WEBVTT
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SJC-13139,
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VAS Holdings and Investments, LLC
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v Commissioner of Revenue.
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Attorney Bowen, we're ready for you.
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Good morning, Chief Justice Budd.
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And it may it please the court,
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Michael Bowen for the appellant
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VAS Holdings and Investments, LLC.
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The one critical takeaway from today's argument
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is that the controlling legal authority
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of the US Supreme Court
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and this court supports the appellant's position.
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The crux of this case is whether the Due Process
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and Commerce Clauses permit the Commonwealth to impose tax
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on capital gain income realized by VAS Holdings,
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a nondomiciliary corporation
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on the sale of its ownership interests in Cloud5, LLC,
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a Massachusetts limited liability company.
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The good news for this court
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is that the path of disposition of this case
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has been predetermined.
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Controlling authority from the US Supreme Court
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and this court instruct
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that the tax can be upheld only by a finding
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that VAS Holdings and Cloud5
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were part of a unitary business.
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To make matters even easier for this court,
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the commissioner readily concedes
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that VAS Holdings and Cloud5
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did not form a unitary business.
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So why are we here?
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We are here
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because the commissioner (indistinct),
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the multistate tax commission
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of MTC have asked this court to join them
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in reading tea leaves.
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The commissioner of the MTC invite the court
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to wholly disregard controlling legal authority
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and adopt a new and unsanctioned constitutional test,
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that is investee apportionment.
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This is so despite the fact
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that the Commonwealth does not have a statute
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or rule that supports the commissioner's theory of taxation.
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The court must decline the invitation
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of the commissioner
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and the MTC to read tea leaves.
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The arguments made by the commissioner
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and the MTC in support of a new theory of taxation
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are better suited for consideration
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by the US Supreme Court, not this court.
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There is no dispute between the parties
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that the general rule
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under both the Due Process and Commerce Clause
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is that the state must not tax value
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earned outside its borders.
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When a company is headquartered
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and operates a business solely in one state,
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there are no extraterritorial constitutional considerations.
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However, if the same company
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grows to become part of a multi-jurisdictional business,
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prickly constitutional questions
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arise regarding how much of the company's income
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is attributed or taxed in each state.
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The US Supreme Court recognize this issue
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and the concept of a apportionment was born.
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The court has made clear, however,
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that a state is only permitted to a portion income
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in the context of a unitary business.
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As consistently explained by the US Supreme Court
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over several decades of decisions,
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the linchpin of apportionability
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is the unitary business principle.
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The focus of the unitary business principle
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is on the relationship
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between the non-resident taxpayers-
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(indistinct)
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Yes, your honor.
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So given what you've just articulated
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over the past few minutes,
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how is it that New York
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approved the investee approach?
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Regardless of whether Massachusetts
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actually has authorized this,
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why couldn't Massachusetts adopt the New York approach?
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Well, it's a great question.
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In the New York cases that are cited by the appellee,
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New York actually did have a law
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that directly provided for investee apportionment.
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And as far as the constitutional analysis went
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in those cases,
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they took a different view of International Harvester
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than we do in this case.
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And they applied their interpretation
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of International Harvester to conclude
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that it was constitutional.
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But I will tell you, your honor,
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that the New York reliance is of limited value
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because in 2015 New York
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repealed its investee apportionment rules.
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For constitutional reasons?
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I'm sorry.
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What did the repeal implicate its conclusion
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that investee approach was unconstitutional
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or was it sort of it's just not good business
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to tax people for their investee-
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That's an excellent question
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to which I do not know the answer.
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I do know that as part of the corporate income tax reform
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in 2015, it was repealed.
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And there are commentators who pose it
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that it was repealed
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because of constitutional considerations.
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And I believe we cited those in our brief,
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but yes, that is part of the equation.
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Councilor, can I follow up with a question with,
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so what about the argument that VAS Holdings
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wasn't very profitable
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until the folks here in Massachusetts,
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the former Thing5 and the folks that got ported
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into Cloud5,
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that they were really they were really the linchpin
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to the profitability
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and the ultimate gain that we're all talking about here.
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Isn't that enough nexus with Massachusetts
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in order to support what the commissioner
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is trying to do here.
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I mean, your fellows realized significant gain
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after the folks here in Massachusetts
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streamlined the employee structure,
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got rid of some bad contracts,
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and then lo and behold, a couple of years later,
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there's a real profit here
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that was really at the hands of the folks
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here in Massachusetts.
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What do you say to that?
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Your honor, there's no question
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that there was an appreciation
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of value of the business post-merger.
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That's not the constitutional question.
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The constitutional question is who can tax that value?
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Well, part of the constitutional question
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is based on whether or not
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there's a nexus with the taxing state, right?
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Right.
I mean, so that's the point.
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So when you look at the fact that the folks here
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in Massachusetts were really the driving forces
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behind the gain that was ultimately realized
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isn't that enough?
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It's not enough
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because the connection asserted by the commissioner
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is that between the Commonwealth and Cloud5,
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but that's not the party subject to tax.
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The party subject to tax is VAS Holdings,
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a non-resident corporation.
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And that's a critical distinction.
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Under the unitary business principle
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it requires there actually be a connection
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between the non-resident and the taxing state.
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The commissioner's theory,
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which is unsupported by US Supreme Court authority
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or this court's authority,
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is that you only need to look to the in-state relationship
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to be able to tax the out of state gain.
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Can I ask then, this is a taxable event?
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I mean, I'm not a tax lawyer,
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but that seems a basic proposition, it's a taxable event.
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So does that mean under your theory that Florida,
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who can tax if we can't tax?
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And how much tax was assessed by the other state?
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Well, it's the latter question.
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Let me just go through your questions in order.
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The first question is yes, if Massachusetts doesn't tax it,
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again, this goes to the issue of sourcing.
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So at the end of the day,
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if it's not sourced to Massachusetts,
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the gain is sourced to the domicile
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of the nondomiciliary taxpayer in this case, Florida.
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But it doesn't have to be Florida.
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The issue in this case can come up
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in a lot of different circumstances.
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Could have been a nondomiciliary-
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Just tell me out again,
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'cause I'd like to understand the practicalities
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'cause I take it we wouldn't be here if it's just
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Florida versus us,
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and it was the same tax,
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there's gotta be something more going on.
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So I take it that
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can Florida assess this whole tax that we've assessed?
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And is this a battle between Florida and Massachusetts,
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or is this somehow some kind of tax concealment issue
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or tax avoidance issue that I don't understand yet?
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It's not a tax avoidance issue if Florida could tax it.
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I mean, if it wanted to it could tax it.
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So it's fully taxable then in Florida?
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It's not fully...
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There was no...
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The way that the tax worked, your honor,
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is that VAS Holdings was a Florida S corporation.
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And it had four-
Through the owner-
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shareholders...
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I'm sorry to interrupt you.
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And I don't mean to interrupt you,
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I'm just trying to clarify,
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but it's shareholders
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are also Florida residents, right?
