United States Supreme Court Dissects Dys-'Functional' Apportionment in 'MeadWestvaco Corp. v. Illinois Department of Revenue'
Originally published January 17, 2008
The allocation or apportionment of income from a capital gain transaction has been the subject of several U.S. Supreme Court, and hundreds of lower court, decisions. On January 16, 2008 the U.S. Supreme Court heard oral argument in a case that state tax practitioners hope will add some clarity to an area of law that has grown increasingly convoluted. MeadWestvaco Corp. v. Illinois Dept. of Revenue, Dkt. No. 06-1413 (September 25, 2007). The oral arguments in this case were emblematic of the type of confusion that has dogged courts for many years. In Mead, the Illinois Appellate Court held that the gain from the sale of Mead's Lexis/Nexis ("Lexis") division resulted in apportionable income. During an oral argument that was at times hard to follow, several very important state tax principles were described, discussed and debated. This Legal Alert describing Sutherland's observations of the oral argument will be published in the BNA Weekly State Tax Report on January 18, 2008.
BACKGROUND - TRAVELING THROUGH ILLINOIS
MeadWestvaco ("Mead") was an Ohio corporation that conducted business in several states, including Illinois. Mead primarily produced and sold forest products, including paper and office supplies. In 1968, Mead purchased Data Corporation, an Ohio-based company whose focus was developing ink jet printing technologies and the development of a computerized full text information retrieval system. Data Corporation's computerized retrieval technology grew to become a major aspect of its business and later became known as Lexis. In 1994, Mead sold Lexis for a significant profit.
Mead contended that the gain was allocable (and not apportionable) because: (1) Mead and Lexis did not have a unitary relationship, and (2) Mead's ownership of Lexis served an investment function (and not an operational function) under Allied-Signal's operational versus investment function test. At trial, Mead successfully argued that the Lexis gain was not unitary income, but the Cook County Circuit Court held that the Lexis gain was properly classified as apportionable income because Lexis served an operational function. Mead Corp. v. Dept. of Revenue, No. 00 CH 7854 (Ill. Cir. Ct. Dec. 2, 2002). Mead appealed the Circuit Court decision to the Illinois Appellate Court, First Judicial District, Sixth Division where the appellate court affirmed the circuit court's decision. Mead Corp. v. Illinois Dept. of Revenue, 861 N.E.2d 1131 (Jan. 12, 2007). Having determined that the income was correctly classified...
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