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MICHIGAN TAX LAW JOURNAL
Volume 9
UNIVERSITY OF DETROIT
January- March 1983
Issue Number 1
TABLE OF CONTENTS
SECTION MATTERS
Members of Section Council . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(i)
Agenda of Taxation Section Council Meeting
January25, I983 ................................... .
Minutes of Taxation Section Council Meeting
January 25, I983....................................
3
Agenda ofTaxation Section Council Meeting
March 24, I983. . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . .
8
Minutes of Taxation Section Council Meeting
March24, I983.....................................
II
ANNOUNCEMENT- CPA/ Attorney ConferenceJune9, I983.......................................
I8
ARTICLES
The Jurisdiction of the Michigan Tax Tribunal
by Daniel Misteravich . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
I9
Tax Questions as a Proper Subject of Action for
Declaratory Judgment by Myron B. Boloyan. . . . . . . . . . . . . .
23
NEW DEVELOPMENTS
Legislative Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30
Case Digests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3I
School of Law
651 E. Jefferson Avenue, Detroit, Michigan 48226
Telephone: (313) 961-5444
This first issue of Volume 9 of the Michigan Tax Law
Journal continues our service of providing summaries of deci
srons-published by the Michigan Tax Tribunal. We hope to continue this service but our efforts may be temporarily curtailed
since the Tribunal has not published opinions for many of the
cases which it has decided. We are currently considering alternatives for providing the Tribunal with assistance in publishing
more of its opinions and will keep our readers informed regarding further developments in this regard.
We regret that in Issue 3 of Volume 8 the address of
Robert B. Stevenson, one of the authors of "1982 Pension Tax
Law Changes" was incorrectly identified. Mr. Stevenson, who is
a partner with Hill, Lewis, Adams, Goodrich and Tait, practices
in the Firm's Ann Arbor office located at 211 E. Huron, Suite 1,
Ann Arbor, Michigan 48104. Mr. Stevenson would welcome any
questions or comments concerning the Journal article. His telephone number is (313) 663-2100.
-----We are pleased that a number of readers have responded
to recent articles and invite all of the Tax Section members to
continue their comments, observations, criticisms and suggestions
for topics to the Journal staff, c/o The University of Detroit
School of Law, 651 East Jefferson Avenue, Detroit, Michigan 48226.
EUGENE A. GARGARO, JR.
Vice Chairperson and
Journal Chairperson
PATRICK A. KEENAN
Professor of Law
and Editor in Chief
C. KIM SHIERK
Managing Editor
STAFF
Peggy Appelle
Steven M. Armstrong
Richard Barr, Esq.
Mary Courtenay
Loretta Lewins-Peck
Stewart Mandell, Esq.
Daniel J. Misteravich
Daniel J. Pierce
MYRON B. BOLOYAN
Articles Editor
MICHIGAN TAX LAW JOURNAL (U.S.P.S. No. 093930) Vo. 9 No. 1
Jan-Mar 1983.
Published quarterly by the Taxation Section of
the State Bar of Michigan. Subscription price $10.00 per year.
Second Class postage paid at Detroit, Michigan. Postmaster:
Send Form 3579 to Publication Office c/o University of Detroit
School of Law, 651 East Jefferson Avenue, Room 115, Detroit,
Michigan 48226
TAXATION SECTION
STATE BAR OF MICHIGAN
CHAIRPERSON
LAWRENCER. VANTIL
3066 City National Bank Building
Detroit, Michigan 48226
(313) 961-1900
VICE-CHAIRPERSON
SECRETARY-TREASURER
EUGENE A. GARGARO, JR.
400 Renaissance Center, 35th Floor
Detroit 48243
(313) 568-_6687
ANDREW M. SAVEL
Detroit Bank & Trust Co.
211 W. Fort Street
Detroit 48226
(313) 222-3577
COUNCIL
C. RICHARD ABBOTT
1840 Buhl Building
Detroit 48226
(313) 963-2500
DONALD A. LANSKY
1400 American Center
Southfield 48034
(313) 355-5000
EDWARD B. GOODRICH
800 Union Bank Bldg.
Grand Rapids 49503
(616) 451-8251
SAMUEL J. McKIM, III
300 Wabeek Bldg.
Birmingham 48012
(313) 259-7700
STEPHEN R. KRETSCHMAN
900 Old Kent Bldg.
Grand Rapids 49503
(616) 459-6121
PETER S. SHELDON
121 E. Allegan St.
Lansing 48933
(517) 371-1730
SANFORD A. KLEIN
1400 N. Woodward Ave.
Ste. 100
Birmingham 48011
(313) 355-3600
WILLIAM J. SIKKENGA
1060 Ford Motor Co. WHQ
The American Center
Dearborn 48121
(313) 322-3534
SUSAN WESTERMAN
500 City Center Bldg.
Ann Arbor 48104
(313) 761-3780
EX-OFFICIO
ALLAN J. CLAYPOOL
313 S. Washington Square
Lansing 48933
(616) 568-8311
TAXATION SECTION
STATE BAR
OF MICHIGAN
CHAIIIPERSON
tAWRENCER.VIlNTIL
>066CITYNAfi0NAlBI<Bl00
January 20, 1983
TAXATION SECTION COUNCIL MEETING
C~~~~;~~~BOTT
EDWARD B. GOODRICH
Date:
January 25, 1983
OOOUNIONBK.UlOO
STEPHENII.KIIETSCHMAN
IICOOlOKENTBlDC)
Time:
9:30 a.m.
Place:
University Club
Detroit, Michigan
SANFORD A. KLEIN
I<OilNW000WAA0AVE
DONALDM.I.ANSKV
::.~~~t~:~~· Ill
P:!:e;~:H~;;LgoN
WILLIAMJ.SIKKENBA
"'"""OAO"OlORCO.WHO
s~J¥:l~~~!!~~N
A.
Planning session: Eighth Annual Tax Institute
9:30 - 10:30
Donald M. Lansky
B.
Minutes of October 11, 1982 meeting
c.
D.
Treasurer's Report
Committee Reports:
1.
Eighth Annual Federal and Michigan Tax Institute Donald M. Lansky
2.
Annual Taxation Section Meeting - Stephen R.
Kretschman
3.
Michigan Taxation Essay Contest - Susan s.
Westerman
4.
Michigan Tax Law Journal - Eugene A. Gargaro, Jr.
5.
Tax Practice and Procedures Manual - Lawrence R.
Van Til
6.
Michigan Tax Legislation - Peter s. Sheldon
7.
Employee Benefits Committee -Stephen I. Jurmu
8.
Inheritance Tax - Andrew M. Savel
9.
Single Business Tax - Samuel J. McKim, I I I
10. Tax Court Luncheon - William Sikkenga
11. State of the Law: Annual Bar Meeting - Donald Lansky
12. Joint Seminar with MACPA - Richard Abbott
13. Publication of Michigan Tax Tribunal decisions Eugene Gargaro, Jr.
14. Tax Tribunal Judge candidate review - Sanford Klein
Tax Council Members
January 20, 1983
Page - 2 -
E.
Project Reports:
1.
The Michigan Bar Journal:
Lawrence R. Van Til
2.
Advice to Michigan Tax Tribunal: RE:
Representation of Taxpayers by Non-Attorneys -
Taxation Issue -
Samuel J. McKim, III
F.
3.
4.
5.
Tax Court Pro Se Program - Edward B. Goodrich
Speaker's Bureau - Richard Abbott
Survey of Section Membership - Allan Claypool
6.
Michigan Tax Law and Regulation Review - Samuel
McKim, III
7.
Federal Tax Legislation and Regulation Review Allan Claypool
Bar Liaison Reports:
Central Region IRS: November 4-5, 1982
1.
CPA's:
2.
a.
Federal Tax committee - Stephen Kretschman
b.
State and Local Tax Committee - Andrew Savel
3.
4.
State Bar Sections:
a.
Administrative Law - Peter Sheldon
b.
Corporation/Finance/Business Law - Richard
c.
Abbott
Real Property - Donald Lansky
Third Annual Conference of State Bar Tax
Sections:
October 22-23, 1982 - Stephen Kretschman
G.
New Business
H.
Next council Meeting
cc:
Mr. Robert Stork
MICHIGAN TAX LAW JOURNAL
MINUTES OF REGULAR MEETING OF
COUNCIL OF TAXATION SECTION
OF STATE BAR OF MICHIGAN
The Council of Taxation Section met at the University Club, Detroit,
Michigan, January 25, 1983 at 10:30 A.M.
COUNCIL MEMBERS PRESENT
C. Richard Abbott
Eugene A. Gargaro, Jr.
