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Interests of Amicus Curiae IN THE SUPREME COURT OF TENNESSEE MIDDLE SECTION, AT NASHVILLE BLUE BELL CREAMERIES, LP, ) ) Plaintiff-Appellee, ) ) v. ) No. M2009-00255-SC-R11-CV ) REAGAN FARR, COMMISSIONER ) DEPARTMENT OF REVENUE, ) STATE OF TENNESSEE ) ) Defendant-Appellant. ) On Application for Permission to Appeal from the Judgment of the Court of Appeals BRIEF OF AMICUS CURIAE MULTISTATE TAX COMMISSION IN SUPPORT OF APPLICATION OF COMMISSIONER OF REVENUE FOR PERMISSION TO APPEAL JOE HUDDLESTON, ESQ. Tennessee State Bar No. 010244 Executive Director and Counsel of Record Shirley Sicilian, General Counsel Bruce Fort, Counsel Multistate Tax Commission 444 North Capitol Street, NW, Suite 425 Washington, D.C. 20001-1538 Tel: (202) 508-3800 Fax: (202) 624-8819 Counsel for Amicus Curiae Multistate Tax Commission TABLE OF CONTENTS Page TABLE OF AUTHORITIES……………………………………………………………..ii I. INTERESTS OF THE AMICUS CURIAE…………………………………………….1 II. ARGUMENT................................................................................................................4 I. A STATE CAN TAX INCOME GENERATED WITHIN ITS BORDERS, WHETHER RECOGNIZED AS CURRENT EARNINGS OR CAPITAL GAINS..................................................4 A. The State Has a Sufficient Nexus to Tax Income Generated Within its Borders Regardless of the Form in Which the Income is Realized......................................................5 B. The “Taxable Activity” the Court of Appeals Should Have Considered Was Not the Reorganization, But the Operation of a Unitary Business Within the State………………7 C. The State Has a Sufficient Nexus Over Gains Resulting from Appreciation in the Value of Intangible Property Attributable to In-State Business Activities………………………………………….11 II. BLUE BELL AND BBC USA ARE PART OF THE SAME UNITARY BUSINESS WHERE BBC USA’S VALUE WAS ENTIRELY DEPENDENT UPON BLUE BELL LP’S OPERATIONS…………………………………………………………………14 A. The Court of Appeals Erred in its Application of the Mobil Oil Test to a Holding Company Which Owns Only the Assets of a Unitary Business…………………………………………...17 B. The Taxpayer Failed to Meet its Burden of Demonstrating That the Capital Gain Arose From Non-Unitary Sources………………………………………………………19 C. An Unduly Constricted View of Enterprise Unity Could Have Far-Reaching Consequences in other Contexts........................21 III. CONCLUSION…………………………………………………………………...22 i TABLE OF AUTHORITIES Federal Cases: page Adams Express Co. v. Ohio, 165 U.S. 194 (1897)………………………………….….11 Allied-Signal, Inc. v. Director, Division of Taxation, 504 U.S. 768 (1992)……………………………………………………………5, 10, 12 ASARCO, Inc. v. Idaho State Tax Commission, 458 U.S. 307 (1982)………………………………………………………………...8, 20 Butler Brothers v. McColgan, 315 U.S. 501 (1942)………………………………….…5 Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1974)………………………...5, 13 Container Corporation of America, Inc. v. Franchise Tax Board, 463 U.S. 159 (1983)………………………………………………………………17, 20 Curry v. McCanless, 307 U.S. 357 (1939)…………………………………………..…11 Exxon Corporation v. Wisconsin Department of Revenue, 447 U.S. 209 (1980)…………………………………………………………....5, 10, 11 International Harvester Co. v. Wisconsin Department of Revenue, 322 U.S. 435 (1944)……………………………………………………………...11, 12 Mobil Oil Corporation v. Commissioner of Taxation (Vermont), 445 U.S. 425 (1980)……………………………………………………………..passim Shaffer v. Carter, 252 U.S. 37 (1920)…………………………………………………11 United States Steel Corp. v. Multistate Tax Commission, 434 U.S. 452 (1978)…………………………………………………………………...2 Wheeling Steel Corporation v. Fox, 298 U.S. 193 (1936)………………………….…11 Whitney v. Graves, 299 U.S. 366 (1937)……………………………………………...10 Tennessee Cases: Blue Bell Creameries, L.P. v. Chumley, No. M2009-00255-COA-R3-CV (Tenn. Ct. App., 9/29/09)………………….….passim Louis Dreyfus Corporation v. Huddleston, 933 S.W.2d 460 (Tenn. Ct. App. 1996)…………………..…………….…5, 14, 15, 20 ii Cases From Other States: A.B. Dick Co. v. McGraw, 678 N.E.2d. 1100, 1108 (Ill. App. 4th Dist. 1997)…….………………………………..17 Appeal of Gad Rad West, Inc., 94A-SBE-0240, 1996 WL 767612 (1996)……………….……………………………..18 Hugo Neu-Proler Int’l Sales Corp. v. California Franchise Tax Bd., 195 Cal. App. 3d 326, 240 Cal. Rptr. 635 (Cal. App. 2nd dist. 1987)……….……….…18 PBS Bldg. Sys., Inc. and PKH Bldg. Sys., Inc., 1994 Cal. Tax LEXIS 434, 94-SBE-008 (11/17/94)……………………………….17, 18 Federal Constitution, Statutes and Reports: U.S. Const., Art. I, § 8 (Commerce Clause)…………………………………...……passim U.S. Const., Amend. XIV (Due Process Clause)…………………………………...passim 26 U.S.C.A. § 1361 (Internal Revenue Code)………………………………….………...6 H.R. Rep. No. 89-952 (1965)…………………………………………………….……....3 State Statutes: Tenn. Code Ann. § 67-4-2006(a)(4)……………………………………………….….….8 Tenn. Code Ann. § 67-4-2007(d)………………………………………………….….