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Investee Apportionment Is Permissible but Not Supported by Statute in Massachusetts

Tax Development May 20, 2022

Investee Apportionment Is Permissible but Not Supported by Statute in Massachusetts

As a follow-up to our release dated April 7, 2022, the Massachusetts Supreme Court (“the Court”) issued its slip opinion in VAS Holdings & Investments LLC v. Commissioner of Revenue on May 16, 2022. As anticipated in our earlier release, the Court found for the taxpayer and disallowed the Commissioner’s assessment of tax based on the investee’s apportionment to Massachusetts. 

In a rather lengthy 36-page opinion, the Court thoroughly analyzed the constitutional ability of a state to  tax on a gain based on the investee’s apportionment to a state. Relying on a long history of U.S. Supreme Court cases, the Court concluded that investee apportionment did not violate either the due process or commerce clauses of the U.S. Constitution. And, although the unitary business principle was discussed and relied upon in many of the cases, the Court concluded that unitary apportionment was not the only permissible method of assigning a gain to the taxing state. 

However, as expected, the Court relied on the answers to its supplemental questions to determine the taxability of the gain in this case. After an analysis of the Massachusetts tax statutes, the Court found that the Massachusetts Legislature specifically limited the state’s ability to tax income that was not within the unitary business principle. In doing so, the Court concluded that the Commissioner lacked the statutory authority to tax the gain realized by VAS Holdings & Investments LLC from the sale of its interest in Cloud5, LLC. 

Our Ryan income tax specialists will continue to monitor legislation and developments in all jurisdictions to see if any promulgate laws or regulations would permit the taxation of a gain based on the in-state investee’s apportionment formula.


Mark L. Nachbar

Mary Bernard

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