United States: Vermont Superior Court Holds Tax Commissioner Incorrectly Determined Insurance Company And Ski Resort Were Unitary

The Vermont Superior Court has held that the Tax Commissioner's determination that a ski resort was unitary with a parent company that primarily operated insurance businesses was not within the constitutional scope of the unitary business principle.1 The testimony of the parent company's witnesses described the ski resort as a discrete business enterprise unrelated to the parent company's insurance and financial businesses. Because the Tax Commissioner did not offer a reason to disregard the testimony and presume the businesses were unitary, the record could only support a conclusion that the Commissioner's finding of a unitary relationship was outside the constitutional boundaries of the unitary business principle.

Background

AIG Insurance Management Services, Inc. (AIG) was a conglomerate that owned more than 700 businesses worldwide. Nearly all of AIG's businesses concerned general insurance, life insurance and retirement services, financial services, or asset management. However, AIG also owned a subsidiary, Mount Mansfield Company (MMC), which owned, operated and conducted business as Stowe Mountain Resort, a Vermont ski resort with summer attractions and a year-round lodging and conference business.2 AIG did not own any other business similar to a ski resort.

In October 2007, AIG filed a 2006 corporate income tax return that included the ski resort in its Vermont unitary group. The Vermont Department of Taxes assessed a tax deficiency based on a mathematical error that AIG made. In December 2008, AIG paid most of the asserted deficiency and the Department abated the remainder. AIG subsequently filed an amended return, in which the ski resort was removed from the unitary group, and requested a refund of nearly $800,000. The Department audited the amended return in 2011 and assessed AIG additional tax of over $60,000, interest and a penalty. Following an appeal by AIG, the Department formally rejected the exclusion of the ski resort from the unitary group and denied the refund request. On appeal, the hearing officer found that the ski resort was part of AIG's unitary group and affirmed the denial of the refund request and the 2011 assessment of additional taxes. AIG appealed this determination to the Vermont Superior Court.

Unitary Business Principle

Under the unitary business principle, a state may not constitutionally impose an income tax on "value earned outside its borders" under the Due Process and Commerce Clauses of the U.S. Constitution.3 The principle rejects "geographical or transactional accounting," and allows a state to define the local tax base as including the whole scope of the crossborder unitary business.4 The Constitution then permits the state to apportion the total income of the unitary business between the part that is fairly attributable to operations within the state and the part that is outside the state.5

The contemporary concept of a unitary business emerged in a series of U.S. Supreme Court cases beginning in 1980. In Mobil Oil Corp. v. Commissioner, the Court isolated three "factors of profitability" that should be considered: "functional integration, centralization of management, and economies of scale."6 Where the factors of profitability show that the in-state business is contributing to out-of-state value, it is fair to apportion.7 However, there is no unitary business if the in-state income "derive[s] from unrelated business activity which constitutes a discrete business enterprise."8

Vermont first required unitary combined income tax reporting for tax years starting January 1, 2006.9 The regulations define a unitary business to be consistent with U.S. Supreme Court decisions.10

Ski Resort Not Unitary with Insurance Business

The Vermont Superior Court agreed with AIG that the ski resort was not part of its unitary group. As an initial matter, the Court rejected AIG's argument that the 2011 assessment was barred by the three-year statute of limitations applicable to deficiency assessments11 and that the "proper return" exception did not apply.12 According to AIG, the three-year period began to run with the filing of its original return, not its amended return. In rejecting AIG's argument, the Court relied on a Vermont Supreme Court decision holding that an amended return that gives the Department the "full picture of a taxpayer's [altered] liability" is a proper return that restarts the three-year limitations period.13

According to the Superior Court, the determinative question in the case was whether the Commissioner's finding of a unitary relationship had reasonable support in the record. The Commissioner conceded that AIG was not actively involved in the ski business, but found that AIG was actively involved in the financial operations of MMC such as supporting it with non-arm's-length loans, managing the expansion of the resort, providing financial and asset management expertise and various corporate services, and having authority over all of MMC's capital and borrowing decisions. In addition, the Commissioner found that AIG used the resort to build broker and other business relations to drive AIG business. AIG also offered resort discounts to its 106,000 worldwide employees and families. According to the Commissioner, the resort was dependent on AIG's loans for its financial viability and had a loss of $10 million in 2006 if reported on a separate accounting basis.

The Superior Court explained that "[t]he Commissioner's findings, if adequately supported in the record, probably would be sufficient to warrant unitizing [the ski resort]." However, the Court concluded that the findings "far outrun the evidence, which unambiguously shows that the [ski resort] was a discrete business that did not send taxable value out of state in any appreciable way." Furthermore, the Court determined that the record did not support findings that AIG used the resort for marketing purposes, exerted any significant managerial control over it, or provided any expertise to it. The record did not provide reasonable support that the ski resort, an unintegrated holding far different from anything else that AIG did in 2006, sent taxable value out of Vermont under the unitary business principle. The Court conceded that the resort had contacts with AIG or other businesses owned by AIG in 2006.14 However, the resort's dealings with AIG mostly were done at arms' length.15

After considering the evidence, the Superior Court concluded that the testimony of AIG's witnesses described the ski resort as a discrete business enterprise unrelated to AIG's insurance and financial businesses. Thus, the Commissioner's finding that there was a unitary business was outside the constitutional boundaries of the unitary business principle. AIG was entitled to a recalculation of its 2006 income tax with the resort removed from the unitary group.

