AIG Insurance Management Services, Inc.
v.
Vermont Department of Taxes
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[Copyrighted Material Omitted]
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[Copyrighted Material Omitted]
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On
Appeal from Superior Court, Washington Unit, Civil Division.
Helen M. Toor, J.
Eric
A. Poehlmann and Wm. Roger Prescott of Downs Rachlin Martin
PLLC, Burlington, for Plaintiff-Appellee/Cross-Appellant.
William H. Sorrell, Attorney General, and Mary L. Bachman and
Margaret A. Burke, Assistant Attorneys General, Montpelier,
for Defendant-Appellant/Cross-Appellee.
Present:
Reiber, C.J., Dooley, Skoglund, Robinson and Eaton, JJ.
OPINION
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Reiber, C.J.
[¶1] This case presents the question of
whether Mount Mansfield Company, Inc. (MMC) had unitary
operations with AIG Insurance Management Services, Inc. (AIG)
such that AIG was required to include MMC as part of the AIG
unitary group on its Vermont corporate income tax return. It
also raises the question of whether, and under what
circumstances, an amended tax return restarts the statute of
limitations period for collecting a deficiency. The trial
court reversed the decision of the Commissioner of the
Department of Taxes that there were unitary operations, and
concluded that MMC is a discrete business enterprise distinct
from AIG's insurance and financial business. The
Department appeals, arguing that the evidence supports the
Commissioner's decision that MMC was part of the AIG
unitary group. AIG cross-appeals, arguing that the tax
assessment was barred by the statute of limitations. We
affirm the court's conclusion that MMC's operations
were not unitary with AIG and therefore do not reach the
statute-of-limitations issue.
[¶2] This appeal concerns the scope of this
state's ability to tax a business operating in interstate
commerce. " Under both the Due Process and the Commerce
Clauses of the Constitution, a State may not, when imposing
an income-based tax, 'tax value earned outside its
borders.' " Container Corp. of Am. v. Franchise
Tax Bd., 463 U.S. 159, 164, 103 S.Ct. 2933, 77 L.Ed.2d
545 (1983) (quoting ASARCO Inc. v. Idaho State Tax
Comm'n, 458 U.S. 307, 315, 102 S.Ct. 3103, 73
L.Ed.2d 787 (1982)). To tax income generated in interstate
commerce, " the Due Process Clause of the Fourteenth
Amendment imposes two requirements: a 'minimal
connection' between the interstate activities and the
taxing State, and a rational relationship between the income
attributed to the State and the intrastate values of the
enterprise." Mobil Oil Corp. v. Comm'r of Taxes
of Vt., 445 U.S. 425, 436-37, 100 S.Ct. 1223, 63 L.Ed.2d
510 (1980) (quoting Moorman Mfg. Co. v. Bair, 437
U.S. 267, 272-73, 98 S.Ct. 2340, 57 L.Ed.2d 197 (1978)). A
state may tax income that is generated by business in another
state " so long as the intrastate and extrastate
activities formed part of a single unitary business."
Id. at 438. This " unitary-business
principle" provides that a state may impose an
apportioned tax on income from a multistate business if the
business's operations in the taxing state have a
sufficient nexus to the unitary operations outside of the
state. Id. Here, the question is whether MMC is part
of a " functionally integrated enterprise" with AIG
such that an apportioned share of the income earned by the
AIG unitary group out of state may be taxed by Vermont.
Id. at 440.
[¶3] We conclude that, although AIG had sole
ownership and the ability to direct MMC's operations
given its power of appointment to MMC's board and its
exclusive role providing financing, MMC was a distinct
business operation. Evidence is absent of a linkage of
economic realities between the business enterprise in Vermont
and AIG's operations outside the state. No
interdependence of functions or use existed amounting to an
exchange of value accruing to AIG across state lines. AIG met
its burden of demonstrating that MMC was not unitary with the
rest of AIG's operations given that there were no
economies of scale realized by the entities' operations,
MMC's business was not functionally integrated with
AIG's business, and AIG did not actually direct MMC's
policy or operations.
I.
Factual and Procedural Background
[¶4] The following facts were found by the
Commissioner. AIG is a multinational
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corporation, owning approximately 700 subsidiary corporations
worldwide. AIG has four general operating segments: general
insurance, life insurance and retirement services, financial
services, and asset management. In 2006, AIG was the largest
insurance company in the world. MMC is wholly owned by AIG,
and has its principal place of business in Stowe, Vermont.
MMC operates and does business as the Stowe Mountain Resort.
It is primarily a ski resort, and also offers year-round
accommodations and summer attractions.
