Idaho: Petition for Cert Filed in Nonbusiness Income Case

The Idaho State Tax Commission has asked the U.S. Supreme Court to review the Idaho Supreme Court’s decision in Noell Industries v. Idaho State Tax Commission. To recap the case, the Idaho Supreme Court held that gain recognized by a corporation from the sale of a majority-owned interest in an LLC did not constitute business income. In reaching this conclusion, the court determined the taxpayer was not unitary with the LLC, largely based on evidence that the taxpayer corporation lacked any business activity. In the court’s view, the taxpayer was “shell holding company” that had no employees, payroll or offices and could not, therefore, share centralized management, oversight, or headquarters with the LLC. The court ultimately ruled in favor of the taxpayer and held that the gain was allocable to the taxpayer’s home state of Virginia.

The petition for certiorari asks whether the U.S. Supreme Court ruling in Mobil, which sets forth the parameters of the unitary-business principle, applies to pass-through entities and encourages the Court to conclude in the affirmative. In Mobil Oil the U.S. Supreme Court ruled “that superficial attributes of a business, such as corporate form or other generic descriptors of the business, did not determine unity.” Instead, the “underlying economic realities” of the business must be examined to determine a unitary relationship. It would then be the taxpayer’s obligation to provide affirmative evidence that it operated as a “discrete business enterprise.”

The Idaho Tax Commission further asserts that in Noell, the Idaho Supreme Court disregarded Mobil when it determined that because the taxpayer was a “shell holding company,” its relationship with the LLC lacked the “interdependence required to manifest unity.”  In the Commission’s view, the unitary business principle is intended to be applied broadly and should be extended to pass-through entities. This would ensure that the underlying business activity of an entity is compared with the business being conducted in the state. It is this comparison, the Commission argues, that should determine apportionability and not the form of the business. It further argues that if Mobil does not apply to pass-through entities, then certain forms of businesses will be subject to different constitutional standards than others.

The petition also notes that, along with Idaho, the New Jersey and Tennessee courts have also heard similar cases and have reached different results. The Commission urges the Court to resolve the split in state courts on the applicability of the Mobil ruling to pass-through entities. Please stay tuned to TWIST for updates on the petition.