{"id":57323,"date":"2022-01-27T17:32:00","date_gmt":"2022-01-27T17:32:00","guid":{"rendered":"https:\/\/www.dinsmore.com\/?post_type=publications&p=57323"},"modified":"2025-10-06T17:32:57","modified_gmt":"2025-10-06T17:32:57","slug":"vas-holdings-and-the-battle-over-taxing-non-unitary-capital-gains","status":"publish","type":"publications","link":"https:\/\/www.dinsmore.com\/publications\/vas-holdings-and-the-battle-over-taxing-non-unitary-capital-gains\/","title":{"rendered":"VAS Holdings and the Battle Over Taxing Non-Unitary Capital Gains"},"content":{"rendered":"\n
\"\"\/<\/figure>\n\n\n\n

Background<\/strong>

VAS Holdings & Investments LLC v. Commissioner of Revenue, No. SJC-13139, currently on appeal before the Massachusetts Supreme Judicial Court, seeks to answer whether a state can tax a nondomiciliary on 100%\u2014or any\u2014of its capital gain derived from the sale of its interest in a subsidiary solely because the subsidiary did business in that state. At its heart, the case considers whether, as the authors believe, the unitary business principle remains the sole test for determining whether a state can tax an apportioned share of a non-domiciliary\u2019s capital gains under the U.S. Supreme Court\u2019s Due Process Clause and Commerce Clause jurisprudence.<\/p>\n\n\n\n

The appellant, VAS Holdings & Investments LLC (\u201cVASHI\u201d), is a Florida limited liability company taxed as an S corporation that in 2011 was based in and formed under the laws of Illinois. Through a business combination in 2011, VASHI acquired a 50% membership interest in Cloud5, LLC (\u201cCloud5″), a Massachusetts LLC taxed as a partnership. Cloud5, in turn, owned a Massachusetts-based subsidiary, Thing5, LLC (\u201cThing5″), that grew more profitable after the 2011 combination. In 2013, VASHI sold its 50% interest in Cloud5 in one transaction and excluded the resulting capital gain from its and its shareholders\u2019 Massachusetts income tax bases. At the time, VASHI did no business in Massachusetts, had no Massachusetts resident shareholders, and its only material assets were bank accounts and its membership interest in Cloud5. Notably, VASHI and its shareholders paid Massachusetts income tax on their distributive shares of Cloud5\u2019s operating income without dispute.<\/p>\n\n\n\n

The Massachusetts Commissioner of Revenue audited and assessed corporate excise tax and nonresident composite tax on 100% of VASHI\u2019s capital gain, based on a Massachusetts regulation that taxes a non-domiciliary owner on all capital gains from the sale of a partnership interest if the dollar amounts of the partnership\u2019s property and payroll factors are greater in Massachusetts than in any other state. VASHI appealed the commissioner\u2019s assessments on Due Process Clause and Commerce Clause grounds. Despite VASHI\u2019s lack of Massachusetts contacts and agreement by the parties that VASHI did not share the hallmarks of a unitary business with Cloud5, the Massachusetts Appellate Tax Board (\u201cATB\u201d) affirmed the assessments.<\/p>\n\n\n\n

Under an all-or-nothing approach referred to as \u201cInvestee Apportionment,\u201d the ATB found in VAS Holdings & Investments, LLC v. Comm\u2019r of Revenue, Mass. that 100% of a non-domiciliary taxpayer\u2019s capital gain could be taxed by Massachusetts if that income was derived\u2014albeit indirectly\u2014from a subsidiary with property and employees in that state. It was constitutionally sufficient, the ATB concluded, that through its partial ownership of Cloud5, VASHI had \u201cavail[ed] itself of the protections and benefits afforded by the commonwealth.\u201d<\/p>\n\n\n\n