[¶5] The taxes at issue are for the 2006 tax
year, the first year for which Vermont required unitary
combined reporting. AIG filed its 2006 tax return in October
2007. AIG included MMC in its Vermont unitary group in that
return. The Department discovered a mathematical error in the
return, corrected the error and, in August 2008, assessed AIG
for the deficiency. AIG acknowledged the error, paid the tax,
and the Department abated the assessment. In March 2009, AIG
filed an amended return, in which it removed MMC from the
unitary group, and requested a refund of $789,246. In
February 2011, as a result of an audit of the amended return,
the Department rejected AIG's exclusion of MMC from the
unitary group, and assessed AIG additional tax of $60,440,
plus interest and a penalty. AIG appealed the assessment. In
September 2011, the Department formally denied AIG's
refund request, and AIG also appealed that denial. AIG's
two appeals were consolidated for a hearing. AIG argued that
the 2011 assessment was barred by the three-year statute of
limitations, and that the refund was improperly denied
because MMC was merely an investment and not part of the AIG
unitary group for tax-reporting purposes.
[¶6] The Department held a two-day hearing
before a hearing officer. At the hearing, the Department
presented evidence from a tax department auditor and
compliance officer. AIG presented testimony from several
employees.
[¶7] Following the hearing, the Commissioner
found that MMC was part of AIG's unitary group and
affirmed the denial of the refund request. The Commissioner
made extensive findings on MMC's operations, including
the following: MMC is wholly owned by AIG; AIG included MMC
in its unitary group on returns in all fifteen other states
with unitary combined filing; MMC employees obtained life
insurance and ERISA-related benefits through AIG; AIG
provided MMC with financial, regulatory, and accounting
services; MMC had two lines of credit from AIG that exceeded
150% of MMC's gross operating revenue and no loans from
other lenders; MMC's board members were appointed by AIG;
MMC had a joint venture with an AIG subsidiary to develop
real estate sales; MMC provides discounts for AIG employees
and their families; and AIG sponsored events at MMC. The
Commissioner concluded based on these facts that AIG was
directly involved in the financial operations of MMC,
managing its real estate expansion, providing financial and
asset-management expertise, and using MMC to build its brand,
and broker and other businesses, and therefore that AIG had
failed to meet its burden to show that MMC was not a member
of the AIG unitary group. As to the statute-of-limitations
argument, the hearing officer further concluded that the 2011
assessment was not barred because AIG's 2009 amended
return was the first complete return, and therefore the
three-year statute of limitations did not begin to run until
the date the amended return was filed.
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[¶8] AIG appealed the Commissioner's
decision to the civil division of the superior court. The
court affirmed on the limitations issue, concluding that
until the amended returns were filed the Department lacked a
full picture of taxpayer's liability and therefore that
the limitations period began to run with the filing of the
amended return.
[¶9] As to whether MMC was part of AIG's
unitary business, the court concluded that the
Commissioner's findings were not supported by the record.
The court concluded that the evidence did not reasonably
support the determination that AIG used MMC for marketing
purposes, exerted managerial control over MMC, or lent it
expertise. The court also concluded that the evidence was
insufficient to show that MMC benefitted from below-market
financing. The court stated that the limited connections that
the evidence demonstrated were that MMC employees received
ERISA-related benefits through AIG, MMC borrowed money from
AIG, MMC received some corporate services from AIG, AIG owned
residences at MMC, AIG companies held conferences at MMC, and
AIG employees received discounts at MMC. The court concluded
that these activities were insufficient to demonstrate that
MMC had unitary operations with the rest of the AIG group.
Instead, the court concluded that the evidence showed that
AIG's investment in MMC was passive, and that it was a
discrete business unrelated to AIG's insurance and
financial business.
[¶10] The Department appeals the court's
decision to remove MMC from the AIG unitary group. AIG
cross-appeals, arguing that the court erred in concluding
that the assessment was within the limitations period.
II.
Unitary Enterprise
[¶11] The Department argues that MMC is a
member of the unitary AIG group. On appeal, this Court
reviews the Commissioner's decision " 'directly,
independent of the conclusion on the intermediate,
on-the-record appeal of the superior court.' "
Quazzo v. Dep't of Taxes, 2014 VT 81, ¶ 13,
197 Vt. 278, 103 A.3d 458 (quoting In re Williston Inn
Grp., 2008 VT 47, ¶ 11, 183 Vt. 621, 949 A.2d 1073
(mem.)). The Commissioner's decision is reviewed under a
" deferential standard." [1]Id. Further, we
defer to the agency's interpretation of statutes under
its administration and its interpretation of Department
regulations. Id. ¶ 12. Where, however, an
agency's interpretation of a statutory provision
implicates constitutional questions, no deference is
afforded. In re Vt. Ry., 171 Vt. 496, 500, 769 A.2d
648, 652-53 (2000) (explaining that deference is afforded to
agency's interpretation of statutes in subject matter in
which agency possesses particular expertise and does not
extend to constitutional questions). As to findings of fact,
they will be affirmed " unless clearly erroneous."
Travia's Inc. v. State, 2013 VT 62, ¶ 12,
194 Vt. 585, 86 A.3d 394. The credibility of witnesses,
weight of the evidence, and inferences that reasonably may ...