Case Name: ELENBAAS v. DEPARTMENT OF TREASURY
Court: Michigan Court of Appeals
Jurisdiction: Michigan
Decision Date: 1999-04-23
Citations: 235 Mich. App. 372
Docket Number: Docket No. 197467
Parties: ELENBAAS v DEPARTMENT OF TREASURY
Judges: Before: Cavanagh, P.J., and Holbrook, Jr., Gribbs, Griffin, Fitzgerald, Saad, and Gage, JJ.
Reporter: Michigan appeals reports; cases decided in the Michigan Court of Appeals.
Volume: 235
Pages: 372–379

Head Matter:
ELENBAAS v DEPARTMENT OF TREASURY
Docket No. 197467.
Submitted April 9, 1998, at Lansing.
Decided April 23, 1999, at 9:20 a.m.
Leave to appeal sought.
Jack and Eleanor Elenbaas brought an action in the Court of Claims against the Department of Treasury, seeking the refund of income taxes paid on gross receipts from oh and gas production. The plaintiffs, who had paid severance taxes on royalties received from oh and gas leases, claimed the income tax refunds on the ground that § 15 of the severance tax act, MCL 205.315; MSA 7.365, allows individuals who pay the severance tax on royalties received from oh and gas leases to be exempt from paying income tax on those royalties because the severance tax is paid in lieu of all other state or local taxes. The court, Michael G. Harrison, J., granted a judgment for the plaintiffs, determining that the plaintiffs are entitled to subtract from taxable income then gross receipts from oh and gas production, and not their net income therefrom. The Court of Appeals, Hood, P.J., and Makkman and Talbot, JJ., affirmed in part, reversed in part, and remanded, holding that the plaintiffs are entitled to exclude from Michigan taxable income their gross receipts from oh and gas production, and stating that MCR 7.215(H)(1) constrains it to follow Cook v Dep’t of Treasury, 229 Mich App 653 (1998), and hold that the plaintiffs’ oh and gas net operating loss for one of the taxable years in question should be added to their taxable income for that year because income subject to the Michigan income tax is calculated in the same manner as it would be under the federal Internal Revenue Code, and that code disallows deductions allocable to income exempt from income taxation. The Court of Appeals, sitting en banc, vacated the Court of Appeals opinion in this case and convened a special panel pursuant to MCR 7.215(H) to resolve the conflict between the vacated opinion and Cook. 231 Mich App 801 (1998).
After consideration by the conflict resolution panel, the Court of Appeals held:
The Cook panel reached the correct result. The trial court erred in finding that the plaintiffs were entitled to deduct the expenses associated with oh and gas production. In ah other respects, the prior Court of Appeals opinion in this case is adopted.
Affirmed in part, vacated in part, and remanded for further proceedings.
Gage, X, dissenting, stated that the Michigan Income Tax Act necessarily provides that taxable income will not include oil and gas production expenses, which are a proper deduction in arriving at federal adjusted gross income, and that because the plaintiffs were entitled to the deductions when calculating their federal adjusted gross income and because the Michigan Income Tax Act does not provide that the expenses associated with oil and gas production must be added back into federal adjusted gross income when calculating taxable income for Michigan, the trial court correctly allowed the deductions. The entire prior opinion of the Court of Appeals in this case should be affirmed.
Taxation — Oil and Gas — Income Tax — Severance Tax — Net Operating Losses.
Oil and gas proceeds that are subject to Michigan severance tax are exempt from taxation as income under the Michigan Income Tax Act; the Michigan Income Tax Act provides that, in the absence of any express provision in the act requiring a different result, income subject to tax is to be calculated in the same manner as it would be under the federal Internal Revenue Code; the Internal Revenue Code does not allow deductions allocable to income that is exempt from income taxation; because oil and gas proceeds subject to the severance tax are not subject to taxation under the Michigan Income Tax Act, the expenses properly allocated to the production of the oil and gas proceeds may not be included in calculating a net operating loss with regard to tax liability under the Michigan Income Tax Act; both oil and gas gross proceeds subject to the severance tax and their expenses are exempted from treatment under the Michigan Income Tax Act (26 USC 265[a][1]; MCL 205.315, 206.2[3], 206.30[1][0], [p]; MSA 7.365, 7.557[102] [3], 7.557[130][1][0], [PD-
Mika, Meyers, Beckett & Jones, P.L.C. (by Jeffrey A. DeVree), for the plaintiffs.
Frank J. Kelley, Attorney General, Thomas L. Casey, Solicitor General, and Kevin T. Smith, Assistant Attorney General, for the defendant.