Edward B. Goodrich
Stephen R. Kretschman
Sanford A. Klein
Donald M. Lansky
Samuel J. McKim, III
Andrew M. Savel
PeterS. Sheldon
William J. Sikkenga
Lawrence R. Van Til
Susan Westerman
COUNCIL MEMBER ABSENT
AllanJ. Claypool
NON-MEMBER PRESENT
A us tin Andersen
MINUTES
Reading of the minutes of the October 14, 1982 regular meeting of
the Council was waived. Copies of the minutes had been circulated to each
member of the Council.
;I>
I''
l!l
II
. 1,:,
,I'
1
TREASURER'S REPORT
Mr. Savel reported that receipts from dues during October, November and December, amounted to $17,610.00, while expenses amounted to
$359.67 for the same period. The fund balance as of 12/30/82 amounted
to $25,442.34.
Mr. Austin Andersen requested and received formal approval to
reimburse travel expenses and pay honorariums of up to $500 each to
speakers for the Eighth Annual Tax Institute.
COMMITTEE REPORTS
Eighth Annual Tax Institute. Mr. Lansky reported that the Institute will take place on October 13-14, 1983 at the Michigan Inn. The
Thursday, October 13 program will consist of an afternoon session only
with discussions by State Treasury officials, and panel discussions on the
3
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''I'
'.1~ ·.:
,,
JVJICHIGAN TAX LAW JOURNAL
Michigan inheritance tax and possibly (Subchapter) S Corporations.
Friday, October 14 will cover various federal tax issues. Lunch will be
included for all registrants.
Annual Taxation Section Meeting. Mr. Kretschman reported
that there will be presentations made by representatives from various tax
divisions of the Michigan DepartmentofTreasury.
~
~llil
Michigan Taxation Essay Contest. Mrs. Westerman reported
that notices have been sent to various universities and professors. April
15, 1983 is the deadline for submission of entries.
Michigan Tax Law Journal. Mr. Gargaro reported that the third
quarter Journal was being sent and that the fourth quarter's issue would be
finalized by the middle of February.
Mr. Gargaro noted that only portions of the Tax Tribunal opinions
are printed and that only a few of the opinions are published. Because of
the length of the available opinions, a printing of the opinions in their entirety would be prohibitive. However, there could be 3-4 opinions published per quarter in abbreviated form.
During the leave of absence of Editor in Chief, Pat Keenan, a U-D
student editorial group is acting iri his place and Mr. Keenan continues to
review the work of the group.
·
Tax Practice and Procedures Manual. Mr. Van Til reported that
publication and distribution of the Manual is scheduled for May 1. Brochures will be sent out soon.
Michigan Tax Legislation. Mr. Sheldon will be meeting with Syd
Goodman to discuss the feasibility of obtaining proposed tax legislation
prior to its introduction in order to review and comment accordingly.
Pete Sheldon, Sam McKim and Steve Kretschman will meet to discuss the coordination of Michigan tax law to Federal tax law.
Inheritance Tax. Mr. Savel reported on the successful effort and
passage of HB 5790 which amended the Michigan inheritance tax to provide for an unlimited marital deduction. He officially thanked all attorneys,
CPA's and trust officers who assisted with the calls and letters. In
particular, he cited the efforts of Co-Chairperson, Sue Westerman; Representative William Bryant, sponsor of the Bill; Syd Goodman arid Francis
Gould, Department of Treasury; and Die Dorney.
Mr. Savel also reported on two other new acts: Public Act 378, dealing with the elimination of safe deposit box seatings and the free accessibility to safe deposit boxes by surviving joint tenants; and Public Act 454 dealing with the approval of insurance and death benefit proceeds to a testamentary trust and the necessity of accounting for these benefits.
Single Business Tax.
Mr. McKim reported on the following new
pieces of legislation:
P.A.
388 updating reference to the Internal Revenue Code.
4
d!
W
JVIICHIGAN TAX LAW JOURNAL
P.A.
393 allowing employers a credit against the SBT for increase
in unemployment taxes.
P.A.
414 dealing with the exemption from "compensation" of
amounts paid for insurance for 'which employees are
beneficiaries.
P.A.
484 expanding the definition of "compensation" to include
payments under employer sponsored health and welfare and
non-insured benefit plans.
I
.I
1',1
i•
Mr. McKim also reported that the Department of Treasury has in
effect acquiesced in the Grace case, which allows all Michigan affiliated
companies to be consolidated for tax return purposes.
Tax Court Luncheon. Mr. Sikkenga reported that there were 45
registrations for the luncheon honoring new appointee, Justice Mary Ann
Cohen. The next luncheon had not been scheduled as yet.
Joint Seminar with MACPA. Mr. Abbott reported that the joint
seminar will be held on Thursday, June 9, 1983 at the Silverdome. Topics
to be covered include:
Tax Exemption for Non-Profit Entities
Michigan Non-Profit Corporation Act
Types of Entities for Investment in Real Estate
Tax Consideration of Purchase/Sale of
Businesses
Change of Residency
Cafeteria Plans
Oil/Gas Developments
New Pre parer Penalties
Tax Tribunal Judge Candidate Review. Mr. Klein reported that
he had discussed the candidate review issue with Mr. Michael Franck, Executive Director of the Michigan Bar Association. Mr. Franck stated that
the Judicial Qualifications Committee had requested a response from the
Governor concerning appointments to the Tribunal. No response had
been received yet.
Mr. Klein requested Mr. Franck to present to the Board of Commissioners at their next meeting (2118) a reaffirmation of the Tax Council's
desire for the Tax Tribunal. Mr. Klein then sought and received the Council's formal support for this action.
PROJECT REPORTS
Michigan Bar Journal: Taxation Issue. Mr. Van Til reported
that the February issue will be devoted to tax practice. Articles will be published authored by Mr. Van Til, Steve Jurmu, Allan Claypool and Gene
Gargaro.
Representation of Taxpayers by Non-Attorneys. Mr. McKim
reported that the Council's letter had been sent to the Tax Tribunal but that
no response had been received yet.
5
11!::
I
MICHIGAN TAX LAW JOURNAL
Speaker's Bureau. Mr. Abbott reported that a Speaker's Bureau
had been put together by the State Bar Association but that it was not upto-date. This list should be reviewed for its effectiveness and Mr. Abbott
will continue his efforts.
It ·II
lf . l~
Survey of Section Membership. Mr. Abbott reported that he and
Mr. Claypool are currently seeking questionnaires from other states' councils for appraisal.
BAR LIAISON REPORTS
Central Region IRS. The report on the meeting which occurred
on November 4-5, 1982 will appear in the next issue of the Tax Law
Journal.
CPA's- State and Local Tax Committee. Mr. Savel reported on the
last meeting which occurred on January 21. In addition to the legislation
reported by Mr. McKim, the attendees commented on the State's delay in
making refunds on last year's returns. Several reported on the State's requests for apparently unrelated information before processing refund
requests. Subsequent telephone objections and requests by preparers for
facilitated handling met with good success.
Third Annual Conference of State Bar Tax Sections. Mr.
Kretschman reported on the Sections meeting which occurred on October
22-23, 1982. He reported on the various topics covered and observed that
most tax sections concentrate heavily on Federal tax problems. There is
some lobbying effort made but not to any great extent.
~'i.·Xl·'.·
·~~
NEW BUSINESS
Change of Domicile. Mr. McKim reported that the State of Michigan requires withholding of state income tax on deferred compensation
paid to non-residents, if the recipients were Michigan residents when they
were employed. The Department of Treasury considers such payments as
taxable.
Mutual Funds/U.S. Obligations/Michigan Taxation. Mr. Savel
reported that the Michigan Department of Treasury currently takes the following position on mutual funds for income tax purposes:
1.
Municipal mutual funds are non-taxable regardless of the states involved in the mutual fund holdings. Thus, non-Michigan municipal interest from mutual funds are not taxable.
2.
U.S. Government interest received through mutual funds are
taxable.
Michigan will also tax interest on U.S. obligations which are individually owned, if the language in the document which authorized the issuance
of the obligation did not specifically exempt state and local taxation.
6
t~
I
TAXATION SECTION
OF MICHIGAN
STATE BAR)
:.\
CHI<IfiPERSON
~AWAENCEA VAN TIL
:o<>\6<:<;• '·~'"'·~CA< ~cO.o
VICE-CHAIRPERSON
EUG~NEA. CAACAAO,JR
).ITHfCO<'~
or,oAEN.,SO~NC.~<NfliR
March 11, 1983
SECREl'ARV-TREAS\J~ER
AfiiDREWM.SIWtL
Ol:fH'>tf!lA~< \n'J$fCI)
TAXATION SECTION COUNCIL MEETING
COUNCIL
C.RICiiAADA880H
DEti>QOT«I"l
EllWAROB.GOOOI\lCII
~,.._~DPAt>lOS<!>;ol
s~:~~?:~~:r~SCHMAN
SANFOROA.ItUIN
Date:
March 24, 1983
Time:
4:00 p.m.
