Non-Business Income Allocated to State of Commercial Domicile

Vermont National Telephone Co. (VNT) owes Vermont tax on its $24 million gain from the sale of FCC licenses covering areas in upstate New York.

The Vermont Supreme Court affirmed Oct. 15 the Vermont Department of Taxes’ determination that the non-business income from the sale of intangible property—the FCC licenses—was allocated to Vermont, because the state was VNT’s commercial domicile (Vermont Nat’l Telephone Co. v. Dep’t of Taxes, 2020 Vt. 83 (10/15/20)).

In 2003, the FCC auctioned licenses granting the right to broadcast in the 700 MHz frequency of the electromagnetic spectrum in specific geographic areas. VNT purchased two FCC licenses in 2003 for investment purposes. These licenses granted the corporation the exclusive right to broadcast over parts of upstate New York. In 2013, VNT sold the licenses resulting in a capital gain of approximately $24 million.

On its Vermont income tax return, VNT reported the capital gain from the sale of the licenses as “non-business income” allocated entirely to non-Vermont sources. In 2015, the Vermont Department of Taxes audited VNT and assessed corporate income tax on the capital gain from the sale of the licenses. The department concluded that the licenses were neither located nor had a situs in New York. The department determined that because VNT never engaged in activities related to the licenses in New York the licenses did not acquire a situs there. The department concluded that VNT’s commercial domicile was in Vermont. A state trial court affirmed the department’s decision.

Location and Situs

On appeal, VNT argued that the licenses were located in New York because they conveyed privileges that could only be exercised in a particular place. Assuming the licenses were not located in New York, VNT argued that its commercial domicile is in Connecticut. (Non-business income is allocated in full to the state where the income-producing activities are located or have a situs. If the assets have neither a location nor a situs, the income is allocated to the state of the business’s commercial domicile).

The department concluded that the licenses did not have a location because intangible property, by definition, has no physical location, and the mere fact that the licenses conveyed rights that could be exercised in New York did not mean they were located there. According to the department, the licenses also did not acquire a New York situs because VNT never engaged in business activities with the licenses there. VNT argued that in interpreting the regulation, the department conflated “situs” with the concept of “nexus.” VNT argued that the licenses were located in New York because they granted a right that could only be exercised there.

VNT first argued that the term “situs” was synonymous with location. The court disagreed. Situs, it noted, is a term of art referring to where intangible property is constitutionally subject to taxation. The regulation directs non-business income to be allocated to the state of a business’s commercial domicile provided that the income-producing assets have neither a “location” nor a “situs.” We presume, the court went on to say, that the department intended the words, “location” and “situs,” in the regulation to carry different meanings. Otherwise, the parts of the regulation referencing situs would be “mere surplusage.” Location refers to a physical position. Situs is the location or position of something for legal purposes. Situs is a term of art referring to where an intangible asset is constitutionally subject to taxation.

Intangibles, since they are without physical characteristics, can have no location in space. Intangibles have no situs in the physical sense, but have the situs attributable to them in legal conception.

Intangibles, the court observed, are generally subject to tax at the owner’s domicile. Intangibles acquire a business situs when the taxpayer extends his activities with respect to his intangibles, so as to avail himself of the protection and benefit of the laws of another state, in such a way “as to bring his person or property within the reach of the tax gatherer there.” Intangibles are taxable only at the domicile of the owner unless they have acquired a business situs elsewhere.

Because the FCC licenses were intangible assets, and therefore had no location, the only way they could be allocated to New York was if they had a situs there. The department reasoned that the licenses did not have a situs in New York because VNT never used the licenses in business activity there. VNT argued that an intangible asset has a situs, regardless of any actual business use, if the asset grants a right that can only be exercised in a particular place. Because the FCC licenses granted a right to broadcast in New York, VNT argued that the licenses had a situs there.

In New York ex rel. Whitney v. Graves, the U.S. Supreme Court recognized that an intangible asset may acquire a situs if either (1) the intangible asset is used in “the actual transactions of a localized business” or (2) the intangible asset grants a right that is “fixed exclusively or dominantly” at a particular place. In the second instance, what is implied in the court’s analysis is that the intangible asset has been created or protected by a state’s laws. The department explained that the FCC licenses granted rights that were created or protected by the FCC, not by New York. Therefore, the licenses did not acquire a situs there. VNT failed to demonstrate any compelling indications of error.

Commercial Domicile

Because the licenses had neither a location nor a situs, the capital gain from the sale of the licenses was allocated to VNT’s commercial domicile. The department concluded that VNT’s commercial domicile during the years in issue was in Vermont.

VNT argued that the most important factor (in determining commercial domicile) was “the center of authority and control.” Applying this test, VNT argued its commercial domicile was in Connecticut because that was where the president made “high-level strategic decisions” and the board of directors met.

Under the regulation, the commercial domicile is defined as “the principal place from which the business is directed or managed.” The principal inquiry for commercial domicile is to consider where the business is managed or directed. Where, the court noted, the board of directors meets is certainly a relevant factor in considering commercial domicile, “but it is neither determinative nor does it carry more weight than any other factor.” The department did not err in concluding that VNT’s commercial domicile was in Vermont. The department found that VNT’s day-to-day business was conducted out of its Vermont office because at that office the chief financial officer filed all of VNT’s tax returns, paid sales tax, and paid payroll withholding tax. Most of the business records were kept in the Vermont office, and a majority of VNT’s employees were subject to Vermont withholding tax. By contrast, VNT had no property in Connecticut, had no employees there, and did not store any business records there.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Robert Willens is president of the tax and consulting firm Robert Willens LLC in New York and an adjunct professor of finance at Columbia University Graduate School of Business.