TCF Nat'l Bank v. Dep't of Treasury

TCF Nat'l Bank v. Dep't of Treasury

Opinion

 [**471]   [*599]  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) The court also affirmed the Department's franchise-tax assessments, derived by the Department using its computation method for determining the amount of 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

 [*600]  TCF is a federally chartered national bank with branches in Michigan and a wholly owned subsidiary of TCF Financial [***2]  Corporation, a Delaware holding company headquartered in Minnesota. TCF 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. On 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 it 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  [*601]  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.³ 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 [***4]  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  [**472]  took the averaged net capital for each member and added the amounts together to derive the UBG's net capital. Using this method 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 method 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.

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