State of Michigan v. United States

40 F.3d 817 (1994)

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State of Michigan v. United States

United States Court of Appeals for the Sixth Circuit
40 F.3d 817 (1994)

Facts

In the early 1980s, tuition rates at public universities in the State of Michigan (state) increased at rates high enough to draw public scrutiny. In response, the governor and the state legislature cooperated to pass the Michigan Education Trust Act. The act created the Michigan Education Trust (MET), a sort of corporation affiliated with the state department of treasury but run by a board that acted independently of the state. The MET’s purpose was to form advance-tuition-payment contracts. An individual, such as a parent or grandparent of a school-aged child, could apply for a contract whereby the individual would pay stipulated amounts actuarially forecasted to be adequate to fund the future college-tuition cost of a designated beneficiary, who had to be a Michigan resident under the age of 18. If the beneficiary were eventually accepted into a public university in Michigan, the MET would pay the beneficiary’s tuition. The MET’s only sources of income were the stipulated payments and any investment income the MET was able to generate. The state was under no obligation to cover the MET’s debts were the MET to become insolvent and unable to pay the tuition for all its beneficiaries. The MET applied to the Internal Revenue Service (IRS) for a ruling that the MET would not be subject to federal income tax on its investment income. The IRS ruled that the MET, in fact, would be subject to federal income tax on its investment income. The MET initially accepted the IRS’s ruling. However, tuition prices climbed faster than the MET had priced its contracts for, and the state felt pressure to revisit the issue. The MET filed for tax refunds. After receiving no response from the IRS as to the status of the refunds, the MET sued the United States government (defendant). The district court dismissed the action, holding that the MET was subject to federal tax on its investment income. The MET appealed.

Rule of Law

Issue

Holding and Reasoning (Nelson, J.)

Dissent (Guy, J.)

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