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Michigan Department of Treasury Chooses Retroactive Enforcement of Kmart Case

**This decision has been reversed. See this article for more information.**

Background:

Kmart Michigan Property Services LLC v Dep't of Treasury ("KMPS") resulted in a single member LLC disregarded for federal tax purposes being permitted to file a separate Michigan Single Business Tax ("SBT") return from its owner contrary to the State's published guidance in Revenue Administrative Bulletin ("RAB") 1999-9. The courts, finding in favor of KMPS, found that a disregarded entity fits within the definition of "person" under the MCL 208.6(1) of the SBT Act. As a result, the SBT Act does not support the requirements of RAB 1999-9 (or RAB 2000-5 related to Qualified Subchapter S Subsidiaries) that a disregarded entity for federal purposes is also disregarded for purposes of the SBT.

Impact of judicial decisions:

Judicial decisions have full retroactive effect. This is not impacted by the fact that contrary guidance has been issued by the Department of Treasury. The result is that RAB's 1999-9 and 2000-5 are invalid to the extent they are inconsistent with the courts decision.

State of Michigan's Position:

In a Notice issued Feb. 5, 2010 the Department of Treasury has stated its intent to enforce the impact of this decision retroactively thus bringing into question all years applicable to disregarded entities. The Notice gives certain guidance related to how they expect taxpayers to file amended returns and new returns for affected disregarded entities. The Notice also states that they will waive applicable penalties, albeit not interest, if returns are filed by September 30, 2010.

What does this mean to you:

Taxpayers who included a disregarded entity in the filing of an SBT return have the ability to amend returns for years the statute of limitation still remains open, i.e., 4 years. The Treasury is asking for all disregarded entities that have a filing requirement on a separate entity basis to file separate SBT returns from the entity's inception date. This results in the very real possibility of double taxation. Business leaders, leading attorneys, and other business organizations are approaching the state legislature looking for opportunities to correct this through the legislative process. In the mean time, it is important to review your entity structure to determine if you have any single member LLC's, Qualified Subchapter S Subsidiaries, or foreign check the box entities that may be impacted by this decision.

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