a 43.2% membership interest to Debora Stevens and Gary Andrus because a previous transfer occurred in January, 2005, that resulted in more than 50% of the total partnership interest being sold in 2005. Petitioner states that “... as a result of these related transactions ... Petitioner, taxed as a partnership, incurred a technical termination and is allowed to report the sale as a sale of a qualifying tangible asset at fair market value.” Response, p 2.



Petitioner also argues that “... the 2004 short-year ending February 2005 SBT Return filed by Petitioner included an ITC carry forward of $22,923 into that short year. The Respondent inappropriately disallowed said carry forward inasmuch as the limitation statute [expired] on September 15, 2009 (four years after filing date).” Id. at 3. Thus, Petitioner contends that “... Respondent cannot improperly disregard the tax termination for that short period and at the same time not allow a carry forward of the ITC....” Id.



FINDINGS OF FACT

The Tribunal has reviewed the respective briefs filed by the parties, and finds the following facts:



1. In January, 2005, the Debora J. Stevens Revocable Living Trust (“Debora”) purchased a 27.7% membership interest in Petitioner. Petitioner's Opposition to Motion for Summary Judgment, p 1.

2. In February, 2005, Debora and the Gary W. Andrus Revocable Living Trust (“Gary”) purchased a 43.2% membership interest from the Phillip D. Stevens Living Trust (“Phillip”). As a result, Debora and Gary held the entirety of Petitioner's membership interests equally. Membership Interest Purchase Agreement, p 1.

3. Pursuant to the Membership Interest Purchase Agreement, Debora and Gary agreed to purchase from Phillip all of its interests in Petitioner for $3,240,000.00 in cash, certified funds or wire transfer of immediately available funds.

4. As a result of the above transaction, under IRC Section 708, the partnership experienced a “technical” termination.

5. Petitioner made a Federal IRC Section 754 election for the 2005 tax year.

6. Petitioner claimed an ITC on its 2005 SBT tax return and claimed carryforward amounts from that credit on its 2006 and 2007 returns.

STANDARD OF REVIEW

Respondent moves for summary disposition pursuant to MCR 2.116(C)(10). In Occidental Dev LLC v Van Buren Twp, MTT Docket No. 292745 (March 4, 2004) , the Tribunal stated “[a] motion for summary disposition under MCR 2.116(C)(10) tests the factual support for a claim and must identify those issues regarding which the moving party asserts there is no genuine issue of material fact.” Under subsection (C)(10), a motion for summary disposition will be granted if the documentary evidence demonstrates that there is no genuine issue of material fact, and the moving party is entitled to judgment as a matter of law. Smith v Globe Life Insurance, 460 Mich 446, 454-455 ; 597 NW2d 28 (1999). In the event, however, it is determined that an asserted claim can be supported by evidence at trial, a motion under subsection (C)(10) will be denied. Arbelius v Poletti, 188 Mich App 14 ; 469 NW2d 436 (1991).



The Michigan Supreme Court has established that a court must consider affidavits, pleadings, depositions, admissions, and documentary evidence filed by the parties in the light most favorable to the non-moving party. Quinto v Cross & Peters Co, 451 Mich 358, 362-63 ; 547 NW2d 314 (1996) (citing MCR 2.116(G)(5)). The moving party bears the initial burden of supporting his position by presenting his documentary evidence for the court to consider. Neubacher v Globe Furniture Rentals, 205 Mich App 418 , 420; 522 NW2d 335 (1994). The burden then shifts to the opposing party to establish that a genuine issue of disputed fact exists. Id. Where the burden of proof at trial on a dispositive issue rests on a nonmoving party, the nonmoving party may not rely on mere allegations or denials in pleadings, but must go beyond the pleadings to set forth specific facts showing that a genuine issue of material fact exists. McCart v J Walter Thompson, 437 Mich 109, 115 ; 469 NW2d 284 (1991). If the opposing party fails to present documentary evidence establishing the existence of a material factual dispute, the motion is properly granted. McCormic v Auto Club Ins Ass'n, 202 Mich App 233, 237 ; 507 NW2d 741 (1992).



