Czars, Inc. v. Michigan Department of Treasury.
Michigan Tax Tribunal, Dkt. No. 220832, October 1, 1996, released January 1997

Unofficial Summary of the Case
Czars, Inc. (Czars) was a Delaware Corporation for the purpose of purchasing an aircraft which was to be used by Grand Aire Express (Grand Aire) to transport property. At the time Czars was created, Michigan law did not exempt aircraft used to transport property. However, around the time the aircraft was acquired by Czars, the law was amended to exempt such aircraft. The Michigan Department of Treasury assessed Czars for use tax on the aircraft. Czars initially argued that the aircraft was exempt from use tax because Czars was a Delaware Corporation and because the aircraft was used in interstate commerce. At the hearing, Czars dropped these arguments and instead argued that Grand Aire was the actual purchaser of the aircraft and was using the aircraft to transport property, thereby making the aircraft exempt from use tax. The Tax Tribunal held that Czars was the actual purchaser of the aircraft and that, since Czars was not using the aircraft to transport property, the aircraft was not exempt. The Tax Tribunal also held that Czars was not entitled to pay tax on the lease payments since Czars had not registered as a lessor with the Michigan Department of Treasury. [Summary by Phil Crowther]


This matter having come for hearing before Administrative Law Judge Thomas E. Straatsma, Jr., and a Proposed Judgment having been issued on July 9, 1996 from which exceptions and written arguments thereto were filed, and the Tribunal, pursuant to Section 26 of the Tax Tribunal Act, as amended by 1980 PA 437, having considered all exceptions timely filed and having given a thorough review of the Proposed Judgment and all testimony and facts as presented to the Tribunal, determines as follows:

Administrative Law Judge Straatsma formulated his opinion based on the weight and credibility of the witnesses and the evidence as submitted. The Tribunal being fully familiar in the premises does hereby adopt and incorporate by reference the Findings of Fact and Conclusions of Law in the said Proposed Judgment as the final decision of the Tribunal.

Entered: October 1, 1996.


Findings of Fact

This case involves a request by Petitioner (Czars) for redetermination of an assessment for use tax issued by Respondent, Michigan Department of Treasury (the department), for tax liability allegedly owing on Czars’ purchase of a certain aircraft. The final assessment, no. H228907, was issued on November 15, 1994, in the principal amount of $58,560, revised downward at the commencement of hearing to $18,900 (the parties having agreed that the purchase price of the aircraft was $315,000, as confirmed by Petitioner’s exhibits 4 and 21). The department has subsequently amended its assessment request to $19,467, plus accrued interest, based on evidence that $9,450 in sales commission was paid, so that the total price of the aircraft was $324,450 (ex. P-20). The assessment, which covers the taxable period of July, 1994, evolved from a departmental audit of Czars’ affiliate, Grand Aire Express (also "Grand Aire"), owner of several airplanes, at least some of which are registered in Delaware.

On July 21, 1995 a hearing was held at the Michigan Tax Tribunal offices in Lansing. Both parties were represented by counsel. Petitioner’s witness was Tahir S. Cheema, the sole employee of Czars and the principal officer of that company and of other related companies, including the referenced Grand Aire Express; Grand Aire being the principal company of the several controlled by Cheema, and a "sister corporation" of Czars. Respondent presented as its only witness Ms. Patricia M. Siegrist, Technical Supervisor of the Sales, Use and Withholding Taxes Division of the department’s Bureau of Revenue. Petitioner’s exhibits P-1-22 and Respondent’s exhibits R-H, I, J and K were admitted into evidence. Both parties filed trial and post-trial briefs.

At issue is the question of Czars’ entitlement to use tax exemption for its subject aircraft under MCL 205.94(x); MSA 7.555(4x), as a domestic air carrier engaged in air cargo transportation. The referenced statute, as amended both by 1994 PA 214, effective June 23, 1994 and by 1994 PA 424, effective January 6, 1995, provides in its present form:

Sec. 4. The [use] tax levied does not apply to the following: ***

(x) The storage, use, or consumption by a domestic air carrier of an aircraft purchased after December 31, 1992 for use solely in the transport of air cargo that has a maximum certified takeoff weight of at least 12,500 pounds. For purposes of this subdivision, the term "domestic air carrier" is limited to entities engaged in the commercial transport for hire of cargo or entities engaged in the commercial transport of passengers as a business activity.

