Michigan Court of Appeals Invalidates Lame Duck Laws Restricting Voter Initiatives

Act No. 608 of the Public Acts of 2018, approved and given immediate effect in that year’s lame duck session, amended several provisions of the Michigan Election Law to create new more restrictive procedural requirements governing voter initiatives proposing initiated laws, constitutional amendments, and referendum of legislation. Most notably, the act required that no more than 15% of the petition signatures used to determine the sufficiency of support for an initiative petition may be provided by voters in any single congressional election district – a restrictive requirement finding no support in the governing constitutional language. Other new provisions required that initiative petitions include a check box to identify petition circulators as volunteers or paid circulators and required paid circulators to file an affidavit identifying themselves as such before circulating petitions for voter signatures.

This legislation has been widely criticized as an impermissible attempt to limit the People’s constitutionally-reserved right to pursue voter initiatives proposing amendment of the Constitution, adoption of initiated laws, and referendum of enacted legislation. The new restrictions pertaining to the collection of petition signatures were particularly problematic in light of abundant case law from our Supreme Court holding that the Legislature may not impose statutory restrictions that curtail or unduly burden the free exercise of the People’s constitutional right to pursue voter-initiated proposals. Thus, it came as no surprise that the constitutional validity of this new legislation has been challenged in the courts.

On January 27, 2020, the Michigan Court of Appeals issued its published decision addressing the constitutional challenges to 2018 PA 608 in the consolidated cases of League of Women Voters, et al. v Jocelyn Benson and Senate and House of Representatives v Jocelyn Benson.  (Court of Appeals Docket Nos. 350938 and 351073) In an Opinion written by Judge Deborah Servitto and joined by Judge Michael Gadola, the Court affirmed the decision of Court of Claims Judge Cynthia Stephens holding that the new 15% limitation on petition signatures collected from any single congressional district and the new requirement that petitions include a check box identifying the circulator as a paid or volunteer circulator are unconstitutional and therefore cannot be enforced. The Court of Appeals also agreed with the League of Women Voters and the Secretary of State that the new requirement for paid circulators to file an affidavit identifying themselves as paid circulators before circulating petitions is also unconstitutional and therefore cannot be enforced, reversing Judge Stephens’ decision to the contrary.  And like Judge Stephens, the Court of Appeals majority found that the Michigan Senate and House of Representatives lacked standing to pursue their claim for declaratory relief but received their briefs and considered their arguments in support of the legislation, nonetheless.

Judge Mark Boonstra wrote a separate Opinion concurring in part and dissenting in part. He disagreed with the majority’s holding that the Legislature lacked standing to present its claims and its conclusion that the new check box requirement was unconstitutional but agreed that the new 15% signature limitation and the affidavit requirement were unconstitutional and could not be enforced.

Secretary of State Benson had joined the League of Women Voters in challenging the constitutionality of Act 608, and thus, the Senate and House of Representatives are the only parties that will have cause to seek further review in the Supreme Court.  The Supreme Court, which had previously called for an expedited adjudication of this matter, has ordered that any application for leave to appeal this decision of the Court of Appeals to that Court must be filed no later than Monday, February 3rd.,  so it will soon become known whether further review of this matter will be pursued.

Graham K. Crabtree has been an appellate specialist in the Lansing office of Fraser Trebilcock since 1996. He was previously employed as Majority Counsel to the Judiciary Committee of the Michigan Senate from 1991 to 1996 and has been a member of the State Bar Appellate Practice Section Council since 2007.

How Much Deference is Owed? Court of Appeals Reverses State Tax Administrator’s Use of Federal Tax Concepts

Tax is statutory. No one owes tax unless a statute imposes that liability. Thus, all tax cases begin with the applicable statute. However, tax statutes sometimes are written in general terms, requiring that important details be filled in either by reference to other authorities, administrative rules or guidance issued the state agency.  Further, state tax laws frequently piggy-back on federal tax law. The typical pattern is to begin the calculation of state taxable income with federal taxable income and then to modify it by adding or subtracting items where state tax policies differ from federal tax policies. As a result, a corporation’s state taxable income can be affected by the application of the Internal Revenue Code (IRC).

State tax laws do provide for some incorporation of federal tax concepts, such as where a  term used in the state taxing statute and not defined differently shall have the same meaning as when used in comparable context under the IRC. But how much deference is owed to the state’s interpretation of federal tax concepts when interpreting state tax law?  The answer is not much. The Michigan Supreme Court has cautioned that when employing federal tax laws to define a state statutorily undefined term, the federal context must be comparable to the Michigan context. In the absence of a comparable context, “the Legislature intended that the word was to be [defined] according to its ordinary and primarily understood meaning,” according to the our Supreme Court.

