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State and Local Tax Update

March 18, 2014
Refund opportunities for individual owners of flow-through entities

Recent court cases provide individual owners of interests in flow-through entities (partnerships, S corporations and LLCs) with opportunities for refund claims based upon combined filing for a group of unitary flow-through entities or amended reporting of sales of interests in a flow-through entity as apportionable business income, rather than as income allocated to a Michigan state of residence.

The Michigan Supreme Court has approved the application of the unitary business principle and combined filing for brother-sister groups and tiered groups of flow-through entities. When members of a unitary group of LLCs, LPs, or S corporations owned real estate or other business assets outside of Michigan, filing an amended Michigan individual income tax return reporting the distributive share of income based upon combining the income and apportioning the income based upon all of the entities’ apportionment factors (payroll, property and sales prior to 1/1/2012 and just sales thereafter) may reduce Michigan taxable income.

Recently, the Court of Appeals approved Michigan taxpayers’ reporting the gain on the sale of their interest in a flow-through entity as business income apportioned to Michigan based upon the entity’s factors. Previously, the Department had required all income from the sale of a flow-through entity interest to be reported as income from the sale of an intangible asset taxed 100% by Michigan for all Michigan residents. The Court of Appeals’ decision may present individual income tax refund opportunities for Michigan residents who sold flow-through entity membership interests where the LLC, LP, or S corporation owned real estate or other business assets outside of Michigan. The general statute of limitations for Michigan income tax refunds is four years, subject to certain tolling events which can extend the statute of limitations on refunds. Please contact your Honigman state and local tax attorney or professional for further information.

Changes to law regarding personal liability for taxes owed by a business

Governor Snyder has signed Public Act 3 (PA 3), which significantly changes the law regarding the personal liability of business owners or managers for unpaid business taxes. Among the biggest changes: 

  • For tax assessments issued after December 31, 2013, personal liability may only be imposed for certain enumerated taxes, including sales and use taxes, tobacco taxes, motor fuel taxes, withholding taxes, and other taxes that a person is required to collect and remit to the state. 
  • A person shall only be considered a “responsible person” liable for the business’s unpaid tax liability if that person “willfully” failed to file a return or pay a tax due. (“Willfully” means that the person knew or had reason to know of the obligation to file a return or pay the tax but intentionally or recklessly failed to file the return or pay the tax).
  • The Department may not assess a responsible person more than four years after the date of the assessment issued to the business. 
  • Persons assessed as being personally responsible for a business’s unpaid taxes now have the right to challenge the assessment to the same extent the business could have challenged it.
  • A person found personally responsible for business taxes may bring an action in circuit court against other responsible persons to recover a portion of the assessment based on each person’s share of liability.
  • Before assessing a responsible person, the Department of Treasury must first attempt to collect the unpaid taxes from a successor business.

PA 3 also made other changes to the law regarding personal liability for business taxes.

If you have any questions or concerns regarding either of these issues, please contact any of the state and local tax attorneys or professionals.

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