Grand Aire Express was incorporated in Michigan in 1985 with Mr. Cheema as the principal shareholder and officer. That company is, and has been, based in Monroe, Michigan. Grand Aire Express is qualified to, and does, engage in air cargo transport throughout the United States pursuant to a "Part 135 Air Carrier Certificate," earned by complying with an extensive certification program required of its pilots by the Federal Aviation Administration (FAA). Its affiliated corporation, Petitioner-Czars, was incorporated in February, 1994. Although its principal office, at all times, has been Grand Aire’s address in Monroe, Michigan, Czars was incorporated in the State of Delaware by the same incorporator as Grand Aire Express, being Mr. Cheema’s attorney, Mr. Gary R. Rentrop.

At the time of Czars’ incorporation, subsection 4(x) of Michigan’s use tax act only exempted from use taxation the storage, use or consumption of aircraft owned or used by domestic passenger air carriers meeting specified statutory criteria. Petitioner-Czars claims that its incorporation was part of a proposed plan to reorganize Grand Aire Express; said plan contemplating that Czars would acquire aircraft and lease them to Grand Aire Express. Testimony revealed that the rationale for the plan was two-fold: to separate assets of Grand Aire from the activity of Grand Aire; and, by incorporating Czars’ in Delaware, to shelter its aircraft from imposition of Michigan’s use tax imposed on air cargo carriers; Delaware being without a like kind of tax for Part 135 carriers like Grand Aire. The reorganization plan between Czars and Grand Aire was never implemented and, according to the evidence, no formal lease was ever executed between Czars and Grand Aire Express. Indeed, Grand Aire has never paid anything in rentals or lease payments to Czars.

The evidence disclosed that Mr. Cheema decides the workings of each of the five (5) affiliated corporations, including Czars and Grand Aire, which he heads; where each company will incorporate; the acquisitions of each of his corporations etc. The decision that Czars would purchase an airplane, admittedly as part of a plan to avoid anticipated liability under Michigan’s 6% use tax, was executed by Cheema a few months after Czars’ incorporation. Thus, on May 24, 1994, a Swearingen Fairchild Metroliner (hereafter, also "Fairchild," "aircraft" or "plane") was purchased from a Florida seller (Arrow Trading, Inc.) in the name of the Delaware-incorporated Czars, Petitioner herein. Cheema negotiated the purchase, and Grand Aire’s general Manager, Gregory Nedder, wrote the purchase offer on Cheema’s behalf. The aircraft was registered in Czars’ name; and Czars informed the FAA that it (Czars) was the owner, in order that the plane could be registered in Delaware. Cheema acknowledged in testimony his preconceived notion that Delaware’s favorable tax environment would save him money. He also testified to having considered moving his business activities out of Michigan to a jurisdiction with more favorable tax treatment of air cargo carriers. The subject Fairchild aircraft was situated in Arizona at the time of the 1994 purchase transaction. In order to bring the plane to Michigan, and because the plane was only minimally airworthy, the FAA issued a special flight (or "ferry") permit to Grand Aire Express, limited to the Arizona to Michigan flight. In or about June, 1994, commercial pilot Chris King, an employee of Grand Aire Express and certified on that company’s Part 135 Certificate, flew the aircraft from Arizona to Monroe, Michigan under Grand Aire’s air worthiness certificate.

