United States: Michigan Court Of Appeals Enforces Mandate Allowing IBM To Make Three-Factor Apportionment Election

The Michigan Court of Appeals has held that the Michigan Court of Claims erred when it failed to issue an order granting summary disposition in favor of International Business Machines Corp. (IBM) on remand as specifically instructed by the Michigan Supreme Court.1 The Michigan Supreme Court's decision had held that IBM could elect to use the Multistate Tax Compact's equally-weighted three-factor apportionment formula for the 2008 tax year. Contrary to the Michigan Supreme Court's instructions, the Court of Claims had entered an order granting summary disposition in favor of the Michigan Department of Treasury. The Court of Appeals' decision does not extend to other taxpayers currently litigating the validity of the Compact.

Background

On July 14, 2014, the Michigan Supreme Court issued its opinion in International Business Machines Corp. v. Department of Treasury in favor of the taxpayer.2 The case centered on whether IBM could use the Compact's three-factor apportionment formula for purposes of the Michigan Business Tax (MBT) for the 2008 tax year or whether it was limited to using the statutory single sales factor formula. The Michigan Supreme Court determined that IBM could elect to use the Compact formula for MBT purposes for the 2008 tax year. According to the Michigan Supreme Court, the legislature had not repealed the Compact's apportionment election provision by implication when it enacted the MBT. The Michigan Supreme Court remanded the case to the Michigan Court of Claims "for entry of an order granting summary disposition in favor of IBM."

In response to the Michigan Supreme Court's decision in IBM, the state enacted legislation on September 11, 2014, which amended the MBT, retroactively rescinded Michigan's membership in the Compact, effective January 1, 2008, and precluded "foreign corporations such as IBM from using the three-factor apportionment formula that had been available under the Compact."3 The Department filed a motion for rehearing with the Michigan Supreme Court bringing this new development to its attention. The Michigan Supreme Court denied the Department's motion.

On remand, as instructed by the Michigan Supreme Court, the Court of Claims entered judgment in favor of IBM. However, the Court of Claims later granted the Department's motion for reconsideration. In its decision, the Court of Claims addressed and acknowledged the "law of the case" doctrine, which provides that "a ruling by an appellate court on a particular issue binds the appellate court and lower tribunals with respect to that issue."4 However, the Court of Claims granted the Department's motion for reconsideration because the 2014 legislation was "an intervening change of law" that created an exception to the application of the law of the case doctrine. IBM appealed this decision to the Michigan Court of Appeals.

Law of the Case Doctrine Did Not Apply

In reversing the Michigan Court of Claims, the Michigan Court of Appeals explained that its analysis turned on the applicability of the "law of the case" doctrine and the exception to the doctrine where there is an intervening change of law. Under the doctrine, generally, "an appellate court's determination of an issue in a case binds lower tribunals on remand and the appellate court in subsequent appeals."5 The Court of Appeals concluded that its analysis was not controlled by the "law of the case" doctrine. Instead, the Court of Appeals looked to the controlling principle that "a lower court cannot exceed the scope of a remand order," which can be distinguished from the "law of the case" doctrine. The Court of Appeals noted that a recent federal case referenced a "rule of mandate" that "is similar to, but broader than, the law of the case doctrine" and provides that "any district court that has received the mandate of an appellate court cannot vary or examine that mandate for any purpose other than executing it."6 While the district court is allowed to decide matters not foreclosed by the mandate, the district court cannot takes an action that contradicts the mandate.7 The Court of Appeals pointed out that, while the term "rule of mandate" does not appear in Michigan case law, it reflects the principle found in Michigan case law that "a lower court must strictly comply with, and may not exceed the scope of, a remand order."

The Court of Appeals indicated that the Michigan Supreme Court's mandate of a ministerial entry of judgment for IBM eliminated all other possibilities for the Court of Claims to do anything other than enter the judgment for IBM's 2008 tax year. By contradicting this mandate, the Court of Claims exceeded the remand's jurisdictional scope. According to the Court of Appeals, the IBM case for the 2008 tax year ended following the Supreme Court's decision without the possibility of further substantive activity and the Court of Claims was "simply to perform the nondiscretionary, ministerial task of entering judgment in favor of IBM." The Court of Claims' decision to apply the 2014 legislation to IBM's 2008 taxes amounted to an impermissible reversal of the Michigan Supreme Court's decision in IBM. The Court of Appeals noted that the Michigan Supreme Court was aware of the 2014 legislation when it denied the Department's motion for rehearing. The Michigan Supreme Court may revisit the issue if it so desires but a lower court cannot ignore the directive by the Supreme Court to dispose of the case.