Place:
Conference Room, Bassey, Selesko & Couzens, P.C.,
1400 American Center, Southfield, Michigan
PUEAS.SHHDON
CANS•h~
<o;'J
Wlll!AMJ.SIKKENGA
IO«·>O•Oo.hH.-,~CO.I"jH!)
AGENDA
SUSANW~STEA!.IAN
AN" •~..o•
,,,,.
EX·OFFICIO
AlLANJCL.O.YPOOL
l•Js w••"'"'•'O~ •o~•••
A.
Minutes of January 25, 1983 meeting
B.
Treasurer's Report
c.
Committee Reports:
l.
Eighth Annual Federal and Michigan Tax Institute
- Donald M. Lansky
2.
Annual Taxation
Kretschrnan
3.
Taxation
Michigan
Westerman
4.
Michigan Tax Law Journal - Eugene A. Garga!o, Jr.
5.
Tax Practice and Procedures Manual Van Til
6.
Michigan Tax Legislation - Peter S. Sheldon
7.
Employee Benefits Committee - Stephen I. Jurmu
8.
Inheritance Tax - Andrew r-1. Savel
Section
Essay
11eeting
Contest
Stephen
R.
Susan
s.
Lawrence R.
Agenda
March 24, 1983 Council Meeting
Page TWO
9.
Single Business Tax - Samuel J. McKim, III
10.
Tax Court Luncheon - William Sikkenga
11.
State of
Lansky
12.
Joint Seminar with MACPA - Richard Abbott
13.
Publication of Michigan Tax Tribunal decisions
Eugene Gargaro, Jr.
14.
Tax
the
Tribunal
Law:
Annual
Judge
Bar
candidate
Meeting
-
review
E.
-
Sanford
Klein
D.
Donald
Project Reports:
1.
Tax Court Pro Se Program - Edward B. Goodrich
2.
Speaker's Bureau -Richard Abbott
3.
Survey of Section Membership - Allan Claypool
4.
Michigan Tax Law and
McKim, III
5.
Federal Tax Legislation and
Allan Claypool
Regulation
Review
Regulation
-
Samual
Review
-
Bar Liaison Reports:
1.
2.
CPA's:
a.
Federal Tax Committee - Stephen Kretschman
b.
State and Local Tax Committee -.Andrew Savel
State Bar Sections:
a.
b.
Administrative Law - Peter Sheldon
Corporation/Finance/Business Law
c.
Abbott
Real Property - Donald Lansky
Richard
Agenda
March 24, 1983 council Meeting
Page Three
F.
New Business:
1.
Lawpac mailer (see attachment)
2.
Release of Section mailing list
3.
Com~issioners'
a.
b.
4.
request (see attachment)
Composition of MTT
attachment)
HB603l and HB6032
Ed
Representative Assembly resolution
- Ed Goodrich (see attachment)
10
Goodrich
(see
(May 14, 1983)
i
MICHIGAN TAX LAW JOURNAL
MINUTES OF REGULAR MEETING OF
COUNCIL OF TAXATION SECTION
OF STATE BAR OF MICHIGAN
The Council of Taxation Section met in the conference room at
Bassey, Selesko & Couzens, P.C., Southfield, Michigan, March 24, 1983
at4:00 P.M.
COUNCIL MEMBERS PRESENT
C. Richard Abbott
Allan J. Claypool
Edward B. Goodrich
Sanford A. Klein
Donald M. Lansky
Samuel J. McKim, III
Andrew M. Savel
PeterS. Sheldon
William J. Sikkenga
Lawrence R. Van Til
Susan Westerman
COUNCIL MEMBERS ABSENT
Eugene A. Gargaro, Jr.
Stephen R. Kretschman
MINUTES
Reading of the minutes of the January 25, 198J regular meeting of
the Council was waived. Copies of the minutes had been circulated to each
member of the Council.
TREASURER'S REPORT
Mr. Savel reported that receipts from dues during January and
February, 1983 amounted to $461.00 while expenses amounted to
$5,822.27 for the same period. The fund balance as of 2/28/83 amounted
to $20,081.07.
COMMITTEE REPORTS
Eighth Annual Tax Institute. Mr. Lansky discussed the Institute
which will take place on October 13-14, 1983 at the Michigan Inn. He presented the Council members with the following outline of topics:
Michigan Taxes- Current Developments and Issues
Panel Discussion pertaining to new Michigan Inheritance
Tax Act including pre and post death planning
considerations
11
I
MICHIGAN TAX LAW JOURNAL
Subchapter S Revision Act of 1982
. Federal Tax Update-individual, corporate and partnership developments
Tax Planning and Consequences of Marital Separation and
Divorce Alimony, child support, dependency exemptions
and property settlements. Survey of recent developments
and income, gift and estate tax planning opportunities and
considerations.
Estate Planning After TEFRA
Implications of and planning considerations
for the $100,000 estate tax exclusion for distributions from qualified plans. Post-mortem
income and estate planning opportunities,
including disclaimers and deferral of payment
of estate taxes. Planning and survivor's estate.
Practical Problems in Designing and Amending Retirement
Plans After TEFRA
Contribution and benefit limitations,
including, COLA, integration and combination
plans.
Top 'Heavy Plans-definitions, contributions,
vesting and benefit requirements.
Loans, Withdrawals and Distributions
Tax Incentives With Respect to Technology
Research and development activities
Acquiring, using and disposing of equipment
- ACRS, ITC, safe harbor and finance leases
Valuation Considerations in Tax Planning
Situations where valuations are important estate and gift tax returns; buy-sell
agreements; business acquisitions, etc.
Planning for and use of experts
Recent Developments
Professional Service Businesses - Future ofP.C.'s
Should professionals incorporate or stay
unincorporated
Is there parity?
Impact of Section 269A and "tax free"
liquidations
Annual Taxation Section Meeting. Mr. Van Til reported for Mr.
Kretschman that the annual meeting will consist of a liaison with the Detroit District Office representatives. In addition, Mr. Joel Gerber will be a
featured speaker. Mr. Gerber is with the Deputy Chief Council's Office of
the IRS in Washington. Mr. Gerber has suggested that his presentation be
on open topics and that he is willing to take suggestions on specific topics.
Mr. Van Til then invited the group to make suggestions at the next Council
meeting. The Council agreed to reimburse the speaker for travel expenses
which will be paid through ICLE.
12
MICHIGAN TAX LAW JOURNAL
Michigan Tax Law Journal. Mr. Van Til reported for Mr. Gargaro that the third quarter issue is at the printers and will be circulated
within one week. It will contain articles on pension law changes, other
legislative updates and Allan Claypool's letter regarding Federal tax
legislation.
The fourth quarter issue is in the final proof stage. April 15 deadline
has been set for circulation. The current Editor, Patrick Keenan, met with
Mr. Gargaro and they appointed C. Kim Shierk as student editor. There
was a discussion regarding Mr. Keenan's continuing role as editor of the
Journal. Mr. Van Til will discuss the matter with Mr. Gargaro.
Mr. Sheldon reported that the Administrative Law Section requested
that their scheduled meeting of April22 be inserted in the next issue of the
Journal. Council members approved this notification.
Tax Practice and Procedures Manual. Mr. Van Til reported that
Ernie Goetz was working hard and finalizing the Manual. Mr. Murphy's
and Mr. Van Til's sections were still to be completed. The May 1 deadline
for publication is still scheduled.
Michigan Tax Legislation. Mr. Sheldon reported that he had met
with Mr. Syd Goodman regarding the development of a procedure whereby the state treasurer's office would forward questionnaires of proposed
legislation for the Council to review. Mr. Goodman stated that the idea was
a good one, had been done in the past and that it will be reinstated. Mr.
Sheldon stated that he had already begun receiving proposed legislation.
Mr. Goodman also stated that he would forward repr~sentative proposals
of others whenever possible. Mr. Sheldon will meet with Mr. McKim and
Mr. Kretschman to review procedures and make recommendations to the
Council regarding review of future proposed legislation.
Employee Benefits Committee. Mr. Claypool reported for Mr.
J urmu that there were 64 attendees at the December 1, 1982 meeting
during which Elaine Worden reported on TEFRA legislation and its
impact on qualified plans. Mr. Claypool also reported that as of May 1,
1983, Cincinnati, Ohio will become the key district for EPEO matters.
On April12, 1983 the Employee Benefits Section will host a meeting
at the Dearborn Hyatt during which Ira Kohen and an associate will discuss
selected TEFRA issues and Sec. 401 (k) plans. They will also discuss new
procedures of the Cincinnati office. Mr. Claypool estimated that the cost of
reimbursing speaker's expenses would be in the $700 to $1,000 range.