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Not all of them.
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Not all of them, okay.
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But again, you say it's perfectly permissible for Florida
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or where these residents live to tax
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that it's just Massachusetts is exceeding its authority.
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Is that your view?
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Correct.
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And in this case,
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the record evidence is that other states
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did in fact tax the gain.
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The same amount?
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How much did Massachusetts seek to charge in taxes
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and how much did Florida impose in taxes?
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Do we know that from-
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Florida does not impose a personal income tax.
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Okay, so there's no Florida personal income tax,
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so again, how much-
And-
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Go ahead, sorry, Justice Gaziano.
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Oh, no, I'm just trying to clarify.
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So the tax goes to the shareholders
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while they're in a state that pays income tax,
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they'd be taxed on that.
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Correct?
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Correct.
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So Massachusetts shareholder of VAS Holdings
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would have been taxed for the capital gains, correct?
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So would an Illinois shareholder.
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But the full megillah, the 37 million, not so much.
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Correct, but that's not relevant
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to the constitution analysis, Justice Gaziano.
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That's just the result of application
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of the unitary business principle in this case.
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I understand.
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We're trying to get the landscape.
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Justice Kafker asked that helpful question
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and give that landscape.
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Because I'm trying to...
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Again, 'cause Massachusetts, as Justice Georges points out,
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has provided a regulatory system
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that enabled Cloud5 to succeed.
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So we could tax Cloud5, obviously it's income, right?
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Correct.
Correct.
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And if they issue dividends,
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we could tax dividends under International Harvester
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or whatever that is.
Correct.
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It's just this capital gains,
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who can tax the capital gains from this S corp?
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You bring up a very good point, your honor.
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And that's that if Massachusetts wanted to
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it's completely within its right to tax Cloud5, the LLC.
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It can oppose an entity level tax with no question.
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Cloud5 operates in the state,
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it generates income within the state,
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it provides benefits and protections to Cloud5,
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if it wanted to, it could tax Cloud5.
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It could withhold tax on distributions to shareholders,
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other states do that.
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Other states have with a dividend given
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under distributable income withholding tax
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like International Harvester,
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Massachusetts does not.
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This case deals with the taxation of capital gain
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something that is triggered
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by a transaction that occurs outside the state
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by a non-resident shareholder.
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Can I ask you a follow-up of Justice Wendlandt's question?
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In that is the New York instance an outlier?
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00:11:50.610 --> 00:11:51.930
I know you don't agree with it,
275
00:11:51.930 --> 00:11:53.970
you said it was repealed for whatever reason
276
00:11:53.970 --> 00:11:56.350
that it didn't go to SCOTUS.
277
00:11:56.350 --> 00:11:59.473
Is the New York case an outlier?
278
00:12:00.690 --> 00:12:01.523
Yes.
279
00:12:01.523 --> 00:12:02.356
I believe it is an outlier.
280
00:12:02.356 --> 00:12:05.280
And unfortunately, due to the passage of time,
281
00:12:05.280 --> 00:12:07.020
I'm not really sure why,
282
00:12:07.020 --> 00:12:09.283
but the New York decision, for example, in Allied Signal
283
00:12:09.283 --> 00:12:13.137
is that the core case relied on by the commissioner
284
00:12:13.137 --> 00:12:15.800
and this case was never appealed to SCOTUS,
285
00:12:15.800 --> 00:12:19.610
even though Allied Signal prevailed
286
00:12:19.610 --> 00:12:21.640
in its protests of New Jersey assessment
287
00:12:21.640 --> 00:12:23.770
on the same income as SCOTUS.
288
00:12:23.770 --> 00:12:26.290
I'm not sure why Allied Signal did not appeal
289
00:12:26.290 --> 00:12:27.260
to the US Supreme Court,
290
00:12:27.260 --> 00:12:29.270
I wasn't a party to the action, didn't participate,
291
00:12:29.270 --> 00:12:30.370
none of that.
292
00:12:30.370 --> 00:12:33.090
But our view is that it is an outlier.
293
00:12:33.090 --> 00:12:34.480
Is that the only instance
294
00:12:36.200 --> 00:12:37.993
of this principle being applied?
295
00:12:38.860 --> 00:12:39.693
No, your honor.
296
00:12:39.693 --> 00:12:43.360
In Ohio, the two states that had,
297
00:12:43.360 --> 00:12:45.910
I should say one has,
298
00:12:45.910 --> 00:12:50.010
New York had an investee apportionment law is Ohio.
299
00:12:50.010 --> 00:12:54.010
Ohio has a provision that directly would apply
300
00:12:54.010 --> 00:12:55.660
in this particular case.
301
00:12:55.660 --> 00:12:58.150
Unfortunately for the commissioner,
302
00:12:58.150 --> 00:13:00.170
in the case of Corrigan v Testa,
303
00:13:00.170 --> 00:13:01.930
the Supreme Court of Ohio determined
304
00:13:01.930 --> 00:13:05.730
that as applied to the circumstances of that case,
305
00:13:05.730 --> 00:13:07.735
it was unconstitutional.
306
00:13:07.735 --> 00:13:11.010
The Due Process Commerce Clause reasons.
307
00:13:11.010 --> 00:13:13.760
And they took the exact same interpretation
308
00:13:13.760 --> 00:13:17.970
of the relevant law as we have in this case.
309
00:13:17.970 --> 00:13:21.980
So but our point is even in Ohio where they expressly
310
00:13:21.980 --> 00:13:24.860
provide for investee apportionment,
311
00:13:24.860 --> 00:13:27.310
they found in circumstances of this case
312
00:13:28.590 --> 00:13:29.940
that it was unconstitutional
313
00:13:29.940 --> 00:13:32.040
under the Due Process and Commerce Clause.
314
00:13:35.430 --> 00:13:36.350
So your honor,
315
00:13:36.350 --> 00:13:38.540
the core of the department's position,
316
00:13:38.540 --> 00:13:40.730
I should say the commissioner's position
317
00:13:40.730 --> 00:13:42.110
is reading tea leaves.
318
00:13:42.110 --> 00:13:43.660
And I mentioned that previously,
319
00:13:43.660 --> 00:13:45.050
and what I mean by tea leaves
320
00:13:45.050 --> 00:13:48.940
is that they grab onto the last three paragraphs
321
00:13:48.940 --> 00:13:52.710
of the MeadWestvaco decision as providing them a lifeline
322
00:13:52.710 --> 00:13:54.350
for an investee apportionment.
323
00:13:54.350 --> 00:13:57.140
Now, as I mentioned at the outset,
324
00:13:57.140 --> 00:13:58.620
that was obiter dicta.
325
00:13:58.620 --> 00:14:00.590
That has nothing to do with the holding of that case.
326
00:14:00.590 --> 00:14:01.423
And in fact,
327
00:14:01.423 --> 00:14:04.900
that case upholds unitary business principle firmly,
328
00:14:04.900 --> 00:14:09.210
but their position is that is dicta that opened the door.
