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January 2013 - Topics include: MI Supreme Court Agrees to Hear Appointment Cases, HICA Tax Doomed, Penalties Rise for Failure to Report Property Transfers

January 7, 2013

Michigan Supreme Court Agrees to Hear Apportionment Cases

On October 4, 2012, the Michigan Supreme Court issued Orders granting the Applications for Leave to Appeal in Malpass v Dep’t of Treasury, 295 Mich App 263 (2012) and Estate of Wheeler v Dep’t of Treasury, Michigan Court of Appeals No. 302251 (July 31, 2012). In issuing the Orders, the Supreme Court ordered the two cases to be argued together and invited amicus curiae briefs from the Taxation Section of the State Bar and other interested persons. We expect the Supreme Court to hear argument and issue decisions in the cases in mid-2013.

Both cases involve the proper apportionment and sourcing of income for Michigan Individual Income Tax purposes when income is received by the taxpayer from one or more flow-through entities. In Malpass, the taxpayers directly owned two S corporations, only one of which had had business activity in Michigan. Because the two flow-through entities operated as a unitary business, the taxpayers wished to combine the income of the two entities and use a single apportionment factor to apportion all income from the business. The Court of Appeals held that the taxpayer could not do so. In Wheeler, the taxpayers were shareholders in an S corporation that owned 99% of two foreign partnerships. The Court of Appeals held that, because the business was operated as a unitary business, it was proper to apportion the income that passed through the S corporation using a single combined apportionment factor.

Clients who receive income from pass-through entities should review the potential impact of the Court of Appeals decisions and the possibility of the Supreme Court's actions to their particular facts.

HICA Tax "Doomed" in Lame Duck; Lawmakers to Try Again in 2013

Public Act 142 of 2011 created Michigan’s Health Insurance Claims Assessment (HICA) Act, effective January 1, 2012. The purpose of the Act was to provide a revenue source for a short-fall in funding identified in the state’s Medicaid regime. Under the Act, certain third-party administrators, carriers and self-insured entities are required to pay a 1% assessment on certain paid health care claims. The claims must be incurred for services rendered in Michigan to Michigan residents. Earlier this month during the lame duck session, lawmakers were considering a bill that would increase the HICA rate, as prior estimates fell short of the needed revenue. Without a solution, Medicaid providers would find their fees cut. The bill was withdrawn from consideration, but the HICA discussion will begin again in the 2013 legislative session.

Penalties Rise for Failure to Report Property Transfers

Michigan Public Act 382 of 2012 increases the penalty for failure to notify the local assessor of a transfer of ownership of industrial or commercial property. Prior law required buyers or other transferees to notify the assessor within 45 days of a transfer by filing a “property transfer affidavit.” The penalty for not filing had been a fine of $5/day up to $200. PA 382 increases the penalty to $20/day up to $1,000 for property selling for $100 million or less. In the case of property that sells for more than $100 million, the fine will be $20,000 after the 45 days have elapsed unless the assessor determines the failure is due to reasonable cause and not willful neglect, in which case the lesser fine is imposed. The buyer or other transferee may appeal the determination to the Michigan Tax Tribunal.

Despite the increase in the fine, property owners should note that in most cases the greatest exposure resulting from not filing a transfer affidavit is the possibility of retroactive uncapping of the property’s taxable value. If a transfer has not been reported, the assessor has the authority to retroactively uncap the taxable value once the transfer has been discovered. In addition to the higher tax, penalties and interest are charged back to the date when the taxes would have been due. With late payment charges that can be as much as 18% per year, this can be a significant amount.

If you have any questions about this alert, please contact any of our State and Local Tax Professionals listed here.