Mississippi OKs capital base change for state tax


Tom Coley
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Jamie C. Yesnowitz
Washington, D.C.
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Chuck Jones
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Lori Stolly
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Patrick Skeehan
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On Aug. 13, 2020, the Mississippi Supreme Court ruled that Comcast Cable Communications, LLC (Comcast) was entitled to make adjustments to its capital base and apportionment calculations in determining its Mississippi franchise tax.1 Rejecting the Mississippi Department of Revenue’s arguments, the Court concluded that the Department’s assessment based on the statutory formula did not fairly represent the true value of the company’s capital employed in Mississippi, therefore producing a distortive result. In agreeing with the taxpayer, the Court found that Comcast presented sufficient evidence showing the true value of its capital in the state.

Background Comcast, a provider of cable network and related services in various states including Mississippi, held investments in over 50 “unitary” subsidiaries engaged in similar types of businesses that generally provided services outside Mississippi during the 2008-2010 tax years at issue.2 In addition, Comcast held minority passive-investment interests in approximately ten “non-unitary” subsidiaries not engaged in the provision of cable services. The non-unitary subsidiaries had no connection with Mississippi.

On its 2008-2010 Mississippi corporate franchise tax returns, Comcast calculated its capital base by excluding certain amounts of capital under the state’s holding company exclusion,3 attaching schedules to document the exclusion. In calculating its apportionment factors for each tax year, Comcast used the statutory two-factor (property and gross receipts) formula, but did not include any Mississippi destination sales in the numerator of its apportionment factors.

Following an audit, the Department disallowed Comcast’s utilization of the holding company exclusion, which increased the capital base calculation. The Department also included all of Comcast’s Mississippi destination sales in the numerator of its apportionment factors, thereby increasing the amount of capital apportioned to Mississippi. As a result of these two adjustments, the Department assessed over $3 million in additional franchise tax.

Comcast appealed the assessment to the Department’s Board of Review, which upheld the assessment. On appeal to the Mississippi Board of Tax Appeals (BTA), Comcast contended that the Department’s assessment did not accurately reflect the true value of its capital employed in Mississippi. Comcast argued specifically that: (i) capital related to investments in its non-unitary subsidiaries should be excluded from its pre-apportioned capital base; (ii) it could apply factor representation to a divided capital base; and (iii) it could use the apportionment factors of its unitary subsidiaries in the apportionment formula. Comcast presented four alternative franchise tax computations in support of its argument. In reviewing the alternative calculations, the BTA determined that the Department’s method resulted in more than a 340% disparity in capital value compared to one of Comcast’s alternatives, the factor-representation method. Therefore, the BTA held that Comcast presented “substantial credible evidence” of a distortive franchise tax assessment and reduced the assessment accordingly.

The Department appealed the BTA’s order to the Mississippi Chancery Court, which granted Comcast’s summary judgement motion and dismissed the Department’s petition. The Department appealed the order to the Mississippi Supreme Court.

Supreme Court decision Before the Court, the Department claimed that Mississippi law did not permit Comcast to exclude the capital value and apportionment factors attributable to its non-unitary subsidiaries in calculating its capital base, and that Comcast could not utilize an alternative apportionment method.

Capital base The Court began by reviewing the franchise tax imposition statute, which provides that the tax is calculated on the basis of capital employed in Mississippi and measured by “the combined issued and outstanding capital stock, paid-in capital, surplus and retained earnings.”4 Noting that only holding companies are allowed an exclusion for the investment in subsidiary corporations, the Court concluded that Comcast did not qualify for the holding company exclusion, which Comcast had already conceded.5 As an alternative, Comcast argued that it was entitled to exclude the investment in its non-unitary subsidiaries under a different provision of Mississippi law. The relevant statutory language provides that a taxpayer may petition the Department and set forth the facts showing the true value of its capital employed in the state if it believes that the statutory formula does not properly reveal the true franchise tax due as measured by the capital value of the corporation.6 While the Department’s determination of the capital base is given a “presumption of correctness,” such presumption may be overcome by sufficient evidence provided by the taxpayer.7

Based on its review of Comcast’s alternative computations, the Court determined that Comcast had overcome the presumption of correctness by showing that the Department’s computation included billions of dollars in non-unitary assets in Comcast’s franchise tax base, assets that represented “passive, non-unitary investments with no connection to Comcast’s business in Mississippi.” Recognizing that the franchise tax imposition statute provides for no explicit exclusions other than the holding company exclusion, the Court reasoned that the statute must yield to the alternative capital valuation statute when it produces an assessment that does not properly calculate franchise tax liability. As such, the Court concluded that the Department incorrectly included these investments in the capital base.

Apportionment method Comcast next argued that it was entitled to depart from the state’s statutory apportionment method for franchise tax purposes, which provides for a two-factor formula consisting of the ratio between real and tangible property owned in Mississippi plus gross receipts from business carried on in Mississippi, divided by total real and tangible personal property owned and gross receipts earned everywhere.8 The ratio is then applied to the total capital stock, surplus and undivided profits to determine the amount of capital employed in Mississippi.9 While the use of the two-factor formula was appropriate, Comcast argued that its capital was not fairly apportioned because the Department failed to account for the receipts and property of its unitary subsidiaries in applying the statutory formula, thus creating an “inherent mismatch between the values used to compute [Comcast]’s . . . franchise tax liability.” Therefore, Comcast relied on the same alternative capital valuation statute to claim that the sales and property factors of its unitary subsidiaries should be included in the apportionment method used to determine its capital.

