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STATE OF MICHIGAN
COURT OF CLAIMS
MICHIGAN BELL TELEPHONE COMPANY,
Plaintiff,
OPINION AND ORDER
v
Case No. 21-000148-MT
MICHIGAN DEPARTMENT OF TREASURY,
Hon. Brock A. Swartzle
Defendant.
___________________________/
The sole issue in this action is a matter of first impression in Michigan: How should a
taxpayer calculate, for purposes of determining its corporate tax base, the basis of an asset
purchased during a year the Michigan’s Single Business Tax (SBT), MCL 208.1 et seq., was in
effect, but sold during a year the Michigan Business Tax (MBT), MCL 208.1101 et seq., or the
Corporate Income Tax (CIT), MCL 206.601 et seq., was in effect? The SBT did not permit
corporate taxpayers to incorporate federal depreciation into their tax base, but the MBT and the
CIT both account for federal depreciation in the calculation of the corporation’s tax base. Plaintiff
would like to use an SBT (nondepreciated) tax basis for certain assets purchased during the SBT
years but sold during the MBT and CIT years. The result of doing so would reduce its taxable
gain on the sale of those assets. Defendant’s position is that neither the MBT nor the CIT permit
taxpayers to “add back” federal depreciation from prior years, and so plaintiff could not increase
the presale value of the assets when reporting its taxable income on its state tax returns.
Both parties move for summary disposition under MCR 2.116(C)(10). The Court has heard
both motions and has considered the briefing. Because plaintiff does not support its position with
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language in the MBT or CIT, and because the language of both statutes supports defendant’s
position, the Court GRANTS defendant’s motion for summary disposition and DENIES plaintiff’s
motion for summary disposition. Finally, the Court DENIES plaintiff’s motion to strike
defendant’s errata reply brief, and the errata reply brief is accepted as-filed.
I. BACKGROUND
Plaintiff is a telecommunications service provider. Plaintiff purchased telecommunications
machines and equipment during the years that the SBT was in effect, and later sold the assets
during the years that the MBT and CIT were in effect. During the SBT years, taxpayers could not
take depreciation deductions for capital assets on their SBT returns, although they could do so for
purposes of their federal taxes. So taxpayers were required to “add back” the depreciation into
their tax base for purposes of state taxes. But starting in 2008 (and going forward), the MBT and
CIT no longer included an add-back requirement for federal depreciation.
Plaintiff sold certain assets during the MBT and CIT years, and adjusted its federal taxable
income on its amended state-tax returns to “add back” the depreciation for those assets. The result
was that the reported value of the assets was higher, and plaintiff’s taxable gain on the sale was
lower. Defendant’s position is that both the MBT and the CIT required plaintiff to start its tax
calculation with the federal taxable income, without making any adjustments for asset
depreciation.
In 2012, defendant audited plaintiff’s MBT returns for tax years 2008 to 2010. Defendant
later expanded the audit to include plaintiff’s 2011 tax return. In an audit report, defendant’s
auditor concluded that “the Department continues to maintain that there is no ability in the statute
to go back and recalculate the basis of an asset; only the bonus depreciation taken in that year may
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be added back.” After an informal conference, which also included tax years 2012 and 2013, the
referee issued an informal conference recommendation upholding defendant’s intents to assess tax
for the relevant tax years. The referee concluded that plaintiff lacked support for its position that
it could increase the tax basis for depreciation deductions allowed under federal law. Defendant’s
Hearings Division issued Decisions and Orders adopting the referee’s recommendation, and then
issued final tax assessments.
Plaintiff sued defendant in this Court, raising three claims relating to whether plaintiff
could adjust its tax base to add back the federal depreciation deductions. Following discovery,
both parties moved for summary disposition under MCR 2.116(C)(10). In its motion, defendant
argues that the starting point for plaintiff’s tax calculation was its federal taxable income. The
MBT and the CIT do not allow for adjustments to federal taxable income for asset depreciation
amounts that were not allowed during the SBT years. The only adjustments to federal taxable
income are specified in the statutes and include bonus depreciation and domestic production
activity. Plaintiff argues, in contrast, that the state statutes did not require it to decrease its tax
basis in the assets purchased during the SBT years. Plaintiff contends it was able to carryforward
the SBT tax basis to the MBT and CIT years. The Court has reviewed the briefing and heard both
motions.
