Opinion ID: 1710425
Heading Depth: 1
Heading Rank: 3

Heading: three factor' or separate accounting

Text: Does the city have the right to impose the three factor allocation method for determining Detroit city income, or does the language of MCLA §§ 141.618, 141.619 and 141.620 (Stat Ann 1969 Rev §§ 5.3194[28], 5.3194[29], and 5.3194[30]), [2] leave the choice of separate accounting method to the absolute discretion of the taxpayer? [3] These sections of the statute read as follows: Sec. 18. When the entire net profit of a business subject to the tax is not derived from business activities exclusively within the city, the portion of the entire net profit, earned as a result of work done, services rendered or other business activity conducted in the city, shall be determined at the election of the taxpayer under either section 19, sections 20 to 24, or section 25. Sec. 19. The separate accounting method shall be used if such taxpayer regularly keeps its books and records in such manner as to show with reasonable accuracy the portion of its net profits attributable to work done, services performed or rendered, and business or other activity conducted within the city, and such portion of the net profits is subject to the tax. If such method is used the administrator may require a statement, explaining the manner in which the apportionment is made, in sufficient detail to determine whether the net profits attributable to the city are apportioned with reasonable accuracy. Sec. 20. The business allocation percentage method shall be used if such taxpayer does not elect to use the separate accounting method of allocation. The entire net profits of such taxpayer earned as a result of work done, services rendered or other business activity conducted in the city shall be ascertained by determining the total `in-city' percentages of property, payroll and sales. `In-city' percentages of property, payrolls and sales, separately computed, shall be determined in accordance with sections 21 to 24. Borman's maintains that the statute and ordinance give absolute discretion to a taxpayer operating in and outside the city to use the separate accounting method. The language used in sections 18 and 19 granted to a taxpayer the election to use separate accounting instead of the three factor allocation formula. Separate accounting is not defined in the statute. There is disagreement among meibers of the accounting profession as to just what the term means. While the taxpayer could initially make his election, we do not construe the method used to be his sole and absolute choice. If a separate accounting method is used by the taxpayer, the city, under § 19, may require a statement explaining the apportionment in sufficient detail to determine whether the net profits attributable to the city are apportioned with reasonable accuracy. MCLA § 141.625 (Stat Ann 1969 Rev § 5.3194[35]) provides that: An alternative method of accounting shall be used if the taxpayer or the administrator demonstrates that the net profits of the taxpayer allocable to the city cannot be justly and equitably determined under the separate accounting method or the business allocation percentage method   . Under § 25, the net profits of the taxpayer allocable to the city must be justly and equitably determined either under the separate accounting method or the business allocation percentage method, or an alternative method is to be used. This case is remanded to the circuit court for a determination of what method of accounting should be used justly and equitably to determine the net profits of the taxpayer allocable to the City of Detroit. It is clear that the method elected by the taxpayer does not meet this test. All of the taxpayer's activities within the City of Detroit, and particularly such vital activities as a central warehouse and advertising and management functions, must have contributed at least something toward making Borman's operations through its retail sales outlets successful. The method contended for by the taxpayer, however businesslike and desirable it may be to test the operations of each retail store, fails to make an equitable allocation for tax purposes of its profits from its entire operations. It does not meet the ultimate test of the statute  allocation of the net profits of the company justly and equitably among its various operations. The case is remanded to the Wayne County Circuit Court for further proceedings in accordance with this opinion. No costs, neither party having fully prevailed upon this appeal.