329
00:14:09.210 --> 00:14:11.723
Now, as far as Massachusetts is concerned,
330
00:14:12.640 --> 00:14:13.870
we have law on the books
331
00:14:13.870 --> 00:14:15.650
that provides unitary business principle.
332
00:14:15.650 --> 00:14:19.290
And in this court in General Mills in 2003,
333
00:14:19.290 --> 00:14:20.920
they faithfully upheld it.
334
00:14:20.920 --> 00:14:25.860
The MTC, however, has consistently banged the drum
335
00:14:25.860 --> 00:14:28.040
for investee apportionment.
336
00:14:28.040 --> 00:14:29.610
Dating back to the eighties,
337
00:14:29.610 --> 00:14:30.960
they filed amicus briefs
338
00:14:30.960 --> 00:14:33.300
in ASARCO and Woolworth arguing
339
00:14:33.300 --> 00:14:34.470
for investee apportionment.
340
00:14:34.470 --> 00:14:37.230
In 1992 in Allied Signal to US Supreme Court,
341
00:14:37.230 --> 00:14:39.110
they argued for investee apportionment.
342
00:14:39.110 --> 00:14:41.500
In 2008, in MeadWestvaco they argued
343
00:14:41.500 --> 00:14:42.980
for investee apportionment.
344
00:14:42.980 --> 00:14:45.040
And 10 months ago,
345
00:14:45.040 --> 00:14:47.600
in the Noell Industries case that was on cert
346
00:14:47.600 --> 00:14:49.330
to the US Supreme Court,
347
00:14:49.330 --> 00:14:52.420
they also filed a brief arguing for investee apportionment.
348
00:14:52.420 --> 00:14:54.860
In each instance the US Supreme Court
349
00:14:54.860 --> 00:14:57.810
has rejected the invitation to pursue
350
00:14:57.810 --> 00:15:01.130
investee apportionment even as an alternative theory,
351
00:15:01.130 --> 00:15:04.070
much less as a primary theory for taxation
352
00:15:04.070 --> 00:15:06.330
on the circumstances of this case.
353
00:15:06.330 --> 00:15:09.530
Your honor, I'm gonna leave with what I began with-
354
00:15:09.530 --> 00:15:11.040
That last statement-
I'm sorry.
355
00:15:11.040 --> 00:15:15.580
So the US Supreme Court has declined
356
00:15:17.012 --> 00:15:20.570
to approve investee apportionment,
357
00:15:20.570 --> 00:15:21.920
is that what you're saying?
358
00:15:24.230 --> 00:15:27.030
My statement is that the MTC
359
00:15:27.030 --> 00:15:30.300
has advocated that the US Supreme Court
360
00:15:30.300 --> 00:15:32.697
adopt investee apportionment.
361
00:15:32.697 --> 00:15:35.340
And my question is the US Supreme Court
362
00:15:35.340 --> 00:15:37.800
has not adopted it,
363
00:15:37.800 --> 00:15:42.210
but it also has not rejected it, is that right?
364
00:15:42.210 --> 00:15:43.280
I think your honor,
365
00:15:43.280 --> 00:15:44.850
and I see I'm running out of time,
366
00:15:44.850 --> 00:15:46.550
do you mind if I finished my question
367
00:15:46.550 --> 00:15:48.050
for the answer to my question?
368
00:15:49.530 --> 00:15:51.310
No, I think we're okay, go ahead.
369
00:15:51.310 --> 00:15:54.410
Okay, I think there are a couple of cases
370
00:15:54.410 --> 00:15:57.313
where they call the MTC out
371
00:15:57.313 --> 00:16:00.220
on its interpretation of investee apportionment
372
00:16:00.220 --> 00:16:02.200
and the unitary business principle.
373
00:16:02.200 --> 00:16:05.320
And my memory at this point is
374
00:16:06.480 --> 00:16:10.070
I believe it's ASARCO where the US Supreme Court
375
00:16:10.070 --> 00:16:12.590
notes that under the MTC's theory
376
00:16:12.590 --> 00:16:15.370
that a non-resident would be liable
377
00:16:15.370 --> 00:16:17.370
for tax merely on
378
00:16:18.360 --> 00:16:21.780
the appreciation of the value of the entity
379
00:16:21.780 --> 00:16:23.370
in which it is invested,
380
00:16:23.370 --> 00:16:26.190
meaning on the flow-through of the appreciation
381
00:16:26.190 --> 00:16:27.610
of the value.
382
00:16:27.610 --> 00:16:29.720
And the US Supreme Court notes that
383
00:16:29.720 --> 00:16:31.630
that is too broad
384
00:16:31.630 --> 00:16:34.740
and of interpretation of the unitary business principle,
385
00:16:34.740 --> 00:16:38.340
much less an interpretation of the restrictions
386
00:16:38.340 --> 00:16:40.363
of the Due Process and Commerce Clause.
387
00:16:41.730 --> 00:16:43.477
Can I ask just the prac...
388
00:16:43.477 --> 00:16:48.477
I'm trying to understand if we adopt the opposite view,
389
00:16:48.920 --> 00:16:51.960
I take it your view is there's gonna be chaos out there
390
00:16:51.960 --> 00:16:52.870
in the taxation.
391
00:16:52.870 --> 00:16:57.870
Give me some examples of what the negative consequences
392
00:16:58.460 --> 00:17:01.920
if we adopt the commissioner's approach here.
393
00:17:01.920 --> 00:17:06.920
I mean, if I buy stock in a Ohio corporation
394
00:17:07.070 --> 00:17:10.690
and I sell it at a gain,
395
00:17:10.690 --> 00:17:12.320
can Ohio
396
00:17:12.320 --> 00:17:16.183
now tax me for that capital gain?
397
00:17:18.260 --> 00:17:21.380
Will there be a fight between Ohio and Massachusetts
398
00:17:21.380 --> 00:17:22.213
in that example?
399
00:17:22.213 --> 00:17:25.690
I'm just trying to understand the practical consequences
400
00:17:25.690 --> 00:17:29.330
of what happens if we adopt the commissioner's view.
401
00:17:29.330 --> 00:17:31.800
Yeah, there are two primary negative consequences
402
00:17:31.800 --> 00:17:32.633
in my view.
403
00:17:32.633 --> 00:17:33.940
The first is what you've already raised.
404
00:17:33.940 --> 00:17:36.430
So if you're a Massachusetts resident,
405
00:17:36.430 --> 00:17:39.220
and you own stock in Ford Motor Company,
406
00:17:39.220 --> 00:17:43.070
under the commissioner's theory of taxation in this case,
407
00:17:43.070 --> 00:17:44.820
you as a Massachusetts resident
408
00:17:44.820 --> 00:17:47.370
on the sale of your stock in Ford Motor Company,
409
00:17:47.370 --> 00:17:50.230
theoretically would owe tax in every jurisdiction
410
00:17:50.230 --> 00:17:52.270
in which Ford Motor Company does business.
