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Revenue Administrative Bulletin 1988-16Approved: May 27, 1988
INDIVIDUAL INCOME TAX - S CORPORATION DISTRIBUTIVE INCOME AND LOSSES
(Replaces Income Tax Bulletin 1985-2)
RAB-88-16. The purpose of this Bulletin is to clarify the income tax and intangibles tax treatment of income distributed by an S corporation (formerly referred to as a subchapter S corporation) that has business activity within and without Michigan. This bulletin supersedes Income Tax Bulletin 1985-2, dated October 1, 1985.
In Chocola v Department of Treasury, 422 Mich 229; 369 NW2d 943 (1985), the Michigan Supreme Court held that a subchapter S corporation's distributive share of income and losses shall be allocated and apportioned to the state in which the activity takes place. The court cited with approval the Department of Treasury Rule 1979 AC, R 206.12(20) which states "[d]istributive income from a subchapter S corporation not allocated or apportioned to Michigan may be claimed as a subtraction from adjusted gross income. Conversely, losses not allocated or apportioned to Michigan shall be added to adjusted gross income."
Prior to the Chocola decision, the Department followed the decision of the State Board of Tax Appeals, Craighead v Department of Treasury (Docket Nos. 1275 and 1364, September 22, 1978) holding that distributions from a subchapter S corporation were nonbusiness income allocable to the taxpayer's state of residency. However, preceding this decision, the Department relied on R 206.12 for apportionment and allocation of S corporation income. The Rule provides in part that:
R. 206.12 Allocation and Apportionment of Income
(17) All distributive income from a subchapter S corporation includable in shareholder's adjusted gross income is subject to tax if allocated or apportioned to Michigan.
(20) Distributive income from a subchapter S corporation not allocated or apportioned to Michigan may be claimed as a subtraction from adjusted gross income. Conversely, losses not allocated or apportioned to Michigan shall be added to adjusted gross income.
Michigan's Income Tax Act, MCL 206.102, provides that a taxpayer's taxable income from income-producing activities confined solely within this state shall be allocated to Michigan. However, if the business activity is conducted both within and without Michigan, the income shall be subject to formulary apportionment as provided in MCL 206.103 and MCL 206.115, respectively.
A nonresident shareholder of a Michigan S corporation must file a Michigan income tax return and report his or her distributive income from the corporation. The statute of limitations is suspended during the period for which a return has not been filed.
A shareholder who relied on the Craighead decision, which allocated S corporation income to a shareholder's state of residency, must file an amended return (MI-1040X) to properly report the income based on R 206.12.
The Michigan intangibles tax is a tax on intangible personal property. The Chocola decision discussed above does not apply to the Intangibles Tax Act as it relates to a shareholder's investment in an S corporation.
The intangibles tax is imposed upon all intangible personal property owned by a resident of the State of Michigan. [See MCL 205.131 et seq.] For intangibles tax purposes, the tax base of an S corporation is the yield or amount of distributions to the shareholder(s) during the taxable year. This position is supported by the Rosenbalm v Department of Treasury, 164 Mich App 99; 416 NW2d 343 (1987), application for leave to appeal pending.
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