In previous posts I discussed the Kmart case and Michigan's guidance which affected companies operating in Michigan who own or utilize a disregarded entity such as a single member limited liability company or a qualified subchapter S subsidiary.
Since Michigan released its NOTICE to taxpayers regarding KMART Michigan Property Services, LLC, there has been a big push to alleviate the pain it was causing or going to cause. Therefore, a legislative fix was proposed. That legislative fix, House Bill 5937, was passed by the House and Senate, and signed by the Governor.
SUMMARY OF LEGISLATION
The legislation amends the revenue Act to give direction to the Department of Treasury regarding the treatment of a taxpayer that filed a Single Business Tax return that included an entity disregarded for Federal income tax purposes, and the treatment of the disregarded entity.
Specifically, for a taxpayer that filed a tax return under the former Single Business Tax Act that included an entity disregarded for Federal income tax purposes under the Internal Revenue Code, both of the following apply:
- The Department of Treasury cannot assess the taxpayer an additional tax or reduce an overpayment because the taxpayer included the disregarded entity on its SBT return.
- The Department cannot require the disregarded entity to file a separate tax return. In addition, if a taxpayer filed an SBT return that included an entity disregarded for Federal income tax purposes, the taxpayer cannot claim a refund based on the disregarded entity's filing a separate return as a distinct taxpayer.
The legislation is curative, and retroactive. It is intended to correct any misinterpretation concerning the treatment of an entity disregarded for federal income tax purposes under the internal revenue code under former 1975 PA 228 that may have been caused by the decision of the Michigan court of appeals in Kmart Michigan Property Services v Michigan Department of Treasury, No. 282058, May 12, 2009.
However, the legislation is not intended to affect a refund resulting from a final order of a court of competent jurisdiction for which all rights of appeal have been exhausted prior to February 12, 2010 to a taxpayer who is a party to that proceeding.
Based on this legislative fix, companies who filed Michigan single business tax returns that included disregarded entities are no longer required to retroactively file separate tax returns for the disregarded entity. This eliminates the compliance burden and additional tax that would have been paid. However, it also eliminates the opportunity to file amended returns for the parent company, which may have resulted in refunds.