Title: VAS Holdings & Investments LLC v. Commissioner of Revenue

State: massachusetts

Issuer: Massachusetts Supreme Court

Document:

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SJC-13139 
 
VAS HOLDINGS & INVESTMENTS LLC  vs.  COMMISSIONER OF REVENUE. 
 
 
 
Suffolk.     January 5, 2022. - May 16, 2022. 
 
Present:  Budd, C.J., Gaziano, Lowy, