Court upholds $25M state tax on Comcast's failed 1999 merger

Friday April 24, 2015 View of the Comcast Tower, the tallest building on the Philadelphia skyline. (ED HILLE / Staff Photographer )

A California appeals court has rejected Comcast's challenge to the $25 million tax bill the state imposed after the cable giant collected $1.5 billion from a failed merger deal in 1999.

In a 40-page decision posted by the state's Second Appellate Court in Los Angeles last week, less than two weeks after lawyers pleaded the case, two  judges upheld a lower-court ruling that the $1.5 billion Comcast collected as a "termination fee" was taxable business income. Comcast collected the money after AT&T outbid Comcast's $60 billion offer for the MediaOne cable system. (It later acquired MediaOne when it bought AT&T's cable network.)

But after 17 years, the tax fight over the 1999 fee may not be over: "We are evaluating our options regarding California and the $25 million," John Demming, a Comcast spokesman, told me in an e-mail.

Unless Comcast finds a way past its failed appeal, California gets to keep the cash, which Comcast had to post as a condition of its challenge to a 2014 decision against the company. Tami Grimes, spokeswoman for the California Franchise Tax Board, declined to comment on the case.

Comcast had argued the money wasn't subject to state tax: because it wasn't income from the company's regular customers; and because it was collected, not by the cable giant at its Pennsylvania headquarters, but by a subsidiary it set up in Delaware, which doesn't tax "intangible" corporate income.

It's not just California. Illinois and California also "settled" with Comcast over tax claims from the Media One deal, Demming told me.

What about Pennsylvania? As I noted in my Dec. 7 column, California argued in its court filings that Pennsylvania might have assessed Comcast as much as $150 million if the Media One payment had been reported as income and taxed in Comcast's home state.

But according to California, Comcast didn't report the deal to Pennsylvania, because the company maintained it had received the money in Delaware, where it was protected from state income taxes. (Comcast did report the payment to the IRS, and eventually paid federal tax collectors $319 million, a fact California told the court strengthened the state's case.)

As I reported Dec. 7, the Pensylvania Revenue Department has been "reviewing the California case to determine if there is an impact in Pennsylvania."

Comcast's reading of the California court findings would leave no room for Pennsylvania to collect.  "The termination fee was found to be lost MediaOne profits. Media One did not have Pennsylvania subscribers. Therefore, there were no 'lost Pennsylvania profits' embedded in the termination fee," Demming said in his statement.

"The taxability of the termination fee is not at issue in any other state other than California," which taxes corporate profits on a "unitary" (all affiliates together) basis -- just like Illinois and Colorado, and unlike other states, Demming added.

The California appeals court finding doesn't mention "lost Media One profits." It states that "California is taxing an apportioned share of income paid to Comcast in lieu of the benefits it would have received had the merger agreement been consummated — operating profits that would have been earned everywhere Comcast conducted its business, including California," as well as the other states where Comcast had customers.