II. ANALYSIS
Summary disposition is appropriate under MCR 2.116(C)(10) when “there is no genuine
issue with respect to any material fact and the moving party is entitled to judgment as a matter of
law.” Emagine Entertainment, Inc v Dep’t of Treasury, 334 Mich App 658, 663; 965 NW2d 720
(2020) (cleaned up). The Court examines the evidence to determine whether, after drawing all
reasonable inferences in favor of the nonmovant, a genuine issue of material fact exists. Id. “A
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question of fact exists when reasonable minds could differ as to the conclusions to be drawn from
the evidence.” Id. (cleaned up).
Although both parties support their motions with evidence, the material facts are not in
dispute, and the question presented is one of law. This matter requires interpretation of tax statutes,
and the goal of statutory interpretation is to give effect to the intent of the Legislature. Badeen v
PAR, Inc, 496 Mich 75, 81; 853 NW2d 303 (2014). The focus is on the express (or plain) language
of the statute, which must be considered in the context of the entire statute. Id. Only when there
is an ambiguity in the plan language of the statute will the Court engage in judicial construction.
Zug Island Fuels Co, LLC v Dep’t of Treasury, ___ Mich App ___; ___ NW2d ___ (2022) (Docket
No. 356419); slip op at 4.
The parties agree that the starting point for a corporate entity’s tax base under the MBT is
the entity’s business income, which is defined to mean federal taxable income derived from
business activity. MCL 208.1201(2); MCL 208.1105(2). Federal taxable income is defined as
“taxable income as defined in section 63 of the internal revenue code, except that federal taxable
income shall be calculated as if section 168(k) [bonus depreciation] and section 199 [the domestic-
production-activity deduction] of the internal revenue code were not in effect.” MCL 208.1109(3).
So the tax base begins with the taxpayer’s federal taxable income derived from business activity,
unless the federal taxable income incorporated bonus depreciation or the domestic-production
activity deduction.
Similarly, under the CIT, the starting point is the corporate income-tax base, which means
the taxpayer’s business income. MCL 206.623(2). Business income is defined to mean federal
taxable income. MCL 206.603(3). Like with the MBT, federal taxable income is defined as
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“taxable income as defined in section 63 of the internal revenue code, except that federal taxable
income shall be calculated as if section 168(k) [bonus depreciation] and section 199 [the domestic-
production- activity deduction] of the internal revenue code were not in effect.” MCL 206.607(1).
The only stated exceptions to using federal taxable income as the starting point for the taxpayer’s
tax base are when the federal taxable income incorporated bonus depreciation or the domestic-
production-activity deduction. And because the federal statute authorizing the domestic-
production-activity deduction was repealed in 2017, see PL 115-97, § 13305(a); 131 Stat 2126,
bonus depreciation is the only remaining exception.
In contrast, the SBT required taxpayers to add back federal depreciation deductions to their
tax base after starting with their federal taxable income. Under the SBT regime, business income
was defined to mean federal taxable income. MCL 208.3(3). In turn, federal taxable income was
defined to mean “taxable income as defined in section 63 of the internal revenue code.” MCL
208.5(3). The Court of Appeals explained that, under the SBT, for corporations like plaintiff, “its
business income is its federal taxable income, which in turn is also its tax base.” TMW Enterprises,
Inc v Dep’t of Treasury, 285 Mich App 167, 174; 775 NW2d 342 (2009). While the SBT was in
effect, plaintiff was required to add back federal depreciation deductions to its SBT base. MCL
208.9(4)(c) (requiring the taxpayer to add back “[a] deduction for depreciation” to the tax base to
the extent the deduction was used to calculate federal taxable income). But when the Legislature
enacted the MBT and the CIT, the Legislature removed the requirement to add back federal
depreciation.
