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Update: Michigan Supreme Court Disallows Alternative Apportionment in Vectren Case

Tax Development Aug 08, 2023

Update: Michigan Supreme Court Disallows Alternative Apportionment in Vectren Case

As reported in our previous release, Vectren Infrastructure Services Corp. (“Vectren”) appealed to the Michigan Supreme Court for the use of alternative apportionment in the sale of a business resulting in a large gain. 

In the fall of 2021, the Michigan Court of Appeals reaffirmed its earlier decision that an alternative method of apportionment was appropriate to avoid unconstitutional distortion by including a gain from the sale of the business in the tax base while excluding the gain from the sales factor. The sale of the business in a Section 338(h)(10) transaction in 2011 resulted in a large gain, which the company included in both its tax base and the denominator of its sales factor. Upon audit, the department removed the gain from the sales factor, effectively changing the apportionment factor from 15 to 70% and a resulting $3 million tax assessment. The case subsequently moved through appeals twice, with a conclusion that the statutory formula produced a “grossly distorted result,” and was finally being reviewed by the highest state court.

In a split decision,1 the Supreme Court agreed with the state’s position that the proceeds from the sale of the business should not be included in the sales factor. The majority’s narrow interpretation of the standard for constitutional distortion held that the company must prove that the income was earned outside of the unitary business engaged in the state to apply alternative apportionment methodology. 

In the opinion of the Court, “the Department properly included the income from the ML-to-Vectren asset sale in the tax base apportionment formula under the MBTA (Michigan Business Tax Act), and the MBTA formula, as applied, did not impermissibly tax income outside the scope of Michigan’s taxing powers and thus did not violate the Due Process or Commerce Clauses of the United States Constitution.”

What is interesting here is the dissent, which cites the inequity and distortion that results from the use of a single factor formula. Unfortunately, based on the sales factor alone, the taxpayer could not show that the sales factor was out of all proportion and was grossly distorted. It is unclear at this time whether this case will be appealed to the U.S. Supreme Court. We will keep you updated if this case should proceed further.

Ryan professionals can assist in evaluating your prospects of achieving an alternative apportionment formula when you find your company has been taxed at a level that results in an unequitable share of your income getting taxed by a particular jurisdiction. Please contact one of the Ryan experts listed below today for assistance.

1 Vectren Infrastructure Services Corp. v. Department of Treasury, Michigan, No. 163742 (July 31, 2023).


Mark L. Nachbar

Greg Rottjakob

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