Revenue Administrative Bulletin 2024-24

Note: A taxpayer may rely on this Revenue Administrative Bulletin (RAB) until it is revoked by Treasury or until a law on which this RAB is based is altered by legislation or by binding judicial precedent. See MCL 205.6a and RAB 2016-20.

RAB 2024-24. This RAB updates the description of the procedures and standards governing the alternative apportionment relief provisions in parts 1 and 2 of Mcihigan’s Income Tax Act (MITA) and in the Michigan Business Tax (MBT) Act in response to the Michigan Supreme Court’s opinion in Vectren Infrastructure Servs Corp v Dep’t of Treasury, 512 Mich 594 (2023).

ISSUES AND ANSWERS

1. What is alternative apportionment?

Answer: Alternative apportionment is a remedy available to both Treasury and taxpayers, including individuals, trusts and business taxpayers, that allows deviation from Michigan’s statutorily mandated apportionment formula when the statutory formula fails to fairly represent a taxpayer’s business activity in Michigan. Alternative apportionment can also refer to non-statutory deviations from the statutory tax base; for example, when inclusion in or removal of income from the tax base is necessary to fairly reflect a taxpayer’s business activity in Michigan.

2. When must a taxpayer submit a request to Treasury to use an alternative apportionment formula?

Answer: A taxpayer must submit a request for alternative apportionment 90 days prior to the due date of the return (including extensions) for which permission to use the alternative method is sought or, in the case of an amended return, 90 days prior to filing the amended return. Late requests will be considered but must be filed before the filing of the return taking the alternative apportionment position.  Returns filed that take an alternative apportionment position without a prior request for alternative apportionment may result in assessments or refund denials.

3. What must a taxpayer submit to Treasury in a request for alternative apportionment?

Answer: A taxpayer’s request for alternative apportionment must be in writing and clearly labeled “Request for Alternative Apportionment.” The request must identify the tax type and period for which alternative apportionment is requested and must clearly demonstrate why the statutory formula does not fairly represent the taxpayer’s business activity in Michigan. It must also include a reasonable alternative method and a disclosure of certain information about the taxpayer’s apportionment methods in other states.

4. Who has the burden of proving that the statutory apportionment formula does not fairly represent the taxpayer’s business activity in Michigan?

Answer: The burden of proof rests on the party advancing an alternative apportionment method.

5. What standard of proof must be met before an alternative apportionment method will be applied?

Answer: The party seeking to apply an alternative apportionment method must prove by clear and cogent evidence that the statutory method grossly distorts the taxpayer’s business activity in Michigan or operates to unconstitutionally tax extraterritorial activity and that the proposed alternative is a reasonable method of apportioning the taxpayer’s income.

6. Is Treasury required to respond to a request for alternative apportionment within a certain timeframe?

Answer: No. Treasury will make every effort to respond within 60 days of a taxpayer’s request for alternative apportionment. Where Treasury is unable to respond within 60 days, the request may be deemed denied.

7. If approved by Treasury, to which tax periods may the alternative apportionment method be applied?

Answer: Once approved, an alternative apportionment method may only be applied to the tax period for which the approval was requested, or another period designated by Treasury.

8. Are there any special instructions for filing a return for a tax period in which an approved alternative apportionment method is used?

Answer: When filing a return using an approved alternative apportionment method, a taxpayer must attach Treasury’s approval letter and a schedule supporting how the apportionment percentage was derived and applied.

9. Under what circumstances may Treasury impose an alternative apportionment method?

Answer: Treasury may impose an alternative apportionment method whenever the statutory formula does not fairly reflect the taxpayer’s business activity in Michigan as it results in either gross distortion or unconstitutional extraterritorial taxation.

