Bringing a semblance of order to the prior proceedings, the Michigan Court of Appeals reversed the Michigan Court of Claims ruling that defied the remand instructions from the Michigan Supreme Court. International Business Machines Corp. v. Dep’t of Treasury, Dkt. 327359 (Mich. Ct. App. July 21, 2016). The appellate court’s ruling would result in granting to International Business Machines Corp. (“IBM”) a total of nearly $6 million in Michigan Business Tax (“MBT”) refunds for the company’s 2008 tax year.
Two years earlier, the Michigan Supreme Court held IBM was entitled to elect the Multistate Tax Compact’s (“MTC” or the “Compact”) evenly-weighted, three-factor apportionment formula using property, payroll and sales instead of the single-sales factor apportionment formula provided by the MBT for tax year ending 2008. International Business Machines Corp. v. Dep’t of Treasury, 852 N.W.2d 865 (Mich. July 14, 2014). In an attempt to limit the impact of the Michigan Supreme Court’s decision in IBM, the legislature retroactively repealed the MTC Compact in its entirety, including the MTC election, effective January 1, 2008 (Public Act 282 of 2014, effective September 12, 2014). Following the enactment of Public Act 282, the Michigan Supreme Court denied the Michigan Department of Treasury’s (“Department”) motion for reconsideration and remanded the case to the Court of Claims for a ministerial entry of an order granting summary disposition in favor of IBM. Notwithstanding the Michigan Supreme Court’s denial of the Department’s motion for reconsideration and an express order to grant summary disposition in favor of IBM, the Court of Claims denied IBM’s motion for summary disposition and instead granted the Department’s motion for reconsideration, finding that Public Act 282 precluded IBM’s claim. International Business Machines Corp. v. Dep’t of Treasury, Dkt. 11-000033-MT (Mich. Ct. Cl. 2015). That is, the Court of Claims, in effect, overruled the Supreme Court.
This rather surprising turn of events was rationalized by the Court of Claims finding that “. . . the Michigan Supreme Court’s mere denial of rehearing does not show that the issue of PA 282 was actually decided. The law of the case doctrine [whereby a ruling by an appellate court on a particular issue binds the appellate court and all lower tribunals with respect to that issue] does not apply to the Supreme Court’s order.” The Court of Claims concluded that the retroactive effect of Public Act 282 precluded IBM “from claiming a refund premised on the Compact’s elective apportionment formula.” This unexpected development, elevating the legislative branch’s subsequent actions above the highest state court’s decision that was based on an interpretation of legislative intent, raised fundamental questions about separation of powers and the ability of a lower court to disregard the order issued by a higher appellate court.
The Court of Appeals has now figuratively set the record straight, clarifying it is improper for a lower court to disregard a higher court’s order and specific instructions, and reversing the Court of Claims decision. The Court of Appeals held:
[T]he Court of Claims did not have any discretion or authority to rule in favor of the Department. The Court of Claims was specifically instructed to enter an order granting summary disposition in favor of IBM, and it erred by ultimately failing to do so.
Additionally, the Court of Appeals found that the law of the case doctrine was not applicable, holding that “the principle. . . that a lower court cannot exceed the scope of a remand order controls and is distinguishable from the law of the case doctrine.” The Court of Appeals instead relied upon the “rule of mandate” which is “similar to, but broader than, the law of the case doctrine.” That rule “embodies the well-accepted principle in our jurisprudence that a lower court must strictly comply with, and may not exceed the scope of, a remand order.”
The Court of Appeals found that the Court of Claims improperly exceeded the limit of its powers on remand and that “[f]or all intents and purposes, the [IBM] case was over once it left the Michigan Supreme Court; there was not to be any further substantive litigation, proceedings, or decision-making.” The Court of Appeals also clarified its position that Public Act 282, which was enacted following the issuance of the Supreme Court’s opinion and prior to rendering a decision on the Department’s motion for rehearing, could not change the decision, noting that “it is well-established that ‘the Legislature may not reverse a judicial decision,’ and that ‘only the Supreme Court has the authority to overrule its own decisions.’” Thus, the Court of Appeals held that neither the state legislature nor the Court of Claims had the power to alter the Michigan Supreme Court’s ruling.
…But Still Not Justice For All
Although it ruled in favor of IBM, the Court of Appeals made clear that its ruling only applies to IBM for its 2008 tax year and not to any other taxpayers or any subsequent tax years, distinguishing the present case from its recent ruling in Gillette Commercial Operations N.A.& Subsidiaries, et al. v. Dep’t of Treasury, 312 Mich. App. 394 (2015), cert denied Dkt. 152588 (Mich. June 24, 2016). In Gillette, the Court of Appeals upheld the retroactive repeal of the Compact in Public Act 282 and denied those corporate taxpayers the ability to make the Compact election. The Court of Appeals explained that its Gillette decision could not overrule or reverse the Michigan Supreme Court’s decision in IBM, which related to IBM’s 2008 MBT liability; however, this decision did not protect IBM or other taxpayers from the effect of Public Act 282 with respect to other taxes not addressed in IBM, regardless of the fact that most of the claims in the Gillette case were filed before the Michigan Supreme Court’s resolution in IBM and
“prudently held […] in abeyance pending that decision.” In other words, with the exception of IBM’s 2008 tax year, Public Act 282 applied instead of the Michigan Supreme Court’s decision in IBM, denying the use of the Compact election for those taxpayers and periods.
Taxpayers have brought Compact election cases in a number of states, with the California Supreme Court and Minnesota Supreme Court ruling in favor of the state and with appeals to the Oregon Supreme Court and Texas Supreme Court pending. Some of the California litigants have petitioned the U.S. Supreme Court for review, and the Michigan litigants from Gillette are reportedly planning to file a petition with the U.S. Supreme Court later this year. While the final disposition of the Compact election cases remains to be seen and the Department still could appeal in IBM, we are pleased to report that in Michigan, at the time of the writing of this article, IBM appears to have received the favorable judgment granted to it by the Michigan Supreme Court in 2014.
For previous updates on the MTC three-factor apportionment election debate, please refer to prior Tax News and Developments articles California Shaves Off its MTC Refund Claims for the New Year (Volume XVI, Issue 1, February 2016), Multistate Tax Compact Litigation: 3-Factor Apportionment Election Update (Volume XV, Issue 5, October 2015), Michigan Multistate Tax Compact Update: Michigan Court of Claims Upholds the Retroactive Repeal of the Multistate Tax Compact in Yaskawa and Ingram Micro (Volume XV, Issue 1, February 2015), and Ready for Another Round? Michigan’s Second Retroactive Repeal of the Multistate Tax Compact Election (Volume XIV, Issue 6, December 2014) available under insights at http://www.bakermckenzie.com.
Contact the Author: Drew Hemmings
This article originally was originally published in the August 2016 edition of Tax News and Developments (Volume XIV, Issue 4) and is available under insights at www.bakermckenzie.com.