The Council agreed that previous authorization for Employee Benefit
speakers was sufficient to cover these expenses.
Inheritance Tax. Mr. Savel reported that there were no new developments on the inheritance tax as amended in 1982. However, he stated
that Senator Faxon was still interested in proposing a complete revision of
the inheritance tax act Proposed language had been previously distributed
to members of the Council who noted many deficiencies in the proposed
language. Council agreed that the language should be totally rewritten after
which time the Council would review and make suggestions.
MICHIGAN TAX LAW JOURNAL
Tax Court Luncheon. Mr. Sikkenga reported that the last luncheon
on January 25, 1983 honoring Judge Mary Ann Cohen was attended by 42
members of the Section, plus IRS representatives. Judge Cohen commented on her observations as a new judge of the Tax Court. The next luncheon
will occur on May 10, 1983 at the University Club honoring Judge H.
Chavot.
Joint Seminar with MACPA. Mr. Abbott reported that a joint
seminar will occur on Thursday, June 6, 1983 at the Pontiac Silverdome.
The following topics will be covered:
Current IRS Problems With Non-Profit Organizations
Highlights of the New Michigan Non-Profit Corporations Act
Factors in Determining Choice of Entity for Investing in
Real Estate
Tax Considerations for Purchase/Sale of a Business
Leasing, Investment Interest & Other Current Topics
Selected Current Oil and Gas Tax Developments
Tax and Estate Planning Considerations When Moving Into
or Out of a State
Cafeteria Plans:
Plans
Qualification of Basis Plan and Underlying
Professional Responsibility Including Preparer Penalties and
Tax Opinion Letters
Tax Tribunal Judge Candidate Review. Mr. Klein reported that
the Board of Commissioners had received our request regarding candidate
review, but advised us not to proceed at this time. It was felt that time was
needed to study various matters with the new Governor. They also suggested that the Council proceed on a voluntary basis for judicial candidates
review. Council then appointed a voluntary committee consisting of Mr.
Klein, Ed Goodrich, Sam McKim and Pete Sheldon.
PROJECT REPORTS
Tax Court Pro Se Program. Mr. Goodrich reported on similar programs from three other locations; Los Angeles, S.M.U. and the State of
Florida. The latter two failed. He reported that Florida's failure was due in
large part to the lack of complete support from all of the courts involved. It
was Mr. Goodrich's conclusion that the success of such a program
depends upon the complete support of the Tax Court and the availability of
statistical data from the IRS. Mr. Goodrich will complete his report and
make recommendations at the next meeting.
Speaker's Bureau. Mr. Abbott reported that Michigan Bar Association has a speaker's bureau covering some 80 topics. Sharon Wilson, a
staff member at the MBA told Mr. Abbott that the bureau's list of speakers
14
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MICHIGAN TAX LAW JOURNAL
is updated every two years. There is an average of 30 to 40 inquiries annually for speakers on various topics. Mr. Abbott's recommendation was that
a separate effort would be redundant. Council members agreed and no further action will be taken.
Survey of Section Membership. Mr. Claypool reported that he received from the American Bar Association copies of surveys sent by the
Probate and Trust Council but he did not find them very helpful. He suggested that questionnaires be distributed to section members at the Eighth
Annual Institute and at their annual meeting to the members present.
Michigan Tax Law and Regulation Review. Mr. McKim reported
that he sends monthly requests to the SBT representatives. The SBT Section is asserting more jurisdiction over foreign corporations while at the
same time attempting to minimize allocation of losses to Michigan on the
basis that other states could tax such loss corporations. There was some discussion about a recent Tennessee decision regarding the taxation of banks
and particularly the inclusion of U.S. government obligation interest. The
SBT which has included such interest will no longer apply. Michigan banks
have indicated that they will apply for refund of past taxes and the SBT has
indicated that it will honor such requests. The amounts of refund however
will be very substantial and probably more than the state can afford at this
time. Some suggestions have already been made regarding increases in
other taxes such as the intangibles tax.
The Real Property Section is currently engaged in reacting to a 1982
bill which amended the method of valuation of real estate which was subject to a long term uneconomic lease. The Real Property Section asserts
that the bill was passed without a proper hearing and that a legislative
proposal be made in 1983 on which the public will be allowed to comment.
Mr. McKim recommended that the Tax Council follow up on the Real
Estate Section's recommendation and will draft a letter accordingly.
A discussion then ensued regarding the faih.)re of the Tax Tribunal
to follow its published rules. A suggestion was made that the Tax Council
send a letter to the Tax Tribunal that either the rules be enforced or that
they be modified according to actual practice. Mr. Van Til will draft such
letter with copies of the Administrative Law Section.
Federal Tax Legislation. Mr. Claypool presented the council
members with a suggested letter urging repeal of the Generation Skipping
Tax along with a list of legislators to whom the letter should be sent. A
motion to attempt such repeal was unanimously approved.
BAR LIAISON REPORTS
CPA's.
committees.
No action regarding federal or state and local taxation
State Bar Sections- Sub Section Administrative Law. Mr. Sheldon
reported that the section had been solicited by Lawpac and invited our response to such solicitation. Mr. Van Til stated that we would discuss this
topic under New Business. Mr. Abbott and Mr. Lansky reported that there
was no activity with the Corporations and Real Property Sections.
15
MICHIGAN TAX LAW JOURNAL
NEW BUSINESS
Lawpac Mailer. There was some discussion regarding the solicitation of section members to encourage participation in Lawpac. The general
attitude of council members however was that this was not a matter of business for the council and there was little positive feeling to participate.
Council members decided that no action was necessary.
Release of Section Mailing List. Mr. Van Til reported that therequest of Alma College had met our guidelines and therefore permission
was given to release our mailing list.
The IAFP has recently requested a release of our mailing list for
their financial planning meeting on May 6 and 7. Mr. Van Til reviewed our
guidelines which are as follows: 1) the request must refer to a topic of
interest to the Taxation Section membership; 2) it must deal with function which does not compete with a scheduled tax program within 30 days;
3) the request must come from a non-profit organization. Since the IAFP
met all of these guidelines the council approved the release of our mailing
list. It was clarified that the requesting organization does not directly receive the mailing list. Rather, the State Bar of Michigan prepares a list and
processes the mailing for the organization which pays for such service.
a
Commissioner's Request (Composition of Tax Tribunal and Representative Assembly Resolution of May 14, 1983). Mr. Goodrich presented the council with a draft of a letter to Michael Franck stating the Tax
Council's position. The Tax Council feels that a constitutional challenge is
not appropriate, but that all Tax Tribunal members should be lawyers.
There was general agreement with Mr. Goodrich's letter. A suggestion was
made that the language be stronger dealing with the recommendation that
Tribunal members be lawyers. It was noted that there are many nonproperty tax cases which deal with complex legal and constitutional issues
that are beyond the ability of the non-lawyer. A suggestion was made that
perhaps a Small Claims Division to the Tribunal be established to take care
of some non-lawyer issues, e.g. valuation of real property. Mr. Goodrich
agreed to redraft his letter.
Safe Deposit Boxes. Mr. Savel reported that recent changes in the
inheritance tax statute dealing with safe deposit box access has resulted in
some new rules. Beginning March 28, 1983, free access will be available to
surviving joint lessees of safe deposit boxes. In the case of a single lessee
the Personal Representative will obtain access to the safe deposit box upon,
filing a notice form available through the Michigan Department of
Treasury. The Personal Representative must wait for the return of such
notice or 15 days, whichever is earlier. Until such time as printed forms in
duplicate are available from the Department of Treasury, copies of the
form distributed by Mr. Savel should be submitted in duplicate. The duplicate will then be returned by the Department of Treasury to the Personal
Representative.
State Bar Fiftieth Anniversary Meeting in 1985. Mr. Savel
reported attending a meeting in Lansing on March 22, 1983 which was
hosted by the Fiftieth Anniversary Planning Committee. This was the first
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MICHIGAN TAX LAW JOURNAL
committee meeting at which various section members were present. Previously several meetings of the Committee had occurred during which
time suggestions were made as to an appropriate method of celebrating the
Bar's Fiftieth Anniversary. Mr. Savel suggested that Council members
give some thought as to the Tax Council's participation in the 1985 Annual
Meeting. The theme that was suggested by the Committee centered
around an historical perspective oflaw practice since 1935.
The Fiftieth Anniversary meeting will occur on September 11
through 13, 1985 and will be held atCobo Hall. The next Committee meeting will occur in May 1983 and Mr. Savel solicited suggestions from the
Council members as to the various topics which might be considered.
NEXT COUNCIL MEETING
The next meeting of the Council was set for Thursday, May 12, 1983
at 4:00P.M. at the University Club in Lansing, Michigan to be followed by
dinner.