CONCLUSIONS OF LAW

The Tribunal finds that Petitioner has shown good cause to grant its Motion for Extension of Time to File Written Opposition to Respondent's Motion. Accordingly, Petitioner's response was considered in the rendering of this decision.



The Tribunal has considered Respondent's Motion for Summary Disposition, under the criteria for MCR 2.116(C)(10), and based on the pleadings, affidavits and other documentary evidence filed with the Tribunal, determines that granting the Motion is appropriate. The Tribunal concludes that the pleadings, affidavits and documentary evidence prove there is no genuine issue with respect to any material fact.



The issue in this appeal is whether Petitioner is allowed to carry forward the unused portion of the ITC, claimed in the 2005 tax year, to the 2006 and 2007 tax years. However, the Tribunal is first charged with determining whether Petitioner was entitled to claim the ITC in the 2005 tax year, pursuant to MCL 208.35a. This determination will then enable the Tribunal to decide whether Respondent properly issued a Final Assessment for SBT deficiency totaling $7,215, plus interest.



The relevant statute is repealed MCL 208.35a, which stated that a taxpayer could claim a credit against the tax imposed by the SBTA provided the taxpayer:



[c]alculate the cost, including fabrication and installation, paid or accrued in the taxable year of tangible assets of a type that are, or under the internal revenue code will become, eligible for depreciation, amortization, or accelerated capital cost recovery for federal income tax purposes, provided that the assets are physically located in the state for use in a business activity in this state and are not mobile tangible assets.

Petitioner supports its arguments by relying on the federal treatment of the partnership after the technical termination that occurred after the Membership Interest Purchase Agreement was executed, which resulted in more than 50% of the partnership membership interest being sold within a period of 12 consecutive months. Petitioner, in its petition, states that the February 2005 purchase resulted in an:



[a]utomatic classification change with the following deemed to have occurred simultaneously: (1) Petitioner was liquidated at the time of sale and its tax year ended automatically; (2) the husband and wife purchased the distributed assets of Petitioner from the selling member; and (3) the husband and wife recontributed the distributed assets to the Petitioner which is treated as a new entity for tax purposes.

Petition, p 2. Petitioner cites IRS Rev. Rule 99-6 (Situation 1) and IRS Regs. § 1.741-1(b) and states that “[t]he acquisition of the building (i.e., the underlying asset) would thus be fully eligible to receive favorable ITC tax treatment for SBT purposes.” Id.



The Tribunal reviewed IRS Rev. Rule 99-6 (Situation 1) and IRS Regs. § 1.741-1(b) and finds Petitioner's reliance on them flawed. The “issue” in Rev. Rul. 99-6 is the following:



What are the federal income tax consequences if one person purchases all of the ownership interests in a domestic limited liability company (LLC) that is classified as a partnership ... causing the LLC's status as a partnership to terminate under § 708(b)(1)(A) of the Internal Revenue Code?

This issue is not relevant to the facts of this case because it references a partnership termination under IRC § 708(b)(1)(A) or a termination when “... no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership.” Id. Under the relevant facts of this case, Petitioner was subject to a technical termination under IRC § 708(b)(1)(B), which states that “within a 12-month period there is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits.” Id.



In its response to Respondent's Motion, Petitioner states that Michigan Revenue Administrative Bulletin (“RAB”) No. 1992-3 supports its argument that it is allowed to report the technical termination as a sale of a qualifying tangible asset at fair market value. Although RAB 1992-3 does generally apply to the ITC, it merely outlines the criteria for the taking and reporting of the capital acquisition deduction. The RAB indicates that a capital acquisition deduction is a deduction of the entire cost of certain tangible assets in the year of acquisition. For this RAB to apply, Petitioner would first have to prove that it purchased a tangible asset (i.e., the commercial real property) in 2005.