The evidence indicated, and Petitioner-Czars emphasizes, that Grand Aire Express, not Czars, paid for the pre-purchase inspection report for the aircraft; that Grand Aire officials negotiated the purchase of the aircraft, with purchase money withdrawn from Grand Aire’s line of credit; and that checks given in payment were those of Grand Aire. The evidence also indicated that no money exchanged between Czars and Grand Aire Express. Czars paid nothing for use of Grand Aire’s FAA certificate in the transporting of the plane to Michigan and/or for repairs to the aircraft. In Monroe, significant modifications to the plane were made and completed in August, 1994 in compliance with Part 135 operations requirements, and the Fairchild airplane was certified on Grand Aire’s Operations Specifications, thereby allowing the plane to engage in commercial cargo flights. Testimony of Cheema indicated that Grand Aire possessed FAA certification, required for engagement in air cargo transportation, on account of which status its affiliate, Czars, was precluded from similar certification.

The evidence indicated that no significant income or expenses were reflected on Czars’ records; exhibit P-15 showing that only nominal interest income and minimal expenses were reported on Czars’ 1994 federal tax return. Grand Aire reported all revenues earned from the subject Fairchild aircraft on its 1994 federal corporation income tax return. No flight logs relative to the Fairchild were maintained by Czars; and 100% of the activity of the plane, according to witness Cheema, was conducted under the Part 135 certification of Grand Aire Express. Important, however, by way of reiteration, is the evidence that Mr. Cheema possessed total control of his companies, including Czars and Grand Aire Express, in the purchasing, use and registration of the companies’ various aircraft. Cheema testified that, to his knowledge, Czars owned only this single Fairchild plane, however Respondent’s FAA records (Respondent’s exhibit J) show ten (10) aircraft registered to Czars in Delaware.

In its original petition filed with the Tribunal in December, 1994, Czars averred, unequivocally, that it was the purchaser of the aircraft at issue; an averment confirmed by Cheema’s hearing testimony. The referenced petition asserted an absence of use tax nexus between the aircraft and Michigan; the plane being, inter alia, an instrument of interstate commerce. The petition also claimed a denial of equal protection because, as a carrier engaged in the transport of cargo, Czars’ subject Fairchild aircraft was (presumably) subject to Michigan’s use taxation, whereas aircraft engaged in the transport of passengers were specifically provided exempt status under the subject use tax subsection 4(x). Petitioner, it appears, was unaware at that time that subsection 4(x) had been amended, effective June 1994, to extend the use tax exemption to air cargo carriers meeting legislatively prescribed criteria.

Respondent-department asserts, and Petitioner does not controvert the assertion that, in January, 1995, the department advised Czars of the amended version of subsection 4(x); requested documentation to determine whether Czars was an exempt "domestic air carrier", and was advised that Czars had no FAA certificate issued in its own right but that, by reason of its lease of subject aircraft to its affiliate, Grand Aire Express, which company met the statutory requirements for use tax exemption, Czars was entitled to claim the exempt status of its lessee-sister corporation, Grand Aire. During the same time period 1994 PA 424, effective January 6, 1995; rewrote subsection 4(x) into its present form, as set forth at page 2 of this Proposed Judgment. At the subsequent Prehearing Conference held in March, 1995, Czars sought from the Tribunal, and was granted, permission to amend the petition to include a claim of exemption under the amended statute. The amended petition, in addition to reaffirming Czars’ purchase of the Fairchild aircraft, abandoned the issue regarding equal protection while reiterating the use tax nexus issue, and adding the claim that:

6. *** Respondent’s use tax is contrary to a specific exemption for aircraft, that have a maximum certified take-off weight of at least 12,500 pounds, and that are used by a domestic air carrier engaged in the commercial transport of cargo pursuant to MCL 205.94(x) as amended by Public Act 424 of 1994.

At the commencement of hearing Petitioner-Czars abandoned its constitutional claims in their entirety; relying instead upon (1) its (Czars’) claimed entitlement to Grand Aire Express’s exemption for the subject aircraft, under subsection 4(x), on the theory that Grand Aire Express, rather than Czars, is a "domestic air carrier" and the only corporate entity to "use, store and consume" the Fairchild plane in Michigan. It claimed that Grand Aire was the only entity authorized by federal law to operate and maintain the aircraft; and that Czars never exercised control over, nor possessed, the plane subsequent to its original flight into Michigan. Petitioner further claimed that (2) even if Czars had acquired control of, and brought the plane to Michigan for lease or sale, Czars immediately transferred possession to Grand Aire Express, a "domestic air carrier," affording Czars a "pass-through" exemption for lessors or sellers to exempt entities such as Grand Aire Express. In support of the latter claim, Petitioner references cases which consider the industrial processing exemption from use tax under subsection 4(g) of the same statute, MCL 205.94(g); MSA 7.555(4g).

