By Peter G. Pupke, Esq.
The Michigan Supreme Court has held that the Department of Treasury improperly disallowed the taxpayer credits for brownfield and historic-preservation activity that the taxpayer claimed under the since repealed Single Business Tax. The court found that the tax credits that had been lawfully acquired by subsidiary of the taxpayer, a Michigan bank, passed by operation of law under the Banking Code to another subsidiary of the taxpayer, a Texas bank, when the two banks merged. Accordingly, the provisions of the Single Business Tax Act (SBTA) that prohibited an assignee of credits from subsequently assigning those credits did not explicitly or implicitly interfere with the Banking Code’s operation in this case. Therefore, the Department erred by not allowing the taxpayer to claim these credits on its returns for tax years 2008–2011, and the Michigan Tax Tribunal erred by granting the Department partial summary disposition. (Comerica, Inc. v. Department of Treasury, Mich. S. Ct., Dkt. No. 161661, 06/07/2022.)
The taxpayer sought review in the Tax Tribunal of a 2013 decision by the Department to deny tax credits for brownfield and historic-restoration activity that the taxpayer had claimed under the since repealed SBTA. In 2005, one of the taxpayer’s subsidiaries had assigned these credits to another subsidiary of the taxpayer, a Michigan bank. In 2007, the Michigan bank merged with a third subsidiary of the taxpayer, a Texas bank. Around the same time, the legislature repealed the SBTA and enacted a successor, the Michigan Business Tax Act (MBTA) (since repealed by L. 2019 P.A. 90). The taxpayer filed returns under the MBTA for the tax years 2008–2011, identifying the Texas bank, but not the Michigan bank, among its subsidiaries, and claiming refunds based in part on the credits that had been assigned to the Michigan bank under the SBTA. In 2013, the Department audited the taxpayer’s returns and disallowed the claimed credits on the basis of two SBTA provisions, former M.C.L. § 208.38g(18) and former M.C.L. § 208.39c(7), which barred assignees of credits from subsequently assigning those credits. The taxpayer sought review before the Tax Tribunal, arguing that the credits had passed to the Texas bank not as the result of a subsequent assignment but by operation of law, as a result of the merger with the Michigan bank.
The Tax Tribunal, citing Kim v. JPMorgan Chase Bank, NA, 493 Mich 98 (2012), granted partial summary disposition to the Department, ruling that the credits had not passed to the Texas bank in the merger but rather had been extinguished. The Michigan Court of Appeals, vacated in part, reversed in part, and remanded, noting that although former M.C.L. § 208.38g(18) and former M.C.L. § 208.39c(7) prohibited any assignment of credits beyond the initial assignment, those provisions were silent regarding transfers made by any other mechanism, such as transfers made by operation of law pursuant to a merger of entities. Accordingly, the court of appeals agreed with the taxpayer that the tax credits had been transferred by operation of law and that those transfers thus were not barred by the SBTA’s single-assignment provisions. The court of appeals also held, contrary to the Tax Tribunal’s conclusions, that the rule of strict construction for tax exemptions does not apply to tax credits and that the tax credits were property rather than privileges (see State Tax Update, 04/20/2020.) The supreme court granted the Department’s application for leave to appeal, and subsequently affirmed the judgment of the court of appeals.
Credits passed by operation of law, not by assignment.
The supreme court noted that former Mich. Comp. Laws Ann. § 208.38g and former Mich. Comp. Laws Ann. § 208.39c provided, in relevant part, that a qualified taxpayer could assign a credit to its partners, members, or shareholders, but that those assignees could not subsequently assign those credits or any portion of those credits. In this case, the taxpayer’s subsidiary (KWA I, LLC) was the qualified taxpayer, and it was undisputed that KWA could lawfully assign its credits to the Michigan bank. Although the Department argued that the SBTA barred the Michigan bank, as an assignee, from becoming an assignor by subsequently assigning the credits to the Texas bank, it offered no evidence that the Michigan bank assigned, or tried to assign, the credits. Instead, the court noted, the credits passed to the Texas bank not by assignment but by operation of law—specifically, the Banking Code, which governs consolidations and mergers of banks. M.C.L. § 487.13703(1) provides in part that if a consolidation agreement has been certified and approved, the corporate existence of each consolidating organization is merged into and continued in the consolidated bank. To the extent authorized by the Banking Code, the consolidated bank then possesses all the rights, interests, privileges, powers, and franchises and is subject to all the restrictions, disabilities, liabilities, and duties of each of the consolidating organizations. That law section further specifies that the title to all property is transferred to the consolidated bank and may not revert or be impaired by reason of the act.
While the parties disagreed about whether the credits should be considered privileges or property, the court said that this distinction made no difference to the outcome in this case because, under the Banking Code, the consolidated bank acquires both the privileges and property of the consolidating organizations, by operation of law, not by assignment or by any other act of the consolidating organizations. The distinction between a voluntary act of assignment and a transfer by operation of law was described in Miller v. Clark, 56 Mich 337 (1885), and this distinction was relied on in Kim. Thus, regardless of whether the SBTA credits are considered property or privileges, M.C.L. § 487.13703 operated to transfer the credits from the Michigan bank to the Texas bank, and no assignment was needed.
SBT assignment provisions did not bar credits from being possessed by others.
The court found that the assignment provisions of the SBTA did not implicitly bar the credits from being possessed by anyone but the initial assignee. The negative-implication canon of statutory construction means that the express mention of one thing implies the exclusion of other similar things. However, the court said this canon does not apply without a strong enough association between the specified and unspecified items, according to common understandings of the specified items and the context in which they are used. In this case, the court said the Department offered no reason to think that the SBTA’s mention of “assign[ing]” and not “subsequently assign[ing]” credits suggests that the legislature meant to regulate all the ways that credits could be transferred so that when the legislature said only “assign” it was impliedly prohibiting other forms of transfer. Because there was no apparent contextual or circumstantial predicate for invoking the negative-implication canon, it was not applied.
The court said that assuming that the canon of strict construction applies to statutes regulating the possession of tax credits, it may be invoked only as a last resort. The directive to strictly construe certain tax statutes in favor of the government reflects a judicial preference against tax exemptions. However, that preference is not aimed at revealing the semantic content of a statute, and it sheds no light on the statute’s meaning. Courts will only employ the canon of strict construction if the statutory meaning fails to emerge after the ordinary rules of interpretation are applied. Because the SBTA’s ordinary meaning was discernible by examining the text and context of its relevant provisions, strict construction played no role in this case.
Accordingly, while the SBTA barred the Michigan bank from assigning the credits, no such assignment was attempted here. Rather, the Banking Code let the Texas bank acquire the credits “by operation of law.” The SBTA did not explicitly or implicitly interfere with the Banking Code’s operation. For these reasons, The court held the credits could lawfully pass to the Texas bank.
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