Michigan AG Seeks to Intervene in IBM Tax Compact Case

The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.

By Michael J. Bologna

Sept. 22 — Michigan Attorney General Bill Schuette (R) vigorously disputed IBM’s contention that he lacks clear authority to challenge a July court ruling that handed “Big Blue” a refund of $6 million in its long-running tax dispute with the Michigan Department of Treasury ( Int'l Bus. Machs. Corp. v. Mich. Dep't of Treasury, Mich., No. 154369, response brief 9/21/16 ).

Schuette, in a response petition filed with the Michigan Supreme Court, pushed back on International Business Machines Corp.'s earlier objections asserting he lacks standing to defend the interests of the state in the tax matter. IBM’s views are premised, in part, on the treasury department’s decision to accept an earlier Michigan Court of Appeals ruling and decline the right to appeal.

On July 21, the appeals court ruled IBM is entitled to use the Multistate Tax Compact’s three-factor apportionment formula for its 2008 taxes rather than the single sales factor regime required under the Michigan Business Tax Act (BTA). The ruling triggered a demand by IBM for a refund of $5.9 million, plus interest (2016 Weekly State Tax Report 16, 7/29/16).

Schuette filed to intervene on behalf of the state on Sept. 1. IBM objected to the intervention Sept. 15 and must file a reply brief responding to Schuette's Sept. 21 response by Sept. 29, but has asked for additional time to respond.

Money ‘On The Line.'

Through Solicitor General Aaron Lindstrom, who is counsel of record, Schuette argued the state’s counsel always has standing to challenge circumstances “when the state’s money is on the line.” At a minimum, the attorney general said the Michigan Supreme Court should give him a full opportunity to argue his position before the court.

“[I]f this Court has any inclination to take the extraordinary step of determining that Attorney General lacks the authority to represent the State when the State’s money is on the line, then the Court should call for further briefing and oral argument on that issue,” according to the brief.

First of a Kind

Tax practitioners in Michigan will be watching the matter closely.

Counsel for IBM told Bloomberg BNA that Schuette’s attempt to intervene may be the first time a state attorney general has pursued a tax appeal in his own name, while acting in conflict with a judgment of the Department of Treasury.

A spokesman for the treasury department told Bloomberg BNA that the agency chose to accept the appellate court's decision, but Schuette has adopted an alternative strategy.

“The Department of Treasury accepts the decision of the Court of Appeals in the IBM case and did not support an appeal to the Michigan Supreme Court,” the agency said in a statement. “The Attorney General chose to pursue an appeal, but Treasury is not a party to that case.”

‘Non-Existent Appeal.'

In its motion to strike intervention filed Sept. 15, IBM cited the precedent established in Federated Ins. Co. v Oakland Cty. Road Comm'n, 475 Mich. 286 (2006). IBM argued the attorney general doesn't have standing to intervene when the losing parties fail to file a timely appeal. To the extent the treasury department—the sole defendant in the action—chose not to appeal, IBM argued Schuette essentially has no client.

“The Attorney General does not have authority to litigate a non-existent appeal that the parties themselves have chosen not to pursue,” IBM argued.

Schuette disagreed in his Sept. 21 brief, saying his client is “the state itself” and he has no requirement to demonstrate that the state’s lawyer had been injured.

In addition, Schuette said IBM’s brief assumes the taxes at issue belong to the treasury department rather than the state.

“The money in the state treasury belongs to the State, and a loss of that money injures the State, not merely the Department of Treasury (the banker),” according to the brief. “The State thus has standing to appeal, represented by the Attorney General (its attorney).”

State Suffering Injury

Finally, Schuette said the precedent in Federated Insurance has no bearing in the IBM matter because the case involved an injury to a county and not the state.

“Because the State has been injured, and the Attorney General represents the State, IBM’s motion to strike should be denied,” according to the brief.

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bna.com

To contact the editor responsible for this story: Cheryl Saenz at csaenz@bna.com

For More Information

The attorney general's response to IBM's motion to strike is at http://src.bna.com/iO4.

IBM's motion to strike is at http://src.bna.com/iO7.

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