Massachusetts’ High Court Strikes Down Capital Gains Tax Levied Against Non-Domiciled Corporation on Statutory Grounds


money and gavel

By: Matthew A. Wachstein

In the recent case of VAS Holdings & Investments LLC v. Comm’r of Revenue, No. SJC-13139, 2022 Mass. LEXIS 204 (May 16, 2022), the Supreme Judicial Court of Massachusetts (SJC) reversed the Appellate Tax Board’s holding that a nondomiciliary corporation could be taxed for its capital gains from the sale of the corporation’s membership interest in an in-state entity. The Appellate Court’s decision was based on the determination that the growth of the entity from which VAS Holdings (VASHI), benefited, was inextricably tied to the “protections, opportunities, and benefits afforded to it by the Commonwealth.” Id. at 3.

The underlying litigation stems from the Department of Revenue’s efforts to impose a $2.6 million tax on the sale of VASHI’s 50% interest in Cloud5 LLC, a Massachusetts based corporation, for $37 million. Other than the foregoing connection to Cloud5, VASHI maintained no other significant ties to Massachusetts and was domiciled in Florida at the relevant time. Despite acknowledging that the facts of this case did not render VASHI’s capital gains taxable under the unitary business principle, the Department of Revenue argued, and the Appellate Court agreed, the tax represented growth of the in-state entity [Cloud5], reaped by a nondomiciliary corporation. In fact, the growth of Cloud5 was largely attributed to “business activities that took place primarily in Massachusetts” between 2011 and 2013. Id. at 6.

Because of VASHI’s status as a pass-through entity for federal tax reporting purposes, its shareholders paid personal federal income tax on the Cloud5 capital gains. By extrapolation, VASHI shareholders were also required to report said gains to the state in which they resided. Unfortunately for Massachusetts, none of those shareholders purportedly resided in its state and therefore, the Department of Revenue sought to collect taxes on those capital gains based on a review of the nexus and apportionment factors making up Cloud5’s connections with the state. In turn, those factors served as the Department of Revenue’s central argument to the High Court.

In its reversal opinion, the SJC noted, although the Appellate decision was Constitutionally viable, the Massachusetts statutes relied upon by the Commissioner to impose the relevant taxes “clearly limit the income subject to tax to that falling within the unitary business principle.” Id. at 30. In order to assess taxes under the unitary business principle, a unitary relationship must exist between the relevant corporate entities. The test for satisfaction of this principle requires a determination of several key factors including whether “(i) there is functional integration, centralization of management and economies of scale between the out-of-State corporation and the in-State entity, or (ii) the investment in the in-State entity serves an operational function of the out-of-State corporation.” Id. at 1.

Absent the necessary unitary relationship between corporations, the Commissioner’s assessment of a tax on the capital gains of VASHI was deemed statutorily invalidated. Unless Massachusetts law is amended, similarly situated corporations can anticipate holding onto a greater portion of their capital gains.

For more information on this topic, contact Matthew A. Wachstein at