April 30, 2012 The Tax Lawyer

The Scoop on the Unitary Business Principle: How Blue Bell’s Corporate Restructuring Increased the Scope of Out-of-State Taxation in Blue Bell Creameries, LP v. Roberts

Vol. 64, No. 4 - Summer 2011

Stuart R. Harding

Abstract

    The recent decisions issued by the Supreme Court on the scope of the unitary business principle are illustrative of the expanding power that a state has to tax a corporate entity’s out-of-state earnings. So long as a state establishes that a corporation’s in-state and out-of-state activities are unitary, the principle permits the state to tax an apportioned share of a corporation’s entire earnings instead of solely the in-state gains. There has been, however, some confusion over the reach of this principle. This uncertainty is evident in the Tennessee Court of Appeals decision in Blue Creameries, LP v. Chumley (Blue Bell I), and the subsequent reversal of that decision by the Tennessee Supreme Court in Blue Creameries, L.P. v. Roberts (Blue Bell II).

    The question in Blue Bell was whether could tax an apportioned share of over $119 million in capital gains that the taxpayer realized as a result of corporate restructuring. The corporate restructuring was implemented and controlled exclusively by Blue Bell’s holding company, Blue Bell ; as such, could only tax an apportioned share of the capital gains if it determined that Blue Bell was unitary with the taxpayer’s primary business. While the State asserted that the facts demonstrated that the tax assessment was constitutional because Blue Bell and Blue Bell were unitary, Blue Bell argued that it was not unitary with Blue Bell under any of the tests established by the United States Supreme Court, and that the tax was therefore unconstitutional.

    In May 2009, the Tennessee Court of Appeals agreed with the taxpayer, holding that Blue Bell and Blue Bell were not unitary under the hallmarks of a unitary relationship test because they did not share sufficient centralized management, functional integration, or economies of scale. Additionally, the court held that the stock transaction that led to the capital gains served an investment, rather than an operational function, preventing from taxing an apportioned share of the capital gains under the operational function test. Finding that the two enterprises were not unitary, and the capital gains served an investment function, the court held that the State had no power to tax an apportioned share of the $119 million.

    In January 2011, the Tennessee Supreme Court reversed this holding. The court explained that traditional tests such as the hallmarks of a unitary principle test could only be used to compare separate and distinct business entities. Here, however, the taxpayer admitted that Blue Bell was a holding company and did not have any independent source of business. Because Blue Bell and Blue Bell shared a single underlying activity, and the taxpayer failed to establish that the two enterprises had separate business operations, the court held that the taxpayer and Blue Bell were unitary, and that could validly tax an apportioned share of the $119 million.

    This Note argues that the Tennessee Supreme Court reached the correct result given both the original purpose of the unitary business principle and recent United States Supreme Court decisions stressing the expansive nature of the principle. Part II of this Note provides an overview of the unitary business principle, and how both the hallmarks of a unitary relationship test and the operational function test are used to determine when business entities are unitary. Part III gives an overview of the relevant facts and the decision from Blue Bell II. Part IV provides critical analysis of the Tennessee Supreme Court’s decision to read the unitary business principle broadly and go beyond the traditional tests, as well as the current state of the unitary business principle.

Read the full article or download the complete issue.