Grunewald v. Department of Treasury Wortley

Danhof, C.J. In this appeal, we address the question whether a Michigan resident is entitled to take into account his distributive share of losses sustained by an out-of-state limited partnership in computing his income subject to the Michigan income tax. During 1969 and 1970, plaintiffs, Carson C. Grünewald and Alfred C. Wortley, Jr., Michigan residents, were limited partners in Liberty Park Development Company (Liberty Park). Liberty Park was a limited partnership formed under Pennsyl *604 vania law for the purpose of acquiring and operating an apartment project in that state. It conducted no business in Michigan. In 1969 and 1970, Liberty Park sustained net partnership losses. Plaintiffs-taxpayers filed joint state and Federal tax returns for these two years. On the Federal returns, the taxpayers deducted their distributive shares of the partnership losses in determining adjusted gross income. In computing taxable income on the state tax returns, the taxpayers carried over the Federal adjusted gross income figures without making any adjustments for the limited partnership losses. Defendant, Michigan Department of Treasury, issued assessments against plaintiffs, claiming that the limited partnership losses were attributable to Pennsylvania and could not be used to reduce income subject to the Michigan income tax. Thus, the treasury required the taxpayers to add their shares of the Liberty Park losses back into their Federal adjusted gross income figures for 1969 and 1970 in computing Michigan taxable income. Plaintiffs appealed unsuccessfully to the Board of Tax Appeals and the Court of Claims, and this appeal followed. We begin our analysis of the relevant provisions of the Income Tax Act of 1967, MCL 206.1 et seq.; MSA 7.557(101) et seq., with two preliminary findings. First, we agree with the Board of Tax Appeals finding that the term "income” in the act includes both positive and negative business results. Therefore, any allocation of income is also an allocation of losses attributable to the same activity. Second, the Board of Tax Appeals and the Court of Claims assumed that the taxpayers’ income from the limited partnership was business income. Section 4(2) of the act, MCL 206.4(2); MSA 7.557(104)(2) states: *605 " 'Business income’ means income arising from transactions, activities and sources in the regular course of the taxpayer’s trade or business and includes income from tangible and intangible property if the acquisition, rental, management and disposition of the property constitutes integral parts of the taxpayer’s regular trade or business operations.” The taxpayers do not argue on appeal that the limited partnership income was nonbusiness income. Such income has been treated as business income in other jurisdictions, Collins v Skelton, 256 Ark 955; 512 SW2d 542 (1974), Friedell v Comm’r of Taxation, 270 NW2d 763 (Minn, 1978), and we hold such treatment was proper in the instant case. The starting point for computation of Michigan taxable income for an individual is Federal adjusted gross income; however, the two figures are not necessarily identical in all cases. See, Production Credit Ass’n of Lansing v Dep’t of Treasury, 404 Mich 301, 311-312; 273 NW2d 10 (1978). Some adjustments to the Federal figure are specified in § 30 of the act which provides: "’Taxable income’ in the case of a person other than a corporation, an estate, or trust means adjusted gross income as defined in the internal revenue code subject to the following adjustments * * MCL 206.30(1); MSA 7.557(130)(1). Eleven adjustments are listed. The dispute in the instant case concerns the applicability of adjustment (j)> which reads: "Adjustments resulting from the allocation and apportionment provisions of chapter 3.” The first relevant provision of chapter 3 is § 103, which states: "Any taxpayer having income from business activity *606 which is taxable both within and without this state, other than the rendering of purely personal services by an individual, shall allocate and apportion his net income as provided in this act.” MCL 206.103; MSA 7.557(1103). The limited partnership income in the present case falls under the category of income from business activity taxable both within and without this state. A taxpayer is taxable in another state where that state has jurisdiction to subject him to an income tax, whether it does so or not. MCL 206.105; MSA 7.557(1105). Pennsylvania has jurisdiction to tax the limited partnership income earned in that state. Shaffer v Carter, 252 US 37; 40 S Ct 221; 64 L Ed 445 (1920). Section 115 of the Income Tax Act sets forth the apportionment procedure as follows: "All business income, other than income from transportation services, shall be apportioned to this state by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is 3.” MCL 206.115; MSA 7.557(1115). The property, payroll, and sales factors represent the percentage of the total property, payroll, or sales of the business used, paid, or made in this state. MCL 206.116; MSA 7.557(1116), MCL 206.119; MSA 7.557(1119), MCL 206.121; MSA 7.557(1121). Each factor in the present case is zero; thus, the fraction specified by § 115 is 0/3, and none of the taxpayers’ income from the limited partnership is attributable to Michigan. Plaintiffs argue that the treasury’s position is inconsistent with the holding of the Board of Tax Appeals, in Craighead v Dep’t of Treasury, Mich *607 Tax Rep (CCH), ¶ 200-751 (1978), that Michigan shareholders in a Colorado subchapter S corporation could deduct their shares of the corporation losses in computing taxable income for the Michigan income tax. The board relied in part on a since-repealed statute which required shareholders in subchapter S corporations to include their proportionate share of the corporation taxable income in their income for state income tax purposes without distinguishing between in-state or out-of-state subchapter S corporations. MCL 206.81; MSA 7.557(181), repealed by 1975 PA 233. The board also suggested that subchapter S distributions are equivalent to corporate dividends which are allocated to this state where the taxpayer is a resident, MCL 206.113; MSA 7.557(1113). Finally, the board found no basis for application of the allocation and apportionment provisions of the Income Tax Act to subchapter S distributions. It is true that in Craighead, the board attributed losses from business activity conducted outside of the state to Michigan as the taxpayers argue should be allowed in the present case. Plaintiffs claim that the substantive similarity between limited partnerships and subchapter S corporations requires that income from the two types of entities receive similar tax treatment. While we agree with the board’s treatment of subchapter S distributions as corporate dividends, we cannot make the same analogy with limited partnership income because partnership income has always been taxed as income to the partners rather than at the partnership level. Finally, we are guided in this case by the principle of statutory interpretation that the practical construction given to obscure statutes by those charged with their administration will be given *608 great weight. Roosevelt Oil Co v Secretary of State, 339 Mich 679; 64 NW2d 582 (1954). We find that application of the allocation and apportionment provisions by the treasury was not improper and affirm the judgment of the Court of Claims. Affirmed. No costs, a public question.