Andrew M. Savel
Secretary- Treasurer
MICHIGAN TAX LAW JOURNAL
THE JURISDICTION OF THE MICHIGAN
TAX TRIBUNAL
Daniel Misteravich
On July 1, 1974, the Tax Tribunal Act became effective. Previous to
that date, taxpayers who wanted to appeal their taxes had a choice between
two actions and two courts. They could appeal their taxes to the State Tax
Commission, or they could pay their tax and bring an action for refund in
.the circuit court. With regard to a special assessment, taxpayers could
either pay the assessment and sue for a refund in circuit court or sue to
enjoin the collection. The extent to which the taxpayers choice has been
limited by the Tax Tribunal Act is the subject of two recent supreme court
decisions handed down together in July of 1982. In both cases the plaintiffs
challenged special assessments and sought injunctive relief. In Wikman v
No vi, 13 Mich 617 (1982), the court decided that the Tax Tribunal had exclusive jurisdiction over the challenge; but in Romulus Treasurer v Drain
Commissioner, 413 Mich 728 (1982), the court decided that the Tax Tribunal did not have jurisdiction. The reconciliation of these two opposites is
the subject of this article.
Although both cases involve challenges to special assessments, they
are distinguishable. In 1976 the City Council of Novi decided to improve
one of its roads, Taft Road. To pay for these improvements, which
amounted to widening and paving, the Council voted· to levy a special assessment on the property which abutted Taft Road. The Wikmans and
others who owned affected property protested the assessment at the Council's meeting, claiming that the improvements to Taft Road conferred no
special benefit on them, that the benefit would be shared equally by all the
citizens of Novi, and that the cost of improving the road should be shared
by all the taxpayers ofNovi. After the City Council voted to levy the special
assessments, theW ikmans carried their challenge to th~ circuit court, seeking injunctive relief to set aside and restrain the collection of the special
assessment. The circuit court agreed with the Wikmans, but the court of
appeals found that the action had been improperly brought in the circuit
court and remanded the case to the Tax Tribunal. The supreme court affirmed in Wikman v Novi.
l
In 1975 and 1976, the Wayne County Drain Commission, after
reassessing the condition of its drains, imposed a special assessment on the
real property of Curt Boller, Paul Kraft and others, for the maintenance
and repair of an already installed drain, according to the Drain Code of
1956. Sixty thousand taxpayers were assessed between $1 and $2. Boller,
Kraft, and others who had paid the assessments joined in a class action
brought in the circuit court to challenge the assessment as not being au thorized by the Drain Code. Plaintiffs claimed that the Drain Commission was
spending the money for administrative costs, not for the maintenance and
repair of the drains, and that this amounted to constructive fraud. Plaintiffs
were joined by city and township treasurers who claimed that they could refrain from paying the collected amounts to the Wayne County Treasurer.
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MICHIGAN TAX LAW JOURNAL
The plaintiff treasurers placed the money in escrow. Plaintiffs sought declaratory and injunctive relief. They wanted a declaration of the rights of
the treasurer plaintiffs to bring the action, an accounting of the Drain Commissioner's records, a declaration that the assessments were illegal and
that the Drain Commissioner's expenses should be paid from the general
fund. They also sought an injunction to, prohibit the defendants froj11 enforcing the assessments and from using the funds for administrative
expenses, and they sought an order that the money in escrow be returned
to them. The Drain Commissioner filed a motion for accelerated
judgment, claiming among other things that the circuit court lacked subject
matter jurisdiction, that this was a claim for a tax refund and was under the
exclusive jurisdiction of the Tax Tribunal. The circuit court granted the
motion for accelerated judgment However, the court of appeals reversed·
the circuit court with a finding that the Tax Tribunal lacked equitable
jurisdiction. The supreme court affirmed the decision of the court of appeals in Romulus Treasurer v Drain Commissioner.
In her opinion in Romulus, Justice Coleman said that Wikman did
not control the result in Romulus. She distinguished the two cases according to the nature of their claims. In Romulus the plaintiffs claimed constructive fraud on the part of the Drain Commissioner in spending funds which
had already been collected. The plaintiffs were seeking a return on part of
the funds being held is escrow. On the other hand, in Wikman the special
assessment had been levied but not collected. The plaintiffs claimed that
the assessment had not been made according to the benefits received. In
Romulus the issue was how the assessment was being spent. In Wikman the
issue was the factual basis justifying the assessment.
Justice Levin, who concurred with the decision in Romulus, but dissented in Wikman, saw a critical similarity between the two cases: neither
of the assessments had been made under state property law in the strict
sense. In Romulus, the special assessment had been made under the Drain
Code. In Wikman the special assessment had been made under the Home
Rule Cities Act. Because of this similarity, Justice Levin would have decided both cases alike-, excluding them from the jurisdiction of the Tax
Tribunal.
The above differences in facts played significantly against the law
which the court applied. The applicable statute is the Tax Tribunal Act,
MCLA 205.702-779. MSA 7.650(01)-(79). Section 31 provides that:
The tribunal's exclusive and original jurisdiction shall be:
(a) A proceeding for direct review of a final decision,
finding, ruling, determination, or order of an agency relating
to assessment, valuation, rates, special assessments,
allocation, or equalization, under property tax laws.
(b) A proceeding for refund or redetermination of a tax
under the property tax laws.
Before the court could apply the law, it had to decide an issue raised
by Justice Levin in his initial dissent to Wikman, an issue which had not
been raised by the parties: the construction of the phrase "under property
tax laws" in the Tax Tribunal Act. In his final dissent to Wikman, Justice
20
MICHIGAN TAX LAW JOURNAL
Levin interpreted the phrase narrowly. He reached back to the constitutional convention to root his construction of the phrase in its legislative history.
He concluded that "under property tax laws" was a term of art meaning ad
valorem property tax law, not tax law under a home rule cities act or a
drain code.
Justice Coleman's majority opinion, sounding rather like a dissenting
opinion on this issue, took a broader view of the phrase. Rejecting Justice
Levin's historical approach, the majority determined that the Legislature
intended the phrase to distinguish special assessments under property tax
law from other types of special assessments, that special assessments were
assessed against real property and were in the nature of a property tax, that
assessments made by municipal corporations are made under delegated
state law, and that the Legislature intended that the Tax Tribunal Act be a
break from past practice and that the Legislature had a rational basis for so
deciding.
:With its broad interpretation of the phrase "under property tax Jaw,"
the Court determined that the claim in Wikman fell under subsection (a)
of Section 31 of the Tax Tribunal Act; the claim came under the exclusive
jurisdiction of the Tax Tribunal. The court ruled that the claim in Romulus
did not meet the requirements of subsection (a) of the Tax Tribunal Act
because plaintiffs were not seeking a review of their assessments but were
claiming constructive fraud in the· spending of the sums collected. The
court also found that the claim failed to meet the requirements of subsection (b) because it was not an action for a typical tax refund; the funds were
being held in escrow by the treasurer plaintiffs.
In addition to distinguishing the cases factually in relation to the applicable law, the court also distinguished them in respect to their suitability
for the expertise of the Tax Tribunal. The Tax Tribunal is composed of
seven members. The Tax Tribunal Act specifies that membership is to include two attorneys, a certified assessor, a professional real estate
appraisor, and a certified public accountant. the expertise of these members is particularly suitable to evaluating the facts of claims for review and
refund; especially suitable for evaluating a claim of no special benefit as in
Wikman. But the Tax Tribunal seems less qualified to hear a claim of constructive fraud. The circuit court seems better able to handle the legal questions involved in a case like Romulus.
These cases can also be distinguished according to their appropriate
relief. In Romulus the court said that if it were to be found that plaintiffs
were entitled to the money held in escrow, then injunctive relief would be
the proper remedy. Because the Tax Tribunal cannot issue an injunction,
the circuit court is the only alternative for these plaintiffs. This is not the
case in Wikman where the court found that plaintiffs had not exhausted
their legal relief; they were entitled to a review by the Tax Tribunal.
Therefore, injunctive relief would not be appropriate.
Justice Levin drew an additional distinction between these cases. He
found that Romulus was a class action whereas Wikman was not. In
Romulus60,000 members were in theclass with very small claims of$1 to
$2; this is the classic form of a class action. Wikman is less clearly so. The
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MICHIGAN TAX LAW JOURNAL
claim involved 45 persons in 34 homes. Each plaintiff had to pay $50 to
have his claim heard by the Tax Tribunal. Justice Levin seems to be suggesting that claims like those in Romulus would be unmanageable in Tax
Tribunal. The court did not directly address this issue.
In Wikman the supreme court characterized the Tax Tribunal as a solution to the forum shopping practices of the past. Consistent with that
view, the court held that all special assessment actions for review or refund
will go to the Tax Tribunal, not just those actions brought under ad valorem property tax law. Romulus represents a further definition of the term
"refund" in the Tax Tribunal Act.