At all relevant times, the Internal Revenue Code (IRC) defined the term taxable income, in
relevant part, as “gross income minus the deductions allowed by this chapter (other than the
standard deduction).” 26 USC 63(a). In turn, gross income was defined to mean “all income from
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whatever source derived,” including certain items outlined in the IRC. 26 USC 61(a). And, during
the SBT years, the Court of Appeals explained that taxable income under the IRC was “gross
income minus allowable deductions.” Preston v Dep’t of Treasury, 190 Mich App 491, 495; 476
NW2d 455 (1991), citing 26 USC 63. Gross income includes the income from the sale of an asset
or property. 26 USC 1001(c). See also 26 USC 1001(a) and (b) (defining gain or loss as the
difference between the amount received on the sale and the property’s adjusted basis). The IRC
defined the basis of property as “the cost of such property,” with several exceptions. 26 USC
1012(a). The parties agree that the tax basis in property is reduced by a deduction for depreciation
under federal law. 26 USC 1016(a)(2). See also 26 USC 167(a) (allowing a depreciation deduction
as a reasonable allowance for exhaustion and wear and tear of property used in a trade or business).
The parties disagree on whether taxpayers must use the depreciated value for assets
purchased during SBT years to calculate the tax base for their MBT and the CIT returns. Plaintiff
would benefit from using nondepreciated values as the starting point because the value of the assets
would be higher, and thus, plaintiff’s gain on the sale would be reduced (leading to a smaller tax
liability). But as defendant explains, the SBT did not require plaintiff to modify its tax basis in the
assets. Rather, the adjustment for federal depreciation took place after the taxpayer started its tax-
base calculation with its federal taxable income. Only through various additions and subtractions
was the federal-tax base converted into the SBT base. Likewise, under the MBT and the CIT,
federal taxable income is still the starting point, and the only adjustments to federal taxable income
are those expressly outlined in the statutes (bonus depreciation and domestic production activity).
Neither statute allows for a generalized asset depreciation “add back” from the SBT years.
In Lear Corp v Dep’t of Treasury, 299 Mich App 533, 536; 831 NW2d 255 (2013), a case
that involved the SBT, the question was whether a C corporation could elect to amortize its
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research and experimental (R&E) expenditures over a ten-year period and deduct the entire amount
in the year it incurred the expenses. The Court of Appeals concluded that the plaintiff had made a
strategic choice to amortize its R&E expenditures, at which point the plaintiff was no longer
guaranteed the full deduction under the SBT. Id. at 539. Importantly, the Court also concluded
that the plaintiff was required to start with the federal taxable income to determine its SBT tax
base: “While the SBTA may have authorized or required adjustments to be made, the only
adjustments that can be made are those that were authorized or required by the SBTA.” Id. Thus,
because the SBT did not authorize the adjustments the plaintiff had made to its tax returns, the
plaintiff was not entitled to the adjustment. Id. at 539-540. The takeaway from Lear is that the
taxpayer must establish that the tax statute authorized an adjustment to the federal taxable income.
Plaintiff cannot do so in this case.
Plaintiff’s chief legal authority is the Court of Appeals’ decision in Sturrus v Dep’t of
Treasury, 292 Mich App 639; 809 NW2d 208 (2011). In Sturrus, the plaintiffs attempted to
recover their lost investment in an entity known as Pupler Distributing Company, an entity that
was a Ponzi scheme with no legitimate business purpose. Id. at 641-642. The plaintiffs attempted
to claim a theft-loss deduction of around $5 million on their 2002 federal-tax return. Id. at 642.
The theft-loss deduction was a “below-the-line” deduction and, therefore, had no effect on the
plaintiffs’ Michigan income-tax liability. Id. The plaintiffs also settled a bankruptcy matter,
allowing them to offset a repayment of business-interest payments they had received from Pupler
against their lost investment in Pupler. Id. at 642-643. The plaintiffs submitted a check in the
bankruptcy matter, leading the plaintiffs to report a theft-loss recovery on their 2004 federal-
income tax return, which is an “above-the-line” adjustment included in the adjusted-gross income.
Id. at 643. To avoid paying taxes twice on the same income (the 2002 below-the-line deduction
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provided no tax benefit in Michigan), the plaintiffs deducted the theft-loss amount (about $4.2
million) from the adjusted-gross income on their 2004 Michigan income-tax return, purportedly
based on a federal tax-benefit rule, 26 USC 111(a). Id.
