Termination Fee Deemed Apportionable Business Income By California State Board Of Equalization

Originally published on March 15, 2011.

Keywords: termination fee, state tax, California State Board of Equalization Tax

Following roughly six hours of argument and debate, the California State Board of Equalization (the "Board") ruled 3-2 against Comcast Cablevision Corp. of CA. ("Comcast") in holding that: (i) a termination fee received by Comcast on account of a failed merger with MediaOne constituted business income; and (ii) Comcast had a unitary business relationship with QVC, Inc. ("QVC") and hence QVC's business income and apportionment factors were required to be included in Comcast's California combined tax return. The Board agreed with Comcast by a 4-1 margin that imposition of an accuracyrelated penalty against Comcast was improper.

The appeal proceeding was streamed live over the internet and was closely-monitored by state and local tax practitioners around the country.

Background

TERMINATION FEE

In early 1999, Comcast entered into a merger agreement with MediaOne. The agreement contained a provision barring MediaOne from soliciting competing merger offers while the agreement was pending. The agreement also stated that if MediaOne received and accepted an unsolicited "superior proposal" it was obligated to pay Comcast a $1.5 billion termination fee.

Subsequently, MediaOne received and accepted an acquisition proposal from AT&T. As was required by the agreement, MediaOne paid Comcast a $1.5 billion termination fee.

Comcast paid federal income tax on the $1.5 billion and then filed a refund claim to treat the termination fee as a nontaxable recovery of capital. Comcast had received a more likely than not opinion from an accounting firm that supported its federal tax position. For California purposes, Comcast treated the termination fee as nonbusiness income that was allocable to its state of domicile (not California) and was not apportionable in California. The California Franchise Tax Board disagreed and took the position that the termination fee constituted apportionable business income.

In its appeal, Comcast relied on the California statutory business and nonbusiness income provisions and guidance interpreting those provisions. Like many states, California adopted the Uniform Division of Income for Tax Purposes Act ("UDITPA").1 However, unlike many states, California has retained the standard UDITPA business income and nonbusiness income definitions,2 under which income is nonbusiness income if it does not meet the definition...