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TCF National Bank v. Department of Treasury

Court of Appeals of Michigan

December 12, 2019

TCF NATIONAL BANK, Plaintiff-Appellant,
v.
DEPARTMENT OF TREASURY, Defendant-Appellee. FLAGSTAR BANCORP, INC., Plaintiff-Appellant,
v.
DEPARTMENT OF TREASURY, Defendant-Appellee.

          Court of Claims LC Nos. 16-000191-MT, 16-000273-MT

          Before: Swartzle, P.J., and Markey and Redford, JJ.

          PER CURIAM.

         In these consolidated appeals, [1] TCF National Bank (TCF) and Flagstar Bancorp, Inc. (Flagstar), appeal by right the decisions of the Court of Claims granting the Department of Treasury summary disposition under MCR 2.116(C)(10) and affirming its franchise tax assessments derived by the Department based on its computation method for determining the franchise tax applicable to financial institutions under the Michigan Business Tax Act (MBTA), MCL 208.1101 et seq. For the reasons stated herein, we reverse.

         I. BACKGROUND

         A. TCF

         TCF is a federally chartered national bank with branches in Michigan and a wholly-owned subsidiary of TCF Financial Corporation, a Delaware holding company headquartered in Minnesota. It filed its Michigan Business Tax (MBT) return as the designated member of a unitary business group (UBG)[2] comprised of TCF Financial Corporation and its subsidiaries as permitted under the MBTA. For its MBT returns for the tax years in dispute, TCF identified each member of the UBG and on Form 4580 identified "elimination" entities used to account for intramember investments and adjustments for negative capital before eliminations. Using this method, TCF reported the UBG's total and ending taxable net capital, and remitted franchise taxes on behalf of the UBG.

         The Department initiated a business tax audit of TCF for the period between January 1, 2008 and December 31, 2009, to determine any difference between the correct franchise tax and TCF's reported tax liability. In computing the UBG's "net capital," which is the taxpayer's tax base for purposes of the franchise tax, the Department first determined each member's equity capital using the equity capital TCF reported on its federal return for each UBG member. If applicable, the Department then subtracted a member's investment in another member from the investing member's equity capital. "Goodwill" and "government obligations" were then subtracted from each member's remaining equity capital, resulting in each individual member's net capital. Next, the Department averaged each member's net capital for the current tax year by adding together the entity's net capital for the current tax year with its net capital for the preceding four tax years and divided that sum by five. If the member existed for less than five years the Department added the net capital for the number of years in existence and divided the sum by the number of years of its existence. The Department took the averaged net capital for each member and added the amounts together to derive the UBG's net capital. Using this methodology to determine TCF's tax base, the audit resulted in a franchise tax deficiency of $558, 794.

         After the Department issued its Final Assessment for the deficiency, TCF requested an informal conference to contest the calculation of its net capital. TCF challenged the Department's averaging methodology on the ground that the Department "inappropriately diluted" the investment elimination. TCF argued that the eliminations were not subject to averaging. The hearing referee disagreed. The Department accepted the hearing referee's recommendation and upheld its determination that the tax due for the period ending December 31, 2008 amounted to $323, 872.

         That prompted TCF to file its complaint alleging that the Department imposed an unlawful assessment and violated its equal protection rights by calculating the UBG's net capital as to each member, rather than calculating it for a "single person," i.e., the UBG, by failing to wholly eliminate investments into subsidiaries, in contravention of MCL 208.1511 and MCL 208.1265. TCF alleged that this treatment discriminated between taxpayers with subsidiaries and taxpayers without subsidiaries. Eventually, the parties filed cross-motions for summary disposition under MCR 2.116(C)(10). The Department asserted that it calculated TCF's tax base consistent with the applicable statutes. TCF argued that the Department's calculation conflicted with the applicable statutes because it should have added its net capital for the tax years 2004 through 2008 and divided that number by five, instead of averaging the net capital of each UBG member individually over the four-year period before 2008, depending on each member's years of existence, and then adding those averages together. The Court of Claims ruled in favor of the Department.

         The Court of Claims opined that a UBG is not a separate and distinct legal entity that keeps its own books and records. But because UBG individual members do, MCL 208.1265(1)'s reference to "the financial institution's net capital" "cannot refer to a UBG's net capital, despite that 'financial institution' may refer to a UBG." The Court of Claims interpreted MCL 208.1265(1) and (2) as referring to an individual member's net capital because it interpreted MCL 208.1265(2) as not referring to a UBG's net capital. The Court of Claims therefore concluded that the Department correctly applied MCL 208.1265(2) to the individual UBG members. The Court of Claims stated that, because a UBG is the creation of tax law, a UBG "has never been 'in existence' on its own," and if it interpreted the first sentence of MCL 208.1265(2) as referring to a UBG, the second sentence would be rendered nugatory. It concluded that the Department correctly interpreted MCL 208.1265(2) by applying it to individual UBG members which have separate and distinct legal existence.

         B. FLAGSTAR

         Flagstar, headquartered in Troy, Michigan, is a holding company for Flagstar Bank and serves as the designated member of a 13-member UBG. In 2013, the Department initiated a business tax audit of Flagstar's MBT returns to determine the difference, if any, between Flagstar's reported and correct franchise tax liability for tax years covered by January 1, 2008 through December 31, 2011. To determine the UBG's "net capital," or tax base for purposes of the franchise tax, the Department identified each individual UBG member's equity capital, averaged each entity's net capital, then determined the UBG's net capital by adding each of the members' averaged net capital. Using this methodology, the Department computed and assessed additional MBT liability which reduced the refund owed to Flagstar from approximately $10.2 million to $7, 026, 404.

         Flagstar disputed the calculation of net capital for the 2008 tax year and requested an informal conference on the ground that the amounts that Flagstar reported were consistent with the statute; whereas, the Department's methodology derived incorrect amounts. Flagstar argued that one of its members, created wholly out of the equity of the parent, should not have been subject to a three-year average for its years in existence; rather, it should have been subject to the UBG's five-year average. The hearing referee disagreed. The Department affirmed the referee's recommendation which prompted Flagstar to file its complaint in the Court of Claims alleging that the Department unlawfully assessed Flagstar for tax years 2008 through 2010 by averaging the net capital of each individual UBG member and adding those averages together to calculate the UBG's net capital without eliminating investments from one UBG member to another.

         The parties filed cross-motions for summary disposition under MCR 2.116(C)(10), each arguing that their calculation of net capital comported with the MBTA's financial institution franchise tax statutory provisions. The Court of Claims ruled in the Department's favor.

         Similar to its ruling in TCF's case, the Court of Claims based its ...


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