Docket No. 20-947 (Links to an external site.), US (cert denied 2/22/21). The US Supreme Court (Court) denied review of a case in which the Idaho State Tax Commission (Commission) queried whether Mobil Oil Corp. v. Comm’r of Taxes of Vermont, 445 US 425 (1980) applies to pass-through entities. The Commission’s petition to the Court had followed an Idaho Supreme Court decision from 2020, which affirmed that an out-of-state company’s gain from the sale of its ownership interest in an Idaho-based limited liability company (LLC) constituted nonbusiness income under state law and concluded in the taxpayer’s favor that the gain did not meet the definition of “business income” under the transactional test, functional test, or unitary business test [see State Tax Matters (Links to an external site.), Issue 2020-21, for more details on this Idaho Supreme Court case]. In petitioning the Court, the Idaho State Tax Commission claimed that while the US Supreme Court has determined under Mobil Oil Corp. that superficial attributes of a corporation are not determinative of unity and that a unitary relationship is presumed unless the corporation proves by affirmative evidence that it was a “discrete business enterprise,” state courts are wrestling with whether superficial aspects of a pass-through entity’s business determine unity. According to the Commission’s petition to the Court, courts in Idaho, New Jersey, and Tennessee have grappled with this question and “produced a split among the states.”
Explain the issue and the impact it has for pass-thru companies. While we are not studying state taxes in this course, this case shows how differences in federal and state tax laws impact companies and must be considered by tax professionals. .