411
00:17:52.270 --> 00:17:54.660
Because every jurisdiction in which Ford Motor Company
412
00:17:54.660 --> 00:17:56.330
does business would argue
413
00:17:56.330 --> 00:17:57.800
that they've somehow attributed
414
00:17:57.800 --> 00:18:00.883
to the appreciation of the stock that you just sold.
415
00:18:01.900 --> 00:18:03.930
I think the second consequence
416
00:18:03.930 --> 00:18:08.930
that's important to note is the coexistence if you will,
417
00:18:09.500 --> 00:18:11.430
of investee apportionment states
418
00:18:11.430 --> 00:18:13.400
and unitary business states.
419
00:18:13.400 --> 00:18:16.340
Because of the diametrically opposed view
420
00:18:16.340 --> 00:18:20.170
of the relationships necessary to sustain tax for each one.
421
00:18:20.170 --> 00:18:21.810
Investee apportionment looks solely
422
00:18:21.810 --> 00:18:23.960
with respect to the relationship
423
00:18:23.960 --> 00:18:26.170
between the state and the in-state business.
424
00:18:26.170 --> 00:18:27.380
The unitary business principle
425
00:18:27.380 --> 00:18:28.940
looks at it completely different,
426
00:18:28.940 --> 00:18:30.070
looking at the relationship
427
00:18:30.070 --> 00:18:33.260
between the non-resident and the in-state business.
428
00:18:33.260 --> 00:18:36.740
So there are myriad different types of examples
429
00:18:36.740 --> 00:18:39.457
where there'll be states fighting over the same income
430
00:18:39.457 --> 00:18:42.640
merely because they're taking two philosophically
431
00:18:42.640 --> 00:18:45.290
different approaches to taxation
432
00:18:45.290 --> 00:18:48.030
based on the location of the taxing state
433
00:18:48.030 --> 00:18:49.080
and the non-resident.
434
00:18:52.420 --> 00:18:53.520
Any other questions?
435
00:18:54.400 --> 00:18:56.320
Great, thank you.
436
00:18:56.320 --> 00:18:57.313
Attorney Goldberg?
437
00:19:01.700 --> 00:19:02.533
You're on mute.
438
00:19:07.320 --> 00:19:08.410
Good morning.
439
00:19:08.410 --> 00:19:10.240
Brett Goldberg for the Commissioner of Revenue.
440
00:19:10.240 --> 00:19:11.763
And may it please the court,
441
00:19:12.760 --> 00:19:15.320
the Supreme Court has said that taxation
442
00:19:15.320 --> 00:19:16.910
has been a means for distributing
443
00:19:16.910 --> 00:19:19.220
the cost of government among those
444
00:19:19.220 --> 00:19:21.463
who enjoy the benefit of its laws.
445
00:19:22.310 --> 00:19:24.920
The constitutional analysis in this case starts
446
00:19:24.920 --> 00:19:28.440
with the bedrock rule that a state has the power to tax
447
00:19:28.440 --> 00:19:30.790
income of a non-resident derived
448
00:19:30.790 --> 00:19:33.320
from activities within the state
449
00:19:33.320 --> 00:19:34.490
because the state-
450
00:19:34.490 --> 00:19:36.600
I'm sorry to interrupt you so early in argument
451
00:19:36.600 --> 00:19:38.570
but I will forget the hypothetical
452
00:19:38.570 --> 00:19:40.690
that your brother just threw out
453
00:19:40.690 --> 00:19:42.740
about Ford Motor Company if I don't.
454
00:19:42.740 --> 00:19:44.270
Can you address that?
455
00:19:44.270 --> 00:19:48.169
If I invest in Ford Motor Company from Massachusetts,
456
00:19:48.169 --> 00:19:50.950
I'm I now gonna be subject to all 50 states
457
00:19:50.950 --> 00:19:52.973
under your theory of taxation?
458
00:19:54.147 --> 00:19:56.160
No, your honor.
459
00:19:56.160 --> 00:19:57.100
Why not?
460
00:19:57.100 --> 00:19:58.683
What's the limiting principle?
461
00:20:01.905 --> 00:20:04.270
Well, International Harvester theoretically
462
00:20:04.270 --> 00:20:06.470
would permit that,
463
00:20:06.470 --> 00:20:11.140
but I think no state including Massachusetts
464
00:20:11.140 --> 00:20:16.140
takes an investee apportionment approach to corporate stock
465
00:20:17.240 --> 00:20:20.940
only with respect to partnership interests.
466
00:20:20.940 --> 00:20:22.080
And the reasons for that of course
467
00:20:22.080 --> 00:20:26.010
is that a corporation is a separate taxable person,
468
00:20:26.010 --> 00:20:30.080
whereas a partnership is a flow-through entity.
469
00:20:30.080 --> 00:20:33.650
I think also as a constitutional matter,
470
00:20:33.650 --> 00:20:37.370
a small stock holder in a corporation
471
00:20:37.370 --> 00:20:39.600
in a publicly held corporation
472
00:20:39.600 --> 00:20:43.470
could not be constitutionally subject to tax
473
00:20:44.802 --> 00:20:48.520
in a state simply because the corporation
474
00:20:48.520 --> 00:20:49.825
itself was operating-
475
00:20:49.825 --> 00:20:50.840
Why not?
476
00:20:50.840 --> 00:20:52.120
Because under your theory,
477
00:20:52.120 --> 00:20:55.670
the benefit is the one provided to the corporation
478
00:20:55.670 --> 00:20:57.710
that's value has gone up.
479
00:20:57.710 --> 00:21:01.170
You're saying that's where Massachusetts interest is
480
00:21:01.170 --> 00:21:04.320
and why wouldn't that apply to partnerships
481
00:21:04.320 --> 00:21:06.490
and corporations alike?
482
00:21:06.490 --> 00:21:09.160
I don't get why it's different?
483
00:21:09.160 --> 00:21:10.790
Well, Massachusetts-
484
00:21:10.790 --> 00:21:15.100
I understand practically chaos would ensue,
485
00:21:15.100 --> 00:21:17.700
but I'm just trying to understand legally
486
00:21:17.700 --> 00:21:19.103
why it's different.
487
00:21:20.380 --> 00:21:22.730
I don't think chaos would ensue, your honor.
488
00:21:22.730 --> 00:21:27.060
That International Harvester case was decided in 1944,
489
00:21:27.060 --> 00:21:28.450
and there has not been a-
490
00:21:28.450 --> 00:21:31.700
But that's a dividend case, that's different.
491
00:21:31.700 --> 00:21:35.960
That's an income type dividend, it's not a...
492
00:21:35.960 --> 00:21:38.790
I mean, people invest in stocks
493
00:21:41.420 --> 00:21:42.323
everywhere.
494
00:21:45.650 --> 00:21:49.290
And again, those corporations are benefited
495
00:21:49.290 --> 00:21:52.790
from your Massachusetts regulatory
496
00:21:52.790 --> 00:21:56.640
or the state's Michigan's regulatory environment for Ford
497
00:21:58.224 --> 00:22:01.330
so I don't understand, you need to help us here
498
00:22:01.330 --> 00:22:03.900
because that's frightening.
