Media Gen. Commc'ns Inc v. South Carolina Dep't Of Revenue
Decision Date | 14 June 2010 |
Docket Number | No. 26828.,26828. |
Citation | 694 S.E.2d 525,388 S.C. 138 |
Court | South Carolina Supreme Court |
Parties | MEDIA GENERAL COMMUNICATIONS, INC., and Media General Broadcasting of South Carolina Holdings, Inc., Respondents,v.SOUTH CAROLINA DEPARTMENT OF REVENUE, Appellant.Media General, Inc., Respondent,v.South Carolina Department of Revenue, Appellant. |
Lynn M. Baker, Managing Counsel, and Ronald W. Urban, Chief Counsel, both of South Carolina Department of Revenue, of Columbia, for Appellant.
Burnet R. Maybank, III, of Nexsen Pruet, of Columbia, for Respondents.
The appellant, the South Carolina Department of Revenue (“Department”), contends the Administrative Law Court (“ALC”) erred in construing S.C.Code Ann. § 12-6-2320(A)(4) as allowing the three multistate corporations named herein to use the combined entity method in apportioning their income and determining their South Carolina corporate income tax liability. We affirm.
This taxation case involves three corporations that are challenging the accounting procedure applied by the Department in calculating their corporate income taxes due in South Carolina. The taxes were based on income earned from intangible assets used in this state-royalty receipts from the use of trademarks, trade names, and licenses. The parties stipulated to the following facts.
Media General, Inc. (“Media General”), a Virginia corporation, is an independent, publicly-owned communications company headquartered in Richmond, Virginia. Media General maintains its commercial domicile in Virginia and is subject to income tax there. Media General is the parent company in a consolidated group of communications companies situated primarily in the Southeast with interests in newspapers, television stations, and interactive media.
Media General owns all of the stock of Media General Communications, Inc. (“MG Communications”), a Delaware corporation that is domiciled in, and subject to income tax in, Virginia. MG Communications owns Media General Operations, Inc. (“MGO”), a Delaware corporation, which, in turn, owns Media General Broadcasting of South Carolina Holdings, Inc. (“MG Broadcasting”), a Delaware corporation domiciled in, and subject to income tax in, Virginia.1
Media General and its affiliates comprise a “unitary group,” which as used herein is defined as a business in which there is a high degree of interrelationship and interdependence among related entities so that the value of the business as a whole exceeds the sum of its individual elements. Unitary groups generally share a unity of management, ownership, and control of operations resulting in unquantifiable flows of value among the related entities of the business. Media General and its affiliates operate converged media operations where television, newspaper, and online products and information are merged and leveraged off of each other.
The Department conducted a corporate income tax audit of Media General, MG Communications, and MG Broadcasting. During the audit period, both MG Broadcasting and MG Communications owned intangible assets utilized in MGO's multistate operations, including those operations conducted in South Carolina. These intangibles included licenses and other authorizations issued by the Federal Communications Commission (“FCC”) for the operation of various television broadcasting affiliates, as well as trademarks for the stations and a Florence daily newspaper.
MG Communications and MG Broadcasting each licensed their intangible assets to Media General and charged Media General a flat royalty fee. Media General then sublicensed the intangibles to MGO and charged MGO a royalty fee. The revenues generated by MGO from its South Carolina broadcasting and publishing operations consisted mostly of advertising sales revenue.
Media General also had an Administrative Services Agreement with MG Communications and MG Broadcasting. The license agreements, sublicense agreements, and the Administrative Services Agreement were all signed on behalf of each entity by the same individual who is a corporate officer for each company.
After evaluating the effects of the royalty income generated by the intangible assets, the Department issued assessments for the three taxpayers at issue in this case, Media General, MG Communications, and MG Broadcasting (collectively, “Taxpayers”).
In determining these assessments, the Department utilized the separate entity apportionment method, which is the standard apportionment method used in South Carolina for apportioning income among multistate, related business entities. The ALC noted that this method “considers each entity having nexus with the taxing state as a separate and distinct entity, even if it is part of a unitary business.”
This is in contrast to the combined entity apportionment method, which the parties have stipulated is defined for this matter as an accounting method whereby each member of a group carrying on a unitary business computes its individual taxable income attributable to activities in South Carolina by taking a portion of the combined net income of the group through the utilization of combined apportionment factors. The combined income of the unitary group is not computed for the purpose of taxing such income, but rather as a basis for determining the portion of income from the entire unitary business attributable to sources within South Carolina that is derived by members of the group subject to South Carolina's taxing jurisdiction. One of the purposes of this method is to capture the many subtle and largely unquantifiable transfers of value that take place among related companies of a single business enterprise.
South Carolina's statutory apportionment methodology as utilized in the Department's assessments and the calculation of taxes on returns filed during the audit period results in income taxes and license fees for Media General, MG Broadcasting, MG Communications, and MGO in the amount of $3,758,320. In contrast, the combined apportionment methodology results in income taxes and license fees for these same entities in the amount of $863,179.
The Department's application of South Carolina's standard apportionment formula utilized in its proposed assessments does not fairly represent petitioners' business activities in South Carolina, thus resulting in a statutory distortion of petitioners' activities within South Carolina.
The corporations timely filed protests to the assessments and asked the Department to use the combined entity apportionment methodology as an alternative method to the separate entity apportionment method to fairly represent their business activities in South Carolina pursuant to S.C.Code Ann. § 12-6-2320(A)(4). This statute provides that if the allocation and apportionment provisions do not fairly represent the taxpayer's business activities in South Carolina, the taxpayer may petition for, or the Department may require, if reasonable, the employment of any other method to effectuate the equitable allocation and apportionment of the taxpayer's income.
The Department issued a Final Agency Determination upholding the proposed assessments. Although the Department agreed that the combined apportionment methodology fairly represents the corporations' business activities in South Carolina during the audit period, as compared to South Carolina's standard apportionment methodology, the Department declined the group's petition to use the combined apportionment method pursuant to section 12-6-2320(A)(4) on the ground that the Department has no authority to either grant a petition for, or require, the use of the combined apportionment method.
Media General filed this matter for a contested case hearing before the ALC. The parties filed cross-motions for summary judgment. The ALC granted Media General's motion for summary judgment, and denied the Department's motion. The ALC found the allowance of the use of “any other method” as provided by section 12-6-2320(A)(4) of the South Carolina Code encompasses the combined entity apportionment method advocated by Media General and that this method should be applied in this case. The Department appeals from the ALC's ruling.
Rule 56(c) of the South Carolina Rules of Civil Procedure provides a motion for summary judgment shall be granted “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Rule 56(c), SCRCP; see also ALC Rule 68 ( ). A reviewing court may reverse the decision of the ALC where it is in violation of a statutory provision or it is affected by an error of law. S.C.Code Ann. § 1-23-610(B)(a), (d) (Supp.2009).
On appeal, the Department contends the ALC erred in construing section 12-6-2320(A)(4) of the South Carolina Code as allowing Taxpayers to use the combined entity method in apportioning their South Carolina corporate income tax. The Department asserts the ALC ignored South Carolina case law when it determined that combined entity apportionment was contemplated by section 12-6-2320(A)(4), there is a split of authority in other states that have adopted similar provisions, and the Department's longstanding administrative interpretation and application of the statute is entitled to deference.
In South Carolina, “[a]n income tax is imposed annually at the rate of five percent on the South Carolina taxable income of every corporation ... transacting, conducting, or doing business within this State or having income within this State, regardless of whether these activities are carried on in intrastate, interstate, or foreign...
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