The defendant (the Department of Treasury) determined that the tax-benefit rule did not
apply and, therefore, the plaintiffs’ theft-loss recovery deduction was improper. Id. at 643-644.
The issue on appeal was whether, because the federal theft-loss deduction provided the plaintiffs
with no Michigan income-tax benefit, the theft-loss recovery was still includable in the plaintiff’s
adjusted-gross income under the Income Tax Act of 1967 (ITA), MCL 206.1 et seq. Id. at 644.
The Court analyzed whether the ITA recognized the tax-benefit rule. Id. at 648. The Court’s
decision was specific to the ITA’s provisions. Id. In analyzing the issue, the Court concluded that
taxable income in Michigan is calculated based on the definitions in the IRC, but concluded that
taxable income under the ITA is not necessarily identical to taxable income in a federal return. Id.
at 650. The Court concluded that the plaintiffs could not transpose their 2002 federal theft-loss
deduction to their 2004 Michigan tax return because the ITA only used the federal calculations,
not the specific federal figures. Id. at 651.
Plaintiff relies on the Court’s holding in Sturrus to support its position that it could adjust
its tax base. But Sturrus is inapplicable because the case involved an individual tax return under
a different tax scheme—the ITA—which defines taxable income for persons other than
corporations, estates, and trusts as “adjusted gross income as defined in the internal revenue code,”
subject to certain adjustments. MCL 206.30(1). And, in Lear, the Court distinguished Sturrus,
concluding that Sturrus did not hold that taxpayers could “completely disregard” their federal-tax
returns when calculating a tax base. Lear, 299 Mich App at 537-538. The Court reasoned, because
the plaintiff was a corporation, “any discussion regarding the characterization of different tax
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entities as it relates to this issue is not applicable here.” Id. at 538. Likewise, because this case
also involves a corporation, Sturrus is inapplicable.
Plaintiff also relies on Maxitrol Co v Dep’t of Treasury, 217 Mich App 366; 551 NW2d
471 (1996), for the position that “FTI could be modified in determining Michigan taxable income,
and Michigan tax computations merely rely on the validity of federal tax returns.” Maxitrol was
a small business designated as an S Corporation for federal tax purposes. Id. at 368. Maxitrol
paid “Michigan intangibles tax” on behalf of its sole shareholder, Frank Kern, and then deducted
the amount of tax it paid on his behalf from its ordinary income on its federal tax return, as
permitted under the IRC. Id. The issue was whether Maxitrol had to pay taxes in Michigan under
the SBT. Id. The Court of Appeals noted that “[b]ecause Maxitrol deducted the payment of
Michigan intangibles taxes that it made on behalf of Frank Kern from its federal taxable income,
its obligation for single business tax payments was correspondingly reduced.” Id. at 369. The
Department took the position that Maxitrol took improper deductions because the IRC provision
on which Maxitrol relied was not applicable. Id.
The issue came down to whether 26 USC 164(e) applied to subchapter S corporations. Id.
The Court of Appeals held that it did, and that Maxitrol had the right to take the deduction. Id.
at 370. The Court noted that because the petitioners’ Michigan tax returns were dependent on
computations from their federal returns, “the Michigan and federal tax returns are inextricably
intertwined.” Id. at 372. The Court also held that the Department had the authority to audit the
validity of Maxitrol’s federal-tax statements and returns. Id. Maxitrol does not support plaintiff’s
position that a taxpayer’s reported federal taxable income can differ from the reported income on
the taxpayer’s state return when the state statute does not provide for the modification. If anything,
Maxitrol supports defendant’s view that the Michigan and federal-tax returns are “inextricably
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intertwined” and that the federal taxable income must be the starting point unless the state statutes
provide otherwise.