Petitioner asserts various technical arguments in support of a conclusion that, under subsection 4(x) of the use tax act, as implemented by the department’s applicable general and specific sales and use tax rules, the Fairchild aircraft in question should be held exempt from taxation; the focus of its argument being that Grand Aire Express, which entity fits within the exemption provision, is the only entity to use or consume the subject plane in Michigan. Petitioner thus argues that transfer of possession of the plane from Czars to Grand Aire Express occurred in Arizona rather than in Michigan; that "use" includes "transfer of the property in a transaction where possession is given," MCL 205.92(b); and that, because the use tax act, at MCL 205.93(1), taxes "the privilege of using, storing, or consuming tangible personal property in this state" (emphasis added), Grand Aire Express, not Petitioner-Czars, is the company which qualifies as the possessor and user of the aircraft, as exempt, under subsection 4(x). Ergo, Czars, without FAA certification or "corporate capacity," had no authority to operate the aircraft in cargo carrying operations. Petitioner vouches for the position that Czars was, for the purposes at issue, a fictional "shell corporation," as described by Cheema.

Petitioner further asserts that the express language of general and specific sales and use tax rules 26 and 82 together serve to preclude the assessment of use tax liability against the Fairchild aircraft in question. Thus, Petitioner argues that general sales and use tax rule 26 (1979 AC Rule 205.26), which requires registration under the use tax act, inter alia, for activity of "(c) A lessor of tangible personal property when rental receipts are taxable ***"; and the language of specific rule 82 (1979 AC Rule 205.132), which requires a lessor making an election "to report and pay use tax on the rental receipts from the rental [of tangible personal property]" to register with the department, together require a "threshold [taxable] transaction" which was not present here. The single transfer, or lease, of the subject aircraft did not produce taxable receipts, Petitioner observes.

Finally, Petitioner argues, on the basis of industrial processing cases, that Czars’ Fairchild aircraft leasing activity with its lessee, Grand Aire, earns for the aircraft, as owned by Czars, the same exemption to which it is entitled in the possession of Grand Aire. In other words, because Grand Aire’s "storage, use or consumption" of the aircraft would qualify the plane for exemption entitlement under subsection 4(x), Czars’ leasing activities allow Grand Aire’s status as a qualified "domestic air carrier" under the statute to "pass through" to its lessor, the affiliated Czars Corporation. For purposes of the Fairchild’s exemption entitlement, therefore, Czars is alleged to stand in the place of Grand Aire Express. The applicability, or lack of same, of the relied-upon industrial processing cases, as a group, will be considered further on in this Proposed Judgment.

Respondent-department’s witness, Ms. Siegrist, testified that the section of the Sales, Use and Withholding Taxes Division over which she is supervisor deals with aircraft, watercraft and vehicle transfers and related matters; an area in which she presently has over eleven (11) years of experience with the department. Her testimony, as pertinent to the instant dispute, recited that the department had been in receipt of official information showing Czars, Inc., with a Michigan address, as owner of a plane registered out-of-state. According to the witness, initial exchange of information between the department and the would-be taxpayer failed to indicate non-use of the aircraft in question by Czars. Further discourse between the parties revealed both the absence of a claim of exemption on behalf of Czars and a claim of acquisition of the aircraft by Czars for the purpose of lease. Departmental investigation indicated that Czars was not registered with the State of Michigan as a lessor, on which basis the department concluded that, under its sales and use tax rule 82, Czars was not entitled to an election to pay use tax on rental receipts and that use tax was due, but had not been paid, at the time of the aircraft’s purchase. The department’s original intent to assess use tax against Czars culminated in the final assessment which became the subject of this litigation. According to Ms. Siegrist, the department later learned, by letter, that Petitioner was claiming exemption from use taxation.

