Comcast, California End Briefing in Unitary Business Appeal

The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.

By Jennifer McLoughlin

Aug. 25 — Comcast and the California Franchise Tax Board have completed a year-long round of briefing in dueling appeals over the cable provider's unitary relationships and taxable business income ( ComCon Prod. Servs. I. Inc. v. Cal. Franchise Tax Bd., Cal. Ct. App., 2nd Dist., Div. 7, No. B259619, reply brief 8/24/16 ).

The pending cross-appeals before the California Court of Appeal, Second Appellate District, arise from a Superior Court decision adopting Comcast's position that there was no unitary relationship between the cable provider and its former QVC Inc. subsidiary. However, the lower court favored the FTB by characterizing Comcast's $1.5 billion termination fee from a failed merger as apportionable business income (2015 Weekly State Tax Report 10, 6/26/15).

Comcast filed a reply brief Aug. 24 wrapping up its opposition to branding the termination fee as taxable business income. The FTB finalized its arguments in a May 4 brief seeking reversal of the ruling on the unity issue.

The court of appeal hasn't scheduled oral arguments.

Not Taxable

After a fall-out from merger discussions with MediaOne, Comcast received $1.5 billion as a contractual termination fee. Failing to report the fee as taxable income, Comcast has maintained that the monies aren't business income under the transactional or functional tests.

According to Comcast, taxation of the termination fee exceeds limitations under the U.S. and California constitutions, fighting any finding of a “minimum connection.”

“The failed merger agreement did not improve, assist, benefit, or deter in any way Comcast's cable operations in California—and thus, there was no connection between the merger agreement and California whatsoever,” according to the Aug. 24 reply brief. “FTB's argument that it is constitutionally permissible to tax income that ‘would have been earned' by Comcast flies in the face of the United States Supreme Court's admonition against state taxation of multistate income based on future—or potential—events.”

In the alternative, if the termination fee constitutes business income, Comcast has contended that the proceeds must be incorporated within the company's sales factor denominator.

Proof of Unity

The FTB reply brief recapped several reasons for finding unity between Comcast and QVC, refuting Comcast's reasoning to affirm the lower's court ruling.

Among several arguments, the FTB reasserted that the lower court failed to address a regulatory presumption that “commonly owned businesses engaged in ‘steps in a vertical process' are strongly presumed to be unitary,” highlighting several facts to show a vertical integration between Comcast and QVC. Likewise, the FTB emphasized that the trial court failed to apply the state's dependency or contribution test for unity.

FTB also circled back to its rationale supporting the treatment of the termination fee as taxable business income.

To contact the reporter on this story: Jennifer McLoughlin in Washington at

To contact the editor responsible for this story: Ryan Tuck at

For More Information

Text of Comcast's brief is at

Text of the FTB's brief is at

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