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Michigan Court Case on Treatment of Single Member LLCs May Provide Refund Opportunities or Exposure

Michigan Court Case on Treatment of Single Member LLCs May Provide Refund Opportunities or Exposure

Issue
Single business tax (SBT) treatment has changed for single member limited liability companies (LLCs) treated as disregarded entities.

Taxpayers Potentially Affected
Businesses previously subject to the SBT that owned single member LLCs that were treated as disregarded entities.

Background
The Michigan SBT was imposed on all persons engaged in business in the state through Dec. 31, 2008. The SBT did not allow for combined filing; each business entity was required to file a separate return. In Revenue Administrative Bulletin 1999-9 (RAB 99-9) the Michigan Department of Treasury took the position that single member LLCs treated as disregarded entities for federal income tax purposes would be treated in the same manner for the SBT.

A recent court case¹ challenged the conclusions of RAB 99-9. In the case, petitioner Kmart Michigan Property Services LLC argued that the underlying statutes governing the SBT were inconsistent with the conclusions reached in RAB 99-9. The Michigan Court of Appeals found for the petitioner, holding that a single member LLC that is disregarded for federal income tax purposes must be treated as a separate entity for purposes of the SBT. As such, the parent and the disregarded single member LLC should file separate SBT returns.

SBT filers with single member LLCs treated as disregarded entities should review their SBT filings for all open years to determine the tax impact under the Appeals Court’s opinion. SBT filers who would benefit from this ruling should consider filing refund claims for all open years.

The Michigan Department of Treasury likely will file an appeal to the state’s Supreme Court, which will delay the resolution of the issue.

Contact Information
If you have questions about the Kmart Michigan Property Services LLC decision, please contact:

• Lisa Pohl at 616.752.4239 or lisa.pohl@crowehorwath.com.
• Howard Wagner at 502.420.4567 or howard.wagner@crowehorwath.com.

¹Kmart Michigan Property Services LLC v. Department of Treasury, State of Michigan Court of Appeals, Docket. No. 282058, 5/12/2009.

 

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Under U.S. Treasury rules issued in 2005, we must inform you that any advice in this communication to you was not intended or written to be used, and cannot be used, to avoid any government penalties that may be imposed on a taxpayer.