MeadWestvaco Corp. v. Illinois Department of Revenue

Background

An Ohio paper and packaging company owned an electronic legal‑research business called Lexis. Mead sold Lexis in 1994 for about $1.5 billion and realized just over $1 billion in capital gain. Illinois audited Mead, said the gain was business income subject to Illinois apportionment, assessed roughly $4 million, and the company sued after paying under protest. The trial court found Lexis and Mead were not a single integrated business; an Illinois appellate court nonetheless allowed Illinois to tax part of the gain because it said Lexis served an “operational function” for Mead.

Reasoning

The Supreme Court considered whether a state can apportion out‑of‑state values based on an “operational function” once a court has found the businesses are not unitary (that is, not a single integrated business across states). The Court held the appellate court misread earlier precedents: finding an asset has an operational role does not create a separate constitutional ground to tax when the businesses are non‑unitary. Instead, the operational‑function idea only matters when it shows the asset itself is part of a unitary business. The Court noted the usual signs of a unitary business are functional integration, centralized management, and economies of scale, and said the state courts must address the unitary question directly on remand.

Real world impact

The ruling limits a State’s ability to tax capital gains from another business division unless the businesses are shown to be unitary. The decision is not final on the merits because the case is sent back to Illinois courts to decide the unitary question. The outcome affects how states and companies treat cross‑border corporate divisions in tax audits.

Dissents or concurrances

Justice Thomas concurred in the result but warned the Court should reconsider whether the Constitution authorizes these kinds of limits on state taxation, expressing doubt about the Court’s role in policing tax excesses.