INTRODUCTION

The Due Process and Commerce Clauses of the U.S. Constitution require a state’s income tax on interstate commerce to be apportioned in a manner that reasonably approximates the relationship between a taxpayer’s income attributed to that state and the taxpayer’s business activities in that state. The U.S. Supreme Court has determined that a state’s standard apportionment formula adequately reflects this relationship if the apportionment formula is internally and externally consistent both facially and when applied to a particular taxpayer. Container Corp of Am v Franchise Tax Bd, 463 US 259 (1983). Where the standard apportionment formula fails to fairly reflect the relationship between the taxpayer’s business activities in Michigan and the taxpayer’s income attributable to Michigan, Michigan law provides relief in the form of an alternative apportionment provision. Michigan law permits deviation from the standard apportionment formula for businesses and individuals, estates and trusts. See MCL 206.195 for individuals, estates and trusts, MCL 206.667 for corporations under the Corporate Income Tax (CIT), and MCL 208.1309 for MBT taxpayers. This RAB addresses the procedures and standards applicable to the use of the alternative apportionment provision for business taxpayers under the MBT for both the business income and the modified gross receipts tax bases, for business taxpayers under the CIT, and for those taxpayers covered by Part 1 of the MITA (sometimes referred to as the Individual Income Tax).

BACKGROUND

A state’s power to tax is an inherent feature of its sovereignty, and a state has wide latitude to establish a taxation scheme. C F Smith Co v Fitzgerald, 270 Mich 659, 668-669 (1935). Its powers, if exercised for public purposes, are generally unlimited, extending to all persons, property, and business within its jurisdiction. Where a taxpayer earns income from a multistate business and more than one state has jurisdiction to impose income tax, the states’ power to tax is limited by two federal constitutional provisions: the Commerce Clause and the Due Process Clause. These limitations shape the statutory framework governing division of business income among the states.

The Commerce Clause restrains states from burdening the free flow of commerce among the states. Massachusetts v US, 435 US 444 (1978). Specifically, it prevents states from subjecting taxpayers to multiple tax burdens simply because they do business across state lines. It is satisfied when a state’s formula, if applied by every jurisdiction, would result in no more than all the taxpayer’s income being taxed (the so-called “internal consistency” test). Container Corp, 463 US at 169. The Due Process Clause precludes a state from taxing value earned outside its borders, sometimes referred to as extraterritorial taxation (the “external consistency” test). ASARCO, Inc v Idaho State Tax Comm'n, 458 US 307, 315 (1982).

Most states, including Michigan, divide or “apportion” income among states using a formula based upon one or more factors representative of the taxpayer’s activities in the taxing state. This method of attributing income earned by a taxpayer in the operation of a unitary business is referred to as “formula apportionment.” The underlying rationale for formula apportionment grew out of the difficulty of identifying the geographic source of income earned by a multistate enterprise. See Trinova Corp v Michigan Dep’t of Treasury, 498 US 358, 373 (1991). Formula apportionment, more commonly known simply as apportionment, does not purport to identify the precise geographical source of a taxpayer’s income but is instead intended to be only a rough approximation of a taxpayer’s income that is related to the activities conducted within the taxing state. Moorman Mfg Co v Bair, 437 US 267, 273 (1978).

Michigan apportions business income using single sales factor apportionment for both business and individual income taxes. (See MCL 206.115(2) in Part 1 of the MITA pertaining to individual income taxpayers for years beginning in 2012 and after. See MCL 208.1301(2) for taxpayers under the MBT and MCL 206.661(2) for taxpayers under part 2 of the MITA or the CIT.) Michigan’s business tax acts do not distinguish between business and non-business income as does Part 1 of the MITA with respect to individual income taxation. The U.S. Supreme Court has determined the sales factor apportionment method to be presumptively valid. Moorman Mfg, 437 US at 273. Most states, including Michigan, permit a taxpayer to deviate from the statutorily mandated apportionment method under certain circumstances. This statutorily authorized relief is commonly referred to as “alterative apportionment.” The presumptive validity of the single sales factor apportionment method is expressly stated in the alternative apportionment provisions of Michigan’s business tax statutes. See MCL 206.667 for the CIT and MCL 208.1309 for the MBT. The CIT alternative apportionment provision, MCL 206.667, which is identical in all pertinent respects to the MBT provision, is as follows:

(1) If the apportionment provisions of this part do not fairly represent the extent of the taxpayer's business activity in this state, the taxpayer may petition for or the state treasurer may require the following, with respect to all or a portion of the taxpayer's business activity, if reasonable:

(a) Separate accounting.

