Dec 07, 2015
From KPMG TaxWatch
In a recent case of first impression in Vermont, the state’s highest court addressed whether a taxpayer was engaged in a unitary business with its wholly-owned subsidiary. The taxpayer at issue was a multinational insurance and financial company that owned about 700 subsidiaries worldwide. One of the subsidiaries was a Vermont ski resort. The taxpayer initially included the ski resort subsidiary in its Vermont unitary group. Later, the taxpayer filed an amended return removing the ski resort from the group and requested a refund of tax. The refund was denied. After the taxpayer unsuccessfully argued before a departmental hearing officer that the ski resort was not unitary with its insurance business, a trial court ruled in its favor. The Department appealed the trial court decision to the Vermont Supreme Court.
The court analyzed whether a unitary relationship existed by reference to the factors utilized by the U.S. Supreme Court in Mobil Oil. Specifically, the court looked at whether there were economies of scale, centralization of management, and functional integration between the entities. The court first determined that the taxpayer and its subsidiary were not integrated through economies of scale because the ski resort business was markedly different from the taxpayer’s insurance and financial service business. Next, the court addressed whether there was centralized management between the taxpayer and the ski resort. Although two of the taxpayer’s officers were board members of the resort, the taxpayer’s control over board appointments never manifested in actual control over the ski resort’s operations. Significantly, the ski resort had its own officers, employees and control over staff. The court concluded that the type of oversight provided was similar to that any parent would provide to its subsidiary, and was insufficient to establish that a unitary business existed. Next, the court addressed the Commissioner’s main argument that functional integration existed because the taxpayer provided financing to the ski resort. Notably, the taxpayer was the ski resort’s only lender, and the taxpayer provided lines of credit amounting to over 150 percent of the ski resort’s operating revenue. However, the court determined that the financing assistance, while important, served an investment, rather than operational function. It was not accompanied by any overlap in operational function and was not part of the taxpayer’s plan to grow its business. The court further rejected the Commissioner’s assertion that the loans were not arm’s-length, noting that the ski resort paid interest on the loans and the evidence did not establish that the rate was below market. The Commissioner also asserted that the taxpayer used the ski resort to “build its brand” and broker relations. However, although the taxpayer held conferences at the ski resort and the taxpayer’s employees received discounts at the resort, there was no evidence that the events generated business for the taxpayer or that the discounts contributed to growing the taxpayer’s brand. Finally, the court considered the Commissioner’s argument that unitary operations should be assumed because the taxpayer included the ski resort in its unitary group in each of the other fifteen states that require unitary combined reporting. The court held that while the taxpayer’s representations in other states was a factor to be considered, it could not create a unitary operation where one did not otherwise exist. Please contact Michael Desrochers at 617-988-1396 for more information on AIG Insurance Management Services, Inc. v. Vermont Department of Taxes.
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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.