Ms. Siegrist testified to the department’s conclusion that, based upon its understanding as to the use of the subject aircraft, combined with the absence of registration as a lessor, Czars was not entitled to claim an exemption as a "domestic air carrier" (under use tax subsection 4[x]), or a rental deduction (under specific use tax subrule 82[2] for rentals to specified exempt entities). In reaching its decision to assess Czars for use tax liability, the department applied the statutory definitions of "use" and "purchase" in section 2 of the use tax act and the definition of "domestic air carrier" in subsection 4(x), together with administrative rules 26 and 82, requiring the registration of lessors. Similarly, see revenue administrative bulletin (RAB) 88-39, attached to Petitioner’s post trial brief, (providing that a "Lessor/Retailer" "[m]ust obtain a Use tax Registration with the Michigan Department of Treasury" and "[i]s not liable for Use Tax when leasing to a qualified exempt lessee ***"). Siegrist testified that even if Czars were registered with the department, which it was not, Czars would not have been entitled to the subsection 4(x) exemption in question since it is not a "domestic air carrier"; and, further, that Czars was not entitled to benefit of a "pass through" of the exemption for which Grand Aire Express would have qualified. Further, she testified that, in the department’s application of rule 82, a "lessor" who is registered, even in the absence of lease documentation, may elect to remit tax on rental receipts. The key for Czars to not have been liable for tax, per the testimony of Siegrist, was to have registered with the department and made an election as to the method of use tax payment. However, this administrative law judge observes that such action would have been adverse to the very purpose for which Czars was incorporated and registered in Delaware--to avoid Michigan taxation.

The department argues that the rights and powers exercised in regard to the subject Fairchild plane were exercised incident to Petitioner-Czars’ ownership and "use" thereof; Petitioner having produced no documents demonstrating that it was not the owner of the plane nor that it was without authority over the plane’s use. In fact, the author of this Proposed Judgment notes that Czars’ counsel was willing to stipulate on the record that Czars, in and of itself and without the benefit of a "pass through" of the subsection 4(x) exemption from Grand Aire Express, was unable to meet the exemption requirements of the statute. The department contends that had Czars produced a lease agreement, which it did not, it would have been unable to disclaim its "use" of the plane. Czars, the department notes, conveniently produced no internal records to support its "arrangement" with Grand Aire. Instead, Czars asserts "use" of the plane by Grand Aire, whose activity it was able to document. The department contends that for Petitioner to establish that Grand Aire’s use of the subject plane was exempt is irrelevant since Grand Aire has not been assessed for its use. The department contends that Czars must disprove its own "use" of the plane, and has not done so, since it has provided no evidence in support of that proposition.

The bogus assertion brought forward by Petitioner’s evidence and argument, that Czars served merely as a "shell corporation" with no separate corporate identity from that of Grand Aire is contradicted by other evidence, some of which is noted by department, namely: the Purchase Agreement for the plane was executed in the name of Czars (ex. P-4); Czars’ Delaware Certificate of Incorporation makes no mention of Grand Aire Express (ex. P-3); Czars registration application to the FAA was accomplished in its own name; Czars separately filed its federal corporation income tax return (ex. P-15); and Czars was awaiting its federal employees identification number (F.E.I.N.) at the time of trial. As the department notes from the evidence, Czars continued to use its corporate form by subsequently registering planes to it. Mr. Cheema orchestrated the activities of his corporations, including Grand Aire and Czars; the subject Fairchild purchase transaction involving the use and allocation of assets controlled by him; and the undocumented arrangement at issue between the corporations as regards the plane.

