Opinion
No. 216850 and No. 216914.
Submitted January 9, 2001, at Lansing.
Decided January 16, 2001, at 9:15 a.m. Updated March 16, 2001.
Appeal from Court of Claims, LC No. 96-016485-CM.
Miller, Canfield, Paddock and Stone, P.L.C. (by Samuel J. McKim, III and Joanne B. Faycurry), for the plaintiff.
Jennifer M. Granholm, Attorney General, Thomas L. Casey, Solicitor General, and Kevin T. Smith, Assistant Attorney General, for the defendant.
Before: Sawyer, P.J., and Murphy and Fitzgerald, JJ.
In Docket No. 216850, defendant Department of Treasury appeals as of right the Court of Claims order granting plaintiff's motion for partial summary disposition, holding that 1990 PA 283 did not apply to the calculation of the Michigan income tax due on a nonresident shareholder's distributive income from a Michigan S corporation doing business in Michigan received before the act's effective date of December 14, 1990. In Docket No. 216914, plaintiff Anthony W. Wisne appeals as of right the order denying his claim for a refund of income taxes paid for the period of December 14 through December 31, 1990, on the ground that a nonresident shareholder's distributive share of a Michigan S corporation is subject to Michigan income taxes after the act's effective date of December 14, 1990. We affirm.
Plaintiff, a resident of Florida, is a shareholder in several Michigan businesses that are known as "S corporations" under § 1361 of the Internal Revenue Code, 26 U.S.C. § 1361. Plaintiff filed a claim for a refund of Michigan income taxes paid during the 1990 tax year on the ground that as a nonresident his 1990 distributive income from S corporations was exempt from Michigan income taxes pursuant to Bachman v Dep't of Treasury, 215 Mich. App. 174; 544 N.W.2d 733 (1996). In Bachman, the Court held that the income earned by nonresident S corporation shareholders was not taxable income under the preamendment version of § 110(2)(b) of the Income Tax Act (ITA), MCL 206.110(2)(b); MSA 7.557(2)(b).
However, § 110(2)(b) was amended by 1990 PA 283, immediately effective December 14, 1990. The provision was amended as follows:
(2)In the case ofFor a nonresident individual, estate, or trust, all taxable income is allocated to this state to the extent it is earned, received, or acquired in 1 or more of the following ways:
(a) For the rendition of personal services performed in this state.
(b) As a distributive share of the net profits ofan unincorporateda business, profession, enterprise, undertaking, or other activity as the result of work done, services rendered,andor other business activities conducted in this state, except as allocated to another state pursuant to the provisions of [MCL 206.111 to MCL 206.114] and subject to the credit provisions of [MCL 206.256; MSA 7.557(1256)] (Emphasis added.).
This is not the current version of the statute. A 1996 amendment, 1996 PA 484, removed the phrases "the provisions of" and "the credit provisions of" in subsection (2)(b). That change is not relevant to this appeal.
On August 13, 1996, defendant denied plaintiff's refund claim for 1990 on the ground that the adoption of 1990 PA 283 rendered a nonresident shareholder's distributive share of an S corporation subject to Michigan income tax for the entire tax year during which the amendment became effective.
Plaintiff filed the present action on November 8, 1996. On June 5, 1997, the Court of Claims ruled that 1990 PA 283 did not apply before December 14, 1990, and therefore granted partial summary disposition on this issue. Defendant appeals from this order in Docket No. 216850. On May 4, 1998, the Court of Claims issued an order holding that a nonresident shareholder's distributive income from an S corporation is subject to Michigan income taxes after December 14, 1990. Plaintiff appeals from this order in Docket No. 216914.
Docket No. 216850
Defendant treasury department argues that the Court of claims incorrectly determined that § 110(2)(b), as amended by 1990 PA 283, does not allocate to Michigan the distributive share of a nonresident shareholder's income before the act's effective date of December 14, 1990. A panel of this Court squarely addressed this issue of law in Alma Piston Co v Dep't of Treasury, 236 Mich. App. 365; 600 N.W.2d 144 (1999), and held that 1990 PA 283 is not applicable to the period before December 14, 1990. Because we believe that Alma Piston was correctly decided, we decline defendant's request to reject the holding in that decision and declare a conflict. Accordingly, we conclude that the Court of Claims properly determined that the amendment does not apply retroactively.
Docket No. 216914
Plaintiff contends that the Court of Claims incorrectly determined that a nonresident shareholder's distributive income from a Michigan S corporation after December 14, 1990, may be allocated to Michigan under the Michigan Income Tax Act (ITA), MCL 206.1 et seq.; MSA 7.557(101) et seq., as amended by 1990 PA 283.
