Bloomberg Law
Aug. 14, 2023, 8:45 AM

Dissent in Michigan Tax Assessment Ruling Blazes New Legal Path

Mike Semes
Mike Semes
Matthew Sommer
Matthew Sommer

Michigan power plant owner Vectren Infrastructure Services Corp. saw its legal victory evaporate—and a $2.3 million tax assessment reinstated—when the Michigan Supreme Court narrowly reversed a unanimous appeals court ruling and denied its claim for alternative apportionment.

The 4-3 decision in Vectren Infrastructure Servs. Corp v. Dep’t. of Treas. upheld the state’s decision to tax 70% of the gain on the sale of its business assets, even though Vectren conducted minimal business in Michigan. The dissenting justices accused the majority of allowing Treasury to get away with a “grossly disproportionate money grab.”

Their harsh language is understandable, considering that Vectren’s average Michigan apportionment for the 10 years prior to the sale was 7%. It spiked to 70% in the year of its sale only because Vectren had responded to an emergency clean-up of an extraordinary oil spill on the Kalamazoo River.

The crux of this case is whether Vectren produced sufficient evidence to prove that the Michigan Department of Treasury’s asymmetrical logic of including in the tax base the company’s gain from selling its business assets so grossly distorted the result that it was unconstitutional.

Including the gain in Vectren’s tax base, but not in the single sales factor, yielded a 70% Michigan apportionment. On the contrary, adopting Vectren’s symmetrical logic—including the gain in both the tax base and the single sales factor—would only have apportioned 15% of the gain to Michigan.

Case Background

In 2011, Vectren’s shareholders sold their shares back to the company, with the parties agreeing to make an election under Section 338(h)(10) of the federal tax code, causing the transaction to be treated as Vectren selling all of its assets. As a result, Vectren reported its gain on the sale on a short-period return from Jan. 1 to March 31.

On this tax return, Vectren asserted an alternative apportionment method—although the high court’s dissent posits that the company may have complied with the single sales factor, despite the parties agreeing that Vectren had sought alternative apportionment. The method included receipts from the sale in the denominator—and not the numerator—of the single sales factor, causing Vectren to apportion to Michigan 15% of its 2011 short-period income (including the gain on the sale of its assets).

The Treasury Department, in an audit, excluded Vectren’s receipts from the sale of its assets in the single sales factor denominator, even though the gain from the sale was included in Vectren’s pre-apportioned tax base. Doing so increased the company’s sales factor to 70% from the 15% Vectren reported and increased its tax liability to $2.3 million from $405,000.

Procedural Study

The manner in which this case yo-yoed through the Michigan court system and the voluminous opinions attached to it offer case studies in Michigan court procedure and constitutional state income tax law.

The constitutional issues in this case implicate Newton’s third law of state taxation: Every apportionment scenario has an equal and opposite scenario. In other words, would the majority have held that a 70% Michigan apportionment was appropriate if Vectren had had a substantial loss instead of a gain? Or if in the year of sale Vectren had conducted 70% of its business activities outside of Michigan instead of inside?

In a perfect world, the result would be the same. But as Yogi Berra astutely quipped, “If the world were perfect, it wouldn’t be.” The dissent recognizes that the Michigan tax world may not be perfect by noting that “when revenue is in reach and budgets are strained, taxing authorities have little incentive for restraint.”

Might it make sense for Congress to narrow the Tax Anti-Injunction Act? If it did, a state tribunal, which has an indirect interest in the outcome of a case, could at least have the option of recusing itself from rendering a decision that may be questioned as being potentially biased. Or might it make sense to modify the act to provide a taxpayer with an avenue to appeal an adverse decision from a state Supreme Court to a federal circuit court?

The high court’s dissent lambastes the majority for “turning a blind eye” to Vectren’s operations in Michigan. These types of acerbic comments underscore the passion this court brought to the case and the uncertainty that permeates apportionment decisions—and will certainly continue for years.

Providing a Blueprint

The most important takeaway from this case is that the dissenters provide a blueprint for a taxpayer to bring an as-applied challenge to the single sales factor.

The dissents poignantly highlight that US Supreme Court precedent recognizes that “the application of a single-factor formula to a particular taxpayer can be unconstitutional” but that the taxpayer in question “presented no record.” The dissenters provided a litany of landmark cases to buttress the holding in Moorman Manufacturing Co. v. Bair to underscore the vulnerability of the single sales factor.

Justice Brian Zahra noted that Container Corp. of America v. Franchise Tax Board unequivocally stated that the three-factor formula is the “’benchmark’ of tax apportionment.” Justice David Viviano affirms the vulnerability of the single sales factor as applied in certain situations and acknowledges that some state and local tax commentators have suggested that the single sales factor “might be more susceptible to constitutional challenge than the benchmark three-factor formula.”

Both dissenters also explained how Trinova Corp. v. Michigan Dept. of Treasury supports the conclusion that the single sales factor is unconstitutional as applied to Vectren. These dissenters point the way for a taxpayer to challenge the single sales factor as applied to its particular circumstance.

The case is Vectren Infrastructure Servs. Corp. v. Dep’t of Treasury, Mich., No. 163742, 7/31/23

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Michael Semes is of counsel at BakerHostetler and is a professor of practice at Villanova University Charles Widger School of Law in the graduate tax program.

Matthew Sommer is an associate at BakerHostetler and a former assistant state attorney general for North Carolina. His practice focuses on state and local tax and complex litigation.

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