That said, the Michigan Department of Treasury (the “Department”) generally does not consider itself bound by federal determinations respecting the application of federal tax law and believes that it is free to interpret the IRC as it sees fit.  Unfortunately, this has led to problems because often the Department’s auditors do not have wide experience with or are not well-trained in federal tax principles. The same can also be generally said of the Department’s in-house legal staff. A recent decision from the Michigan Court of Appeals illustrates the misapplication of federal tax law by the state tax authorities.

On March 31, the Court of Appeals in Labelle Mgmt Inc v Dep’t of Treasury, reversed a trial court decision which found in favor of the Department’s interpretation that sufficient “indirect ownership” existed among Labelle and two brother-sister entities thus comprising a unitary business group under the Michigan Business Tax Act (MBT).

In reaching for the meaning of “indirect ownership,” the lower court looked to contextually analogous provisions of federal income tax law to supply a definition.   The Court of Appeals found that this impermissibly expanded the definition of the term “unitary business group” beyond what the Legislature intended.  Instead, the trial court should have relied on the normal rules of statutory construction to define indirect ownership, according to the Court of Appeals.

For a generation Michigan experimented with its business tax regime. First, in 1976 with its VAT like Single Business Tax (SBT), and then its hybrid gross receipts/income tax called the Michigan Business Tax in 2008.  These schemes had little need to adhere to, or understand, federal corporate income tax concepts.  Further, although the Michigan Corporate Income Tax, repealed after 1975, used the “unitary” business concept, the SBT did not and relied instead on a separate filing method.  For perceived compliance reasons, the Michigan legislature adopted (or perhaps, reintroduced) the “unitary” concept when it enacted the MBT in 2008.

Under the MBT (and Michigan’s current Corporate Income Tax (CIT)), a “unitary business group” exists where one member owns or controls, either directly or indirectly, more than 50 percent of the ownership interests of the other members. Indirect ownership isn’t defined by the MBT, but it does provide that “[a] term used in this act and not defined differently shall have the same meaning as when used in comparable context in the laws of the United States relating to federal income taxes in effect for the tax year unless a different meaning is clearly required.  In various administrative pronouncements, the Department instructed that “indirect ownership is generally determined by using [IRC] section 318 or analogous authority.”

Finding no “directly comparable” federal income tax provision in this case, the trial court looked to “contextually analogous” provisions of the IRC, specifically sections 957 and 958 to find that “indirect ownership” can include “constructive ownership.”

The Court of Appeals reversed, finding that the trial court erred in using the federal income tax definition of constructive ownership to define indirect ownership. The Court of Appeals stated that “the federal tax statutes and regulations are replete with examples that illustrate the proposition that indirect ownership and constructive ownership are two different concepts.”  “[A]t the point the trial court acknowledged that the federal tax laws do not address a ‘comparable context,’ under Michigan law, it should have used the ordinary rules of statutory construction,” the appeals court said.

Looking at the plain and ordinary meaning of indirect ownership, the Court of Appeals reasoned that it means “ownership through an intermediary, not ownership by operation of legal fiction,” as is the case with constructive ownership as the Department argued. Finding otherwise would expand the statute “beyond the meaning intended by the Legislature,” Put bluntly, if the Legislature had intended the constructive ownership rules of the IRC to apply, they would have said so. Finding that none of the entities involved owned more than 50 percent of any other, through an intermediary or otherwise, the Court of Appeals concluded that the taxpayer was entitled to summary judgment and reversed.

The takeaway here is that one should not rely on administrative interpretive positions of the Department were they apply federal tax concepts, nor should one assume that state tax auditors will understand and correctly apply federal tax principles.  It may be necessary to call upon a company’s federal tax advisors to explain these principles, and it will likely be necessary to talk to senior people in the Department, who are more likely to be knowledgeable about federal tax rules than are the auditors.

Fraser Trebilcock attorney Paul McCord, PaulV. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.

Court of Appeals Upholds Retroactive Tax Legislation

McCord, PaulOn September 29, 2015, the Michigan Court of Appeals in Gillette Commercial Operations v Dep’t of  Treasury, No 325258 (consolidated with about 50 other cases), held that Michigan’s retroactive repeal of the Multistate Tax Compact (MTC) to avoid paying $1.1 billion in tax refunds did not violate the Contract Clause, or the Due Process Clause. Further, the Court of Appeals held that the retroactive repeal of the MTC did not violate the Separation of Powers Clause in the Michigan Constitution because it did not reverse or repeal the Michigan Supreme Court’s decision in IBM v Dep’t of Treasury.  In addition to these claims, the Court of Appeals also rejected a host of other theories advanced by taxpayers.

By way of background, businesses that operated in a number of states deal with an important question: How should their tax liability be spread across many states? In other words, what portion of their business activity should be subject to tax in Michigan? This question is frequently answered through the establishment of an “apportionment” formula contained in state law.