The Unitary Business Principle<\/strong>

It has often been said, as in Mobil Oil Corp. v. Commissioner of Taxes of Vt., that the unitary business principle is \u201cthe linchpin of apportionability in the field of state income taxation.\u201d The Supreme Court has described a unitary business relationship as existing when three unities are present: centralized management, functional integration, and economies of scale. The Commissioner of Revenue stipulated that such a relationship did not exist between VASHI and Cloud5.<\/p>\n\n\n\n

The commissioner nevertheless asserted the power to tax this capital gain based on some of the Court\u2019s statements that appeared to sanction taxing a non-domiciliary corporation on its income in the absence of these three properties. In Allied-Signal, Inc. v. Dir., Div. of Taxation, the Court said that it has never \u201cestablish[ed] a general requirement that there be a unitary relation between the payor and the payee to justify apportionment[.].\u201d Taken out of context, this language caused many to mistakenly believe that a unitary relationship wasn\u2019t necessary to apportion\u2014and to tax\u2014a non-domiciliary owner\u2019s capital gain. However, in Allied-Signal and other apportionment cases before 2008, the Supreme Court required states to show something more before taxing such capital gain: \u201cthat the capital transaction serve an operational rather than an investment function[]\u201d in the non-domiciliary taxpayer\u2019s interstate business.<\/p>\n\n\n\n

In MeadWestvaco Corp. v. Ill. Dep\u2019t of Revenue, the Court seemingly acknowledged the confusion its statement in Allied-Signal had created, and harmonized the requirement of an operational function with its earlier unitary jurisprudence, by bluntly stating that Allied-Signal, among others, \u201cdid not announce a new ground for the constitutional apportionment of extrastate values in the absence of a unitary business.\u201d<\/p>\n\n\n\n

Despite this, Massachusetts and New York, among a few other jurisdictions\u2014including New York City, as recently as last March in the Goldman Sachs Petershill Fund appeal\u2014persist in advancing a faulty interpretation of older Supreme Court decisions. In particular, they construe Int\u2019l Harvester v. Wis. Dep\u2019t of Taxation and Wisconsin v. J.C. Penney Co. as permitting them to tax a nonresident on its capital gains because the gains represent income somehow earned in the state. However, in addition to relying on outdated case law, these jurisdictions ignore a fundamental distinction present in those very cases. The tax at issue in those two cases was a tax on paying out the operational income from the entity itself\u2014not a tax on the investment gains of nonresident owners. It was a tax on dividend income, paid directly from the corporation\u2019s earnings and profits\u2014not a capital gain of the shareholder, derived from a purchaser\u2019s motivations that may be unrelated to the fundamental value of the enterprise.<\/p>\n\n\n\n

Investee Apportionment Is Bad Tax Policy<\/strong>

The purpose of the Commerce Clause is to prevent states from discriminating against non-domiciliary Court clarified that the unitary business principle is the single test for apportionability in MeadWestvaco because it had to; allowing states to have multiple standards for apportionability invites the kind of multiple taxation the Commerce Clause was intended to avoid. It\u2019s telling, then, that neither the commissioner nor the ATB rely on MeadWestvaco as authority, and even more telling that the Multistate Tax Commission\u2019s amicus brief in favor of the commissioner conveniently declined to present any arguments under the Commerce Clause.<\/p>\n\n\n\n

Mentioning the Commerce Clause would have invited a discussion on what should be the fundamental point of VAS Holdings: that some income must be sourced by constitutional rules because it cannot easily be said to have been \u201cearned\u201d in any particular location and that each state must allow other states their own sovereignty to tax\u2014or not tax\u2014the income properly sourced under those rules. During the Jan. 5 oral arguments, two justices of the Supreme Judicial Court asked questions that suggested they were concerned with the idea that if Massachusetts couldn\u2019t tax the capital gain at issue, then the gain would escape taxation by any state. This isn\u2019t the result of a constitutional rule that allows capital gains to escape taxation, but a rule that assigns much of the income to a state that chooses not to tax it. However, the ATB\u2019s ruling indicates that some 36% of the owners of VASHI were taxed by their states of residence, but implies they were allowed a credit for the Massachusetts tax paid\u2014an assertion that is not clear from the record.

