Corporations come and go. But corporate tax disputes can take on a life of their own.
Consider the tale of Comcast Corp. and the $1.5 billion kill fee:
Way back in 1999, the Philadelphia-based video and entertainment giant agreed to pay $60 billion for Media One, a big cable TV company that covered much of the western U.S.
Then AT&T Corp. outbid Comcast, offering $62 billion. Media One took AT&T's higher bid, and paid Comcast what it termed a $1.5 billion "termination fee" -- or kill fee, as investment bankers call it -- a consolation prize for losing the deal.
Sounds sweet, to get paid all that, for walking off with nothing. (Especially when you consider that, just three years after, Comcast got the Media One assets anyway when it bought AT&T Cable.)
But 17 years later, Comcast is still in court, arguing over how much it should have paid in state taxes on Media One's money.
Last week, tax lawyers for a Comcast subsidiary squared off against the California Franchise Tax Board to appeal $25 million in income taxes that a state court ordered Comcast to pay California in 2014 as its share of kill fee taxes.
Comcast had to pay the money to make this appeal, and is asking for its millions back from the Golden State.
According to Comcast's appeal in the case, filed by lawyers from the firm Sutherland Asbill & Brennan LLP in Washington and Sacramento, Comcast believes it shouldn't have to pay this state tax on the $1.5 billion, because:
- It wasn't really income-taxable "business income" -- unlike monthly pay TV bills, the kill fee was an unusual, one-time payment;
- The money was sent to "a Comcast subsidiary headquartered in Delaware," which was "exempt from Delaware income tax" because "Delaware does not tax" income from "intangible" sources, such as intellectual property. Or kill fees.
In their court filings, California tax officials contend Comcast, acting at the suggestion of its advisers at the former Arthur Andersen accounting firm, assigned that $1.5 billion payment to the tax-advantaged Delaware unit -- not when its Media One offer went south and it collected the money -- but only "at the last minute," before Comcast had to file its yearly tax returns, in late 1999.
Tax officials tend to frown on that kind of after-the-fact, low-tax-state shopping, California noted.
So, according to California, the $1.5 billion shouldn't have been taxed in business-friendly Delaware. That argument paved the way for California, and some other states where Comcast had business operations, to claim a share of income taxes on the kill fee.
As to Comcast's argument that a one-time kill fee isn't the same as routine business income, California pointed out that Comcast actually did report the kill fee as "business income" in its 1999 federal income tax return.
The company later changed its mind and told the IRS it didn't feel it should have to pay the resulting $319 million in federal income taxes.
But after ten years of back and fourth, Comcast "eventually conceded to the IRS that the fee constituted federal taxable income" and paid the tax, California noted in its filing.
If Comcast had been taxed as a Pennsylvania company, it could have faced Pennsylvania's 9.9 percent tax rate.
Indeed, the California tax agency in its filing asks if Comcast's "last-minute" claim it collected the $1.5 billion under Delaware law was made only "to avoid paying $150 million of taxes on the income to Pennsylvania."
If the California appeals court agrees that Comcast received the kill fee in Pennsylvania, not Delaware, and should have reported the $1.5 billion to its home state, is it too late for Pennsylvania to try and claim its own tax share?
After all, the state Department of Revenue says it doesn't recognize any time limits on income it finds that it is owed.
"We are reviewing the California case to determine if there is an impact in Pennsylvania," state Revenue Department spokesman Kevin Hensil told me.