A partnership that terminates under the sale or exchange rule is deemed to contribute all its assets to a new partnership and then make a liquidating distribution of its interests in the new partnership. Treas. Reg. § 1.708-1(b)(4). Thus, Debora and Gary contributed Petitioner's property to the new partnership; the partnership property was not purchased by Petitioner due to the technical termination. Petitioner's attempt to disguise the true facts of the transaction fails as it was not a sale and purchase of Petitioner's partnership property.



Further, Petitioner's argument that its Federal 754 election supports its eligibility for the ITC fails. IRC § 754 states that “[s]uch an election shall apply with respect to ... all transfers of interests in the partnership during the taxable year with respect to which such election was filed and all subsequent taxable years.” IRC § 743 states that “[t]he basis of partnership property shall not be adjusted as the result of a transfer of an interest in a partnership by sale or exchange ....” Thus, the Federal 754 election is applicable upon the sale of an interest in the partnership and not on the contribution of property. Again, this election does not change the reality of the underlying transaction and only alters the partner's federal reporting position by allowing a step-up in basis.



Rather, as contended by Respondent, the actual transaction that occurred was the sale and purchase of Petitioner's membership interest, as evidenced by the Membership Interest Purchase Agreement. Because the ITC provides a credit for the purchase of tangible assets only, the Tribunal must determine whether the membership interest is a tangible asset.



The SBTA does not provide a definition of what constitutes a tangible asset. Pursuant to repealed MCL 208.2(2), one must examine the “... laws of the United States relating to federal income taxes.” Upon review of the Internal Revenue Code, the Tribunal finds that it does not specifically define what a tangible asset is. Although the word “tangible” is not statutorily defined, undefined statutory words and phrases are construed according to their common and approved usage, unless such a construction would be inconsistent with the Legislature's manifest intent. ADVO-Systems, Inc v Dep't of Treasury, 186 Mich App 419, 424 ; 465 NW2d 349 (1990). The Tribunal looks to The American Heritage College Dictionary defines “tangible” as, “1a. discernable by the touch; palpable. b. Possible to touch. c. Possible to be treated as fact; real or concrete.” The American Heritage College Dictionary (2002), at 1408. Further, upon examination of the legal definition of “tangible,” Black's Law Dictionary defines “tangible” as “[h]aving or possessing physical form; corporeal. 2. Capable of being touched and seen; perceptible to the touch; capable of being possessed or realized....” Black's Law Dictionary (9th ed).



The Tribunal finds that reliance on these dictionary definitions to ascertain the plain meaning of the term tangible asset is appropriate. In applying these definitions, it is apparent that the purchase of the partnership interest is an intangible asset as it is not corporeal in nature. Moreover, Respondent has proven that a genuine issue of disputed fact does not exist and Petitioner has failed to rebut that presumption. Respondent properly determined that Petitioner's subject property does not meet the requirements for an ITC.



The statute of limitations has run regarding whether Petitioner's 2005 Single Business Tax Return is deficient due to an improper ITC application. MCL 205.27a(2). As such, the Tribunal has no jurisdiction over this issue. However, the Tribunal has proper jurisdiction over whether the ITC carry forward was properly applied to Petitioner's 2006 and 2007 tax return and concludes that the carry forward is invalid. Thus, Respondent's Final Assessment is affirmed. Therefore,



IT IS ORDERED that Petitioner's Motion for Extension is GRANTED.



IT IS FURTHER ORDERED that Respondent's Motion for Summary Disposition is GRANTED.



IT IS FURTHER ORDERED that Respondent's Final Assessment No. S198906 is AFFIRMED.



This Order resolves all pending claims in this matter and closes this case.



MICHIGAN TAX TRIBUNAL

By: Steven H. Lasher

Entered: June 27, 2012

1





Although Petitioner is an LLC, an LLC with at least two members is classified as a partnership for federal income tax purposes. Therefore, the Tribunal shall refer to Petitioner as a partnership in this Final Opinion and Judgment.



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