Michigan: Court of Appeals’ orders Court of Claims to enter judgment in IBM’s favor

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On July 21, 2016, Michigan’s Court of Appeals issued an opinion (Opinion) in favor of International Business Machine’s (IBM) three-factor tax apportionment calculations, chastising the Court of Claims for failing to follow its mandate. Stated the Court: “[w]hen an appellate court remands a case with specific instructions, it is improper for a lower court to exceed the scope of the order.”

In July 2014, in the case IBM v Dep’t of Treasury, the Michigan Supreme Court determined that the company could apply the Multistate Compact’s (Compact) three-factor apportionment formula to its 2008 state tax bill, entitling it to a refund of almost $6 million. We explained the history of the case and the Compact earlier this month, when the state’s high court refused to hear further appeals pursuant to the Compact’s September 2014 legislative repeal.

The July 21, 2016, Opinion underscored that the Michigan Supreme Court had concluded “that IBM was entitled to use the Compact's three-factor apportionment formula for its 2008 Michigan taxes,” declaring that “the Court of Appeals erred by holding otherwise.” The appellate court further pointed out, with italicized emphasis, that the high court’s unambiguous conclusion was to “reverse the Court of Appeals judgment in favor of the [Treasury] Department, reverse the Court of Claims order granting summary disposition in favor of the Department, and remand to the Court of Claims for entry of an order granting summary disposition in favor of IBM.”

After the Supreme Court’s decision refusing the appeal, Michigan’s Treasury Department (Department) filed a motion asking for a rehearing, but before the court rule on it, lawmakers terminated the state’s membership in the Compact, retroactive to 2008. This meant that corporations could not apply the Compact’s three-factor apportionment formula; instead, they had to use the sales-factor apportionment formula under the state’s Business Tax Act of 2008.

The retroactive repeal served as the basis for the Department’s rehearing motion at the Supreme Court, as well as the Court of Claims’ conclusion in the Department’s favor on remand, pursuant to the Department’s motion for reconsideration.

The Appellate Court was unconvinced that the law’s repeal justified the Court of Claims’ defiance of its mandate. Citing numerous cases, the Court of Appeals highlighted the principle that “[w]hen an appellate court remands a case with specific instructions, it is improper for a lower court to exceed the scope of the order….Here, the Court of Claims was specifically instructed to end an order granting summary judgment disposition in favor of IBM, and it erred by ultimately failing to do so.”

As for the subsequent repeal of the law, the Court of Appeals reasoned that the case was effectively over once it left the Supreme Court’s jurisdiction. Strict adherence to Appellate Court’s order was necessary to preclude further “substantive litigation, proceedings, or decision making,” lest the issue of proper apportionment be “litigated endlessly on the basis of any future statutory changes…”

The Appeals Court noted that the door could be open for further action: “[I]f the Supreme Court wishes to revisit the issue on an application for leave to appeal, it of course has that prerogative…”

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