(b) The inclusion of 1 or more additional or alternative factors that will fairly represent the taxpayer's business activity in this state.

(c) The use of any other method to effectuate an equitable allocation and apportionment of the taxpayer's tax base.

(2) An alternate method may be used only if it is approved by Treasury.

(3) The apportionment provisions of this part shall be rebuttably presumed to fairly represent the business activity attributed to the taxpayer in this state, taken as a whole and without a separate examination of the specific elements of the tax base unless it can be demonstrated that the business activity attributed to the taxpayer in this state is out of all appropriate proportion to the actual business activity transacted in this state and leads to a grossly distorted result or would operate unconstitutionally to tax the extraterritorial activity of the taxpayer.

(4) The filing of a return or an amended return is not considered a petition for the purposes of subsection (1).

The alternative apportionment provision under part 1 of the MITA, pertaining to individual income taxpayers, is nearly equivalent to the MBT and CIT provisions but does not contain subsection (3) or (4). Treasury considers the single sales factor prescribed in part 1 of the MITA to have the same rebuttable presumption as expressly stated in section 667(3) of part 2 of the MITA based upon the U.S. Supreme Court’s determination of this formula’s presumptive validity. As a matter of uniformity, Treasury considers subsection (4) of part 2 of the MITA to be equally applicable to individual income taxpayers under part 1 of the MITA as will be discussed below.

PROCEDURES AND STANDARDS

Michigan law permits either the taxpayer to petition for, or Treasury to require, the use of a reasonable alternative apportionment method when the statutory apportionment method does not fairly represent the extent of the taxpayer’s business activity in Michigan. This RAB addresses the procedures applicable in each scenario.

Taxpayer Request for Alternative Apportionment Relief

Time for Filing. A request for alternative apportionment will not be considered unless it has been timely filed by the taxpayer with Treasury. A taxpayer seeking to apply an alternative apportionment method must seek Treasury’s approval 90 days prior to the due date of the return (including extensions) for which permission to use the alternative method is sought or, in the case of an amended return, 90 days prior to filing the amended return. Late requests will be considered but must be filed before the filing of the return taking the alternative apportionment position.

Where to File. A taxpayer’s request for alternative apportionment must be sent to Treasury’s Bureau of Tax Policy at P.O. Box 30828, Lansing MI 48909 or for overnight mail to 430 West Allegan Street, Lansing, MI 48922. Email requests can be sent to TreasPolicyDirOfc@michigan.gov.

Required Components. A taxpayer’s request for alternative apportionment must be a written request clearly labeled “Request for Alternative Allocation or Apportionment” and include:

1. Tax Type and Period. A request must identify the tax type and period covered by the taxpayer’s request.
2. Statement of Reasons. A request must contain a statement of the reasons, supported by detailed facts and data, explaining why the taxpayer believes the statutory method does not fairly represent the activities of the taxpayer in Michigan.
3. Proposed Alternative Method. A request must detail the proposed alternative apportionment method(s) and explain how the method reflects the taxpayer’s income attributable to Michigan and why it is a reasonable alternative.
4. Data and Analysis. The proposal must attach documentation identifying and describing the nature of the taxpayer’s business activity and justifying the figures presented in the proposal for alternative apportionment, as well as the figures’ origin, nature and relation to the overall result proposed.
5. Disclosure. The request should disclose whether the proposed method is being used or requested in other states and whether the alternative method has been approved or rejected in those other states or is still pending in those states.

Criteria for Evaluating Requests for Alternative Apportionment

Presumptions. The statutory method of apportionment is presumed to fairly represent the business activity attributable to the taxpayer in Michigan for all tax types covered by this RAB. See MCL 206.667(3) for CIT, 208.1309(3) for the MBT, and Moorman Mfg, 437 US at 273. Therefore, a taxpayer requesting alternative apportionment must rebut the presumption.

