United States v. Clintwood Elkhorn Mining Co. (07-308), MeadWestvaco Corporation v. Illinois Department of Revenue (06-1413) and order list

April 17, 2008 Supreme Court Update

Greetings, Court fans!
In a rare display of what passes for judicial humor, the Court released two tax opinions on the dreaded April 15th. The Court released three additional decisions yesterday, which we'll bring you in a separate Update to break things up.
In United States v. Clintwood Elkhorn Mining Co. (07-308), the Court held that when the Internal Revenue Code says you have to exhaust the administrative claims process before you can sue for a refund, you can't circumvent that process (or its time limits for claims) by suing under the Tucker Act. For years, Clintwood and two other coal-producing companies were taxed on coal that they exported. After a court concluded that taxing exported coal ran afoul of the Export Clause of the Constitution, they filed administrative claims and got a refund, with interest, for 1997-1999. An administrative claim for earlier tax years would have been time-barred, so they filed suit in district court under the Tucker Act for taxes paid between 1994 and 1996, hoping to take advantage of the Tucker Act's much longer six-year statute of limitations.
The unanimous Court would have none of it. As the Chief explained, the Code says that "no suit" shall be maintained "in any court" for the recovery of "any internal revenue tax," "any penalty," or "any sum alleged to have been excessive or in any manner wrongfully collected" until a claim has been filed with the IRS, and it means it. ("Five ‘any's' in one sentence and it begins to seem that Congress meant the statute to have expansive reach.") Clintwood's argument that the tax was unconstitutional and not truly a tax (because Congress could not tax exports) was irrelevant because the administrative claims process applies to "any sum" wrongfully collected, however characterized. The Court noted that the need for adherence to the administrative claims process and its deadlines was particularly compelling here given the taxing authorities' "exceedingly strong interest in financial stability."
The Court's second tax decision, MeadWestvaco Corporation v. Illinois Department of Revenue (06-1413), was equally dry. In 1968, Mead, an Ohio corporation in the paper and school-supplies business, acquired Data Corporation, which owned an inkjet printing tool and a "full-text information retrieval system" that would become a little-known legal research service called Lexis/Nexis (perhaps you've heard of it?). Mead sold Lexis/Nexis in 1994 for $1.5 billion, realizing a capital gain of $1 billion. Mead reported the gain on its Ohio tax return but not its Illinois return, taking the position that the proceeds were "nonbusiness income" that the law allowed Mead to allocate entirely to its domiciliary state. Illinois, not surprisingly, viewed the proceeds as business income subject to a proportionate tax by Illinois. (A little bit of background: The Due Process and the "dormant" Commerce Clauses bar states from taxing "extraterritorial values," but a state may tax a proportionate share of the value generated by all of a corporation's activities if it is a "unitary business" – that way states do not have to try to isolate only those activities that are "intrastate.") An Illinois trial court agreed that Lexis/Nexis and Mead were not a unitary business because they were not functionally integrated or centrally managed and had no economies of scale. But it upheld the tax on the ground that Lexis/Nexis served an "operational" purpose in Mead's business because it was considered in strategic planning and resource allocation. The Illinois Court of Appeals affirmed without reaching the "unitary business" issue – meaning that Illinois treated the "unitary business" and "operational purpose" tests as different, independent tests that could support apportioned taxes.
Justice Alito led the Court in unanimously vacating and remanding. As Alito explained, the tests were not distinct: The "operational purpose" test was but one way to determine whether a business was unitary. Given the trial court's ruling that Lexis/Nexis did not have a unitary relationship with Mead, which the Illinois Court of Appeals did not disturb, Illinois could not assess a proportionate tax on Mead. (Note: Since the Illinois Court of Appeals never reached the "unitary business" issue, it conceivably could reverse the trial court's ruling and reinstate the tax on remand).
Justice Thomas issued a lone concurrence noting his longstanding belief that the dormant Commerce Clause is a fiction and thus does not bar Illinois's tax. Also, Thomas agreed that the Due Process Clause limits what a state may tax, but he questioned whether it limits how much a state may tax where a state does have some taxing authority. Neither party raised these issues, however, so he joined the Court's opinion.
The Court also granted cert in two new cases:
Entergy Corporation v. EPA (07-588), PSEG Fossil LLC v. Riverkeeper, Inc. (07-589), and Utility Water Act Group v. Riverkeeper (07-597), where the Court will determine "[w]hether Section 316(b) of the Clean Water Act authorizes the EPA to compare costs with benefits in determining the ‘best technology available for minimizing adverse environmental impact' at cooling water intake structures." This one could have far-reaching consequences.
Van de Kamp v. Goldstein (07-854), which asks (pardon our abridgements): "(1) Where absolute immunity shields an individual prosecutor's decisions regarding the disclosure of informant information . . . made in the course of preparing for the initiation of judicial proceedings or trial . . . , may a plaintiff circumvent that immunity by suing one or more supervising prosecutors for purportedly improperly training, supervising or setting policy with regard to the disclosure of such informant information . . . ? (2) Are the decisions of a supervising prosecutor . . . intimately associated with the judicial phase of the criminal process and hence shielded from liability . . . .?"
We'll be back in your inboxes shortly with the remaining decisions from this week. Thanks for reading!

Kim & Ken
From the Appellate Practice Group at Wiggin and Dana
For more information, contact Kim Rinehart, Ken Heath, or any other member of the Practice Group at 203-498-4400