Under Michigan's prior Single Business Tax ("SBT"), the Michigan Department of Treasury (the "Department") generally did not require individuals or estate and gift planning entities to file SBT returns or pay tax on income earned from passive investment activities. However, the Department's Discovery Division has recently been sending notices to taxpayers that appear to change this historical position. The Department is using an expansive interpretation of the definition of "business activity" under the SBT Act to conclude that items of passive income such as interest, dividends, and gains from the sale of assets constitute gross receipts that can create an SBT filing requirement even if the individual or entity does not own a business or engage in active business operations in Michigan.

The Department appears to be taking the position that many taxpayers with passive investment activity should have filed SBT returns for prior years dating back to as early as 2000, and is currently mailing "Letters of Inquiry" to individuals, partnerships, family limited partnerships (FLPs), and fiduciaries of estate and gift planning entities. These letters of inquiry ask taxpayers to file SBT returns, and to pay any taxes due, along with penalties and interest. The letters state that failure to respond will result in an assessment.

The Department's expansive interpretation of "business activity" creates both legal and practical issues that need to be addressed. Taxpayers who receive these types of Letters of Inquiry should take quick and careful action to avoid an assessment or conflict. For any taxpayers who have received a letter of inquiry from the Department and subsequently paid tax, penalties, and interest, it is important to take appropriate actions to ensure that the right to claim a refund is protected.