Burden and Standard of Proof. The burden of proof rests on the party seeking to apply an alternative apportionment formula. Carolyn Joy Lee, Charlette Noel, Per Se versus "As Applied" Challenges and the Use of Alternative Apportionment Provisions, 2010 St & Loc Tax Law 241, 261-262 (2010). That party must prove by clear and convincing evidence that the presumptively fair statutory formula is unfair under the circumstances and that the proposed alternative is reasonable. Donovan Const Co v Dept of Treasury, 126 Mich App 11, 21 (1983). Note that the “clear and cogent” standard of proof referenced in Moorman Manufacturing is equivalent to the “clear and convincing” standard of proof under state law. See Vectren Infrastructure Svcs Corp v Dep’t of Treasury, 512 Mich 594, 615-615 (2023).

Evidence supporting alternative apportionment is clear and convincing when it supports a firm belief or conviction as to the “appropriateness of alternative apportionment” that is “evidence so clear, direct and weighty and convincing as to enable [one] to come to a clear conviction, without hesitancy, of the “appropriateness of alternative apportionment." In re Martin, 450 Mich 204, 227 (1995).] This standard imposes two burdens on the requesting party, one relative to the statutory formula and one relative to the proposed alternative. See paragraph 9.20 Equitable Apportionment Provisions, Hellerstein and Swain, 1999 WL 1398944, 16. See also BNA’s Tax Management Weekly State Tax Report, Vol 17, No 49, p 5, December 10, 2010.

Proving that the Statutory Method Does Not Fairly Represent Business Activity

As to the first burden, the one relative to the statutory formula, the business tax statutes adopt what is known as the constitutional gross distortion standard. For a party attempting to overcome the presumption that the statutory formula is fair, that standard requires the party to demonstrate one of two things:

That the business activity attributed to the taxpayer in this state is out of all appropriate proportion to the actual business activity transacted in this state AND leads to a grossly distorted result,

OR

That the statutory formula would operate unconstitutionally to tax the extraterritorial activity of the taxpayer. MCL 206.667(3) and 208.1309(3).

(See the U.S. Supreme Court’s opinion in Hans Rees’ Sons, Inc v N Carolina ex rel Maxwell, 283 US 123, 135 (1931), for the derivation of the “out of all appropriate proportion” language and the U.S. Supreme Court’s opinion in Norfolk & W Ry Co v Missouri State Tax Comm, 390 US 317, 326 (1968) for the derivation of the “gross distortion” language.)

Gross distortion can be shown with evidence of a state’s taxation of extraterritorial activity. Norfolk & W Ry Co, supra 390 US at 327. The alternative apportionment relief provision under section 195 of Part 1 of the MITA, pertaining to individuals, requires the same gross distortion level of proof as that required under the business tax statutes, based upon the Michigan Supreme Court’s determination in Trinova Corp v Dep’t of Treasury, 433 Mich 141 (1989). There, the Michigan Supreme Court considered section 69 of the Single Business Tax Act, which is nearly identical to section 195 of the MITA and determined that it served as a constitutional circuit breaker, requiring the gross distortion standard of proof. Section 69 lists four alternatives to the statutory apportionment formula instead of the three listed by Section 195. The sections are otherwise identical.

For all taxes covered by this RAB, a determination as to whether the standard apportionment formula attributes income to Michigan out of all appropriate proportion to the taxpayer’s business activities within Michigan and, therefore, produces a grossly distorted result or whether it operates to unconstitutionally tax extraterritorial activity will depend on the facts and circumstances. A taxpayer may not rely solely on a large difference between the statutory and alternative methods as to either the income attributed to Michigan or the resulting tax liabilities as proof of distortion. Rather, additional analysis establishing why the statutory method attributes income to Michigan out of all appropriate proportion to the taxpayer's business activities within Michigan is necessary to sustain any distortion claim. (See Citizens Utilities Co of Illinois v Dept of Revenue, 488 NE2d 984, 993 (1986), noting that the 15,000% increase in tax liability between the statutory formula and the separate accounting method in Butler Bros v McColgan, 315 US 501 (1942), was upheld because bare percentages without explanation were insufficient.)