I. The ITA before amendment by 1990 PA 283
Chapter 1 of the act defines "taxable income" as federally defined adjusted gross income, subject to a list of adjustments that include "[a]djustments resulting from the allocation and apportionment provisions of chapter 3." MCL 206.30(1); MSA 7.557(130)(1)(i). Chapter 3 of the act contains the following provisions:
Sec. 103. Any taxpayer having income from business activity which is taxable both within and without this state, other than the rendering of purely personal services by an individual, shall allocate and apportion his net income as provided in this act. [MCL 206.103; MSA 7.557(1103).]
Sec. 110. (1) For a resident individual, estate, or trust, all taxable income from any source whatsoever, except that attributable to another state under sections 111 to 115 and subject to section 255, is allocated to this state.
(2) In the case of a nonresident individual, estate or trust all taxable income is allocated to this state to the extent it is earned, received, or acquired:
(a) For the rendition of personal services performed in this state.
(b) As a distributive share of the net profits of an unincorporated business, profession, enterprise, undertaking, or other activity as the result of work done, services rendered, or other business activities conducted in this state, except as allocated to another state pursuant to sections 111 to 114 and subject to section 256. [MCL 206.110; MSA 7.557(1110).]
This is not the current version of the statute. A 1996 amendment, 1996 PA 484, deleted "the provisions of" following "under" and "the credit provisions of" following "subject to" in both §§ 110(1) and 110(2)(b).
Sec. 115. All business income, other than income from transportation services shall be apportioned to this state by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is 3. [MCL 206.115; MSA 7.557(1115).]
"Business income" is defined in Chapter 1 of the act as
income arising from transactions, activities and sources in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, rental, management and disposition of the property constitutes integral parts of the taxpayer's regular trade or business operations. [MCL 206.4(2); MSA 7.557(104)(2).]Bachman, supra, dealt with the preamendment version of § 110. In Bachman, the Court held that a nonresident shareholder's distributive income from an S corporation conducting business in Michigan is not taxable income that may be allocated to Michigan under the preamendment version of the ITA.
The parties propose two competing interpretations of § 110(2)(b), as amended by 1990 PA 283, for determining whether distributive income received by a nonresident individual is taxable income that may be allocated to Michigan. Defendant argues that distributive income from an S corporation is business income allocated to Michigan that must be apportioned in accordance with §§ 103 and 115 of the act. See Chocola v Dep't of Treasury, 422 Mich. 229; 369 N.W.2d 843 (1985) (income from an out of state S corporation is business income under applicable Department of Treasury rules and may be apportioned and thereby excluded from a Michigan resident's tax base). Defendant suggests that § 115 governs both residents and nonresidents and requires that all taxable business income, including income from an S corporation, be apportioned to this state according to the three part formula.
In contrast, plaintiff contends that under § 110(b)(2) income earned by a nonresident shareholder from an S corporation conducting business in Michigan is not taxable income that may be allocated to Michigan. He argues that § 110(1), which applies to residents, expressly references § 115 (addressing the apportionment of business income) while § 110(2), which applies to nonresidents, does not. Plaintiff cites Bachman. Supra, in support of the assertion that "a nonresident individual's distributive income from an S corporation conducting business in Michigan is not taxable income that may be allocated to Michigan." However, as discussed above, Bachman was based on the preamendment version of § 110(2)(b), which specifically allocated the taxable income of nonresidents to Michigan to the extent it is earned, received, or acquired as the distributive share of the net profits from an unincorporated business, profession, or activity conducted in Michigan. Because § 110(2)(b) has been amended to delete the word "unincorporated," Bachman's holding that "taxable income" does not include distributive income earned by a nonresident individual from an S corporation is not controlling in the present case.
Alma Piston, supra, addressed the issue of the retroactivity of the amendment of subsection 110(2)(b) and held that the amendment does not apply retroactively to the shareholders' distributive share of the corporations' net profits attributable to the period before December 14, 1990.
Neither Bachman nor Alma Piston squarely addressed the issue presented here; that is, whether a nonresident shareholder's distributive income from an S corporation is taxable income that may be allocated to Michigan under the ITA, MCL 206.1 et seq.; MSA 7.557(101) et seq.
However, both cases alluded in dicta to this precise issue. In Bachman, the Court noted that the 1990 amendment of § 110(2)(b) eliminated the word "unincorporated" before the word "business" and that the "legislative analysis for this bill [1990 PA 283] stated that this change was to make it clear that nonresidents could be taxed on their share of the net profits from a subchapter S corporation." Bachman, supra at 180-181, n 2. In Alma Piston, the Court noted that "as amended, subsection 110(2)(b) clearly imposes tax liability on petitioner's nonresident shareholders for their distributive share." Alma Piston, supra at 366-367.
