Supreme Court unanimously reverses Illinois's MeadWestvaco case: liaison meeting minutes reveal candid discussions between TEI and government; opposition to codification of ESD continues.

• Position: Tax Executives Institute

In an eagerly awaited decision, the Supreme Court of the United States in April unanimously ruled that the "operational function" test for determining whether income is apportionable for state tax purposes must be narrowly applied to assets used in the taxpayer's business, but not to the relationship between business entities or businesses. The Court's decision adopts the position presented by TEI in an amicus brief in support of the taxpayer late last year.

TEI President Robert McDonough called the decision "a significant victory for taxpayers with operations in several states." We are very pleased, he added, that TEI's position in this case was vindicated.

The State of Illinois had taxed a capital gain realized by Mead when the company sold its Lexis/Nexis business division. The trial court found that the two companies were not unitary, but concluded that the state could tax an apportioned share of Mead's capital gain because Lexis/Nexis served an operational purpose in Mead's business. The state appellate court affirmed.

In its April 15 decision, the Supreme Court vacated the appellate court's decision, holding that the lower court erred by considering the operational test after determining that Mead and Lexis/Nexis were not unitary. The Court ruled that the concept of operational function referred to in the Allied-Signal and other cases was not intended to modify the unitary business principle by adding a new ground for apportionment. When the asset in question is another business, the hallmarks of a unitary relationship continue to be functional integration, centralized management, and economies of scale, the Court said. Because the appellate court had not considered the trial court's finding of a non-unitary relationship, the Supreme Court remanded the case back to the Illinois Appellate Court.

The Court's opinion in MeadWestvaco Corp. v. Illinois Department of Revenue is available on TEI's website, www.tei.org. TEI's amicus brief in the case was reprinted in the Winter 2007 issue of The Tax Executive.

Liaison Meeting Minutes Released

TEI's President led a delegation of TEI's Executive Committee and committee chairs in three mid-February meetings with the Commissioner of Internal Revenue, officials of the IRS Large and Mid-Size Business Division, and representatives of the U.S. Treasury Department's Office of Tax Policy.

Commenting on the meetings, Mr. McDonough observed that "regular discussions with tax policy makers and...