News and Insights

Michigan Court of Appeals Rules Bad Debt Denial Was Proper

Tax Development Sep 26, 2016

The Michigan Court of Appeals recently upheld the Michigan Department of Treasury’s (“Department’s”) denial of taxpayers’ bad debt deductions in Ally Financial, Inc. v. Department of Treasury. The taxpayers in this case were motor vehicle finance companies, who provided retail installment loans to car purchasers. When car purchasers defaulted on their contracts and did not repay the full purchase price and sales tax owed, the Plaintiffs repossessed the vehicles, sold them, and applied the proceeds to the outstanding loan balances. However, the proceeds of these sales did not cover the entire unpaid balance, so the Plaintiffs claimed the remaining balances on their federal tax returns as “bad debts” under Internal Revenue Code, 26 USC 166.  The Department denied their claim, and the taxpayers appealed.

The Department’s denial was based on several factors:

  • The taxpayer’s written election designating which party may claim the deduction was insufficient under Mich. Comp. Laws § 205.54i(3) because it applied only to “currently existing” loans and, therefore, did not cover the accounts for which the taxpayer  sought a deduction.
  • The taxpayer did not submit RD-108 Application for Michigan Title and Registration Statement of Vehicle Sale, which is the form used to document a vehicle sale.
  • The taxpayer included repossessed property in its claim.

The Appellate Court (“Court”) found that the language in Mich. Comp. Laws § 205.54i(3) was clear, and as such, the taxpayer’s election, which was executed after the bad debts were written off and was limited to “currently existing” loans, was insufficient to demonstrate the right to a refund or an exemption. The Court further determined that the Department was within its rights to require RD-108 from the taxpayer because the plain language of Mich. Comp. Laws § 205.54i gave the Department the authority to determine what evidence was required to support a bad debt claim. Lastly, the Court also agreed with the Department’s position that repossessed property is not to be included in a bad debt claim. Based on all of these factors, the Court ruled in favor of the Department and upheld the bad debt denial.