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

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 administrators are a key part of TEI's ongoing communications with the government. They enable all concerned to evaluate what is working well, how it can be sustained and, equally important, what is not going as well and how it can be improved." For example, in this year's meeting with IRS, officials addressed how the IRS is developing tools to assist in risk-assessing e-filed return data as well as non-tax data and how to better understand the increase in pass-through return filings. In addition, participants shared ideas and best practices regarding professional recruitment, especially in light of the extent of the expected turnover of IRS personnel in the coming years.

The minutes of these meetings are reprinted in this issue, beginning at page 117. The agendas for the meetings were published in January-February 2008 issue of the The Tax Executive; both agendas and minutes are also available on-line at www.tei.org.

TEI Renews Opposition to Codification of Economic Substance

In March, TEI renewed its opposition to the codification of the economic substance doctrine, asserting that statutorily "clarifying" the economic substance doctrine would do nothing to curb illegitimate transactions because there are no illegitimate transactions currently beyond the judicial doctrine's reach. Put differently, because the judicial doctrine requires judges to apply their best judgment to the facts and circumstances, there is no need for statutory embellishment. The current ESD proposal is part of ongoing House-Senate negotiation focused on the Farm Bill reauthorization and is currently the sole, non-lee revenue raiser.

TEI's letter is reprinted in this issue, beginning on page 134 and is also available at www.tei.org.

Coming in next month's TTE:

* Comments on Cafeteria Regulations

* Amicus Brief in VFJ Ventures, challenging Alabama's add-back statute

* Letter on Federal Mobile Workforce Act

* Recommendations for Alternatives for Employment Tax Obligations of DREs

* Recommendations for Paperwork Burden Reduction in Canada

And much more ....