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On December 9, 2011, Vodafone Americas, Inc. ("VAI") filed a multi-million dollar corporate income tax refund suit against the Florida Department of Revenue claiming that an out-of-state, indirect, minority shareholder of a Florida general partnership is entitled to a refund of all Florida corporate income tax paid over the previous three years. Specifically, Vodafone contends in a 10 count complaint, the partner was not part of the same unitary business, and, therefore, Florida did not have the constitutional right to tax the corporate partner's share of the partnership income. Alternatively, even if the income was part of a unitary business, the income itself should be non-business income excluded from the apportionment factors.

A copy of the original complaint filed 12-9-2011 is available to download as a PDF at the end of this article. This is a very hot case and you should take the time to understand it fully to see if it might apply to your company (or your client's company), such that a protective claim for refund may be warranted. Alternatively, with a better understanding of this case, a business could be restructured to take tax advantage of the business structure.

To lay a foundation, Florida has a corporate income tax but does not tax partnerships. Instead, the partners' share of partnership income (and apportionment) flows up to the partners of the partnership. If a partner is a C-Corporation, then, under normal circumstances, Florida will subject the C-Corporation partner to Florida corporate income tax based on the partner's share of the Florida apportioned income from the partnership. This would normally be true regardless of whether the partner has any other operations in the state of Florida. However, as with most principles in the multistate tax world, there are constitutional limitations on a state's ability to tax an out of state business. In this case, the limitation lies within the "unitary business principle's" effects on state income tax nexus and apportionment.

In Butler Brothers v. McOlgan, 315 U.S. 501 (1942), the Supreme Court held that states can only combine the business income of businesses that are part of a unitary group, establishing the "three unities test" consisting of (1) unity of ownership (>50%), (2) unity of operation (centralized purchasing, accounting, advertising, etc), and (3) unity of use (centralized executive force, systems of operations, etc). A group of businesses must met all three unity tests for a state to combine the companies as one for state tax purposes, or, in this case, attribute the business operations of a partnership to the partners. In Mobile Oil Corp. v. Commissioner of Vermont, 445 U.S. 425 (1980), the court also looked at the existence of functional integration, centralization of management, and economies of scale to determine whether a group of businesses could be combined as one for tax purposes.

In this case, VAI is a C-Corporation with a principal place of business is Denver, Colorado. VAI owns two single member LLCs (disregarded for federal income tax purposes) and (by direct and indirect ownership) 100% of a partnership, all three of which have a principle place of business in Denver, Colorado. These two LLCs and the partnership own, by various degrees of ownership, a 45% interest in Cellco Partnership. Thus, indirectly through two single member LLCs and a partnership, VAI indirectly owns 45% interest in Cellco Partnership. Cellco Partnership, which does business as Verizon Wireless, has significant business operations in the state of Florida. The remaining 55% ownership interest in Cellco Partnership ("Cellco") is owned by Verizon Communications, Inc. an unrelated entity to VAI.

The crux of the matter is whether Florida can tax VAI based on its 45% indirect, non-controlling ownership interest in the Cellco Partnership, which is in a completely different line of business than VAI. Florida has taken the position that VAI and Cellco are part of a unitary business and, therefore, the net income and apportionment factors of Cellco are attributable to VAI. If Florida is correct, then this would give VAI the requisition nexus to subject VAI to Florida's corporate income tax and the apportionment factors of Cellco would flow through to VAI.

However, VAI had no physical presence in the state of Florida during the period in question. In fact, under the Cellco partnership agreement, VAI was precluded from having any direct or indirect responsibility for the day-to-day operations of Cellco's business as well as being precluded from any control over the management or business operations of Cellco. Furthermore, the partnership agreement contained non-compete provisions that precluded VAI from participating in Cellco's line of business. Similarly, no agency relationship existed between VAI and Cellco. Therefore, VAI's only connection with the state of Florida was its indirect, minority ownership interest in Cellco during the tax years in question.

We will not go into all the creative and well thought out arguments presented in the 10 count, 19 page complaint (downloadable as a PDF file below). However, for those of you knowledgeable on the subject, Rule 12C-1.022(2)(e), F.A.C., provides that a corporate partner of a partnership operating in Florida is responsible for the payment of corporate income taxes "irrespective of the relationship between the foreign corporate partner and the in-state partnership," which is an administrative attempt to ignore the US Supreme Court's unitary business principle holdings. Suffice it to say that VAI's 2nd count is that this offending administrative rule is not only unconstitutional but it also exceeds the legislative authority of Sec. 220.11, Fla. Stat.

It is also worth noting that a very similarly situated taxpayer successfully made the same argument in New Jersey in BIS, LP, Inc. v. Division of Taxation, Dkt. No. A-1172-09T2 (N.J. Super. Ct. App. Div. 08/23/2011) (downloadable as a PDF below).

We will keep you up to date on how this case proceeds and if you have any questions whether your company (or your client's company) might take advantage of the same arguments as VAI by filing a protective claim for refund, then please contact us for an evaluation of your situation.

Click on the link below to download a copy of the original complaint:

Vodafone Americas, Inc. v. State of Florida, Department of Revenue, Case No. 37 2011 CA 3496 (Fla. 2nd Cir., filed December 9, 2011) (Original complaint).

Vodafone Americas, Inc. v. State of Florida, Department of Revenue, Case No. 37 2011 CA 3496 (Fla. 2nd Cir., filed December 9, 2011) (Amended complaint - Filed Dec. 30, 2011).

BIS, LP, Inc. v. Division of Taxation, Dkt. No. A-1172-09T2 (N.J. Super. Ct. App. Div. 08/23/2011)


Sec. 220.11, Florida Statute

Section 120.52, Florida Statute

Rule 12C-1.022(2)(e), Florida Administrative Code

See also, Technical Assistance Advisement 11C1-001

© 2011 All rights reserved - James H Sutton Jr