Commentary

This decision provides the first reported case with respect to the application of the unitary business principle in Vermont, a relative newcomer to the world of combined reporting. The Vermont Superior Court includes a detailed review of the relevant U.S. Supreme Court decisions and highlights the need to follow the standards expressed in these cases. A unitary business decision is very fact-specific and is sometimes difficult to determine. However, in this case, the facts as indicated in the decision seem to clearly support reversing the Commissioner and holding that AIG and the ski resort were not a unitary business. AIG and the ski resort operated entirely different types of businesses. Although AIG had some transactions with the ski resort, it did not control the resort's daily operations or borrowing decisions nor did it lend any expertise to or make use of the resort for marketing purposes in the year at issue. Because the ski resort was a discrete business, there was no clear showing that it was unitary with AIG.

There are a large number of cases from a variety of states that apply the U.S. Supreme Court's unitary business principle. In most of these cases, courts conclude that the members of the group are operating a unitary business. This case is interesting because it illustrates that a state which follows the U.S. Supreme Court's unitary business principle may conclude that a group is not unitary. The fact pattern in this case is somewhat reminiscent of a California matter involving a corporation that owned and operated 28 commercial properties such as hotels in California, a farm in the state which produced agricultural products, and a cattle ranch in Nevada.16 The California State Board of Equalization (SBE) held that the cattle ranch in Nevada was not unitary with the California commercial property because they were distinct types of businesses. As explained by the SBE in this matter, "[b]ecause of a lack of uniformity, different types of businesses do not lend themselves to centralization of functions and advantages to be gained by centralization are at a minimum." 17 Therefore, completely diverse business operations that are largely unintegrated may not be unitary. A different result might have occurred if the Department had proven that the use of the ski resort had been tied more closely into AIG's core businesses, for example, if the resort had been used frequently as a means to develop and maintain relationships with companies that utilized the taxpayer to form Vermont-based captive insurance companies.

Footnotes

1 AIG Insurance Management Services Inc. v. Department of Taxes, Vermont Superior Court, Docket No. 589-9-13, July 30, 2014.

2 AIG's founder was a skiing enthusiast who repeatedly loaned money to MMC when it was independent and AIG was held privately. After MMC was unable to pay the loans, its ownership eventually passed to AIG.

3 Container Corp. v. Franchise Tax Board, 463 U.S. 159 (1983).

4 Id.

5 Id.

6 445 U.S. 425 (1980).

7 Id.

8 Exxon Corp. v. Wisconsin Department of Revenue, 447 U.S. 207 (1980).

9 VT. STAT. ANN. tit. 32, § 5862(d); VT. CODE R. 1-3-104:1.5862(d).

10 VT. CODE R. 1-3-104:1.5862(d)-6.

11 The Commissioner is permitted to assess deficiencies, penalties and interest within three years of the date that the tax liability was originally required to be paid. VT. STAT. ANN. tit. 32, § 5882(a).

12 The three-year period does not begin to run until the taxpayer files a "proper" return. VT. STAT. ANN. tit. 32, § 5882(b)(1).

13 TD Banknorth, N.A. v. Department of Taxes, 967 A.2d 1148 (Vt. 2008).

14 For example, there was testimony that the resort's employees received ERISA-related benefits through AIG, the resort borrowed money from AIG (possibly at below-market rates), the resort received some corporate services from AIG, AIG owned two residences at the resort, AIG companies occasionally would hold conferences at the resort, AIG employees had access to discounts on resort services, an AIG business was a one percent owner of the resort's Spruce Peak project, and AIG did not decide to sell the resort when it was looking for ways to raise money to pay its government bailout.

15 The Court explained that AIG businesses paid the same as other customers for the conferences. Also, there was no indication that the residences were purchased at special rates. There was no showing that AIG's employees used the discounts at the resort very much. The evidence showed that the investment in the Spruce Peak project was passive. The fact that the resort may have benefitted from below-market financing alone was insufficient to show that it was unitary with AIG's extensive insurance and financial operations. Furthermore, there was no evidence that AIG exercised authority over the resort's capital and borrowing decisions.

16 Appeal of Allied Properties, California State Board of Equalization, SBE-XII-177, 64-SBE-026, March 17, 1964.

17 Id. However, note that the SBE explained that "[w]e do not mean to say that two operations such as a hotel and a ranch should never be treated as unitary." For example, "if the ranch supplied beef to the hotel restaurant, there would be a degree of mutual dependency and contribution which might well call for unitary treatment."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.