The department also argues that the Michigan legislature has never provided exemptions in the use tax act for lessors as a general class, leasing as an activity nor, in a situation such as the present, for lessors of planes to a "domestic air carrier." The department, contesting the applicability of the industrial processing cases cited by Petitioner, suggests that Czars has demonstrated no basis, "substantive" or otherwise, for exemption of the subject aircraft; Grand Aire, a "domestic air carrier," being the only entity which could statutorily lay claim to exemption-entitlement were it qualified under the facts of this case and were it the entity assessed for use tax liability. The department’s position is succinctly reflected in the following (post-trial brief, p 16):

*** Had [Czars] not been trying to shelter itself from Michigan use tax altogether, it would have registered under the use tax act, it would have paid tax based on its rental receipts, it would have made an election under Rule 82 and would now be seeking a refund. Czar[s’] construction of [the applicable sales and use tax rules] is incorrect and must be rejected.

Conclusions of Law

Petitioner, Czars, has incurred, and was properly assessed, use tax liability notwithstanding its protestations to the contrary and irrespective of its technical arguments in favor of its claim of use tax exemption. Simply put, Petitioner’s sole employee and principal officer, Tahir S. Cheema, admittedly attempted, in what is herein concluded to have been an unsuccessful manipulation of the Michigan use tax statute in question, to avoid taxation through the incorporation, in a foreign jurisdiction, of the Czars corporation separate and apart from his separately owned, and Michigan-incorporated, affiliate of Czars, Grand Aire Express. The fact that, in retrospect, Grand Aire would, apparently, have statutorily qualified, as a "domestic air carrier," to gain for the Fairchild aircraft in question a tax exemption under subsection 4(x) of the use tax act serves to avail Czars nothing. Czars is admittedly not a "domestic air carrier." Saliently, the attempt by Petitioner to pierce the corporate veil and show that its sister corporation, Grand Aire, was the company which, for all practical purposes, purchased the subject aircraft; took "possession" of the plane, either in Arizona or immediately upon its arrival in Michigan; and solely "used" the aircraft under FAA certification is not persuasive. See Moline Properties, Inc v Commissioner, 319 US 436, 438-439; 63 S Ct 1132, 1133-1134; 87 L Ed 1499 (1943) cited by Respondent-department for the proposition that:

The doctrine of corporate entity fills a useful purpose in business life. Whether the purpose be to gain an advantage under the law of the state of incorporation or to avoid or to comply with the demands of creditors or to serve the creator’s personal or undisclosed convenience, so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity. *** [T]he taxpayer had adopted the corporate form for purposes of his own. The choice of the advantages of incorporation to do business *** required the acceptance of the tax disadvantages.

Emphasis added.

Accord: In the Matter of the Petition of TOPS, Inc., State of New York--Division of Tax Appeals, 1988 N.Y. Tax Lexis 488 ("Where, as here, a taxpayer selects a business format, he may not disregard that format to avoid tax disadvantages which subsequently may arise."); In the Matter of the Appeal of Jerome W. And Rita Ann Wayno, State Board of Equalization of the State of California, 1986 Cal Tax Lexis 8; Cargill, Inc v G. Howard Spaeth; Cargill Warehouse Co v Same, 215 Minn 540; 10 NW2d 728 (1943); and Milwaukee Motor Transportation Company v Comm’r of Taxation, 292 Minn 66; 193 NW2d 605, 609-610 (1971):

"We reject as fundamentally unsound and obsolete the thesis that a corporation can be regarded for any purpose as a mere fiction of law. To reduce it to a fiction is to make it nothing. Then to disregard it as a fiction is to disregard nothing. ***"


If a corporation elects to treat itself as an independent business for some purposes, it should not be permitted to disavow that identity merely to avoid the resultant tax consequences. ***

Ordinarily, separate corporations retain their distinct identities notwithstanding the fact that they may have common stockholders, directors, and officers. ***

See, also, Cross Export, Inc v Michigan Department of Treasury, 5 MTT 362, 370-371, (1987), aff’d, unpublished opinion per curiam of Court of Appeals, decided 10-31-88 (Docket No. 104407) ("[T]hose who receive tax advantages as a consequence of choosing a particular mode of incorporation must also be willing to suffer whatever tax disadvantages inhere in that choice."); and City of Ann Arbor v The University Cellar, Inc, 401 Mich 279, 291-292 (1977) ("To disregard the corporate entity and treat the Cellar as the alter ego of the University for tax exemption purposes, and yet regard it as a separate entity [for other purposes] would be to run with the hare and hunt with the hounds."). Petitioner’s claim that Czars was nothing more than a shell corporation clearly must be rejected.