Before: Cavanagh, P.J., and Holbrook, Jr., Gribbs, Griffin, Fitzgerald, Saad, and Gage, JJ.

Opinion:
Cavanagh, P.J.
Pursuant to MCR 7.215(H)(3), this special panel was convened to resolve a conflict between this Court's prior, vacated opinion in Elenbaas v Dep't of Treasury, 231 Mich App 801 (1998), and this Court's earlier decision in Cook v Dep't of Treasury, 229 Mich App 653; 583 NW2d 696 (1998). In accordance with MCR 7.215(H)(1), the prior Elenbaas panel was required to follow the precedent of Cook, supra. Were it not for MCR 7.215(H)(1), the previous panel would have affirmed the decision of the lower court.
The facts of this case were set out in this Court's previous opinion:
After this Court's ruling in Bauer v Dep't of Treasury, 203 Mich App 97; 512 NW2d 42 (1993), plaintiffs filed amended income tax returns for 1990, 1991, 1992, and 1993, seeking refunds for income taxes paid on their gross receipts from oil and gas production. In Bauer, this Court determined that § 15 of the severance tax act, MCL 205.315; MSA 7.365, allows an individual who pays the severance tax on royalties received from oil and gas leases to be exempt from paying income tax on those royalties. Id. at 99. This Court held that § 15 was clear and unambiguous and that, when it applies, the severance tax is to be paid in lieu of all other taxes. Id. at 100. No exception is made for the income tax. Id. at 101. Because plaintiffs had paid both the severance tax and the income tax on the gross receipts from their oil and gas production in those years, they filed amended income tax returns. Plaintiffs calculated the amount of their claimed refunds by subtracting the amount of their gross receipts from oil and gas production, which receipts had been taxed pursuant to the severance tax act, from the total taxable income on the returns for each year. They then recalculated the amount of income tax owed.
Defendant failed to issue the full amount of the refunds claimed for 1990, 1991, and 1992 and failed to issue any refund for 1993. It determined that the amount of gross receipts should not have been deducted from the total taxable income, but rather the amount of net income derived from oil and gas production for each year should be subtracted. This resulted in less of a refund for 1990, 1991, and 1992. In 1993, plaintiff's did not enjoy net income from their oil and gas production, but rather had a net loss. Defendant determined that the net loss should be added to their total taxable income for 1993 and thus, plaintiffs owed additional taxes for that year. The Court of Claims determined that plaintiffs were entitled to the full refunds claimed, which refunds were calculated by subtracting the gross receipts from oil and gas production from their total taxable income. [Elenbaas, swpra at 801-802.]
The conflict at issue is over whether plaintiffs were entitled to deduct oil and gas expenses when calculating their 1993 Michigan income tax or to include those expenses when calculating their net operating loss for Michigan income tax purposes. The Cook panel held that subsection 265(a)(1) of the federal Internal Revenue Code generally applies, under subsection 2(3) of the Michigan Income Tax Act (ita), to prevent taxpayers from deducting expenses related to exempt classes of income. The prior Elenbaas panel disagreed, noting that plaintiffs were entitled to deduct oil and gas production expenses when calculating their federal adjusted gross income and that oil and gas receipts are taxed in Michigan under the severance tax act, MCL 205.301 et seq.; MSA 7.351 et seq.
Following an order by the Court of Appeals en banc invoking the conflict resolution procedure of MCR 7.215(H)(3)-(6), this case was reconsidered by this special panel. After due consideration, we are persuaded that the Cook panel reached the correct result. We therefore hold, for the reasons set forth in Cook, that the trial court erred in finding that plaintiffs were entitled to deduct the expenses associated with oil and gas production in computing a net operating loss. In all other respects, we adopt the opinion of the prior Elenbaas panel as our own.
Affirmed in part, reversed in part, and remanded for further proceedings consistent with this opinion. We do not retain jurisdiction.
Holbrook, Jr., Gribbs, Griffin, and Fitzgerald, JJ., concurred.
26 USC 265(a)(1).
MCL 206.2(3); MSA 7.557(102)(3).
The prior Elenbaas panel and our dissenting colleagues disagree with Cook in part because oil and gas gross receipts are taxed under the severance tax act. We are not convinced by this argument. Subsection 2(3) of the ita does not say that, after considering all available Michigan tax schemes, Michigan taxpayers should be treated the same as they would under the federal tax scheme. Instead, subsection 2(3) clearly states that "the income subject to tax [shall] be the same as taxable income as defined and applicable to the subject taxpayer in the internal revenue code." MCL 206.2(3); MSA 7.557(102)(3). We therefore conclude that the taxation of a taxpayer under a different tax scheme, such as the severance tax act, is irrelevant.