The court also characterized the Tax Tribunal as being well suited to
decide the factual issues of the challenges under its jurisdiction, better
suited than the circuit court. The result will presumably be fairer decisions
based more closely on the facts of the cases, added protection for citizens
and closer scrutiny of municipalities. However, Justice Levin suggests that
allowing taxpayers to challenge local special assessments in the Tax
Tribunal, where payment of the assessment is not a precondition, might
create obstacles for municipalities which are seeking to improve their
communities. He thinks that allowing this kind of challenge will work profound changes on the appeal procedure, that the pendency of litigation will
result in delays in the sale of bonds and increases in the cost of
construction. In short, it will impede progress. Whether the supreme court
has overly favored taxpayers at the expense of the powers of their municiple governments will be seen in the future. If a retrenchment should be
necessary, the court will have ample justification in Justice Levin's eloquent dissent to Wikman v No vi.
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MICHIGAN TAX LAW JOURNAL
TAX QUESTIONS AS A PROPER SUBJECT
OF ACTION FOR DECLARATORY JUDGMENT
Myron B. Boloyan
A declaratory judgment is a statutory remedy for the de.termination
of a justiciable controversy where the plaintiff is in doubt as to his legal
rights. 1 The declaratory judgment proceeding provides an organization
denied tax-exempt status by the Internal Revenue Service (IRS) with an
opportunity to achieve prompt recognition as a public charity before an
audit. The intended purpose of a declaratory judgment is to afford a
speedy and inexpensive method of deciding legal disputes and .of settling
legal rights and relationships without awaiting a violation of rights.
As a general rule, the Declaratory Judgment Act, 28 U.S.C. §22012,
and the Anti-Injunction Act 26 U.S.C. §74213, preclude the availability of
declaratory judgment actions to resolve most tax issues. There are,
however, four special situations where a taxpayer may obtain a declaratory
judgment settling tax issues that have been presented to the IRS for administrative action.
The Internal Revenue Code authorizes declaratory judgment actions
to determine:
(1) the initial or continuing qualifications or classifications of tax
exempt organizations and private foundations,
(2) the initial or continuing qualification of retirement plans,
(3) whether and under what conditions a transfer of property from
the United States described in Section 367 (a) (1) has federal
income tax avoidance as one of its principal purposes, and
(4) whether interest on state or local government bonds is tax-free
under Section 103 (a) 4.
Two common themes run throughout the sections authorizing declaratory judgments. One, the taxpayer must exhaust administrative remedies to preserve the right to a declaratory judgment. The taxpayer must
make a bona fide attempt to obtain the desired action from the IRS
through the administrative process. If the taxpayer does not exhaust this
process, the court cannot issue a judgment. 5 An organization is considered
to have exhausted its administrative remedies after all of the following
three steps have been completed:
(1) File a substantially completed Form 1023 or a foundation status
determination request.
(2) Submit all additional information needed with respect to such
form or request.
(3) Exhaust the available IRS administrative appeals. 6
A withdrawal of a request for a ruling or determination letter is not considered an exhaustion of administrative remedies.
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MICHIGAN TAX LAW JOURNAL
To assure adequate time for administrative procedures, Code Sections 7428 (b)(3), 7476 (b)(5), 7477 (b) (4) and 7478 (b) (3) require a minimum period before a taxpayer can seek a declaratory judgment.
Second, the taxpayer must develop an administrative record sufficient to support a favorable judgment. 8 The record developed in the administrative process can determine the outcome of a subsequent declaratory judgment action. Except in cases involving governmental obligations
or revocation of the qualified status of retirement plans or exempt organizations or foundations, the Tax Court's decision in a declaratory judgment
action ordinarily will be based on the administrative record. Tax Court
Rule 217(a). It is the taxpayer's responsibility for developing the administrative record. In Houston Lawyer Referral Service, /nc.,9an applicant for
a ruling attempted to introduce evidence not contained in the administrative record (alleged oral representations made during conferences). The
Tax Court said that the requirement of exhaustion of administrative remedies would be meaningless if the applicant were permitted to withhold evidence from the IRS and to later introduce it in the declaratory judgment
proceeding.
In the Tax Reform Act of 1976, Congress enacted Section 7428,
which provides jurisdiction for the Tax Court, the United States District
Court for the District of Columbia and the Court of Claims to render a declaratory judgment with respect to a ruling issued by the IRS involving the
status of an organization as a public charity or a private or operating
foundation. The purpose of Section 7428 is to provide an organization
with an effective appeal from the adverse determination of the IRS.IO
Section 7428 deals with declaratory judgments as to the initial and
continuing qualifications of organizations under Section
501 (c)(3)(charitable, educational, etc.), Section 170 (c) (2) (deductibility
of contributions), Section 509 (a) (private foundations) and Section
4942 Q) (3) (operating foundations).
When the IRS has issued its final adverse determination, the organization must decide in which of the above-mentioned courts to file a declaratory judgment. The organization may decide to forego the declaratory
judgment remedy and to file an ordinary tax refund suit in the local federal
district court or the Court of Claims. Considerations of the choice of
forum include:
(1) the prior decisions of the various courts on exempt organization
issues.
(2) the relative cost of litigation,
(3) the likelihood of a speedy decision,
(4) the experience of the courts in dealing with declaratory judgment
matters,
(5) procedural rules of the courts,
(6) the availability of oral arguments,
(7) ·the court to which an appeal would be taken,
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MICHIGAN TAX LAW JOURNAL
(8) the existence of specific rules relating to Section 7428 actions in
the Tax Court (and the absence of similar rules in the District
Court for the District of Columbia and the Court of Claims). 11
The general rule that there must be an "actual controversy," or a
justiciable controversy, between the parties as a basis for an action for a declaratory judgment, applies in actions concerning taxes. 12 The term,
"actual controversy" refers to Article III, Section 2 of the Constitution of
the United States which limits the federal judicial power to decide cases
and controversies. One of the essentials of an actual controversy is that
the complainant have a legal interest or right which needs protection from
a source which is competent to place such interest or right injeopardy.13
The requirement of an actual controversy ordinarily will not pose a
problem. Generally, the organization must be in existence and the IRS
must have made, or failed to have made, a determination relative to its
qualification or classification. The "actual controversy" under Section
7428 must relate to a determination, or a failure to make a determination,
by the IRS with respect to the initial or continuing qualification of an organization as a:
(1) public charity under Section 501 (c) (3) or Section 170 (c) (2),
(2) private foundation as defined in Section 509 (a), or
(3) private operat-ing foundation as defined in Section 4942 G) (3). 14
If an organization seeking status as a public charity under Section
501 (c) (3) and Section 170(c) (2) requests a determination by the IRS,
takes all reasonable steps to secure a determination, and the IRS has not
acted by the end of 270 days after the date of the request, the organization
can thereafter bring its action for a declaratory judgment.15 The 270-day
period begins on the date a "substantially completed" Form 1023 is sent
to the appropriate key district director. 18If the IRS gives notice of an unfavorable determination before the end of the 270-day period, the organization does not have to wait until the period expires. Instead, it must file its
court action before the 91st day after the date of the mailing of the
notice.11
An organization that is reasonably certain of an unfavorable decision
from the IRS may gain an advantage by filing a declaratory judgment
action in the Tax Court after exhausting all appeals, but before an adverse
ruling is issued. 18 The reason for this action is that Tax Court Rule
217 (c)(2) (ii) shifts the burden of proof of non-qualification to the IRS
when it has failed to issue a notice of determination. The petitioner has
the burden of proof in all other cases. There is risk to filing early, as the
Court may find that the petition was filed before the administrative remedies ·were exhausted. If the IRS issues an adverse determination after the
petition is filed, the organization should consider filing a second petition
based on the adverse determination.
The IRS has ruled that in order for a final determination to be
reviewable, it must be adverse. In New Community Senior Citizen Housing
Corp.,19 a Section 501 (c)'(3) organization received an adverse ruling
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MICHIGAN TAX LAW JOURNAL
about the effect of a proposed transaction on its tax-exempt status, but its
exemption was not revoked. The Tax Court held that the ruling was not a
"determination." Another example could be where an organization seeks
a ruling that it is not a private foundation because it qualifies as a church
under Section 509(a) (1) and Section 170(b) (1) (A) (i). The IRS could rule
that the organization is not a private foundation based on Section
509 (a) (2). This ruling is not as advantageous to the organization because a
church receives preferential treatment under the Code. In Private Letter
Ruling 7925003, the IRS held that in such circumstances there has been
no "determination" within the meaning of Section 7428(a) because the
organization has received a favorable ruling relating to: its private
foundation status.