499
00:22:03.900 --> 00:22:07.450
We don't wanna create chaos here.
500
00:22:07.450 --> 00:22:09.480
So tell us why that's wrong?
501
00:22:09.480 --> 00:22:14.450
That's wrong because a small stockholder
502
00:22:14.450 --> 00:22:18.230
in a publicly traded corporation would not
503
00:22:18.230 --> 00:22:22.000
under the Due Process Clause be subject to tax
504
00:22:22.000 --> 00:22:23.920
in all those states
505
00:22:23.920 --> 00:22:28.180
because it wouldn't have a sufficient connection
506
00:22:28.180 --> 00:22:29.060
with those states.
507
00:22:29.060 --> 00:22:32.670
And it wouldn't be on notice that it would be subject to tax
508
00:22:32.670 --> 00:22:34.790
in those states.
509
00:22:34.790 --> 00:22:38.160
A member of a partnership is on notice
510
00:22:38.160 --> 00:22:41.498
that it is subject to tax in the states
511
00:22:41.498 --> 00:22:42.798
in which it does business.
512
00:22:45.340 --> 00:22:49.800
The small shareholder could not be subject to tax
513
00:22:49.800 --> 00:22:50.850
under due process
514
00:22:50.850 --> 00:22:54.470
because it wouldn't have the minimum connections
515
00:22:54.470 --> 00:22:58.470
with the states simply because the corporation
516
00:22:58.470 --> 00:23:00.170
was doing business there.
517
00:23:00.170 --> 00:23:02.070
But what is the connection...
518
00:23:02.070 --> 00:23:04.670
What's the difference between the connection
519
00:23:04.670 --> 00:23:07.320
of the partnership here
520
00:23:07.320 --> 00:23:11.163
and the connection of a casual investor in Ford?
521
00:23:14.540 --> 00:23:16.680
Partners, a partner in a partnership.
522
00:23:16.680 --> 00:23:18.760
First of all, there's two differences.
523
00:23:18.760 --> 00:23:21.680
One is in the hypothetical
524
00:23:21.680 --> 00:23:24.620
of the publicly traded corporation,
525
00:23:24.620 --> 00:23:27.445
the investor is a very small investor.
526
00:23:27.445 --> 00:23:30.853
1%, 2%, 10% maybe,
527
00:23:32.229 --> 00:23:33.062
but that-
528
00:23:33.062 --> 00:23:34.460
So the constitutional principle
529
00:23:34.460 --> 00:23:38.250
would depend on the percentage ownership of Ford?
530
00:23:38.250 --> 00:23:41.440
For a very small owner, your honor,
531
00:23:41.440 --> 00:23:44.373
due process would bar a state
532
00:23:44.373 --> 00:23:49.030
from imposing a tax on a non-resident
533
00:23:49.030 --> 00:23:50.340
corporate shareholder
534
00:23:50.340 --> 00:23:54.870
because there would not be sufficient connection
535
00:23:54.870 --> 00:23:59.050
between the out-of-state shareholder
536
00:23:59.050 --> 00:24:00.883
and the taxing state in that-
537
00:24:03.130 --> 00:24:03.963
I'm sorry.
538
00:24:03.963 --> 00:24:06.683
Would it be different for you Elon Musk or Jeff Bezos?
539
00:24:09.650 --> 00:24:14.650
If they owned 50% or 80% of their corporations,
540
00:24:15.710 --> 00:24:17.263
theoretically yes.
541
00:24:20.040 --> 00:24:24.193
But in fact, that is not the law in any state.
542
00:24:25.110 --> 00:24:26.060
Well, when it comes down to
543
00:24:26.060 --> 00:24:29.340
is in the first question that Justice Wendlandt asked you
544
00:24:29.340 --> 00:24:31.363
is give us the limiting principle.
545
00:24:32.700 --> 00:24:34.980
And so you're basically telling us
546
00:24:34.980 --> 00:24:38.940
trust us, it won't apply to the little guy.
547
00:24:38.940 --> 00:24:40.300
It won't apply to the little guy
548
00:24:40.300 --> 00:24:42.300
under the constitution, your honor.
549
00:24:42.300 --> 00:24:44.363
I think that is the limiting principle.
550
00:24:45.270 --> 00:24:48.880
States would be barred from taxing the little guy
551
00:24:48.880 --> 00:24:53.880
because of due process, minimum connections required
552
00:24:54.730 --> 00:24:57.022
in order to impose a tax.
553
00:24:57.022 --> 00:24:59.420
How do you figure out where that line is
554
00:24:59.420 --> 00:25:00.813
for planning purposes?
555
00:25:04.290 --> 00:25:05.123
Well,
556
00:25:07.750 --> 00:25:09.900
could you explain the question a little more?
557
00:25:09.900 --> 00:25:13.110
Well, okay, so the little guy is not gonna be taxed,
558
00:25:13.110 --> 00:25:14.710
the billionaires are,
559
00:25:14.710 --> 00:25:16.723
everyone else needs to plan for taxing.
560
00:25:17.600 --> 00:25:21.600
The billionaires aren't subject to tax, your honor,
561
00:25:21.600 --> 00:25:24.350
because no state imposes
562
00:25:24.350 --> 00:25:29.350
an investee apportionment regime on corporations.
563
00:25:30.090 --> 00:25:32.760
And I think it would be very difficult as they say
564
00:25:32.760 --> 00:25:34.770
under the constitution to do that.
565
00:25:34.770 --> 00:25:37.600
It's possible under International Harvester,
566
00:25:37.600 --> 00:25:38.737
but no state has done that,
567
00:25:38.737 --> 00:25:40.623
and Massachusetts isn't doing that.
568
00:25:41.750 --> 00:25:46.400
But this is, again, this is an S corporation.
569
00:25:46.400 --> 00:25:48.390
It's a pass through.
570
00:25:48.390 --> 00:25:49.770
So are there
571
00:25:51.950 --> 00:25:55.683
small shares in this S corporation?
572
00:25:57.130 --> 00:26:00.653
Little guys in the terminology we're using here?
573
00:26:01.693 --> 00:26:04.400
I think there's some
574
00:26:04.400 --> 00:26:08.520
12 or 15 shareholders altogether, your honor.
575
00:26:08.520 --> 00:26:12.653
And some of them hold smaller percentages down to-
576
00:26:13.500 --> 00:26:16.970
So take the smallest one in the record,
577
00:26:16.970 --> 00:26:20.380
and talk us through how that person's connection
578
00:26:20.380 --> 00:26:21.853
to the state is.
579
00:26:23.220 --> 00:26:27.680
You say there are 12, who owns the least
580
00:26:27.680 --> 00:26:30.063
and how much is it roughly?
581
00:26:31.750 --> 00:26:34.893
Does that have any contact with Massachusetts?
