LOS ANGELES -- Comcast and the California Franchise Tax Board (FTB) are set to square off before the before the California Court of Appeal, Second Appellate District, about whether or not Comcast controlled the shopping network QVC in the late 1990s.

Both sides in the case are appealing part of a lower court ruling. Comcast is appealing the decision that the $1.5 billion contractual termination fee was taxable business income and the FTB contests the lower court’s finding that there was not unity between Comcast and QVC during the time in question.

“Both fact patterns strike me as fairly unique,” Darien Shanske, a University of California, Davis, school of law professor, told Northern California Record . “That said, if this case were to lead to a California Supreme Court decision that aimed to clarify the existing tests, then that would be significant.”

FTB has argued that the trial court did not apply the dependency or contribution tests for unity in their assessment. FTB also said they argued demonstrated vertical integration between Comcast and QVC, and the regulatory presumption that such integration shows unity among commonly owned businesses.

“Yes, common ownership is relevant and implies unity. That said, there is genuine dispute as to the standard to apply here,” Shanske said. “And the standard is just that, a standard, and so there is room for reasonable disagreement based on the facts.”

For Comcast’s argument against the termination fee being taxable income, the company stated that mergers do not generate income, and that the monies generated by the fees are not business income subject to taxation under the transactional or functional tests. Comcast also argued that taxation of these particular fees flies against the Supreme Court’s admonishment of state taxation of multistate income based on future or potential events.

“Yes, the termination fee in question is not income in exactly the same way as Comcast’s income from, say, cable subscribers. That said, the standard is again complicated and fact intensive,” Shanske said. “The FTB has a good case that, however unusual, the termination fee was still business income.”

With both sides calling into question the lower court’s application of various standard tests used in these kinds of taxation cases, the potential for an important ruling across California tax law does exist despite how unusual and situational the particular facts of this case may be. With both sides arguing different parts of the lower court’s ruling, the potential for it being overturned in part exists on both sides of the case, Shanske said.

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