In its reply brief, plaintiff relies on a 25-year-old Maryland Tax Court decision, The Bank
of Baltimore v State Dep’t of Assessments and Taxation, unpublished opinion of the Maryland Tax
Court, issued December 6, 1995 (Docket Misc. No. 913), to support its position that the starting
point for the state-tax base can deviate from the federal taxable income. The Bank of Baltimore
case involved whether the defendant (a state-tax department) correctly disallowed a subtraction
from the petitioner’s federal taxable income on its franchise-tax return for a “bad debt reserve
recapture requirement imposed by amended federal law.” Id. at *1. The focus of the case was on
the petitioner’s handling of its bad debts and the tax implications of its decision to change its
business structure from a savings bank to a commercial bank. Id. Specifically, the Court addressed
whether the federal recapture under 26 USC 585 of the reserve for bad debts is includable in the
computation for the petitioner’s net earnings, which were subject to a state franchise tax. Id. at *2.
The Court concluded that a “strict adherence” to the reporting requirements on the franchise-tax
form would result in a windfall (or unjust enrichment) to the state. Id. at *3. The result was a
double-tax on the amount included in the petitioner’s federal taxable income as recapture, which
was also added to the federal taxable income in prior years. Id. And the taxpayer received no state-
tax benefit from the additions to the bad-debt reserve deducted in any prior year. Id. So allowing
the state to tax the same income again would be “ ‘inconsistent with common sense.’ ” Id.
Bank of Baltimore is highly fact-specific and not binding on this Court. Although Bank of
Baltimore lends some support to plaintiff’s position that it should not be double taxed, this case
does not present the same type of blatant double taxation as was found in the Maryland case.
Moreover, even if there is some level of over-lapping taxation, plaintiff cites no law from Michigan
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that would allow this Court to reverse defendant’s tax assessment solely because it could result in
unfair tax treatment.
In its brief and during the hearing, plaintiff cited several examples of “transitional rules”
to support its position. For example, plaintiff cites MCL 208.23b(h) of the SBT, which permitted
taxpayers to deduct any business loss to carry forward into the next year. When the Legislature
transitioned to the MBT, it limited the carryover of business losses and instructed taxpayers to
“[d]educt any available business loss incurred after December 31, 2007.” MCL 208.1201(5).
Plaintiff argues that the language limiting the loss incurred to those losses incurred after
December 31, 2007, is an example of a transition rule indicating the Legislature’s intent to limit
business losses that could carryover from the SBT to the MBT. Plaintiff also cites MCL
208.1201(2)(i) of the MBT, which allowed for certain deductions if the book-tax differences for
the fiscal period ending on July 12, 2007, resulted in deferred liability for the person subject to
tax. Plaintiff argues that the intent of this adjustment “was to create an immediate deferred tax
asset that would offset the potential deferred tax liability, and avoid any impact to a business’
financial statements.” Plaintiff posits that “[i]f the Legislature intended to provide a transition
rule, the Legislature would have done so as it had done for other adjustments, such as business
loss carryforwards and deferred tax assets and liabilities.” The Court disagrees. The absence of a
transition rule in this context leads to the conclusion that the Legislature intended taxpayer to abide
fully with the new tax regime. Plaintiff has provided no legal basis to read any other meaning into
the lack of a transition rule.
Plaintiff also relies on the federal tax-benefit rule, which is outlined in 26 USC 111(a). The
tax-benefit rule permits the taxpayer to exclude from federal gross income any income recoverable
during a tax year that was deducted in a prior tax year, if the deduction did not reduce the taxpayer’s
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liability under federal law. The statute provides, in relevant part, “Gross income does not include
income attributable to the recovery during the taxable year of any amount deducted in any prior
taxable year to the extent such amount did not reduce the amount of tax imposed by this chapter.”
26 USC 111(a). Plaintiff argues that a similar rule applies in Michigan, yet cites no provision of
the MBT, the CIT, or any caselaw to support its position. And the rule would only apply if plaintiff
had deducted the depreciation on its state-tax returns—which it did not do. The tax benefit rule,
therefore, does not support plaintiff’s position.
Next, plaintiff relies on a definitions provision from the CIT, MCL 206.601, to support its
argument that its Michigan business income could differ from its federal taxable income. MCL
206.601 provides:
A term used in this part and not defined differently shall have the same
meaning as when used in comparable context in the laws of the United States
relating to federal income taxes in effect for the tax year unless a different meaning
is clearly required. A reference in this part to the internal revenue code includes
other provisions of the laws of the United States relating to federal income taxes.