Embodied in this burden are two evidentiary hurdles, one quantitative and one qualitative. The quantitative hurdle requires a party to employ the metric that most appropriately quantifies the level of distortion between the taxpayer’s business activities conducted in Michigan and the income attributed to Michigan using the statutory formula. The level of distortion must be of constitutional magnitude, usually called “gross” distortion. “Gross” distortion is flagrant distortion, distortion beyond all reasonable measure. Black’s Law Dictionary, (10^th ed 2014).

Besides quantitative distortion of constitutional magnitude, a taxpayer must also show qualitative distortion. The qualitative prong of the metric focuses not on the magnitude of the distortion but on the nature of the distortion and requires a taxpayer to show that its sales into Michigan do not fairly represent the nature of the taxpayer’s business activity in Michigan. Microsoft Corp, supra 39 Cal 4^th at 769. In Microsoft, the Court noted that the taxpayer’s treasury functions were qualitatively different from its principal business in contrast to the facts of another case, involving Merrill Lynch, where the taxpayer’s treasury functions were not qualitatively different from its principal business of buying and selling securities. Id. at 766. Because separate accounting is of little value in accurately depicting the business activity of a unitary business in a particular jurisdiction, Mobil Oil Corp v Comm’r of Taxes of Vermont, 445 US 425, 438 (1980), if the taxpayer’s business is unitary, Treasury will rarely consider separate accounting to be an appropriate method for establishing gross distortion. By the same principle, attempts by a unitary taxpayer to establish gross distortion or extraterritorial taxation with evidence that the taxpayer is more profitable in one jurisdiction than another will rarely be pertinent. Section 8.16 Distortion or Misattribution of Income, Hellerstein and Swain, 1999 WL 1398922, 10.

Likewise, attempts to carve out certain receipts from the tax base will be unsuccessful without a showing that the income is somehow unrelated to the taxpayer’s unitary business activity or not reasonably reflective of the taxpayer’s business activity in Michigan. See Vectren Infrastructure Svcs Corp v Dep’t of Treasury, 512 Mich 594 (2023). The form of a business’s investments or its organization will not control the appropriateness of an alternative apportionment method. For example, dividends received from subsidiaries and affiliates that reflect profits derived from a functionally integrated enterprise are income to the parent earned in a unitary business and their inclusion in the tax base does not result in gross distortion of the taxpayer’s business activity in Michigan. Additionally, unusually large receipts from an extraordinary event or an isolated transaction are not grossly distortive per se. State Taxation § 8.16 Distortion or Misattribution of Income, 1999 WL 1398922, 16. (See also Vectren, supra, wherein the Court held that whether the statutory formula apportioning income from the sale of a business fairly represents a taxpayer’s business activity in the state depends on the taxpayer’s unique facts and circumstances.) Distortion is not proved solely by comparing results. To determine whether there is gross distortion, Treasury will look at the relationship between the apportionment factor and the taxpayer's business activity producing the taxable income.

Single sales factor apportionment is intended to attribute sales to the consumer state and in so doing gives recognition to the consumer state’s contribution in the taxpayer’s production of the income. For a discussion of that point, see Pierce, The Uniform Division of Income Tax for State Tax Purposes, 35 Tax 747 (October 1957). The metric used for measuring gross distortion or extraterritorial taxation should, therefore, demonstrate how the factor reflects Michigan’s contribution to the production of the taxpayer’s income, especially where it establishes that Michigan had no contribution at all or much less than that attributed to Michigan by the statutory formula.

Proving that the Proposed Alternative Is Reasonable

Once the burden of establishing gross distortion is met, the second burden is to show that the proposed alternative is a reasonable method of apportioning the taxpayer’s income. To demonstrate that the method is reasonable, the party asserting it must establish a close connection between the method and the basis for deviating from the statutory formula. (See A New Approach to Defining a “Reasonable” Alternative Apportionment Method, State and Local Tax Advisory, September 10, 2013.) Treasury considers the following factors to be relevant in determining the reasonableness of the taxpayer’s alternative apportionment method:

• the filing position the taxpayer has taken in other jurisdictions and/or what requests for alternative apportionment the taxpayer has made in other jurisdictions;
• whether under the proposed method the income escapes taxation in all jurisdictions, and
• whether the proposed method reflects the economic reality of the taxpayer’s business activity in Michigan.

