United States: Michigan Supreme Court Clarifies Refund Claim Procedures Necessary To Trigger Accrual Of Interest

The Michigan Supreme Court has clarified the actions that a taxpayer must take under Michigan law to trigger the accrual of interest on a tax refund.¹ The plain language of the refund statute requires a taxpayer to pay the disputed tax, make a "claim" or "petition" for a refund, and "file" the claim or petition. The "claim" or "petition" does not need to take any specific form, but it must clearly demand, request or assert a right to a refund of tax payments made to the Department of Treasury that the taxpayer asserts are not due. Finally, in order to "file" a claim or petition, a taxpayer must submit the claim to the Department in a manner sufficient to provide it with adequate notice of the claim.

Background

The taxpayer and the Department substantively disagreed over whether the taxpayer owed amounts under the former Single Business Tax (SBT) related to contributions to its Voluntary Employees' Beneficiary Association (VEBA) trust fund for 1997 through 2001. Because this was a procedural case, the timing and content of the communications between the taxpayer and the Department was relevant.

On August 3, 2005, the Department sent an Audit Determination Letter informing the taxpayer that the VEBA contributions were taxable under the SBT. The taxpayer immediately returned the letter to the Department after checking the box indicating that the taxpayer disagreed with the determination.² On November 17, 2005, the taxpayer requested an informal conference with the Department on the determination that the VEBA contributions were taxable.

On August 25, 2006, the taxpayer sent a letter to the Department withdrawing its request for an informal conference, informing the Department that the taxpayer intended to file a complaint in the Court of Claims, and requesting that the Department verify that the disputed tax liability was satisfied with unassigned funds that the taxpayer had deposited with the Department. Also, this letter stated that application of the taxpayer's funds on deposit were payment "under protest" pursuant to the statute authorizing appeals.³

On September 15, 2006, the Department sent a Final Audit Determination Letter assessing a tax liability approximately $20 million greater than the amount the taxpayer previously had paid. The Department also stated that the taxpayer owed approximately $2 million in tax deficiency interest.⁴

On December 13, 2006, the taxpayer filed a complaint in the Court of Claims asserting that the VEBA contributions were not taxable under the SBT. The Court of Claims granted summary disposition to the Department. The taxpayer appealed and the Court of Appeals reversed on the substantive issue, holding that the VEBA contributions were not taxable under the SBT.⁵

The taxpayer filed a motion in the Court of Claims on August 29, 2011 to enforce the judgment. Before the motion was decided, the Department remitted $15 million to the taxpayer rather than the $17 million that the taxpayer claimed was due. The $2 million difference resulted in part from a procedural disagreement regarding when the refund claim was filed, thus triggering interest accumulation on the refund. The taxpayer and the Department agreed that overpayment interest begins accruing 45 days after the taxpayer provides adequate notice of a refund claim. The Department argued that interest should begin accruing 45 days after December 13, 2006 (the date the taxpayer filed the complaint in the Court of Claims), but the Court of Claims agreed with the taxpayer that interest should begin accruing 45 days after August 3, 2005 (the date the taxpayer immediately responded to the Department's Audit Determination Letter, which was issued on that same date). After the Court of Appeals reversed the decision, holding that interest did not accrue until 45 days after December 13, 2006,⁶ the Michigan Supreme Court granted leave to appeal.

Refund Claim Procedures

Because it previously had been determined that the Department erroneously taxed the VEBA contributions, the Michigan Supreme Court only considered the procedural actions a taxpayer must take to trigger the accumulation of interest on a refund. A statute in the Michigan Revenue Act provides that, before interest begins accumulating on a tax refund, a taxpayer must pay the disputed tax, make a "claim" or "petition," and "file" the claim or petition.⁷ If these requirements are satisfied, interest is added to the refund beginning 45 days after the claim is filed.⁸

Payment of Disputed Tax

The Michigan Supreme Court explained that a taxpayer must actually pay the tax before it seeks a refund.⁹ The taxpayer had funds on deposit with the Department sufficient to pay the disputed tax liability by October 31, 2002. The Department acknowledged that the taxpayer directed it to apply these funds to the disputed liability. Therefore, by October 31, 2002, the taxpayer satisfied the statutory requirement that it pay the disputed tax.

Claim or Petition for Refund

If the taxpayer pays the tax, the statute requires that the taxpayer make a "petition" or "claim" for refund.¹⁰ Because the Revenue Act does not define these words, the Court presumed that the legislature intended for them to have their ordinary meaning. After examining dictionary definitions, the Court considered its decision in NSK Corp. v. Department of Treasury¹¹ regarding the proper interpretation of "petition" and "claim" as used in the refund statute. In NSK, the Department sent an Audit Determination Letter informing the taxpayer that it had overpaid its taxes. The taxpayer responded by checking the box that it agreed with the Department that a refund was owed in the amount stated, but also checked the box that it disagreed with the Department's determination. The taxpayer included a letter demanding interest on the refund. The Court explained in NSK that the refund statute "requires that the claim be one made by the taxpayer seeking a refund either in a tax return or by separate request."¹² The taxpayer in NSK did not satisfy this requirement until it "responded . . . to the Treasury Department's Audit Determination Letter, agreeing with the amount of the refund, but demanding interest on the refund."¹³

In the instant case, the Court reaffirmed its interpretation of the refund statute in NSK by concluding that a taxpayer can make a claim for refund in the form of a tax return, as specifically permitted by the statute, or "by separate request."¹⁴ Also, a taxpayer is not required to make the claim on a specific form or in any other specific manner, but only must "demand" or "request" the refund or "assert[] . . . an existing right" to the refund.¹⁵

After thoroughly considering the taxpayer's various communications to the Department, the Court concluded that the taxpayer's August 25, 2006 letter made a "claim" or "petition" for a refund by informing the Department that it intended to file suit in the Court of Claims pursuant to the statute authorizing appeals.¹⁶ Although a taxpayer does not need to file a lawsuit in order to make a claim or petition for a refund, the Court concluded that the reference to the statute authorizing appeals constituted a claim or petition for refund. By referring to the appeals statute in expressing the taxpayer's decision to institute a formal legal action in a court of law, this letter indicated that the taxpayer was claiming a refund as distinctly contemplated by the appeals statute.

