The Supreme Court has issued unanimous rulings in two tax cases, MeadWestvaco Corp. v. Illinois Department of Revenue, and U.S. v. Clintwood Elkhorn Mining Co.
In the MeadWestvaco case, the Supreme Court vacated and remanded the decision of the Illinois appellate court, which had allowed the state of Illinois to tax a capital gain realized by Mead, an Ohio-based subsidiary of MeadWestvaco, when Mead sold its LexisNexis business division. Mead paid the tax and sued in state court.
The trial court found that Lexis and Mead were not unitary because they were not functionally integrated or centrally managed and enjoyed no economies of scale. It nevertheless concluded that Illinois could tax an apportioned share of Mead's capital gain because Lexis served an operational purpose in Mead's business. The State Appellate Court in affirming found that Lexis served an operational function in Mead's business and thus did not address whether Mead and Lexis formed a unitary business.
Justice Samuel Alito (pictured) wrote in his opinion that the state courts erred in considering whether Lexis served an "operational purpose" in Mead's business after determining that Lexis and Mead were not unitary.
"We have been asked in this case to decide whether the State of Illinois constitutionally taxed an apportioned share of the capital gain realized by an out-of-state corporation on the sale of one of its business divisions," he wrote. "The Appellate Court of Illinois upheld the tax and affirmed a judgment in the state's favor. Because we conclude that the state courts misapprehended the principles that we have developed for determining whether a multistate business is unitary, we vacate the decision of the Appellate Court of Illinois." The case was remanded for further proceedings consistent with the opinion.
"The Constitution bars a state from taxing the income from an out-of-state corporate subsidiary unless that sub is part of a 'unitary business' with its in-state parent," said Don Griswold, a partner in Reed Smith's state tax group. "The Illinois Appellate Court did not address whether the sub and parent here were unitary, but allowed the state to impose tax anyway. Justice Alito had no patience for this, and remanded the case so the lower court could decide the issue it should have decided in the first place."
Justice Clarence Thomas wrote a concurring opinion, expressing "serious doubt that the Constitution permits us to adjudicate cases in this area," citing his reservations about the applicability of the commerce clause.
In the Clintwood Elkhorn Mining case, the court found that taxpayers need to file for refunds of taxes that have been unlawfully assessed within the proper time periods.
"The Internal Revenue Code provides that taxpayers seeking a refund of taxes unlawfully assessed must comply with tax refund procedures set forth in the Code," wrote Chief Justice John Roberts. "Under those procedures, a taxpayer must file an administrative claim with the Internal Revenue Service before filing suit against the government. Such a claim must be filed within three years of the filing of a return or two years of payment of the tax, whichever is later. The Tucker Act, in contrast, is more forgiving, allowing claims to be brought against the United States within six years of the challenged conduct. The question in this case is whether a taxpayer suing for a refund of taxes collected in violation of the Export Clause of the Constitution may proceed under the Tucker Act, when his suit does not meet the time limits for refund actions in the Internal Revenue Code. The answer is no."
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