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AIG Ins. Mgmt. Servs., Inc. v. Vermont Department of Taxes

Supreme Court of Vermont

November 20, 2015

AIG Insurance Management Services, Inc.
Vermont Department of Taxes

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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.


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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 ...

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