The primary goal of judicial interpretation of statutes is to ascertain and give effect to the intent of the Legislature. Frankenmuth Mut Ins Co v Marlette Homes, Inc, 456 Mich. 511, 513; 573 N.W.2d 611 (1998). If reasonable minds can differ with respect to the meaning of a statute, judicial construction is appropriate. Adrian School Dist v Michigan Public School Employees' Retirement System, 458 Mich. 326, 332; 582 N.W.2d 767 (1998). Tax statutes are construed most strongly against the government where there is doubt over their interpretation. Comerica Bank-Detroit, supra at 92.
Here, the Legislature amended § 110(2)(b) to eliminate the word "unincorporated." A change in a statutory phrase is presumed to reflect a change in the meaning. Eaton Farm Bureau v Eaton Twp, 221 Mich. App. 663, 668; 561 N.W.2d 884 (1997), remanded 457 Mich. 887; 586 N.W.2d 232, on remand 231 Mich. App. 622; 588 N.W.2d 142 (1998). By its plain meaning, § 110(2)(b) clearly imposes tax liability on the distributive share of the net profits of "a business, profession, enterprise, undertaking, or other activity as the result of work done, services rendered, or other business activities conducted in this state, except as allocated to another state pursuant to the provisions of sections 111 to 114 . . ." Because the language of the statute is clear, judicial construction is not permitted. Accordingly, a nonresident shareholder's distributive income from an S corporation is by definition taxable income allocated to Michigan after December 14, 1990. Because the income is business income, Chocola, supra at 243-245, the income is, however, subject to apportionment pursuant to § 115. MCL 206.103; MSA 7.557(103) (any taxpayer having income from business activity that is taxable both within and without Michigan must apportion the income as provided in the remainder of the act.)
Plaintiff's argument that a nonresident's business income is not taxable in Michigan because § 110(2)(b) makes no reference to § 115 ("all business income . . . shall be apportioned to this state . . .") is misplaced.
By an ordinary reading of Chapter 3 of the act, §§ 110(1) and (2) govern the general allocation of business and nonbusiness income for residents and nonresidents to Michigan by describing the sources of taxable income under Michigan law. Section 115 then governs the apportionment of the taxable business income that was identified as taxable income under § 110, based on the formula provided. In other words, sources of taxable income are defined by § 110, and § 115 divides the business income between Michigan and other states. [ Bachman, supra at 181-182.]
"Allocate" is used to direct taxable income to one state, and "apportion" is used to divide taxable income among states. Bachman, supra at 182, n 4.
As originally drafted in 1967 PA 281, neither § 110(1) nor 110(2) referenced § 115. As originally drafted, § 110(1) read as follows:
In the case of a resident individual, estate, or trust all taxable income from any source whatsoever, except that allocated to another state under the provisions of sections 111 to 114 and subject to the credit provisions of section 255, is allocated to this state.
Section 110(2) read as follows:
In the case of a nonresident individual, estate or trust all taxable income is allocated to this state to the extent it is earned, received or acquired:
(a) For the rendition of personal services performed principally in this state.
(b) As a distributive share of the net profits of an unincorporated business, profession, enterprise, undertaking or other activity as the result of work done, services rendered and other business activities conducted in this state, except as allocated to another state pursuant to the provisions of sections 111 to 114 and subject to the credit provisions of section 256.
It would have rendered § 115 surplus and led to an absurd result to hold that § 115, requiring the apportionment of business income, applied to neither residents nor nonresidents as originally drafted. However, strict application of the original language of § 110(1) could lead to the implication that all of a resident's income from any source must be allocated to Michigan unless specifically allocated to another state under sections 111 to 114. Hence, a resident could arguably have ignored the attribution provisions of § 115 and allocated all business income to Michigan. The Legislature, apparently recognizing the potential for improper allocation of "business income," amended § 110(1) by excepting business income attributable to another state and expressly incorporating § 115. 1969 PA 332. The addition of a reference to § 115 made it clear that even for residents, "business income" was subject to apportionment pursuant to § 115.
A similar amendment for § 110(2) was not necessary because § 110(2) limits the sources of income that are allocated to Michigan. For nonresidents under § 110(2)(b), only specific "business income" is allocated to Michigan. Consequently, unlike § 110(1), § 110(2) could not be read to require allocation of all income to Michigan, and no conflict existed between § 110(2) and §§ 103 and 115 as originally drafted. Thus, it was unnecessary to add a reference to § 115 when the ITA was amended by 1969 PA 332.
Affirmed.