A request for an apportionment of income that results in all or a significant portion of a taxpayer’s income escaping tax in all jurisdictions is unreasonable.

APPLYING THE STANDARDS

Vectren Infrastructure Svcs Corp v Dep’t of Treasury, 512 Mich 594 (2023).

In Vectren, the Court of Appeals addressed a taxpayer’s belated request for alternative apportionment involving the MBT. In that case, the taxpayer included in its tax base the gain from the sale of its assets on its short-year return but also included it in the sales-factor denominator, without first seeking Treasury’s approval to use this alternative apportionment method. During its later audit, Treasury excluded the sale of assets from the sales factor denominator. Vectren argued that its one-time sale of stock, resulting in a deemed asset sale, unfairly increased its tax base as apportioned to Michigan. It, therefore, belatedly requested alternative apportionment seeking either to exclude the gain from its business income tax base or, alternatively, to include the sale in the sales factor denominator when apportioning the income. Treasury denied the request for failing to demonstrate any valid basis for the application of an alternative apportionment method.

After several rounds of appeals and remands, the Michigan Supreme Court held that Treasury properly included the income from the asset sale in the tax base and that it was inappropriate to include it in the sales factor numerator or denominator. The Court looked first at the taxpayer’s arguments that the sale proceeds should not be included in the tax base and concluded that the asset sale at issue undeniably constituted “business activity” and “business income” and was appropriately included in the income tax base. The Court held that there was nothing unique about the sale of an entire business that would trigger constitutional protections against including the proceeds in the tax base unless the challenged income was earned in the course of activities entirely unrelated to the business activities it carried on in Michigan. Id. at 632. The court was unconvinced by the taxpayer’s arguments 1) that the apportionment was unconstitutional because the intangible assets and goodwill were primarily developed out of state or 2) that the sale proceeds of a business should be excluded from a tax base simply because the value can somehow be tied to its historical development or its past performance in a different state.

The Court held that the proper inquiry was not where the taxpayer’s assets were physically located or where its domicile was for intangible assets, but rather whether those assets played a part in the unitary business’s operations which subjected it to taxation in Michigan in the first place. Id. at 636. Additionally, the Court concluded that even though past performance may be an important indicator of future earning potential, it is not the only consideration. Rather, a company’s value is more often than not based upon forward-looking metrics. The Court held that the fact that the taxpayer’s net income was greater than in previous years due to the sale of the business did not dictate the conclusion that the sales factor does not fairly represent the extent of the taxpayer’s business activity such that the sale proceeds should be removed from the base. Id. at 641.

The Court then looked at the statutory apportionment formula and determined that even though the asset sale contributed to the taxpayer’s income, it was inappropriate to include the sale in either the sales factor numerator or denominator because it was not “stock in trade” or other property that could be inventoried or sold as a service as defined in MCL 208.1115(1)(a). Id. at 631. Moreover, it held that the taxpayer failed to show by clear and cogent evidence that the apportionment formula included income that was disproportionate to the business it conducted in Michigan or that it resulted in a gross distortion of its tax liability. Id. at 646. Importantly, the Court rejected the proposition that historical tax liability is relevant to the gross distortion analysis. Id. at 653. Finally, the Court stressed that the taxpayer was not entitled to pursue alternative apportionment without first seeking and obtaining permission from Treasury. Id. at 647.

Vectren is important for several reasons. It underscores the principle that gain realized from an isolated sale or the sale of a business or a portion of its assets does not categorically entitle taxpayers to use an alternate method of apportioning income. It confirms that a fair apportionment of a business’s income is based on the business’s activity in the taxing state during the current tax period and not on its historical business activity in the taxing state. Lastly, the case highlights that a taxpayer must petition for Treasury’s permission to use an alternate method, that the alternate method must be a reasonable one that rebuts the presumption that the statutory apportionment formula fairly reflects the taxpayer’s business activity in Michigan, and that Treasury must approve the use of the proposed alternate method of apportionment.