582
00:26:37.480 --> 00:26:39.480
They don't have any contact with Massachusetts
583
00:26:39.480 --> 00:26:41.490
other than through the partnership,
584
00:26:41.490 --> 00:26:46.490
but VASHI concedes that distributive share income
585
00:26:46.500 --> 00:26:51.500
derived from the partnership is taxable by Massachusetts.
586
00:26:51.960 --> 00:26:56.410
And that rule that imposes investee apportionment
587
00:26:56.410 --> 00:26:59.210
on partnership distributed shares
588
00:26:59.210 --> 00:27:03.993
is not just Massachusetts, it's common among many states.
589
00:27:05.440 --> 00:27:10.190
And partnerships are different from corporations
590
00:27:10.190 --> 00:27:12.543
because they are flow-through entities.
591
00:27:13.634 --> 00:27:15.860
And there's no debate that
592
00:27:16.773 --> 00:27:19.090
a distributive share of income
593
00:27:19.090 --> 00:27:21.920
from a partnership is subject to
594
00:27:22.890 --> 00:27:27.070
state tax where the partnership does business.
595
00:27:27.070 --> 00:27:30.070
There's no question about that,
596
00:27:30.070 --> 00:27:31.360
VASHI concedes that.
597
00:27:31.360 --> 00:27:35.500
It's arguing only that there is a difference
598
00:27:35.500 --> 00:27:37.410
for capital gains
599
00:27:37.410 --> 00:27:39.160
from distributed shared income.
600
00:27:39.160 --> 00:27:43.783
And the Supreme Court has said that there is no difference,
601
00:27:48.053 --> 00:27:50.340
it's the underlying-
602
00:27:50.340 --> 00:27:52.500
Again, you're relying on International Harvester,
603
00:27:52.500 --> 00:27:54.760
which is a dividend-
604
00:27:54.760 --> 00:27:55.610
No, your honor.
605
00:27:56.544 --> 00:27:59.230
What also are you relying on for that proposition?
606
00:27:59.230 --> 00:28:02.410
ASARCO and Allied Signal both say
607
00:28:02.410 --> 00:28:06.226
that there were corporate cases,
608
00:28:06.226 --> 00:28:09.980
but it applies to distributive share income as well.
609
00:28:09.980 --> 00:28:13.770
That there is no difference constitutionally
610
00:28:13.770 --> 00:28:17.950
between dividends or distributive share income
611
00:28:17.950 --> 00:28:19.960
and capital gains.
612
00:28:19.960 --> 00:28:23.610
It is the underlying business activity that matters
613
00:28:23.610 --> 00:28:28.610
not the form of the income derived from those activities.
614
00:28:29.130 --> 00:28:30.373
And as I say,
615
00:28:31.372 --> 00:28:34.410
VASHI concedes in the distributive share context
616
00:28:34.410 --> 00:28:36.070
that it is subject to tax,
617
00:28:36.070 --> 00:28:38.463
that all its partners are subject to tax,
618
00:28:40.529 --> 00:28:42.493
and that is, I think,
619
00:28:44.171 --> 00:28:46.330
universally accepted notion
620
00:28:46.330 --> 00:28:49.930
with respect to partnership taxation.
621
00:28:49.930 --> 00:28:51.390
Corporations are different
622
00:28:51.390 --> 00:28:54.370
because they are not flow-through entities.
623
00:28:54.370 --> 00:28:59.110
And the corporate shareholders are not on notice
624
00:28:59.110 --> 00:29:00.970
that they're subject to tax
625
00:29:02.950 --> 00:29:06.367
in all the states in which a corporation does interest.
626
00:29:06.367 --> 00:29:09.250
The partners in a partnership are on notice
627
00:29:09.250 --> 00:29:11.980
and do expect, and it is widely accepted
628
00:29:11.980 --> 00:29:15.500
that they are subject to tax in all the states
629
00:29:15.500 --> 00:29:18.360
in which a partnership does interest.
630
00:29:18.360 --> 00:29:20.000
Because
631
00:29:20.000 --> 00:29:21.360
in fact,
632
00:29:21.360 --> 00:29:26.253
if you're non-unitary partner in a partnership,
633
00:29:27.110 --> 00:29:30.030
Massachusetts and many other states
634
00:29:30.030 --> 00:29:33.680
use an investee apportionment approach,
635
00:29:33.680 --> 00:29:37.682
that is they apportion the income derived
636
00:29:37.682 --> 00:29:40.770
by the partner from the partnership solely
637
00:29:40.770 --> 00:29:44.253
with reference to the partner's property payroll or sales.
638
00:29:46.440 --> 00:29:49.980
Why shouldn't we just rely on Florida
639
00:29:51.700 --> 00:29:52.680
to do this?
640
00:29:52.680 --> 00:29:56.350
Why are we extending ourselves into...
641
00:29:56.350 --> 00:29:58.870
What's the logic of that?
642
00:29:58.870 --> 00:30:03.500
Because these people, it is a Florida corporation,
643
00:30:03.500 --> 00:30:06.460
we both agree it's a taxable event, right?
644
00:30:06.460 --> 00:30:08.110
Of course.
The only issue is
645
00:30:09.068 --> 00:30:10.273
who can tax it?
646
00:30:11.370 --> 00:30:14.453
Who pays the tax on the capital gain?
647
00:30:15.712 --> 00:30:17.017
And it is a Florida corporation,
648
00:30:17.017 --> 00:30:20.110
and there are Florida shareholders,
649
00:30:20.110 --> 00:30:23.160
why aren't they the people who should be taxing this
650
00:30:23.160 --> 00:30:24.450
rather than us?
651
00:30:24.450 --> 00:30:26.480
Your honor, it's very clear
652
00:30:26.480 --> 00:30:29.770
under old Supreme Court case law,
653
00:30:29.770 --> 00:30:34.051
Shaffer v Carter, (indistinct)
654
00:30:34.051 --> 00:30:36.820
that states have jurisdiction
655
00:30:36.820 --> 00:30:39.060
to tax based on
656
00:30:39.950 --> 00:30:41.833
residents or source.
657
00:30:43.410 --> 00:30:45.440
And two states
658
00:30:45.440 --> 00:30:47.940
can tax the same income,
659
00:30:47.940 --> 00:30:49.433
one based on residence,
660
00:30:50.840 --> 00:30:52.233
and one based on source.
661
00:30:53.410 --> 00:30:57.140
Here you take a hundred percent of the tax.
662
00:30:57.140 --> 00:31:01.340
Massachusetts seeks to impose a hundred percent of it,
663
00:31:01.340 --> 00:31:02.300
why is that?
664
00:31:02.300 --> 00:31:04.650
Explain to me the logic of that.
665
00:31:04.650 --> 00:31:08.780
Because substantially all of Cloud5's
666
00:31:08.780 --> 00:31:13.780
property and payroll were located in Massachusetts.
667
00:31:15.560 --> 00:31:18.720
I take it, they pay income tax here.