The administrative prerequisites for declaratory judgments
pertaining to retirement plans are similar to those of an exempt
organization. Section 7476 deals with determinations as to the qualification
of retirement plans under Sections 401-425. The process for obtaining a
determination letter for a retirement plan has three phases: providing
notice to interested parties, filing a completed application, and appealing
an adverse determination to the Appeals Office.20
Usually, a petitioner who seeks a declaratory judgment concerning
the qualified status of a retirement plan is required to give notice to
interested parties of the request before receiving either a determination
letter or a declaratory judgment.21 However, the Fourth Circuit has held
that "the notification of interested parties" is not a mandatory
prerequisite to declaratory relief, but is instead permissive, giving the Tax
· Court discretion to enforce or waive the notification requirements. 22
When an actual controversy exists (where the plan has been put into
effect before the filing of the pleading), Section 7476(a) and Tax Court
Rule 210 give jurisdiction to the Tax Court in cases where the IRS has
made:
(1) an unfavorable determination, or
(2) no determination with respect to (a)
initial qualification, or
(b)
continuing qualification where the controversy arises from
amendment termination, or other change in qualification.
Section 7476 (b) (1) allows a pleading to be filed under this Section:
"Only by a petitioner who is the employer, the plan
administrator, an employee who has qualified under
regulations prescribed by the Secretary as an interested
party for purposes of pursuing administrative remedies
within the Internal Revenue Service, or the Pension Benefit
Guaranty Corporation."
The administrative remedies of a petitioner about a plan's initial
qualification are exhausted upon the earlier of two events. The first is the
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completion of all steps in the party's administrative remedy, none of
which is deemed complete until the service has had a reasonable time to
act. The second is the expiration of the 270-day period after filing, but
only if the service's failure to make a determination within that time
results from failure to act with due diligence.23
As was stated earlier with regard to exempt organizations, it is
essential that a complete administrative record be maintained. For a plan
sponsor, the administrative record is composed potentially of five groups
of documents:
(1) The initial request, the plan and the trust agreement (if
applicable), with any written modifications and amendments.
(2) Supplemental documents filed by the applicant.
(3) Any written correspondence or other documents issued by the
IRS to the applicant.
(4) Any comments and related documents submitted by interested
parties.
(5) A copy of the official report of the services investigation, if one
was made.24
For an interested party, the core of the administrative record is the
comment letter submitted to the IRS. It is essential that the comment
letter contain every allegation the applicant desires to assert.
Section 7477 deals with determination under.Section 367(a)(l) ,
about whether a transfer of property from the United States is part of a
plan having as one of its principal purposes the avoidance of federal
income taxes.
The Tax Court has the power to review an IRS determination (1)
that an exchange described in Section 367 (a) (1) is in pursuance of a plan
having as one of its principal purposes the avoidance of federal income
taxes, or (2) of the terms and conditions required by IRS before a
favorable ruling will be issued. In addition, the Tax Court may rule on
Section 367 (a) (1) issues where IRS has failed or refused to act on a ruling
request.
Administrative remedies under Section 7477 are exhausted when
three conditions are fulfilled:
(1) The
tax.payer must have complied with all procedural
requirements for filing a ruling request and protesting an adverse
ruling.
(2) The taxpayer must have responded in a prompt and complete
manner to all IRS information requests.
(3) The IRS must have had a reasonable time to act after receiving
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MICHIGAN TAX LAW JOURNAL
The administrative record consists of S~ction 367 (a) (1) ruling
request and supplements all other documents submitted by the taxpayer,
and any written documents submitted by the IRS, including the ruling
letter.
The Tax Court will decide whether or not the IRS's determination
as to tax avoidance motives is reasonable. If the IRS has sought to impose
terms and conditions as a prerequisite to a favorable ruling, the Tax Court
is to make a finding as to whether or not the terms and conditions are
reasonable. If the terms and conditions are found to be unreasonable, the
Tax Court is to make a declaration as to the terms and conditions it finds
to be reasonable in order to prevent the avoidance of income taxes.
Section 7478 deals with determinations on whether interest paid on
a governmental obligation qualifies under Section 103 (a) for exemption
from income tax. The administrative remedies for a prospective issuer of
an obligation consists of two steps:
(1) A ruling request setting out all relevant facts must be submitted
to the IRS.
(2) The applicant must comply in a timely fashion with all IRS
requests for additional information.
The administrative record consists of the ruling request and
additional information sought by the IRS. The record closes when a
determination is issued or a declaratory judgment petition is filed ..
In summary, the Tax Court generally lacks jurisdiction to render a
declaratory judgment. As has been discussed, there are, however, four
limited statutory grants of declaratory judgment powers. For each of these
four exceptions to the rule, th~ Tax Court rules contain specific
provisions detailing the procedures to be followed in a declaratory
judgment case. Most importantly, the applicant for a judgment must
satisfy the doctrine of exhaustion of administrative remedies and must
keep an accurate administrative record.
With these four exceptions, the taxpayer now has a speedy and
inexpensive method of deciding legal disputes on these issues.
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FOOTNOTES
c
1. Black's Law Dictionary 712 (4th Ed. 1951).
2. 28 U.S.C. §2201 (1970).
3. 26 U.S.C. §7421 (1970).
4. Kittrel, Administrative Prerequisites for Declatory Judgment About Tax
Issues, 66 A.B.A. J. 1570 (1980).
5. I.R.C. §7428(b)(2).
6. Rev. Proc. 80-25, 1986-26 I.R.B. 39.
7. Rev. Proc. 77-24, 1977-2 C.B. 532.
8. Kittrel, supra note 4, at 1570.
9. Houston Lawyer Referral Service, Inc. v Commissioner, 69 TC 570
(1978).
10. Winslow, 421 T.M., BxemptOrganizations-DeclaratoryJudgments.
11. Id
12. Nims v Grand Trunk Western R. Co., 326 Mich 371, 40 NW2d 188
(1970).
13. Smith v Have/and, 223 Minn. 89, 25 NW2d 474, 174 ALR 544 (1946).
14. Winslow, supra note 10.
15. I.R.C. §7428 (b)(2).
16. Sec. 3, Rev. Proc. 77-24, 1977-2 CB 532.
17. I.R.C. §7428(b)(3).
18. Kittrel, supra note 4, at 1571.
19. New Community Senior Citizen Housing Corp. v Commissioner, 72 T.C.
372 (1979).
20. Treas. Reg. 601.201(o)(lO).
21. Treas. Reg. 301.7476-1.
22. Federal Land Bank Assoc. of Asheville North Carolina v Commissioner,
573 F2d 179 (1978).
23. Treas. Reg. 601.201 (o) (10) (iv).
24. Treas. Reg. 601.201 (o) (8).
25. Treas. Reg. 301.7477-1(b)(2).
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MICHIGAN TAX LAW JOURNAL
LEGISLATIVE UPDATE
PENDING LEGISLATION
1. HB4314
Income
Excludes farmland preservation tax credits received
from determination of taxable income for the Michigan
income tax.
2.
HB4086
Intangibles
Increases the intangibles tax personal deduction for taxpayers age 65 or older.
3.
HB4116
City Income
Provides for payment of interest for city income tax
refunds paid 45 days or more after later of filing or due
date of return.
4.
HB 4163
Property
Establishes a property tax exemption for $6,500 of
state equalized valuation of the homestead of a person
age 65 or older or disabled.
ENACTED LEGISLATION
1.
P.A. 15
Income
Increased the state income tax rate from 4.6% to
6.35%, effective January 1, 1983. The increase will be
phased-out according to decreases in the seasonally adjusted average state unemployment rate.
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MICHIGAN TAX LAW JOURNAL
CASE DIGESTS
REAL PROPERTY VALUATION
RECOGNITION OF LEASE TERMS
Taxing authorities will not be required to use actual rental income received by an owner in determining true cash value of real property when
the lease agreement is favorable to the owner in fee.
Uniroyal, Inc. v City ofAllen Park and Wayne County
MTT Docket No. 39933, Entered January 7, 1983
FACTS:
I
r
At issue was the true cash value of a 36.43 acre parcel zoned for
medium industrial use for the tax years 1979-1981. 8.76 acres were developed and included an oftlce building and parking area. 27.67 acres were
undeveloped land. The office building had been financed and constructed
by Imboden Properties, Inc., in 1965. At the same time Imboden entered
into a sales and leaseback arrangement with Uniroyal, Inc. Under terms of
the lease, Uniroyal was responsible for all incidents of ownership including
property taxes.
