Vermont Court on AIG
My memory is this had to do with Stowe. But with no such reference I can't cut through the legal language.
Steep Slope — Vermont Supreme Court
Finds AIG Not Unitary With a Ski Resort Based On a Clear and Cogent Evidence
Burden of Proof
posted on: Monday, November 30, 2015
In the first Vermont Supreme
Court decision addressing combined unitary reporting since Vermont’s
combined reporting regime became effective in 2006, the court affirmed a lower
court’s decision that AIG, the multinational insurance company, was not unitary
with a ski resort operated by a subsidiary in Vermont; accordingly, a combined
report covering the two businesses was not required. The decision is important
because it lays the foundation for future unitary cases in Vermont.
The court agreed with AIG that there
were no economies of scale between the operations of AIG and the ski resort.
“Because [the entity] is a ski resort and therefore its business type is not
similar to AIG’s insurance and financial service business, there is no
opportunity for common centralized distribution or sales, and no economy of
scale realized by their operations.” On centralization of management, the court
noted that although AIG controlled the appointments to the ski resort’s board
and management, this did not translate into “actual control” over the ski resort’s
operations. Lastly, the Vermont Department of Taxes attempted to argue
functional integration based primarily on AIG’s influx of working capital to
the ski resort. The court rejected this assertion stating the funding “served
an investment rather than operational function. The financing was not part of
an AIG operational goal to grow part of its business. Further, there is no
operational integration between AIG’s insurance and financial businesses and
the ski resort operated by [the resort].”
The case is interesting because it
involved whether an instate entity was unitary with its parent. For the year at
issue, Vermont had a three factor apportionment formula with a double-weighted
sales factor. Presumably, the ski resort had a high Vermont apportionment
factor and relatively little income, so including AIG in the combined group
increased AIG’s Vermont apportionment factor without significantly
diluting its income.
Interestingly, the court addressed
AIG’s burden of proof on the unitary issue. The taxpayer argued that a
preponderance of the evidence standard should apply. The Vermont Supreme Court
disagreed. Looking to the United States Supreme Court’s decision in Container
Corp. as well as to decisions of other states, the taxpayer has the burden
of proving by “clear and cogent” evidence that its operations are not
unitary. Interestingly, the court suggested that one California court
decision that applied a preponderance of the evidence standard to a unitary
question was distinguishable because that case involved a taxpayer claiming
that unity existed — and AIG was claiming that unity did not exist. This
disparate burden depending on the direction of the unitary argument may prove
important to taxpayers seeking to bring entities or operations into a combined
report in Vermont.
State tax professionals may react to
this decision in a manner similar to the way many reacted when the Court of
Appeals of Arizona decided Talley Industries and Woolworth. Those
decisions engendered substantial hope that courts — and, ultimately, state
revenue agencies — would analyze unitariness not on the basis of a “checklist”
or as a knee-jerk reaction to some superficial facts, but rather on the basis
of seeking to implement the whole purpose of unitary apportionment. That purpose
is, of course, reflecting the amount of income earned in a particular taxing
jurisdiction. In other words, was the profitability of the ski resort affected
by the operations of AIG? It would seem that merging the incomes and
apportionment factors of the ski resort with those of AIG would cause a gross
distortion of the profitability of the two distinct businesses.
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