Vt. Nat'l Tel. Co. v. Dep't of Taxes

Decision Date09 October 2020
Docket NumberNo. 19-280,19-280
Citation250 A.3d 567
CourtVermont Supreme Court
Parties VERMONT NATIONAL TELEPHONE COMPANY v. DEPARTMENT OF TAXES

William R. Prescott and Timothy C. Doherty, Jr. of Downs Rachlin Martin PLLC, Burlington, and Henry P. Bubel and Tiffany N. Tam of Patterson Belknap Webb & Tyler LLP, New York, New York, for Plaintiff-Appellant.

Thomas J. Donovan, Jr. Attorney General, and Will S. Baker, Assistant Attorney General, Montpelier, for Defendant-Appellee.

PRESENT: Reiber, C.J., Robinson, Eaton, Carroll and Cohen, JJ.

CARROLL, J.

¶ 1. Vermont National Telephone Company (VNT) appeals the Commissioner of Taxes' determination that, pursuant to Department of Taxes Regulation § 1.5833-1, the capital gain VNT earned from the 2013 sale of two Federal Communications Commission (FCC) telecommunications licenses is subject to Vermont tax.1 VNT also argues that the penalty the Commissioner assessed for VNT's failure to report the 2013 sale violated 32 V.S.A. § 3202(b)(3) and the Vermont and United States Constitution. We affirm.

¶ 2. Before turning to the facts, we briefly discuss the Department regulation governing this dispute. Regulation § 1.5833-1 governs the taxation of corporate income. It provides that business income shall be "apportioned" to Vermont to the extent the income "is derived from any trade, business or activity conducted" within the state. Allocation and apportionment of "Vermont net income" by corporations § 1.5833-1, Code of Vt. Rules 10 060 002(a)(1) [hereinafter Regulation § 1.5833], http://www.lexisnexis.com/hottopics/codeofvtrules. Nonbusiness income, however, is "allocated" in full to the state where the income-producing assets are "located" or have a "situs." Regulation § 1.5833-1(e). If the assets have neither a location nor a situs, the income is allocated to the state of the business's commercial domicile, which is defined as "the principle place from which the business is directed or managed." With that background, we turn to the facts of this dispute.

¶ 3. The following is undisputed. In 2003, the FCC auctioned licenses granting the right to broadcast in the 700 MHz frequency of the electromagnetic spectrum in specific geographic areas. The 700 MHz frequency was originally licensed for television broadcast. In the 1980s, however, the FCC decided to move television broadcasting to a lower portion of the spectrum and license the 700 MHz frequency for mobile telecommunications. By 2003, many television channels were still broadcasting at 700 MHz and it was unclear when they would stop operating at that spectrum, which was problematic because television operations at this frequency would interfere with mobile telecommunications.

¶ 4. Considering these uncertainties, VNT purchased two FCC licenses in 2003 for investment purposes. These licenses granted the company the exclusive right to broadcast over parts of upstate New York. License WPZW674, otherwise known as the "Albany license," covered a geographic area that included Albany, Troy, Schenectady, Amsterdam, and Saratoga Springs. License WPZW676, otherwise known as the "Glens Falls license," covered Glens Falls, Whitehall, and Fort Ann. In 2010, the FCC granted VNT authorization to "carve out" a portion of the Glens Falls license to provide telecommunications service to approximately 1700 customers around Hebron, New York.

¶ 5. In 2013, VNT sold the Albany and Glens Falls licenses—excluding the "carve-out" area covering Hebron—to AT&T Mobility Spectrum LLC, resulting in a capital gain of approximately $23,970,730. Following the sale, VNT sought advice from its accounting firm about whether the sale would be subject to Vermont and/or New York tax. In a memorandum to VNT, the firm concluded that the gain would not be subject to Vermont tax. The firm explained that under Regulation § 1.5833-1, the capital gain would qualify as nonbusiness income. Because the Regulation directs nonbusiness income to be allocated to the state where the income-producing assets are located, the firm reasoned that the capital gain would be allocated to New York under the assumption that the licenses were located there. The memorandum expressly cautioned that:

Any tax advice contained in this correspondence or attachments is based upon our understanding of relevant facts and the tax law and governmental rulings that were in effect at the time the advice was given. Furthermore, in accordance with [Internal Revenue Service] rules, we hereby advise you that any tax advice contained in this correspondence or attachments is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service.