Three (3) points are especially persuasive in arriving at the conclusion that the assessed liability, even to the extent of the increased sum urged by the department, is due and owing. First, the revised amount of use tax liability urged by the department to be due and owing was wholly supported by the evidence. Second, the statute in question, by its clear language, provides no authorization for a "pass-through" of would-be exemption entitlement from one entity to another, even an affiliated, yet wholly separate, corporation like Czars, the party assessed. Third, the transactions upon which Czars bases its request that it be allowed to stand in Grand Aire’s place for exemption purposes, having been orchestrated wholly by Mr. Cheema, the principal officer of each of the corporations at issue, were less than "arm’s length" in nature and entirely self-serving.

The industrial processing cases relied upon by Petitioner are deemed inapposite to the subject matter at hand. Subsection 4(g) provides in relevant part:

Sec. 4. The tax levied does not apply to the following: ***

(g) Property sold [or rented, see use tax act subsection 2(f), MCL 205.92(f); MSA 7.555(2f); rule 82; and Kress v Department of Revenue, 322 Mich 590 (1948)] to the following:

I) An industrial processor for use or consumption in industrial processing. ***

(Emphasis added.)

By the terms of the foregoing subsection, the acts of selling or renting industrial processing equipment to industrial processors allows the seller or lessor an exemption from use tax derived from the status of its lessee. It is important to observe that no such derivative exemption entitlement is provided for in subsection 4(x), which is at issue in the instant case.

The burden of proving entitlement to use tax-exempt status rests with the claimant, Czars, to establish its claim beyond reasonable doubt. See Evanston YMCA Camp v State Tax Commission, 369 Mich 1, 8; 118 NW2d 818 (1962); Edison v Department of Revenue, 362 Mich 158, 162; 106 NW2d 802 (1961). In the instant case, in addition to the demonstrated self-serving nature of the transactions between the corporations, there is a conspicuous absence of records in support of Czars’ contentions.

It has been held that the construction of a statute and implementing rules, by the agency charged with their administration, are entitled to deference and respectful consideration. Cross Export, Inc v Treasury, supra, 5 MTT at 370. The testified-to requirements that Czars register with the department and elect to pay tax on rental receipts (thereafter applying for a refund of taxes paid, and not owing, on rental proceeds received from an exempt lessee), were not met. In Terryl Masse v Michigan Department of Treasury, 5 MTT 750 (1989), the primary issue involved Masse’s liability for use tax arising from his purchase of an aircraft from an Oklahoma dealer; his taking possession, and his subsequent storage, use or consumption of the aircraft within Michigan. Masse paid no sales or use taxes to any jurisdiction in regard to the transaction and, up to the time he entered a written lease agreement with a lessee for subleasing of the aircraft, he was without a sales/use tax license or registration. At some point, unlike in the case at hand, Masse did apply for use tax registration to the department.

The factual distinctions between the Masse case and the instant matter are several, such as the memorialized lease arrangement in existence between Masse and his lessee; the assumed arm’s length nature of the relationship between the lessor and lessee in Masse, contrasted with the common ownership and control of "lessor" and "lessee," Czars and Grand Aire, by a single individual in the instant case; the eventual obtaining of a use tax registration by Masse, but not by Czars in the case at hand; and the absence in Masse of an exemption claim under subsection 4(x). Nevertheless, the following rationale from the Masse case, pp 753-757, as regards the requirements for registration and election under Rule 82, is relevant here:

*** Masse acknowledged that he did not seek the guidance of personnel within the department relative to whether the circumstances [of purchasing out-of-state an aircraft and entering a lease arrangement in regard thereto without having a sales/use tax license/registration] dictated payment of use tax. ***