The Court rejected the taxpayer's argument that it made a claim or petition for refund on August 3, 2005 when it responded to the Audit Determination Letter by checking the box indicating that it "disagrees with this determination." Although expressing disagreement with a tax assessment may imply that the taxpayer may seek a refund, an expression of disagreement alone is not a demand for, request for, or assertion of a right to a refund. Also, the taxpayer's November 17, 2005 request for an informal conference with the Department did not constitute a claim or petition for refund. A request for an informal conference could potentially constitute a claim or petition for a refund if it includes a demand, request or assertion of a refund, but the taxpayer's request for an informal conference in this case did not make such a demand, request or assertion.

Filing of Claim or Petition

The refund statute provides that interest only is added to the refund beginning 45 days after the claim is filed.¹⁷ Similar to the terms "claim" and "petition," the Revenue Act does not define "filed." Applying definitions of "file" to the statute contained in a dictionary, the Court concluded that, in order for a taxpayer's "claim" for a refund to trigger the 45-day waiting period, the taxpayer must "submit" the claim to the Department. According to the Court, the term "file" requires the taxpayer to provide the Department with adequate notice of the taxpayer's claim or petition for a refund. This interpretation is consistent with the purpose of the 45-day waiting period between submission of the claim and the start of interest accumulation on the refund. This waiting period provides time for the Department to investigate the claim for refund and determine its validity before interest begins accumulating.

The Court held that the taxpayer's August 25, 2006 letter satisfied this requirement because the taxpayer mailed the letter to the Department, and, as evidenced by the Department's responsive letter of September 15, 2006, the Department received it. Thus, all of the requirements of the refund statute were satisfied on August 25, 2006. Interest began accruing on the refund 45 days later, on October 9, 2006.

Separate Opinion Agrees with Analysis, Disagrees with Application

In a separate opinion concurring in part and dissenting in part, three justices of the seven justice Court agreed with the majority's statutory analysis, but disagreed with the majority's determination that the taxpayer's August 25, 2006 letter satisfied the test. Specifically, the three justices disagreed with the conclusion that, by virtue of this letter, the taxpayer made a claim or petition for a tax refund by informing the Department that it intended to file suit in the Court of Claims pursuant to the statute authorizing appeals. According to the three justices, this letter did not claim or petition any right to a refund. Thus, the majority's holding that the August 25, 2006 letter constituted a claim or petition "injects unnecessary uncertainty" in applying the test. The three justices would have affirmed the Court of Appeals' decision holding that the taxpayer did not satisfy the statutory requirements until it actually filed its complaint in the Court of Claims on December 13, 2006.

Commentary

In this case, the Michigan Supreme Court clarified the statutory refund claim procedures that are necessary to trigger the accrual of interest, emphasizing the strict nature of the procedure that must be followed. The ruling may benefit taxpayers in some cases, because it broadly construes the second part of the test requiring that a taxpayer make a claim or petition for a refund. A taxpayer is not required to make the claim on a specific form or in any other specific manner, but it must clearly demand, request or assert a right to a refund of tax payments. However, as expressed by the concurring/dissenting opinion, there may be some difficulty in determining whether a taxpayer complies with this test.

This decision demonstrates that in order for interest to begin to accrue, taxpayers should file a clear claim or petition for a refund with the Department that meets the test outlined in this decision and that is not subject to any potential misinterpretation. To ensure that they comply with the refund statute, taxpayers may want to prepare an actual amended return and refund letter. Further, filing the refund claim with the Department's central office rather than a field agent will ensure that the Department is immediately put on notice that if successful on the substantive claim, the taxpayer will also receive accrued interest.

Footnotes

1 Ford Motor Co. v. Department of Treasury, Michigan Supreme Court, Dkt. No. 146962, June 26, 2014.

2 The letter incorporated the audit report of findings prepared by the Department, which acknowledged that the taxpayer "disagrees with the audit determination" and "want[s] to request a hearing on the contested issue."

3 MICH. COMP. LAWS § 205.22.

4 On September 19, 2006, the taxpayer notified the informal conference division that it was withdrawing its request.

5 Ford Motor Co. v. Department of Treasury, 794 N.W.2d 357 (Mich. Ct. App. 2010).

6 Ford Motor Co. v. Department of Treasury, Michigan Court of Appeals, Dkt. No. 306820, Feb. 26, 2013 (unpublished opinion).

7 MICH. COMP. LAWS § 205.30.

8 MICH. COMP. LAWS § 205.30(3).

9 MICH. COMP. LAWS § 205.30(2).

10 Id.

11 748 N.W.2d 884 (Mich. 2008).

12 Id. (emphasis added by Court).

13 Id.

14 Id.

15 Id.

16 MICH. COMP. LAWS § 205.22. This statute provides that "[i]n an appeal to the court of claims, the appellant shall first pay the tax, including any applicable penalties and interest, under protest and claim a refund as part of the appeal."

17 MICH. COMP. LAWS § 205.30(3).

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