Respondent had assessed the developed property on the basis of the
income approach to valuation. Petitioner, Uniroyal, sought review by the
Michigan Tax Tribunal contending that the assessed value exceeded 50%
of the true cash value and secondly, that the subject property was assessed
at a greater percentage of true cash value than the average level of assessment in the community. Relying on C.A.F. Investment Co. v Saginaw
Township, 410 Mich 428; 302 NW 2d 164 (1981), the Petitioner argued
that valuation should be based on a "leased fee" interest. C.A.F. required
taxing authorities to use actual income received by the owner of real property subject to a long term unfavorable lease, as opposed to comparable
rental market value, when employing the income capitalization approach
to determine true cash value. Petitioner, the lessee, viewed its lease agreement as unfavorable to itself, and argued that C.A.F. would allow recognition of the lease as an unfavorable encumberance against the property.
HELD:
The court held that C.A.F. was limited in application to situations
having similar facts and concluded that, in order to impose C.A.F., two
conditions must exist One, an unfavorable long-term lease to the owner of
the property, i.e. an encumbrance on the property itself; and two,
petitioner, as owner, is the taxpayer of the ad valorem tax imposed, in rem
against the real property. The court distinguished the instant case from
C.A.F. on two grounds. First, the Petitioner, Uniroyal, was not the owner,
but the lessee. Second, the court found the lease to be commercially reasonable and favorable to the owner. The court pointed to an advantageous
tenant and a guaranteed rate of return as indices of a favorable lease
agreement.
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MICHIGAN TAX LAW JOURNAL
The court decided Petitioner's "leased fee" valuation is something
less than fee simple valuation and did not accurately reflect true cash
value. Michigan's Constitution and statutes do not allow something less
than full value of the entire real property for ad valorem taxation.
Having concluded that the Petitioner's "leased fee" approach to
value is inapplicable, the court alternatively accepted Petitioner's fee
simple valuation which lowered the assessed value of the developed
parcel.
REAL PROPERTY TAX - TRUE CASH VALUE
The true cash value of hydroelectric power plants is determined by
applying the Adjusted Reproduction Cost Method of evaluation which employs straight line depreciation to allow for physical deterioration, functional absolescence, and economic obsolescence not due to regulation by
governmental agencies.
Wisconsin Electric Power Co. v Mansfield & Mastodon Townships, Iron
County, & Breitung Township, Dickinson County
MTT Docket No. 46440-45,55430-31, January 28, 1983
FACTS:
Wisconsin Electric Power Company (WEPCO) appealed eight assessments made on nine of its hydroelectric plants located in the upper
peninsula townships of Mansfield, Mastodon, and Brei tung. These power
plants consisted of structures, improvemen~, dams, generators, turbines,
and related equipment, roads, bridges, and operator houses. The plants
varied in age, type, capacity, and condition. All were subject to regulation
by the Federal Energy Regulatory Commission (FERC) and the Michigan
Public Service Commission (PSC). WEPCO sought to have the Tax Tribunal determine the true cash value of its properties and the proper level of
assessment for 1980. In accord with Section 43 of the Tax Tribunal Act of
1973 PA 186, the Tax Tribunal compelled WEPCO to pay its 1981 tax
before the Tribunal would make a final decision on the proceeding. The
Tribunal waived 1/3 of the total amount levied after Petitioner filed a
motion for a rehearing and the Respondent answered.
In determining the true cash value ofWEPCO's property, the Tribunal considered the opinions of three appraisers: Charles E. J erominski for
WEPCO; John D. Russell for Respondents; and, Leslie V. Anderson for
the State Tax Commission. All three agreed that, of the available approaches to value, being cost, market, and capitalization, cost was the appropriate method. However, the appraisers differed in their depreciation
rationale.
Under the cost method, true cash value is calculated by deducting
depreciation from reproduction cost new. All three appraisers used the
Handy-Whitman Indexes for Public Utility Construction Costs to arrive at
reproduction cost new. Mr. Anderson, however, averaged a series of
indexes, rather than using the closest tax day index. In arriving at the
amount of depreciation, Mr. Jerominski and Mr. Anderson employed the
straight line method. Mr. Russell did not.
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MICHIGAN TAX LAW JOURNAL
Mr. Jerominski allowed depreciation deductions for physical depreciation due to the aging process, functional depreciation due to
absolescence, and economic depreciation due to regulatory restrictions imposed by PERC and PSC. Mr. Anderson allowed depreciation for physical
deterioration and functional absolescence, and he allowed for economic
absolescence for two specific plants with particular problems. He did not
allow deductions for PERC and PSC restrictions; however, in arriving at
his final value, he did consider the rates as regulated. Mr. Russell used an
accounting concept of depreciation based on capital recovery over a period
of years. Under this method, the future service life of the property was
more important than its actual value.
HELD:
The Tribunal accepted Mr. Anderson's appraisal and ordered the
true cash value of each plant revised accordingly. In addition, the Tribunal
accepted the level of assessment presented by WEPCO, since Respondents
presented no reliable evidence to the contrary. The Tribunal rejected Mr.
Jerominski's appraisal because it overstated the amount of depreciation
and understated the true cash value by allowing for economic depreciation
resulting froin PERC and PSC regulations. The court also objected to his
cash value because it equaled WEPCO's net book cost, a figure used by the
PSC in determining the rate of earnings. The Tribunal rejected Mr: Russell's appraisal as being unreliable because it was based on the long term
cost of money as discounted.
COUNTY PUBLIC WORKS ACT
MANDATORY PREPAYMENT SEWER CONNECTION
A township may specially assess non-users of a sewer extension
system who are located in the special assessment district in such a way as to
allow a credit upon installation equal to that of the installation charge and
to allow for a refund for all assessments made prior to the connection in
excess of that connection charge and thereafter reducing the assessm«nt to
zero.
Samuel Frankel, eta/ v The Charter Township ofPontiac,
MTTDocketNos.40042 (1979) and48298 (1980-1981)
FACTS:
Petitioners filed an action with the Michigan Tax Tribunal alleging
that the formula used to determine the amount of the special assessment
on their property was arbitrary and unlawful. The special assessment district and levies made upon it were part of a plan by the Respondent to finance a deficit in funds raised to fulfill a contractual obligation (extension
bond obligation) with the County of Oakland. Pursuant to this obligation,
the county financed an extension of the Clinton Oakland Sewage disposal
system to provide service to the special assessment district. The shortages
and resultant special assessments involved occurred in 1979, 1980, and
1981, approximately seven years after the installation of the sewer
extensions. Prior to 1979, the sewer system and extensions were paid for
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MICHIGAN TAX LAW JOURNAL
on a utility basis, e.g., connection fees and use and debt service charges.
Non-users (those not yet connected) paid nothing directly towards the
system. The effect of the special assessment was to require the non-user to
contribute money directly towards the sewer extension. Although users
(those persons connected to the system) and non-users alike w~ere to be assessed via the benefit obtained, in the Respondent's formula the users
were allowed a credit equal to the previously paid connection charges, thus
reducing their special assessments to zero. While the credit method applied
to non-users, such credit was not applied until the non-users became connected to the system. If the accumulated assessment paid by the non-users
exceeded the connection charge, a refund of the excess would be made,
reducing their portion of the special assessment to zero, as was the user's
assessment.
Petitioners argued that the special assessment is not only arbitrary as
applied towards them, but that it was unlawfully enacted.
HELD:
The special assessment levied by respondent in 1979, 1980, and
1981 should be sustained.
The Respondent was authorized pursuant to the County Public
Works Act, MCLA 123.7421 (1) and (2); MSA 5.570 to meet its contractual obligation with the county with funds raised by special assessments upon
lands benefited. Respondent properly contended that Petitioner was
benefited by the reasonable availability and potential use of the system. As
the Petitioner, upon connection to the sewer system, would receive a full
refund of any special assessments paid in excess of the connection charge,
this special assessment works as a prepayment of the connection charge
which is not prohibited by County Public Works Act, MCLA 123.7421;
MSA 5.570, authorizing special assessments. In its attempt to distribute
fairly the contract deficiency amounts, the Respondent correctly and lawfully considered the special benefits to the assessed lands in relation to (a)
the portion of the contract obligations being assessed upon benefited
lands, and (b) the portion being collected from other benefited lands in
connection, user, and debt service charges. With respect to the benefit
provided to the township as a whole, the township properly considered the
sewer facilities by their use and application of the at large grants (grants
and other surplus) funds and earnings on all collected moneys and funds
and thereby discharged any municipal duty to bear a portion of the contract
obligations to Oakland County. Although Respondent did not avail itself of
the special assessment until 1979, seven years after the sewer extensions',
the Respondent, after a reasonable, conscientious, and fair exploration of
the methods available to meet the deficiency, acted prudently and within
its lawful discretion. The Respondent rightfully chose to use the County
Public Works Act, MCLA 123.7421; MSA 5.570, as a means for its sewer
installation. Here, the Township Public Improvement Act, MCLA 41.725;
MSA 5.2770(55) merely supplements the County Public Works Act for
procedural purposes such as notice and hearing and for enforcement by
way of a lien against property for filing and collection purposes.
34
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