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Is Investee Apportionment a Permissible Apportionment Methodology?

Tax Development Apr 07, 2022

Is Investee Apportionment a Permissible Apportionment Methodology?

One of the more closely watched cases over the past year is VAS Holdings & Investments LLC v. Commissioner.1 This case deals with whether Massachusetts can apportion a gain from the sale of a partnership based on the activities of the partnership being sold. 

VAS Holdings & Investments LLC (“VAS”) had a 50% investment in Cloud5, LLC (“Cloud5”). VAS sold its investment in 2013 and realized a gain on the sale. VAS had no contacts or connections in Massachusetts other than its ownership of Cloud5. In fact, VAS had no employees or operations, and its only asset was the ownership in Cloud5. Cloud5 had all its operations in Massachusetts, and over the period that VAS had an interest in Cloud5, its Massachusetts operations increased significantly. 

Even though VAS had no contacts with Massachusetts, the Department of Revenue (DOR) asserted a tax on the gain realized by VAS. VAS has argued that the gain can only be apportioned to Massachusetts if the two enterprises are unitary. In its efforts to persuade the courts to find in its favor, VAS cites Asarco Incorporated v. Idaho State Tax Commission, 458 U.S. 307 (1982), that “the lynchpin of apportionment is the unitary business principle.” The DOR has argued that the gain is derived from Cloud5’s presence in Massachusetts and, therefore, the gain is taxable in the state. So far, the DOR has prevailed at the Massachusetts Appellate Tax Board (ATB).2 The case is now before the Massachusetts Supreme Judicial Court (“the Court”), and oral arguments were heard on January 5, 2022.

In an unusual request, on March 30, 2022, the Court has issued a rare order asking the parties to address several questions: 1) What specific statutes are relied on by the DOR to tax the gain based on the investee’s connection to Massachusetts? 2) How do those statutes work together to authorize the investee approach? 3) How does the decision in Dupee3 affect the answer? 4) Do the repealed investee apportionment rules in Ohio, New York City, and New York State have comparable provisions in Massachusetts law? 5) Has VAS waived any objection to the statutory authority authorizing the investee approach?

These questions would appear to imply that the Court seriously questions the DOR’s ability to tax the gain and may find for VAS in this case. The case has had several amicus briefs filed for both parties. In addition, many commentators have addressed the issues contained in the case. After repealing its tax on investees under a subsidiary apportionment tax, New York City has a similar issue pending in In the Matter of Goldman Sachs Petershill Fund Offshore Holdings (Delaware) Corp4 (“Petershill”). If the VAS decision is decided in favor of the taxpayer, it will be interesting to see what the New York court’s final outcome is in Petershill, and how this issue will be treated in the future.

Ryan’s State Income and Franchise Tax team will continue to monitor these developments and report the Court’s decision and how it will affect taxpayers in an ongoing basis.

1 VAS Holdings & Investments LLC v. Commissioner of Revenue, Docket Nos. C332269 & C332270 (Mass. App. Tax Bd. October 23, 2020).

2 Massachusetts Supreme Judicial Court, No. SJC-13139.

3 Commissioner of Revenue v. Paul R. Dupee, Jr., 423 Mass. 617 (1996). This case was decided for the taxpayer regarding the state’s ability to tax the gain Dupee realized on the sale of his partial interest in the Boston Celtics.

4 The decision on appeal is Matter of Goldman Sachs Petershill Fund Offshore Holdings (Delaware) Corp., TAT(E) 16-9(GC), New York City Tax App. Trib. (March 12, 2021).


Mark L. Nachbar

Mary Bernard

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