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By David McAfee
Dec. 5 — Comcast and the California Franchise Tax Board squared off at the California Court of Appeal, arguing over dueling appeals about the nature of the cable giant’s relationship with QVC and the taxability of the termination fee stemming from a failed merger ( ComCon Prod. Servs. I, Inc. v. Cal Franchise Tax Bd., Cal. Ct. App., 2d Dist., No. B259619, oral arguments 12/2/16 ).
Stephen Lew, supervising deputy attorney general with the state Department of Justice and counsel to the FTB, asked the appellate panel to reverse a trial court’s finding that there was no unitary relationship between Comcast and its former subsidiary, TV shopping network QVC Inc. The cable provider’s own statements in SEC filings and annual reports establish the existence of such a relationship, he said.
“The trial court’s decision must be reversed because of Comcast’s own words,” Lew said during oral arguments Dec. 2. “Statements made before there was a tax dispute are weightier. Comcast told shareholders it was a co-founder of QVC.”
Lew also claimed Comcast stated that QVC was an “integral part” of the cable provider’s business.
Jeff Friedman, a partner at Sutherland Asbill & Brennan LLP who argued on behalf of Comcast, said the appeals court should affirm the lower court’s finding regarding the existence of a unitary relationship, but reverse a holding regarding the taxability of a $1.5 billion termination fee Comcast received from a failed merger with MediaOne. The deal with MediaOne was canceled unexpectedly 42 days after it was signed, he argued.
The oral arguments, which Comcast sought to postpone, are the most recent development in the long-running dispute between Comcast and the FTB over the company’s unitary relationships and the taxability of funds from a failed merger. An opinion will be filed by March 1, 2017, according to court records.
Lew claimed the trial court ignored statements made publicly by Comcast on the nature of its relationship with QVC, but Presiding Justice Dennis M. Perluss pushed back. All that information was before the lower court, he said.
The court didn’t necessarily ignore the arguments, Perluss noted. Instead, it didn’t “give them the weight” Lew had hoped.
Lew responded to Perluss’s comments, saying SEC filings like those at issue “are under penalty of perjury.” They are an “admission to shareholders” about the relationship between Comcast and QVC.
Lew also argued that the trial court failed to address a regulatory presumption that “commonly owned businesses engaged in ‘steps in a vertical process’ are strongly presumed to be unitary,” saying Comcast and QVC had a “classic vertical relationship.”
“Comcast is a program distributor,” Lew said, adding that QVC provided the content for its then-majority owner.
Friedman disputed the claim that there was a vertical relationship. He said the lower court gave credence to Comcast’s expert on that issue.
Perluss responded that the vertical relationship aspect does seem to be clear.
“How can anyone say these aren’t vertically related entities?” Perluss asked, clarifying that both companies were part of the same chain of production. “They are vertically related, aren’t they?”
Perluss asked about a “flow of value” between Comcast and QVC, and Lew cited commissions QVC paid to Comcast, launch incentives and the use of studio space. Friedman rejected that argument, saying payments made to Comcast from QVC should be considered separately.
He added that he and his team “are not aware of any” flows of value, let alone the millions of dollars claimed by the FTB.
“Well, there was some use of studio space,” Perluss said.
Friedman said there was a “mountain of evidence” presented over a 19-day trial and that the trial court did its job in weighing it.
Friendman further argued that the court should reverse a holding regarding the taxability of a $1.5 billion termination fee Comcast received from the failed merger with MediaOne.
“Comcast is in the business of operating cable companies,” Friedman said. “It’s the operator that generates the revenue.”
Perluss questioned whether the merger was “part of the regular course of business” for Comcast, which is known for acquiring and integrating other related companies.
“Unless and until MediaOne terminated, there was no income,” Friedman said. “The only transaction that generated income was the termination.”
Justice Laurie D. Zelon, also sitting on the three-judge appellate panel, said the “Black Swan” event couldn’t have been entirely unexpected. The companies planned for it by including a termination fee in the contact, she said.
“They were either going to have more channels or more cash,” Zelon explained.
Lew said afterward that there were no surprises at the hearing, and that the appellate panel’s line of questioning didn’t give any hint at a ruling.
“I can’t tell how the court is going to rule on either issue,” he told Bloomberg BNA. “I didn’t get any indication one way or the other.”
A representative for Comcast declined to provide additional comments after the hearing.
To contact the reporter on this story: David McAfee in Los Angeles at dMcAfee@bna.com
To contact the editor responsible for this story: Ryan C. Tuck at firstname.lastname@example.org
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