Virginia Allocation Apportionment Ruling Inconsistent with U.S. Supreme Court’s Decision in Meadwestvaco

  by Stewart Weintraub and Jennifer Weidler

The U.S. Supreme Court’s decision in Meadwestvaco Corp. v. Illinois Dept. of Revenue calls into question a recent Virginia Ruling relating to allocation apportionment. Virginia Public Document Ruling No. 11-52, 04/05/2011.  Pursuant to established case law, a state may tax an apportioned share of the value generated by a multistate enterprise’s activities that form part of a “unitary business.”  In Allied-Signal, Inc. v. Director, the U.S. Supreme Court enunciated the factors to be considered in establishing the existence of a unitary relationship: (1) functional integration; (2) centralization of management; and (3) economies of scale.

In Allied-Signal and Container Corp. of America v. Franchise Tax Bd., the Court further observed that an asset could form part of a taxpayer’s unitary business if it served an “operational rather than an investment function” in the business.  However, in Meadwestvaco, the Court held that the operational function reference was not intended to modify and expand upon the unitary business principle by adding a new apportionment ground.  As the Court explained, the decision “did not announce a new ground for the constitutional apportionment of extrastate values in the absence of a unitary business.”

The recent Virginia Ruling, involved a Taxpayer who acquired stock in Corporation A through four separate transactions.  The Taxpayer ultimately sold its stock in Corporation A, recognizing a capital gain, the subtraction of which the Virginia Department of Revenue disallowed.  The Tax Commissioner’s Ruling concluded that the Taxpayer and Corporation A: lacked any common or centralized sales, marketing or advertising functions; did no conduct common research or maintain common facilities; did not have common or centralized management; did not have common employees or transfers of employees; and did not maintain common pension or employee benefit plans.

Relying upon Allied-Signal, the Tax Commissioner explicitly stated that, “it is clear that no unitary relationship existed between the Taxpayer and Corporation A.  As such, the issue to be addressed in this case centers upon whether the Taxpayer’s investment in Corporation A fulfilled an operational function rather than a passive investment function.”  However, pursuant to Meadwestvaco, this decision and analysis is wholly inaccurate.  Absent a unitary relationship between the Taxpayer and Corporation A, there was no ground for constitutional apportionment of the gain.

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