¶ 6. On its 2013 Vermont tax return, VNT—based on the advice of its accounting firm—reported the capital gain from sale of the licenses as nonbusiness income allocated entirely to a non-Vermont source. In 2015, the Department audited VNT and assessed corporate income tax on the capital gain from the sale of the licenses,2 $334,899 in interest, and an automatic underpayment penalty of $445,222.52. VNT appealed to the Commissioner.3

¶ 7. Before the Commissioner, VNT argued that the capital gain from the sale of the licenses was not subject to Vermont tax because the income-producing assets—the FCC licenses—were located in New York as "they convey benefits that can only be exercised in New York ... and their value is inextricably bound to a host of geographic-specific factors in New York." Assuming, in the alternative, that the licenses had no location, VNT contended that the licenses would still not be subject to Vermont tax because VNT's commercial domicile was in Connecticut, not Vermont. VNT also argued the Department should not have assessed an automatic underpayment penalty because, given the complexity of the legal issues, VNT acted reasonably in allocating the gain from the sale of the licenses to New York.

¶ 8. In a lengthy written decision, the Commissioner affirmed the assessment of corporate income tax and the underpayment penalty. First, the Commissioner concluded that the FCC licenses were neither located nor had a situs in New York. The Commissioner reasoned that the geographic-specific factors VNT cited did not locate the licenses in New York because they were "all factors which may affect the unknown, but potential, future cost of acquiring infrastructure and future income in the event the licenses are used in New York business." That the licenses granted the right to broadcast in New York did not mean the licenses were located there because the broadcast areas "were simply market areas drawn on the map by the FCC."

¶ 9. In determining that the licenses did not have a situs in New York, the Commissioner concluded that the term "situs" in Regulation § 1.5833-1 was a term of art referring to whether an asset is constitutionally subject to taxation in a state. The Commissioner explained that due process requires some minimum connection between "a state and the person, property or transaction" it seeks to tax. (Quotation omitted.) Consistent with this rule, intangible property is generally subject to tax by the owner's state of domicile because intangible property is a source "of actual or potential wealth" that "cannot be dissociated from" its owner. (Quotations omitted.) Intangible property may, however, be subject to tax in a state other than the owner's domicile "if the owner engages in activities related to the intangible and those activities are subject to the taxing state's governmental protections and benefits." In the latter case, the intangible acquires a "business situs" or "tax situs." Based on these constitutional principles, the Commissioner determined that because VNT never engaged in activities related to the licenses in New York—e.g., did not charge or collect broadcast contract fees—the licenses did not acquire a tax situs there.

¶ 10. Second, the Commissioner concluded that in 2012 and 2013, VNT's commercial domicile was in Vermont. The Commissioner made extensive findings to support this conclusion, which were summarized as follows:

Vermont was the location of the principal office, the place where high-level policy was implemented, where the conduct of day-today business operations occurred, where the greatest number of office staff and business employees worked, and where the business records were kept, and was the state that gave the greatest protection and benefits ....

¶ 11. Finally, the Commissioner declined to abate the underpayment penalty because the structure of § 3202(b)(3) indicated that the Legislature "intended to create a penalty for simple failure to pay with no fault." In addition, the Commissioner determined that the penalty was appropriate because one of the purposes of penalties was to encourage taxpayers to seek formal guidance from the Department rather than take questionable tax positions. By failing to seek formal guidance, VNT "assumed the risk" of a penalty. VNT appealed to the trial court.

¶ 12. At the trial court, VNT made three arguments. First, it argued that the licenses were "localized" in New York because it is the only place that granted the right to broadcast. Second, VNT argued that the Commissioner improperly considered "all the facts" in determining VNT's commercial domicile. Finally, VNT argued that the automatic penalty violated § 3202(b)(3) —because that section requires the Commissioner to exercise discretion in determining whether to assess a penalty—and was constitutionally excessive.

¶ 13. Although the trial court affirmed the Commissioner's decision, it disagreed with some of his analysis and conclusions about where the FCC licenses were located. First, the trial court determined that the term "situs" in the Regulation was not being used as a term of art, such as tax situs or business situs. Instead, according to the trial court, the term simply meant location,...

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