The corresponding MBT provision appears in MCL 208.1103. These statutes apply the federal
definitions to terms that are not otherwise defined in the state statutes, unless a different meaning
is required. The statutes do not permit a taxpayer to alter federal taxable income, other than in the
ways allowed under the CIT or the MBT. As discussed above, the CIT and the MBT define federal
taxable income, and the Court declines to graft a federal definition onto the state-tax scheme when
the state statues have expressly defined the relevant terms. Finally, it is worth noting that the IRC
also does not define the term “federal taxable income,” meaning that MCL 206.601 and MCL
208.1103 are not useful in this context.
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Plaintiff also highlights the method under federal law for calculating the tax basis in an
asset. Plaintiff points out that in calculating federal taxable income, the taxpayer must compute
the gain (or loss) on the sale of assets, as outlined in 26 USC 1001, 1011, 1012, and 1016. Plaintiff
relies, in large part, on the instructions outlined in 26 USC 1016 (IRC 1016). 26 USC 1016(a)(2)
provides, in relevant part, that the taxpayer shall make a proper adjustment for property:
in respect of any period since February 28, 1913, for exhaustion, wear and tear,
obsolescence, amortization, and depletion, to the extent of the amount--
(A) allowed as deductions in computing taxable income under this subtitle
or prior income tax laws, and
(B) resulting (by reason of the deductions so allowed) in a reduction for any
taxable year of the taxpayer’s taxes under this subtitle (other than chapter 2, relating
to tax on self-employment income), or prior income, war-profits, or excess-profits
tax laws,
but not less than the amount allowable under this subtitle or prior income tax laws.
Where no method has been adopted under section 167 (relating to depreciation
deduction), the amount allowable shall be determined under the straight line
method.
In plaintiff’s view, the MBT and the CIT incorporated the instructions in IRC 1016(a), and allowed
the reduction of the tax basis in its assets for depreciation. The Court does not disagree
fundamentally with plaintiff’s argument that the above federal-tax statutes are taken into
consideration when calculating taxable income at the federal level. Where the Court disagrees
with plaintiff, however, is in how the federal taxable income applies in the state context. The
federal-tax laws do not direct the taxpayer to increase the adjusted basis of their assets based on
whether the taxpayer was required to add back depreciation under Michigan law. The instructions
in IRC 1016(a)(2) relate, solely, to the calculations that take place at the federal level. Taxpayers
cannot alter the federal taxable income on their state returns, except in the context of bonus
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depreciation (or, previously, domestic production activity). To rule otherwise would require the
Court to read an additional exception into the MBT and the CIT, which the Court declines to do.
The Court is sympathetic to plaintiff’s argument that defendant has been silent on the issue
and has not provided any guidance, a fact which defendant has acknowledged. Moreover, the
Court recognizes that the change in tax regimes has led to what may be considered an unfair
outcome to certain taxpayers. But when the Legislature changed regimes, the Legislature deemed
the new tax system inherently better. The Court declines to read language into the MBT and the
CIT that does not exist to amend a perceived unfairness in the tax statutes. See Menard Inc v Dep’t
of Treasury, 302 Mich App 467, 473; 838 NW2d 736 (2013). For these reasons, the Court
concludes that plaintiff’s tax calculations were in error, and defendant correctly assessed tax.
Finally, the Court has reviewed plaintiff’s motion to strike defendant’s errata reply brief in
support of summary disposition, and that motion is DENIED for lack of merit. Defendant’s errata
reply brief is accepted as-filed.
III. CONCLUSION
For the reasons discussed, IT IS ORDERED that defendant’s motion for summary
disposition is GRANTED.
IT IS FURTHER ORDERED that plaintiff’s motion for summary disposition is DENIED.
IT IS FURTHER ORDERED that plaintiff’s motion to strike defendant’s errata reply brief
in support of summary disposition is DENIED.
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IT IS SO ORDERED. This is a final order that resolves the last pending claim and closes
the case.
Date: February 3, 2023 __________________________________
Hon. Brock A. Swartzle
Judge, Court of Claims