These principles were reemphasized in the recent Court of Claims decision in MGM Grand Detroit, Inc v Dep’t of Treasury, opinion of the Court of Claims, issued July 9, 2024, Docket No. 24-000009-MT, wherein the taxpayer asserted it was not required to request alternative apportionment before adjusting its Michigan apportioned income where the gain from the sale of a subsidiary was included in the tax base and the taxpayer contended that the gain was earned outside Michigan and the sale had no connection to the UBG’s activities in the state. The Court of Claims held that a request for alternative apportionment is required whether the claim is one of gross distortion or a claim that the default apportionment would operate to unconstitutionally tax a UBG’s out-of-state activity. In either circumstance, a taxpayer is required to request alternative apportionment before adjusting its tax base or the sales factor.

When is Alternative Apportionment Appropriate?

Gross Distortion Example: The Court in Norfolk & Western Railway Co v Missouri State Tax Commission found that Missouri’s standard statutory apportionment formula yielded a grossly distorted result, and alternative apportionment was therefore appropriate. 390 US 317, 329 (1968). There, the statutory formula required railroad rolling stock to be apportioned to Missouri by multiplying the total value of the taxpayer’s rolling stock by the ratio of the taxpayer’s track mileage in Missouri to the taxpayer’s track mileage everywhere. In the year in question, the taxpayer leased all the property of another railroad company that engaged in a substantial amount of business in Missouri, causing the statutory formula to attribute 8% or $20 million of its rolling stock to Missouri. The taxpayer established that the actual percentage of its rolling stock located in Missouri was 2.71% of its total fleet by number of vehicles, and 3.16% or $7.6 million of its fleet by value, a distortion of 165%.

Additionally, the taxpayer demonstrated that its coal operations required substantial amounts of specialized equipment that rarely ever entered Missouri and that the traffic density on its Missouri tracks was only 54% of the traffic density on its system as a whole. Allowing alternative apportionment, the Supreme Court reasoned that although a state need not prove that its formula resulted in an exact measure of value, when confronted with strong evidence that the formula yields a grossly distorted result, the State must counter that evidence or make the necessary adjustments to ensure that its taxing power is confined to constitutional limits.

Extraterritorial Taxation Example: Taxpayer DM, a wholly owned subsidiary of Holdco and the designated member of a unitary business group, files a combined CIT return with certain of Holdco’s other subsidiaries. Holdco is headquartered in a state other than Michigan and is the parent holding company of a group of subsidiaries involved in the manufacture of heavy equipment with no independent business activities of its own.

Holdco had a passive investment in publicly traded Subsidiary C, whose business activity is unrelated to heavy equipment manufacturing. Holdco had a 25% voting interest in Subsidiary C. Holdco and Subsidiary C had no common management, no common services or operations, and no intercompany transactions. Holdco did not fund the working capital of its business operations with its investment earnings from Subsidiary C. There was no asset unity between Holdco and Subsidiary C, meaning Subsidiary C did not serve an operational function in Holdco’s business. During tax year 2023, Holdco sold its interest in Subsidiary C and realized a gain of $5 billion from the transaction.

The CIT requires Taxpayer DM to include the gain from the sale on its combined return because it is business income under the statute. See MCL 206.603(3) and 206.623(2). If Taxpayer DM requests alternative apportionment, which in this case would be a request to deviate from statute by excluding the gain from the tax base, and otherwise follows the procedures and meets the criteria established in this RAB, Treasury will grant the request because the income was not derived from the unitary business, nor did it serve an operational function in the taxpayer’s business, i.e. Holdco did not, for instance, rely on the income of Subsidiary C for its working capital. See Walter Hellerstein, State Taxation, paragraph 8.07 et seq. for further explanation of asset unity and the operational function analysis.

