United States

Vermont Supreme Court issues unitary ruling

Businesses should review make-up of unitary group

TAX ALERT  | 

On Nov. 20, 2015, the Vermont Supreme Court issued its decision in AIG Ins. Mgt. Serv. Inc. v. Department of Taxes, ruling that the AIG Insurance Management Services, Inc. (AIG) could not include its wholly-owned ski resort subsidiary, Mount Mansfield Company, Inc. (MMC), in its Vermont unitary combined corporate income tax return because AIG and MMC lacked the “linkage of economic realities” necessary to support a finding of unity.

AIG and its subsidiaries, a group of related entities engaged in the insurance and financial services business, owned 100 percent of MMC, and had the power to appoint all the members of MMC’s controlling board. In spite of AIG’s control over appointments to its board, MMC made its own decisions regarding its operations, and maintained its own purchasing, advertising, and marketing functions. The most significant documented transaction between AIG and MMC was that AIG provided financing to MMC pursuant to arm’s length terms.

AIG initially included MMC in its Vermont unitary group in its 2006 return. However, based upon further analysis of the facts involved, AIG determined that there was insufficient flow of value to establish a unitary relationship, and filed an amended return excluding MMC from its unitary group and claiming a refund $789,246. The Commissioner of the Department of Taxes determined that MMC was unitary with AIG because AIG controlled the board of MMC and provided MMC with financing, and denied this refund claim. After exhausting its administrative appeal rights, AIG appealed to the Civil Division of the Vermont Superior Court, which agreed with AIG’s position because AIG’s investment in MMC was passive and MMC’s business was discrete and unrelated to AIG’s insurance and financial services business. The Commissioner appealed this decision to the Vermont Supreme Court.

In its first decision on combined unitary reporting since Vermont adopted combined reporting in 2006, the Vermont Supreme Court applied the U.S. Supreme Court’s test for unity articulated in Mobil Oil Corp. v. Comm’r of Taxes, 445 U.S. 425 (1980), and determined that the record provided insufficient evidence to support a finding of unity because (1) AIG and MMC were in separate and distinct businesses that did not benefit each other through economies of scale, (2) AIG’s control over appointments to Stowe’s board did not result in actual control over Stowe’s operations, and (3) AIG and MMC were not part of a vertically integrated enterprise and did not engage in common activities. Furthermore, the court rejected the Commissioner’s contention that the financing provided by AIG to MMC established a unitary relationship because the financing by AIG served an investment function, was undertaken under arm’s length terms, and, absent other indicia of unity, was insufficient to warrant combination on its own. Finally, the court rejected the Commissioner’s contention that AIG and MMC were bound to file on a combined unitary basis in Vermont because they did so in 15 other jurisdictions, stating that AIG and MMC’s representations to other states “cannot create a unitary operation where it does not otherwise exist.”

In light of this decision, taxpayers should review their unitary determinations and combined filings, and analyze whether specific entities and/or operations constitute a single unitary business. Where entities were improperly excluded from, or included in, a Vermont unitary group, corporate income tax refund opportunities or exposure may exist.

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