Tax News

CCH (cch.taxgroup.com) reports:

The U.S. Supreme Court has granted an Ohio corporation's request to decide if Illinois may require it to treat the gain from its sale of an underlying business segment as apportionable business income, for state corporate income tax purposes, on the basis that the asset served an operational function.
Since 1968, the corporation (Mead) had owned 100% of what became Lexis/Nexis. Lexis/Nexis changed several times between a division and a subsidiary of Mead. In 1994, Mead sold Lexis/Nexis for a gain of approximately $1 billion. Mead, which transacted business in many states including Illinois, excluded the gain from its 1994 Illinois corporate income tax return. However, the Illinois Department of Revenue issued a deficiency notice on the basis that the gain was apportionable business income.
Mead challenged the Department's action in court, asserting that its investment in and disposition of Lexis/Nexis served an investment, as opposed to an operational, function and, therefore, the gain was not apportionable. The trial court disagreed and the Illinois Appellate Court affirmed. (TAXDAY, 2007/01/16, S.11) The Appellate Court considered several factors in concluding that Lexis/Nexis served Mead in an operational rather than an investment function, including: Mead's capital investment in the early years of Lexis/Nexis, Mead's retention of various tax advantages, Mead's investment of Lexis/Nexis' excess cash, Mead's approval of all major capital expenditures, Mead's ability to change Lexis/Nexis from a division to a subsidiary, and Mead's description in its annual report of Lexis/Nexis as a key business component.
The Illinois Supreme Court denied Mead's subsequent petition for appeal, and Mead filed this petition with the U.S. Supreme Court that has now been granted. Mead asserts that all of the factors relied upon by the Illinois Appellate Court derive from the fact that Mead owned 100% of Lexis/Nexis, and reflect an ordinary relationship between a company and a 100% owned subsidiary. If the Illinois decision is allowed to stand, Mead argues that it would mean that all income received by non-domiciliary corporations from subsidiaries or divisions will be subject to apportionment, in direct conflict with Allied-Signal, Inc., 504 U.S. 768 (1992), F.W. Woolworth Co.,
458 U.S. 354 (1982), and ASARCO Inc., 458 U.S. 307 (1982), and the Due Process and Commerce Clauses of the U.S. Constitution. Oral argument probably will be in January 2008 and a decision will be issued prior to the end of the Court's term next summer.
Subscribers to CCH Tax Research NetWork can view the petition.
MeadWestvaco Corp. v. Illinois Department of Revenue, U.S. Supreme Court, Dkt. 06-1413, petition for certiorari granted September 25, 2007.