In Ally Financial Inc v State Treasurer, No. 327815, the Court of Appeals affirmed the trial court’s grant of summary disposition holding that Ally is not entitled to a “bad debt” tax credit under MCL 205.4I because the election forms signed by the lenders apply only to “accounts currently existing or created in the future” and are not applicable to the already written off loans. The Court of Appeals also affirmed that repossessed property is excluded as ‘bad debt’ tax and clarified the interpretation of bad debt to mean what the plain language of the contract states. Further, the Court found that the Department could require plaintiffs to submit specific RD-108 forms as proof those taxes had, in fact, been paid.
Plaintiffs are financing companies that financed the purchase of motor vehicles from retailers around the state. Under the retail installment contracts, car purchasers agreed to pay the entire amount financed, including sales tax. The dealership assigned all of their rights under the installment contracts to plaintiffs, which included the right to enforce the debt and repossess the property. Once plaintiffs determined such installment contracts worthless, they claimed the remaining balances as ‘bad debts’ under §166 of the Internal Revenue Code, 26 USC 166, on their federal tax returns.
The Court of Claims found in order for either a retailer or a lender to seek a refund for sales tax on bad debts, there had to be a clear election as to who would be entitled to pursue the refund. The court found the plaintiffs' written elections with the retailers did not satisfy the statute because they applied on the “currently existing” loans. The plaintiff had provided several documents regarding election agreements with retailers, however these documents were signed and dated after the date plaintiff wrote off the bad debt for federal income tax purposes. Because the election forms applied only to “accounts currently existing or created in the future,” they were not applicable to the already written off loans.
Further, the Court of Claims did not err when it found that the Department could require plaintiffs to submit RD-108 forms as proof that tax had, in fact, been paid. “In MCL 205.54i(4), the Legislature specified that the deduction must be supported by evidence required by the Department. The Department was granted authority to determine the evidence necessary to support the refund.
Finally, the Court of Claims cited and relied upon the non-binding case Daimler Chrysler, when it concluded that repossessed property was excluded as bad debt. Although under MCR 7.215(C)(1) the unpublished decision is not binding, the Court agreed with its straightforward analysis. Until the Legislature amends the statute or the Department adopts regulations that are different, the Court was not persuaded that it should depart from the interpretation adopted by the Department and affirmed by the Court of Appeals in Daimler Chrysler. The Department’s longstanding policy with respect to bad debt deductions for repossessed property is consistent with the plain and unambiguous language of the statute and we therefore give it deference
