Generally, for federal reporting, gains and losses are classified as either ordinary or capital. Capital gains or losses are either short term or long term and netted on federal Schedule D. Investment property such as stocks and bonds are capital assets and the gain or loss generated is a capital gain or loss. Federally, for a partnership or S corporation, these gains and losses are separately reported to the partners or shareholders.

The MBT business income tax base imposes tax on every taxpayer with business activity within this state. The business income tax base means a taxpayer's business income subject to certain adjustments. "Business income" means that part of federal taxable income derived from business activity. For a partnership or S corporation, business income includes payments and items of income and expense that are attributable to business activity of the partnership or S corporation and separately reported to the partners or shareholders. MCL 208.1105. There are no statutory adjustments to the business income tax base for the disposition of capital assets. MCL 208.1201. Therefore, any net capital gain attributable to business activity of the investment partnership that is separately reported to the partners is also included in the MBT business income tax base of the partnership.

The MBT also imposes tax on the modified gross receipts tax base of each taxpayer with nexus. MCL 208.1203. "Gross receipts" means the entire amount received by the taxpayer as determined by using the taxpayer's method of accounting used for federal income tax purposes, . . ., from any activity whether in intrastate, interstate, or foreign commerce carried on for direct or indirect gain, benefit, or advantage to the taxpayer or to others with certain exceptions. Subsection (p) provides an exception for each capital asset sold. MCL 208.1111(1)(p). When a capital asset is sold or disposed of at a gain, only the gain is effectively included in gross receipts.

This exception does not make a similar provision for capital assets sold at a loss. In such cases, the exception only excludes the proceeds from gross receipts. There is no adjustment or deduction of losses from the gross receipts. Therefore, a taxpayer may not net capital gains and losses when calculating the modified gross receipts tax base.

Finally, MCL 208.1111(1)(x) excepts from gross receipts investment activity by a person that is organized exclusively to conduct investment activity and that does not conduct investment activity for any person other than an individual or a person related to that individual or by a common trust fund established under the collective investment funds act, 1941 PA 174, MCL 555.101 to 555.113. A person related to an individual is defined as a spouse, brother or sister, whether of whole or half blood or by adoption, ancestor, lineal descendent of that individual or related person, or a trust benefiting that individual or one or more persons related to that individual. Unless the facts and circumstances surrounding the investment partnership meet this exemption, gains from the sale of capital assets must be included in gross receipts as described above. In such instances, a taxpayer may not net capital gains and losses when calculating the modified gross receipts tax base.