Michigan ~ Personal Income Tax: Apportionment Proper for Unitary Business

The Michigan Court of Appeals has held that an S corporation and a lower-tier general partnership were unitary, so that the shareholders/taxpayers properly apportioned their income to Michigan under the personal income tax laws. The S corporation made automotive electrical systems and acquired all the business assets of a German business, which was also a manufacturer and assembler of electrical distribution systems. The German business’s operating assets were moved into a partnership as part of the acquisition. The taxpayers received flow-through income from the S corporation and the partnership, which they apportioned.


Under the unitary business principle, for a taxpayer to use apportionment, there must be some sharing or exchange of value not capable of precise identification or measurement (beyond the mere flow of funds arising out of a passive investment or a distinct business operation) that makes apportionment reasonable. Reviewing applicable case law, the court observed that Michigan law does not allow separate entities to be treated as a unitary business in the absence of some common ownership at the entity level and that being owned by the same individual taxpayer is insufficient to trigger this relationship requirement. In this case, the court determined that the taxpayer could use the unitary business principle to apportion income. Furthermore, the unitary business principle does not exclude foreign entities. The personal income tax definition of “state” specifically includes foreign countries.


Finally, the two businesses met the test to be considered unitary: (1) under the economic realities, the regularly conducted activities of the businesses were related as they were both engaged in manufacturing and assembling electrical distribution systems; (2) under functional integration, the business functions were blended to promote a unitary relationship as component engineering, manufacturing and industrial engineering, cost estimating, business development, finance, and executive administration were shared; (3) management was centralized; (4) economies of scale were achieved with an expanded customer base, sharing of unique and proprietary processes, and improved financing terms; and (5) under substantial mutual interdependence, acquisition of the German business was essential for the S corporation to remain a Ford supplier. Accordingly, the lower court properly found that the taxpayers apportioned their income under the unitary business principle.


The Estate of Thomas M. Wheeler, et al., v. Department of Treasury, Michigan Court of Appeals, No. 302251, May 15, 2012, ¶401-677



Wolters Kluwer Tax and Accounting

Wolters Kluwer Tax and Accounting is a leading provider of software solutions and local expertise that helps tax, accounting, and audit professionals research and navigate complex regulations, comply with legislation, manage their businesses and advise clients with speed, accuracy and efficiency. Wolters Kluwer Tax and Accounting is part of Wolters Kluwer N.V. (AEX: WKL), a global leader in information services and solutions for professionals in the health, tax and accounting, risk and compliance, finance and legal sectors. We help our customers make critical decisions every day by providing expert solutions that combine deep domain knowledge with specialized technology and services. Wolters Kluwer reported 2016 annual revenues of €4.3 billion. The company, headquartered in Alphen aan den Rijn, the Netherlands, serves customers in over 180 countries, maintains operations in over 40 countries and employs 19,000 people worldwide. Wolters Kluwer shares are listed on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. Wolters Kluwer has a sponsored Level 1 American Depositary Receipt program. The ADRs are traded on the over-the-counter market in the U.S. (WTKWY).

All stories by: Wolters Kluwer Tax and Accounting