In reaching its decision, the Court of Appeals also addressed the decision in Gillette Commercial Operations North America & Subsidiaries v Dep't. of Treasury, which upheld the constitutionality of the 2014 legislation.8 The Court of Appeals stated that the subsequent Gillette decision cannot "overrule or reverse" the Michigan Supreme Court's earlier decision in IBM concerning 2008 taxes. The Court of Appeals went on to explain that "other taxes not addressed in the [IBM] opinion but caught under the umbrella of [the 2014 legislation] . . . would be subject to [the 2014 legislation] as construed by the Gillette panel" as would all other pending tax disputes.

Commentary

The ability of taxpayers to utilize the Compact's three-factor apportionment election has been the subject of much litigation in a variety of states. While the decision by the Michigan Court of Appeals marks a victory for IBM, it adds little to the overall Compact litigation that is under consideration. The decision by the Court of Appeals turned on a specific fact pattern that was unique to IBM: the failure of the Court of Claims to follow the remand order issued by the Michigan Supreme Court that directed the Court of Claims to issue summary judgment in favor of IBM.

While the decision does shed light on the nuances of the law of the case doctrine and introduces the rule of mandate into Michigan case law, it does not shed much light on the ongoing controversy in Gillette surrounding the constitutionality of the retroactive 2014 legislation that eliminated the ability to make the Compact election. On June 24, 2016, the Michigan Supreme Court denied the taxpayers' application for leave to appeal.9 However, two justices filed a dissent contending that the Court should grant leave to appeal because the issues raised in the case are "of considerable constitutional significance as to matters affecting the tax policy and procedures, the fiscal and business environments, and the jurisprudence of [Michigan]." At this point, it is likely that at least one of the many taxpayers in Gillette will appeal the case to the U.S. Supreme Court.

Footnotes

1 International Business Machines Corp. v. Department of Treasury, Michigan Court of Appeals, No. 327359, July 21, 2016.

2 International Business Machines Corp. v. Department of Treasury, 852 N.W.2d 865 (Mich. 2014), reh'g denied, 855 N.W.2d 512 (Mich. 2014). See also GT SALT Alert: Michigan Supreme Court Allows Multistate Tax Compact Three-Factor Apportionment Election for 2008 MBT Return.

3 Act 282 (S.B. 156), Laws 2014. For a discussion of this legislation, see GT SALT Alert: Michigan Enacts Legislation Designed to Eliminate Multistate Tax Compact Apportionment Election Refunds Allowed by IBM Case.

4 International Business Machines Corp. v. Department of Treasury, Michigan Court of Claims, No. 11000033-MT, April 28, 2015, citing Ashker v. Ford Motor Co., 627 N.W.2d 1 (Mich. Ct. App. 2001). See also GT SALT Alert: Michigan Court of Claims Reconsiders and Rules Against IBM in Multistate Tax Compact Three-Factor Apportionment Case.

5 Citing In Grievance Administrator v. Lopatin, 612 N.W.2d 120 (Mich. 2000). In Grievance Administrator, the Michigan Supreme Court provided the following explanation of the law of the case doctrine: "Under the law of the case doctrine, if an appellate court has passed on a legal question and remanded the case for further proceedings, the legal questions thus determined by the appellate court will not be differently determined on a subsequent appeal in the same case where the facts remain materially the same. The appellate court's decision likewise binds lower tribunals because the tribunal may not take action on remand that is inconsistent with the judgment of the appellate court. Thus, as a general rule, an appellate court's determination of an issue in a case binds lower tribunals on remand and the appellate court in subsequent appeals."

6 Citing Stacy v. Colvin, U.S. Court of Appeals, 9th Circuit, No. 13-36025, June 7, 2016.

7 Id.

8 878 N.W.2d 891 (Mich. Ct. App. 2015).

9 Gillette Commercial Operations N.A. & Subsidiaries v. Dep't of Treasury, 880 N.W.2d 230 (Mich. 2016).

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