The alternative to the unitary business principle, and the breathtaking rule the Supreme Judicial Court seems to be considering, would allow any state to tax any capital gain if the state\u2019s relationship with the investee, versus the investor, is sufficient\u2014a fundamentally flawed policy. In Massachusetts\u2019 case, the connection is the investee\u2019s property and payroll factors in the state being greater than anywhere else. Accepting the investee apportionment approach as constitutional could allow another state to say that the state with the investee\u2019s greatest proportion of in-state sales has the greatest connection and tax 100% of the gain. Under this approach, a state could conceivably go even further and argue that any time it has given benefits, protections, or opportunities to the investee entity, it can tax some part or all of a non-domiciliary investor\u2019s capital gain on the sale of their ownership interest.<\/p>\n\n\n\n

Investee apportionment would lead to multiple taxation for investors with no connection to the taxing state\u2014including Massachusetts residents\u2014and invites interstate disputes. The Supreme Court\u2019s recent reluctance to resolve such tax disputes between states, as evidenced by denying motions for leave to file a bill of complaint in New Hampshire v. Massachusetts, No. 22O154, and in Arizona v. California, No. 22O150, suggests the Supreme Judicial Court has in its hands more power than it may realize. Let us hope that rather than defer to their state\u2019s narrow interest in generating revenue, the justices show to their fellow state courts the respect they would want to be shown to Massachusetts as part of this republic. As counsel for VASHI pointed out during oral argument, other states may apply the rule the court adopts to Massachusetts\u2019 own residents in return.<\/p>\n\n\n\n

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.<\/em><\/p>\n\n\n\n

Reproduced with permission from Copyright 2022 The Bureau of National A\ufb00airs, Inc. (800-372-1033) www.bloombergindustry.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Background VAS Holdings & Investments LLC v. Commissioner of Revenue, No. SJC-13139, currently on appeal before the Massachusetts Supreme Judicial Court, seeks to answer whether a state can tax a nondomiciliary on 100%\u2014or any\u2014of its capital gain derived from the sale of its interest in a subsidiary solely because the subsidiary did business in that\u2026<\/p>\n","protected":false},"author":8,"featured_media":0,"menu_order":0,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"tags":[],"publication-type":[],"class_list":["post-57323","publications","type-publications","status-publish","format-standard","hentry"],"acf":[],"yoast_head":"\nVAS Holdings and the Battle Over Taxing Non-Unitary Capital Gains - Dinsmore & Shohl<\/title>\n<meta name=\"description\" content=\"VAS Holdings and the Battle Over Taxing Non-Unitary Capital Gains Read insights and legal analysis from attorneys at Dinsmore & Shohl LLP.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.dinsmore.com\/publications\/vas-holdings-and-the-battle-over-taxing-non-unitary-capital-gains\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"VAS Holdings and the Battle Over Taxing Non-Unitary Capital Gains\" \/>\n<meta property=\"og:description\" content=\"VAS Holdings and the Battle Over Taxing Non-Unitary Capital Gains Read insights and legal analysis from attorneys at Dinsmore & Shohl LLP.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.dinsmore.com\/publications\/vas-holdings-and-the-battle-over-taxing-non-unitary-capital-gains\/\" \/>\n<meta property=\"og:site_name\" content=\"Dinsmore & Shohl\" \/>\n<meta property=\"article:modified_time\" content=\"2025-10-06T17:32:57+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.dinsmore.com\/wp-content\/uploads\/2022\/01\/kelvin-benner.jpg\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data1\" content=\"7 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.dinsmore.com\/publications\/vas-holdings-and-the-battle-over-taxing-non-unitary-capital-gains\/\",\"url\":\"https:\/\/www.dinsmore.com\/publications\/vas-holdings-and-the-battle-over-taxing-non-unitary-capital-gains\/\",\"name\":\"VAS Holdings and the Battle Over Taxing Non-Unitary Capital Gains - 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