668
00:31:18.720 --> 00:31:22.490
They pay their corporate income tax, whatever it is here.
669
00:31:22.490 --> 00:31:24.327
So you're taxing Cloud5,
670
00:31:26.005 --> 00:31:27.850
Massachusetts is taxing Cloud5
671
00:31:27.850 --> 00:31:29.750
in a variety of different ways, right?
672
00:31:30.625 --> 00:31:33.060
Cloud5 is a partnership, not a corporation
673
00:31:33.060 --> 00:31:37.283
so it is not subject to tax at the entity level.
674
00:31:38.170 --> 00:31:40.510
The partners are subject to tax
675
00:31:40.510 --> 00:31:45.510
on their distributive shares of the partnership's income.
676
00:31:46.120 --> 00:31:51.120
That tax though, that distributed share income
677
00:31:51.210 --> 00:31:54.380
that's passed through results in an increase
678
00:31:54.380 --> 00:31:57.440
in each partner's outside basis
679
00:32:00.077 --> 00:32:02.300
and that reduces the capital gain
680
00:32:02.300 --> 00:32:05.640
that the partner gets on sale of the partnership interest.
681
00:32:05.640 --> 00:32:08.560
So there's no double tax here.
682
00:32:08.560 --> 00:32:10.438
The tax that's-
683
00:32:10.438 --> 00:32:12.850
Just again, I am not a tax lawyer
684
00:32:12.850 --> 00:32:14.600
nor have I ever wanted to be one,
685
00:32:14.600 --> 00:32:19.600
but so just tell me simply how does Massachusetts tax
686
00:32:20.800 --> 00:32:25.230
besides this tax, how does Massachusetts tax Cloud9
687
00:32:25.230 --> 00:32:26.623
or Cloud5, excuse me?
688
00:32:29.940 --> 00:32:32.403
Cloud5 is not taxed at all, your honor.
689
00:32:34.476 --> 00:32:35.309
VASHI,
690
00:32:37.630 --> 00:32:40.330
the non-resident investor is taxed
691
00:32:40.330 --> 00:32:41.750
on its distributed share
692
00:32:42.670 --> 00:32:47.190
and those taxes increase its outside basis,
693
00:32:47.190 --> 00:32:50.000
which reduce its capital gain on sale
694
00:32:50.000 --> 00:32:52.420
and Massachusetts does tax that
695
00:32:52.420 --> 00:32:56.050
the taxable portion of that capital gain on sale.
696
00:32:56.050 --> 00:32:59.620
I understand we're fighting over the capital gains tax.
697
00:32:59.620 --> 00:33:03.090
Does Massachusetts tax this entity?
698
00:33:03.090 --> 00:33:06.210
'Cause I'm completely persuaded by your point
699
00:33:06.210 --> 00:33:10.440
that we provide a benefit to Cloud5, I get it.
700
00:33:10.440 --> 00:33:13.673
We provide a regulatory environment,
701
00:33:14.640 --> 00:33:18.040
Cloud5 is the source of this increased value
702
00:33:18.040 --> 00:33:20.640
so Massachusetts has some ability to tax.
703
00:33:20.640 --> 00:33:24.470
I can't tell what they can and cannot tax.
704
00:33:24.470 --> 00:33:26.650
What else do they tax besides...
705
00:33:26.650 --> 00:33:29.310
If they don't get this, do we end up with nothing?
706
00:33:29.310 --> 00:33:32.840
Or are we taxing somehow here?
707
00:33:32.840 --> 00:33:36.220
Meaning if you can't get this capital gains tax,
708
00:33:36.220 --> 00:33:38.040
is Massachusetts out of luck
709
00:33:38.040 --> 00:33:41.450
and we get no revenue from this?
710
00:33:41.450 --> 00:33:45.240
Or is there multiple ways that Massachusetts is taxing
711
00:33:45.240 --> 00:33:46.293
this entity?
712
00:33:48.570 --> 00:33:51.990
VASHI is taxed on its distributive share
713
00:33:51.990 --> 00:33:54.363
and we've collected that.
714
00:33:55.760 --> 00:33:58.123
And VASHI doesn't dispute that.
715
00:33:59.090 --> 00:34:02.943
The capital gain is a different matter,
716
00:34:04.080 --> 00:34:09.080
and if Massachusetts doesn't tax it, no state is going to.
717
00:34:09.640 --> 00:34:11.350
Can you give me a rough number
718
00:34:11.350 --> 00:34:14.310
what the distributed share tax was here
719
00:34:15.450 --> 00:34:19.113
versus what is at stake here, for example?
720
00:34:20.192 --> 00:34:23.340
Do you have those numbers in the record anywhere?
721
00:34:23.340 --> 00:34:24.173
Yes, they are.
722
00:34:24.173 --> 00:34:26.560
Well, there's the notices of assessments,
723
00:34:26.560 --> 00:34:29.943
I think in the first volume of the record appendix.
724
00:34:30.990 --> 00:34:33.210
So roughly, do you have a rough sense?
725
00:34:33.210 --> 00:34:37.000
Again, we want Massachusetts to get the benefit
726
00:34:37.000 --> 00:34:39.840
of the regulation it provided.
727
00:34:39.840 --> 00:34:40.673
The question is,
728
00:34:40.673 --> 00:34:44.500
are you getting other things of real value
729
00:34:44.500 --> 00:34:46.930
and you're seeking something that's novel
730
00:34:46.930 --> 00:34:49.940
and potentially problematic,
731
00:34:49.940 --> 00:34:54.940
or are you getting nothing unless you get this?
732
00:34:55.040 --> 00:34:56.580
So I'm just trying to get a rough sense
733
00:34:56.580 --> 00:34:58.930
of the answer to that question.
734
00:34:58.930 --> 00:34:59.763
I'm sorry.
735
00:34:59.763 --> 00:35:00.980
Could you just ask that one more time?
736
00:35:00.980 --> 00:35:02.730
I want to make sure I understand that.
737
00:35:02.730 --> 00:35:03.920
Yeah, so again,
738
00:35:03.920 --> 00:35:07.823
I'm persuaded that Massachusetts provides value to Cloud5.
739
00:35:08.970 --> 00:35:11.963
Cloud5 is the source of this increased value.
740
00:35:13.180 --> 00:35:15.480
Therefore Massachusetts should have some ability
741
00:35:15.480 --> 00:35:16.840
to tax Cloud5.
742
00:35:16.840 --> 00:35:18.540
What I don't really get,
743
00:35:18.540 --> 00:35:20.660
and again, maybe my own ignorance,
744
00:35:20.660 --> 00:35:23.280
is what else you're taxing there
745
00:35:23.280 --> 00:35:27.930
and how that compares to the amount at stake here.
746
00:35:27.930 --> 00:35:32.340
Is Massachusetts getting its chunk of change out of
747
00:35:34.780 --> 00:35:37.293
Cloud5 in a variety of other ways?