Noting that Comcast presented four alternative franchise tax computations to show a distortive result, the Court focused on the factor-representation method, a method previously recognized by the BTA, and by the Court in Ashland Pipe Line Co. v. Marx.10 The Court observed that Comcast followed the Court’s instruction in Ashland by comparing the Department’s assessment to the company’s computation that included the factors of its subsidiaries. By using the factor-representation method, the Court agreed with the BTA that Comcast had demonstrated that the Department “sought to tax more than 340 percent out-of-state value than allowed.” In doing so, the Court reasoned, the Department’s assessment disregarded the receipts and property of Comcast subsidiaries from the computation of the apportionment formula, even though the same subsidiaries comprised between 77-80% of Comcast’s total asset value during the tax years at issue. Agreeing with Comcast, the Court found that this discrepancy created an “inherent mismatch” that “does not reflect a rational relationship between the values being taxed and the activities giving rise to the value.” As the Department’s assessment created a distortive and unreasonable result that “did not fairly represent the true value of Comcast’s capital employed in Mississippi,”11 the Court affirmed the Chancery Court’s order granting summary judgment and sustaining the reduced assessment.

Commentary The Comcast decision is a welcome development for Mississippi taxpayers seeking to make adjustments to their capital base or apportionment calculations as allowed under the available statutory provision. The decision addresses the concept of adjusting the valuation of important components of the tax base when such valuation provides for an unjust result. This is instructive, as taxpayers often view distortion-styled arguments to be restricted to the method by which they are allowed to apportion.

As demonstrated in recent litigation, alternative apportionment provisions are often applied unevenly across the states, especially when the taxpayer is petitioning the state taxing authority that an alternative apportionment method is appropriate as applied to their particular situation.12 In many cases, taxpayers often carry a higher burden in showing that an alternative apportionment method is appropriate. In this case, however, the Court was convinced that a more than 340% disparity between the Department’s assessment and Comcast’s factor-representation method was evidence that the Department’s inclusion of Comcast’s investments in its non-unitary subsidiaries produced a distortive result that did not fairly represent the value of its capital apportioned to Mississippi.

Interestingly, the Court accepted Comcast’s arguments for alternative calculations of the capital base and apportionment factors without having to address the taxpayer’s constitutional arguments. Although not explicitly addressed by the Court, the facts in Comcast resemble past cases coming before the U.S. Supreme Court, which has generally accepted proposed alternative apportionment methods when the taxpayer shows a disparity between the statutory formula and the proposed alternative formula that results in a variance outside the constitutional margin of error.13 In any event, the Comcast decision signifies that petitions for capital valuation adjustments or alternative apportionment may be successful where the taxpayer provides sufficient evidence that the statutory formula produces a distortive result.

1 Mississippi Department of Revenue v. Comcast of Georgia/Virginia, Inc., n/k/a Comcast Cable Communications, LLC, No. 2019-CA-01134-SCT, Supreme Court of Mississippi, Aug. 13, 2020.
2 Only two of Comcast’s unitary subsidiaries had connections with Mississippi during the tax years at issue.
3 The holding company exclusion provides an exception to the inclusion of a subsidiary’s assets in a holding corporation’s franchise tax base. MISS. CODE ANN. § 27-13-9(2).
4 MISS. CODE ANN. § 27-13-9(1).
5 MISS. CODE ANN. § 27-13-9(2). Although Comcast claimed the holding company exclusion on its tax returns filed during the tax years at issue, it later acknowledged that it did not qualify for the exclusion.
6 The statute provides that “[i]f any organization has cause to believe that the calculations required on the return prescribed . . . do not properly reveal the true franchise or excise tax to be due as measured by the value of the capital of that organization, or shall feel aggrieved at the requirements upon it for information or tax, then such organization shall have the right to file with the commissioner a petition and affidavit . . . setting forth the facts showing the true value of its capital.” MISS. CODE ANN. § 27-13-11.
7 Id.
8 MISS. CODE ANN. § 27-13-13(1).
9 Id.
10 623 So.2d 995 (Miss. 1993).
11 Comcast also presented an alternative argument that the Department’s assessment was invalid under the U.S. Constitution. However, the Court did not address these constitutional arguments, finding that Comcast had successfully shown that the assessment did not reflect the true value of its capital employed in Mississippi.
12 For example, in Corporate Executive Board v. Virginia Department of Taxation, 822 S.E.2d 918 (Va. 2019), the Virginia Supreme Court ruled that the taxpayer could not use an alternative apportionment formula reflecting a market-based sourcing approach for the sale of services, because it failed to prove that the standard cost-of-performance formula was inequitable. For further discussion, see GT SALT Alert: Virginia upholds constitutionality of apportionment statute.
13 For example, the U.S. Supreme Court has invalidated statutory formulas that attribute income or capital value to a state that are out of proportion to the business transacted in the state or that lead to a “grossly distorted result.” Such formulas were invalidated when the disparity between the standard formula and the proposed alternative formula were in excess of 166%. See Hans Rees’ Sons, Inc. v. North Carolina ex rel. Maxwell, 283 U.S. 123 (1931); Norfolk & Western Railway v. Missouri State Tax Commission, 390 U.S. 317 (1968).

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