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C35. If two shareholders of a C corporation ("X Corp") are themselves C corporations (Y Corp and Z Corp) and one of Y Corp's shareholders is paid a management fee for managing the business of X Corp, does the management fee factor into the disqualifiers for the Small Business Alternative Credit under MCL 208.1417?

No, a management fee paid by X Corp to a Y Corp shareholder would not be considered compensation or directors' fee of an X Corp shareholder in determining disqualification under MCL 208.1417(1)(b). A Y Corp shareholder providing management services to X Corp for a fee is an inter-corporate transaction whereby the fees paid are revenues for the performance of services as opposed to "compensation" under MCL 208.1417(1)(b). Compensation is defined generally to mean all wages, salaries, fees, bonuses, commissions, and other payments made in the tax year for the benefit of the taxpayer's employees, officers, and directors. MCL 208.1107(2). Thus, compensation implies an employment relationship. A C corporation providing management services to another C corporation is not an employment relationship, but is rather the provision of services by one corporation to another. Therefore, the management fee Y Corp shareholder receives from X Corp is not included in the determination of the compensation ceiling disqualifier for the Small Business Alternative Credit for X Corp.

The Small Business Alternative Credit "is available to any taxpayer with gross receipts that do not exceed $20,000,000.00 and with adjusted business income minus the loss adjustment that does not exceed $1,300,000.00 as adjusted annually for inflation using the Detroit consumer price index" and subject to certain disqualifiers. MCL 208.1417(1). One such disqualifier is that a corporation other than a subchapter S corporation is disqualified from receiving the credit if either of the following occur for the respective tax year: (1) compensation and directors' fees of a shareholder or officer of the corporation exceed $180,000 or (2) the sum of (a) compensation and directors' fees of a shareholder and (b) the product of the shareholder's ownership percentage multiplied by the difference between the sum of business income and, to the extent deducted in determining federal taxable income, a carryback or carryforward of a net operating loss or capital loss, minus the loss adjustment, exceeds $180,000. MCL 208.1417(1)(b). Since a management fee paid by X Corp to the Y Corp shareholder is not compensation, it would not be includable in the credit disqualifier compensation ceiling of $180,000 for X Corp.

It should be noted, however, that the management fee paid to the Y Corp shareholder could disqualify Y Corp for the credit if the amount of the management fee caused the corporation's gross receipts to exceed $20,000,000.00 or its adjusted business income minus the loss adjustment to exceed $1,300,000.00.

It also should be noted that the disqualifiers under MCL 208.1417(1)(a) and (b) apply to a taxpayer that is a unitary business group if such disqualifiers apply to any member of that unitary business group. In the example posed, it is not clear whether X Corp and Y Corp and Z Corp meet the control test and relationship test under MCL 208.1117(6) so as to constitute a unitary business group. However, if the X Corp and the two corporations do satisfy the control test and relationship test and thus constitute a unitary business group under MCL 208.1117(6), then compensation or directors' fees of an officer of any of the member corporations exceeding $180,000 for the tax year would disqualify the unitary business group from receiving the credit.

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