Invalid Requests for Alternative Apportionment

A request for alternative apportionment must comply with the procedures set forth in this RAB. A valid request must be submitted in advance of a return and may not be attached to an original or amended return. A return or amended return applying an alternative method of apportionment without prior approval does not constitute a valid request for alternative apportionment. (See Vectren, supra, affirming the need for Treasury to approve the use of an alternative method of apportioning income.) This is true for taxpayers under both part 1 of the MITA and part 2 (CIT) of the MITA and for taxpayers under the MBT. MCL 206.667(4) and MCL 208.1309(4). In the event that Treasury processes an original or amended return that uses an unapproved alternative method, such action does not reflect Treasury’s acceptance or approval of the taxpayer's proposed alternative method.

A claim for refund that does not comply with the procedures set forth in this RAB does not constitute a valid request for alternative apportionment.

Treasury Response to Request for Alternative Apportionment

As soon as practicable after receiving a proper and timely filed request for alternative apportionment, Treasury will review and respond to the request, indicating whether it has been denied, approved, or approved in part and denied in part and stating the reasons for the determination. This determination is appealable to the Court of Claims pursuant to the provisions of the Revenue Act. MCL 205.22(1) (See Enterprise Holdings Inc v Mich Dep’t of Treasury, MTT (Docket No. 22-000532 and 22-001009), issued July 21, 2023, which questions whether alternative apportionment appeals can be heard by the Michigan Tax Tribunal). Treasury will make every effort to respond within 60 days. If Treasury does not act upon a taxpayer’s request before the expiration of 60 days from the date of Treasury’s receipt of the request, the request may be deemed denied. In other words, the taxpayer may choose to treat its request as if it has been denied for purposes of initiating an appeal. But the taxpayer is not required to do so and may instead await Treasury’s response or continue to work with Treasury on the request.

Filing Instructions for Approved Requests

Approval of an alternative apportionment method or partial approval is effective only for the tax period for which the approval was requested or another period designated by Treasury. When filing a return or amended return using the alternative apportionment method, attach Treasury’s approval letter and a schedule indicating how the apportionment percentage was derived and applied.

If approval is given for more than one tax period, the taxpayer must furnish information with the filing of its return in each subsequent tax period that establishes that the circumstances remain substantially unchanged. Approval for subsequent periods, if given, may be revoked by Treasury if the circumstances justifying the variation in apportionment method have substantially changed.

Denied Requests

If a taxpayer’s request for alternative apportionment is denied, the taxpayer may not use an alternative apportionment method and must report using the apportionment method mandated by the applicable statute. An aggrieved taxpayer may appeal Treasury’s decision to the Court of Claims pursuant to Section 22(1) of the Revenue Act. MCL 205.22(1). (See Enterprise Holdings Inc v Mich Dep’t of Treasury, MTT (Docket No. 22-000532 and 22-001009), issued July 21, 2023, which questions whether alternative apportionment appeals can be heard by the Michigan Tax Tribunal).

Treasury’s Imposition of Alternative Apportionment Formula

Treasury will generally only impose an alternative apportionment method as the result of an audit or in conjunction with a partial rejection of a taxpayer’s request for alternative apportionment. Treasury is subject to the same presumptions and burdens of proof as those applicable to a taxpayer as outlined in this RAB. Specifically, the statutorily mandated apportionment method is presumed to fairly represent the Michigan business activity attributable to the taxpayer. Treasury may impose an alternative apportionment method if it determines that the Michigan business activity attributed to the taxpayer under the statute is out of all appropriate proportion to the taxpayer’s actual business activity transacted in Michigan and leads to a grossly distorted result, and if Treasury’s proposed apportionment method is reasonable.

Because Treasury must rely on taxpayers to self-report their income and tax liability, Treasury is not required to notify the taxpayer in advance of the return due date of its intent to apply an alternative apportionment method for that tax period. Treasury may apply the alternative apportionment method for more than one tax period so long as the facts and circumstances for subsequent periods remain unchanged.

When Treasury imposes an alternative apportionment method, it must advise the taxpayer in writing of: 1) the reason the statutory formula does not fairly represent the taxpayer’s Michigan business activity, 2) the alternative apportionment method being applied to determine the taxpayer’s Michigan business activity and why it is a reasonable alternative, and 3) the tax type and periods to which the alternative apportionment method applies.