News and Insights

Unitary Business Group Test in Michigan Does Not Consider Indirect Ownership

Tax Development Mar 10, 2017

The Michigan Supreme Court denied the Department of Treasury’s (“the Department’s”) Application for Leave to Appeal LaBelle Management Inc. v. Department of Treasury 1 (“LaBelle”). The Court of Appeals decision is now binding precedent and fully retroactive to all open years.

The issue in Labelle was the interpretation of “indirect ownership” as applied to the Unitary Business Group (UBG) definition under section 117(6) of the Michigan Business Tax Act.2 A UBG is a group of related United States persons, other than a foreign operating entity, whose business activities or operations are interdependent. The entities must pass a control test and one of two relationship tests. The control test is satisfied when one person owns or controls, directly or indirectly, more than 50% of the ownership interest with voting or comparable rights, of the other person or persons. Labelle Management challenged the Department’s interpretation of the control test, which relied on Internal Revenue Code Section 318 to define indirect ownership to include constructive ownership, or ownership through attribution. The Court of Appeals agreed with Labelle Management and reversed the Court of Claims decision. The Department subsequently appealed the decision, resulting in the Supreme Court’s recent denial.

As it now stands, the earlier Court of Appeals decision eliminates constructive ownership or ownership through attribution as a means of satisfying a UBG control test. As the same control test is used for both the Michigan Business Tax and the Corporate Income Tax, the Department takes the position that the LaBelle decision applies to both taxes.

The decision is interpreted as narrowing the UBG groups to those in which ownership or control is based upon a parent-subsidiary chain of relationships and not a brother-sister relationship. For example, where Company A owns 51% of Company B, which owns 51% of Company C, which owns 51% of Company D, all four Companies will form a parent-subsidiary controlled group under LaBelle because Companies B and C are both permissible intermediaries through which Company A indirectly controls Companies C and D as well as directly controlling Company B. 

Amended returns may be required to remove any entities from the UBG that do not conform to the LaBelle decision. The Department has issued a Notice to Taxpayers Regarding Labelle Management Inc. v. Department of Treasury on February 28, 2017, detailing the process and terms of any required amended returns due to this decision. 

1 315 Mich App 23 (2016).
2 MCL 208.1117(6).


Mary Bernard