748
00:35:38.220 --> 00:35:39.920
We're not taxing Cloud5, again, your honor,
749
00:35:39.920 --> 00:35:43.793
we're only taxing VASHI and its shareholders.
750
00:35:44.940 --> 00:35:46.563
As a practical matter,
751
00:35:49.451 --> 00:35:51.510
there was distributed share income
752
00:35:51.510 --> 00:35:54.430
and I think 2011 and 2012,
753
00:35:54.430 --> 00:35:59.430
there was none in 2013, it was quite a small amount
754
00:35:59.470 --> 00:36:00.913
of distributed share income.
755
00:36:02.890 --> 00:36:04.730
We did tax that
756
00:36:04.730 --> 00:36:06.840
at the corporate level
757
00:36:06.840 --> 00:36:10.590
and at the shareholder level at 5.25%,
758
00:36:10.590 --> 00:36:13.090
and I think 2.75%
759
00:36:14.030 --> 00:36:14.973
approximately,
760
00:36:15.940 --> 00:36:18.570
but that was a very small amount
761
00:36:18.570 --> 00:36:22.543
because Cloud5 didn't distribute very much income.
762
00:36:24.411 --> 00:36:28.613
It did though increase tremendously in value as you know.
763
00:36:29.610 --> 00:36:32.980
And that value, that increase,
764
00:36:32.980 --> 00:36:34.220
the real benefits
765
00:36:36.285 --> 00:36:39.828
that Massachusetts provided to
766
00:36:39.828 --> 00:36:42.170
Cloud5 would not be taxed
767
00:36:42.170 --> 00:36:44.623
if Massachusetts doesn't tax it here.
768
00:36:47.449 --> 00:36:50.133
Let me caveat that a little bit.
769
00:36:51.870 --> 00:36:55.380
There would be no tax at the entity level
770
00:36:55.380 --> 00:36:58.350
'cause other states in general don't impose
771
00:36:58.350 --> 00:37:00.720
an entity level tax on S corporations.
772
00:37:00.720 --> 00:37:04.710
We do if they're very large S corporations.
773
00:37:04.710 --> 00:37:09.436
There would be a tax for some of the shareholders
774
00:37:09.436 --> 00:37:14.436
on their S corporation flow-through capital gain income,
775
00:37:19.109 --> 00:37:21.860
but given Massachusetts jurisdiction to tax as well,
776
00:37:21.860 --> 00:37:25.690
those states would give a credit to the shareholders
777
00:37:27.831 --> 00:37:29.830
for the tax paid to Massachusetts.
778
00:37:29.830 --> 00:37:31.940
So there wouldn't be any double tax
779
00:37:36.515 --> 00:37:38.470
and the sum of the capital gain,
780
00:37:38.470 --> 00:37:41.220
I think some 30% of the capital gain
781
00:37:41.220 --> 00:37:45.350
because it would have been subject to tax in other states.
782
00:37:45.350 --> 00:37:49.060
But if Massachusetts
783
00:37:49.060 --> 00:37:50.000
is allowed to tax it,
784
00:37:50.000 --> 00:37:53.963
those states give credit for taxes paid to Massachusetts.
785
00:37:55.995 --> 00:37:58.360
I wanna clear up one point
786
00:37:58.360 --> 00:38:02.790
which is this question of Massachusetts authority
787
00:38:02.790 --> 00:38:07.790
under the regulation and statute to impose this tax.
788
00:38:08.030 --> 00:38:12.950
I truly don't understand the assertion that it's not clear
789
00:38:12.950 --> 00:38:16.410
because it is crystal clear in the regulation,
790
00:38:16.410 --> 00:38:19.760
and the example quoted on page 59 of our brief
791
00:38:19.760 --> 00:38:21.610
from the regulation
792
00:38:21.610 --> 00:38:26.240
that a non-unitary partner in a partnership
793
00:38:26.240 --> 00:38:28.150
is subject to tax
794
00:38:28.150 --> 00:38:30.210
on its distributive share
795
00:38:30.210 --> 00:38:34.290
and on the capital gain on disposition of the partnership.
796
00:38:34.290 --> 00:38:38.070
There's just no question that Massachusetts
797
00:38:40.390 --> 00:38:42.780
is permitted under its own regulations
798
00:38:42.780 --> 00:38:45.370
and statutes to impose the tax.
799
00:38:45.370 --> 00:38:47.990
That's why it wasn't really disputed
800
00:38:47.990 --> 00:38:49.340
at the Appellate Tax Board.
801
00:38:50.960 --> 00:38:53.923
Your honors, as you recognize, VASHI-
802
00:38:55.380 --> 00:38:56.640
Mr. Goldberg, to that,
803
00:38:56.640 --> 00:38:58.300
is a really important point to me.
804
00:38:58.300 --> 00:39:00.763
And you said page 59 of your brief,
805
00:39:01.747 --> 00:39:03.590
but your brief is 58 pages long.
806
00:39:03.590 --> 00:39:05.910
Can you just-
Sorry,
807
00:39:05.910 --> 00:39:06.870
maybe I misspoke.
Yes.
808
00:39:06.870 --> 00:39:08.200
It's page 51.
809
00:39:08.200 --> 00:39:09.620
51, okay, great, thank you.
810
00:39:09.620 --> 00:39:12.140
I'll just add that.
811
00:39:12.140 --> 00:39:15.090
And that example, your honor,
812
00:39:15.090 --> 00:39:19.670
is on all fours with our situation here.
813
00:39:19.670 --> 00:39:21.790
It describes a corporation that's domiciled
814
00:39:21.790 --> 00:39:23.023
outside Massachusetts,
815
00:39:27.747 --> 00:39:30.770
and the non-resident partner is not engaged
816
00:39:30.770 --> 00:39:33.540
in a unitary business with the partnership.
817
00:39:33.540 --> 00:39:37.070
And it's very clear that disposition
818
00:39:37.070 --> 00:39:38.623
of that partnership interest,
819
00:39:39.650 --> 00:39:44.210
the non-resident is subject to tax apportioned
820
00:39:44.210 --> 00:39:47.410
with reference to the partnership's payroll property
821
00:39:47.410 --> 00:39:48.243
or sales.
822
00:39:50.230 --> 00:39:53.190
Your honors, the VASHI here
823
00:39:53.190 --> 00:39:56.210
and its shareholders gain great profits
824
00:39:56.210 --> 00:39:57.590
from
825
00:39:57.590 --> 00:40:01.940
the extensive employees, operations and property
826
00:40:01.940 --> 00:40:05.040
that Cloud5 had in Massachusetts,
827
00:40:05.040 --> 00:40:10.040
and there's nothing in the constitution that spares them
828
00:40:10.520 --> 00:40:13.860
the responsibility in common with other taxpayers
829
00:40:13.860 --> 00:40:15.640
of supporting the government
830
00:40:15.640 --> 00:40:18.113
under whose protection they have profited.
831
00:40:19.645 --> 00:40:22.090
Thank you very much.
832
00:40:22.090 --> 00:40:23.290
Thank you, your honor.