U.S. Supreme Court Decides MeadWestvaco Corp. v. Illinois Department of Revenue, Vacating Decision and Remanding to Appellate Court of Illinois

The U.S. Supreme Court has issued a decision on the case of MeadWestvaco Corp. v. Illinois Department of Revenue, Docket No. 06-1413, vacating the judgment of and remanding the case back to the First District Appellate Court of Illinois. On September 25, 2007, the U.S. Supreme Court granted certiorari in the case of MeadWestvaco Corp. v. Illinois Department of Revenue, a case concerning approximately $1 billion in capital gains realized by Petitioner when it sold the assets of an operating division in 1994, which had functioned as an independent and separately managed business for more than 25 years. Previously, the Illinois Supreme Court affirmed, without opinion, the decision of the First District Appellate Court of Illinois, and Petitioner, MeadWestvaco, appealed to the U.S. Supreme Court. (Please see our October 31, 2007 press release, “U.S. Supreme Court Grants Certiorari in MeadWestvaco Corp. v. Illinois Department of Revenue” for further background on this case.)

In its opinion, the U.S. Supreme Court, decided that the Illinois state courts erred in considering whether Lexis, an operating division of MeadWestvaco, served an “operational purpose” in Petitioner’s corporate structure after the courts already concluded that MeadWestvaco and Lexis were not part of the same unitary business. It was noted that the appellate court considered Lexis as serving an operational purpose without reviewing the trial court’s determination that MeadWestvaco and Lexis were not unitary. Because the appellate court did not address the unitary issue, the U.S. Supreme Court did not address the issue either.

Further, the Court declined to consider the State of Illinois’s argument that Lexis, as an operational asset, did substantial business in and had substantial contacts with the state to justify apportionment of the gain realized by MeadWestvaco, as this would create new law regarding the apportionment of intangible property. The U.S. Supreme Court noted that this issue was raised for the first time in the state’s brief on the merits and was disinclined to rule on whether apportionment of an operational asset that was not regarded as being unitary with the taxpayer was constitutionally justified, as the issue was not raised nor passed upon in the state courts.

MeadWestvaco Corp. v. Ill. Dep’t of Revenue, 128 S. Ct. 1498; 170 L. Ed. 2d 404; 2008 U.S. Lexis 3473; 76 U.S.L.W. 4193 (U.S. 2008).