When Michigan adopted it’s now repealed Michigan Business Tax (MBT), that tax required multi-state businesses to apportion both their income and gross receipts to Michigan based on a single factor: their gross sales within Michigan. However, while enacting the MBT in 2008, the legislature made no changes to another state law relevant to business taxation – the MTC Act.  Michigan enacted the MTC Act in 1969 as part of a joint effort by many states to coordinate their tax policies and fend off federal efforts to preempt some state control over business tax provisions that were the subject of debate at that time. The MTC Act has its own provision regarding apportionment. That Act allows businesses that operate in two or more states to elect, at the businesses’ discretion, to apportion any “income tax” imposed by the state according to a three-factor apportionment that included sales, property, and payroll.

The apparent conflict between the MBT and MTC’s apportionment formula was addressed by the Michigan Supreme Court’s July 2014 decision in IBM v Dep’t Treasury.  That case allowed IBM to elect to use the Compact’s three-factor apportionment formula on its MBT return for the 2008 tax year.

Before the Supreme Court’s judgment became final, however, the Michigan legislature swiftly enacted legislation in September 2014 to prevent taxpayers from claiming MBT refunds based on the election to use the MTC’s three-factor apportionment formula.  Specifically, legislation retroactively repealed the MTC Act retroactively  to January 1, 2008.

IBM, along with a number of other business taxpayers including Gillette Commercial Operations, with pending tax refund claims challenged the legislature’s retroactive repeal in the Court of Claims.  The Court of Claims ruled in favor of the state and the various taxpayers appealed to the Court of Appeals.

Due process concerns are implicated when a retroactive law takes away a vested right.  That said, while due process protects vested property rights, it does not protect one’s mere expectation of a right.  Here, the taxpayers argued that they had a vested right to the tax refunds resulting from the MTC election.  But the Court of Appeals pointed out that Michigan has long held that taxpayers have no vested right in the tax laws and that the Legislature is free to take away any provision at any time.  Furthermore, correcting the Supreme Court’s arguable interpretative mistake, as well as protecting the public fisc were, according to the Court of Appeals, legitimate legislative purposes further by rational means.

The taxpayers also  argued that the Legislature’s retroactive action violated the separation of powers clause.  Specifically, that the Legislature overstepped its bounds as the retroactive legislation was an attempt to reach into pending court cases and direct the courts to find a different result.

In addressing the taxpayers separation of powers arguments, the Court of Appeals reasoned that the Legislature did not overturn IBM or overrule the Michigan Supreme Court’s final judgment.  Instead, the legislature acted within its authority to correct the Supreme Court’s misinterpretation of a statute.

The decision by the Court of Appeals was fairly anticipated and is consistent with the recent trend of taxpayer defeats on this issue in several states in the last 12 months. Taxpayers have suffered defeats in Minnesota, New York, Oregon, Texas, and Washington and have seen their overall chances of success on this issue decline significantly. The California Supreme Court is scheduled to take up the issue in October and the taxpayers in the Washington case have filed an application for cert to the US Supreme Court which is also scheduled to be addressed in October.  It is highly likely that the taxpayers in Gillette Commercial Operations and the consolidated cases, will appeal the Court of Appeals decision to the Michigan Supreme Court.

If you are interested in discussing this tax legislation or have any additional tax law questions, contact Fraser Trebilcock attorney Paul McCord at 517.377.0861 or pmccord@fraserlawfirm.com.

Health Care Reform Debate Continues in the Courts

Litigation over the constitutionality of Health Care Reform continues to work its way through the Federal judiciary and towards the Supreme Court. In an article in today’s New York Times, the arrival of two active cases from the trial level to the United States Court of Appeals (4th Circuit) in Richmond, Virginia, will give the first federal appellate court a crack at resolving inconsistent rulings by two different lower courts.

One of the lower courts, according to the Times, said Congress overstepped in mandating health insurance. Another lower court said otherwise. Whatever the Court of Appeals rules following today’s oral arguments in both cases, you can bet that they will quickly head to the United States Supreme Court.

The Times also reports that 31 cases have been filed across the country, of which a total of 9 have already moved on to the US Court of Appeals.

So consider it a horse race, as lawyers around the country try to win the lottery, by not only pursuing the case that the US Supreme Court decides, but to be on the winning side. In addition, as the Times points out, many if not all of the cases will be barnacled by briefs filed by scores of non-party “friends-of-the-court” (which actually translates to “special interest groups”).

In the end, each of the litigants, and “friends-of-the-court” think they know whether Congress can mandate that citizens buy commercial health insurance. Whether or not even the Supreme Court answers that as clearly as everyone would like is another question entirely.

For more information, please contact Jonathan Raven, Chair of Fraser Trebilcock Health Care Law Department, at 517.377.0816 or JRaven@FraserLawFirm.com