….8 Other Authorities: California Franchise Tax Board, Rev. Ruling No. 95-8, 1995 WL 831603……………………………………………………………………...18 W. Hellerstein, State Taxation (3rd ed., Warren, Gorham & Lamont 2009)………………………………...11, 12, 18, 19 McIntyre, Mines & Pomp, Designing a Combined Reporting Regime for a State Corporate Income Tax: A Case Study of Louisiana, 61 La. L. Rev. 699 (2001)…………………………….…..21 iii Multistate Tax Compact, reprinted in, RIA, All States Tax Guide (2005)…………………………………………...............2 Swain, State Income Tax Jurisdiction: A Jurisprudential and Policy Perspective, 45 William & Mary L. Rev. 319 (2003)…………………….…..11 iv I. INTERESTS OF AMICUS CURIAE Amicus curiae Multistate Tax Commission (“the Commission”) submits this brief in support of the “Application of Commissioner of Revenue for Permission to Appeal” filed by Defendant/Appellant Reagan Farr, Commissioner of Revenue for the State of Tennessee (“Tennessee” or “the state”). The Commission joins the state in urging this Court to hear an appeal of the final decision of the Tennessee Court of Appeals at Nashville rendered on September 29, 2009. Blue Bell Creameries, L.P. v. Chumley, No. M2009-00255-COA-R3-CV (“Slip Op.”). In this matter, the Court of Appeals upheld a Chancery Court decision setting aside an assessment of excise taxes against Blue Bell Creameries, L.P. (“the taxpayer” or “Blue Bell”), which produced and sold ice-cream in several states, including Tennessee. The Court of Appeals held that Tennessee was precluded by the Due Process Clause and the Commerce Clause of the United States Constitution from imposing an excise tax on a fairly apportioned percentage of a capital gain recognized by the taxpayer in early 2001. That gain was triggered by the redemption of stock in a holding company, Blue Bell Creameries U.S.A., Inc. (hereafter “BBC USA”), undertaken as part of a complicated restructuring of the taxpayer’s business designed to eliminate entity-level federal taxation of the taxpayer’s earnings. T.R., Vol. II at 238-239. The Court of Appeals concluded that the capital gain could not be taxed in Tennessee because BBC USA and the taxpayer were not engaged in the same “unitary business,” even though BBC USA’s only function was to hold the assets making up the Blue Bell ice cream business, including the intermediary corporations that served as Blue Bell’s partners. Slip. Op. at 14. The Commission respectfully submits that in reaching this conclusion, the Court of Appeals misapplied the “unitary business principle”--the constitutional underpinning for formulary apportionment which is the basis for state income and excise taxes of multistate businesses--by failing to recognize the nature and source of the income in question. The Commission has a significant interest in supporting the state’s petition, because the Court of Appeals’ decision, if allowed to stand, would create uncertainty and confusion in the administration of state excise and corporate income taxes which could resonate beyond the state’s borders. The Commission is the administrative agency for the Multistate Tax Compact (“Compact”), which became effective in 1967. See RIA All States Tax Guide, ¶ 701 et 1 seq., (2005). Today, forty-seven states and the District of Columbia are members of the Commission. Twenty states have legislatively established full membership. Six additional states are sovereignty members and twenty-two are associate members.2 The purposes of the Compact are: (1) facilitation of proper determination of state and local tax liability of multistate taxpayers, including equitable apportionment of tax bases and settlement of apportionment disputes; (2) promotion of uniformity or compatibility in significant components of tax systems; (3) facilitation of taxpayer convenience and compliance in the filing of tax returns and in other phases of tax administration; and (4) avoiding duplicative taxation. See Compact, Art. I. 1 The validity of the Compact was upheld in United States Steel Corp. v. Multistate Tax Commission, 434 U.S. 452 (1978). 2 This brief is filed by the Commission, not on behalf of any particular member state. Compact Members are: Alabama, Alaska, Arkansas, California, Colorado, District of Columbia, Hawaii, Idaho, Kansas, Michigan, Minnesota, Missouri, Montana, New Mexico, North Dakota, Oregon, South Dakota, Texas, Utah and Washington. Sovereignty Members: Georgia, Kentucky, Louisiana, Maryland, New Jersey, West Virginia and Wyoming. Associate Members: Arizona, Connecticut, Florida, Illinois, Iowa, Indiana, Maine, Massachusetts, Mississippi, Nebraska, New Hampshire, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont and Wisconsin. 2 The Compact arose as a result of threatened federal legislation that would have imposed significant limitations on state
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