*** If a taxpayer lacks the appropriate registration, use tax ordinarily is payable.


*** According to Masse, no authority exists in statute or rule for the department’s stated position that he must suffer the assessed tax because he did not possess either a Michigan use tax registration or sales tax license at the time the aircraft was purchased and/or leased ***. ***

*** According to the department, Masse may not prevail because he did not meet the precise requirements for *** exemption. *** [C]ontrary to [rule 82’s] requirements, he neither remitted use tax premised upon rental receipts, nor had the pertinent tax registration/license at the time the property was acquired. Barring application of a stated use tax exemption, Masse is liable for use tax calculated on the basis of the price he paid for the Cessna. *** ***

*** [Rule 82] limits the availability of the election in *** mandating that the taxpayer possess a sales tax license or use tax registration. Rule 82 does not delineate the procedure to be used by the taxpayer to inform the department of the election.


*** Rule [82] under controlled circumstances permits that single taxpayer to opt to pay the tax either at the time the property is acquired (Option #1), or at the time rental payments are received (Option #2). While the Rule does not tell the taxpayer what he should do to exercise Option #2, it is reasonable to assume that such would be readily accomplished by timely obtaining the appropriate tax registration/license, and by beginning to pay the tax on rental proceeds as they are received. *** Because Masse failed to successfully activate Rule 82 relative to payment of the tax on rental proceeds in lieu of purchase price, he is required to pay use tax as assessed.

To reiterate, for Czars to have registered with the State of Michigan Department of Treasury would have defeated the very purpose for which Czars was incorporated--in Delaware--in the first place; that being to shelter its, and Grand Aire’s, owner from liability for Michigan’s 6% use tax on the purchase of the Fairchild aircraft. Petitioner’s actions geared toward tax avoidance should not be condoned by giving credence to Petitioner’s technical arguments as to non-applicability of the department’s registration requirements and its bootstrap argument regarding applicability to Czars of the exemption entitlement of which Grand Aire, had it been the purchaser and consumer of the aircraft, might have legitimately availed itself.

Petitioner-Czars was the owner of the aircraft in question; an aircraft in regard to which use tax was applicable, as a complement to its companion, the sales tax act, Don McCullagh, Inc v Department of Revenue, 354 Mich 413, 418-420; 93 NW2d 252 (1958), app dis 359 US 343; 79 S Ct 897; 3 L Ed 2d 927 (1959); the subject transaction being one not covered by the sales tax, but being within the reach of the use tax, Master Craft Engineering, Inc v Department of Treasury, 141 Mich App 56, 68; 366 NW2d 235 (1985); National Bank of Detroit v Department of Revenue, 334 Mich 132, 141; 54 NW2d 278 (1952). There can be no dispute that, as owner, Czars must be deemed to have "used" the plane in question, in conformity with the definition contained in subsection 2(b) of the use tax act, by means of "the exercise of a right or power over tangible personal property incident to the ownership of that property including transfer of the property in a transaction where possession is given."

Other issues as originally pleaded have been abandoned by Petitioner and, therefore, will not be accorded consideration in this Proposed Judgment.


IT IS THEREFORE ORDERED that use tax assessment number H228907 shall be and is AFFIRMED in the principal amount of $18,900 and thereafter MODIFIED to include an additional amount of $567 for a total principal liability of $19,467, plus accrued interest.

IT IS FURTHER ORDERED that the parties to this cause of action shall have 21 days from the date of entry of this Proposed Judgment to file with the Tribunal exceptions and written arguments consistent with Section 81 of the Administrative Procedures Act, MCL 24.281; MSA 3.560(181). In presenting exceptions and written arguments, the parties shall limit them to the evidence and testimony presented to the administrative law judge. This Proposed Judgment, together with any exceptions and written arguments, shall be considered by the Tribunal in arriving at a final decision in this matter under Section 26 of the Tax Tribunal Act, MCL 205.726; MSA 7.650(26).

Entered: July 9, 1996.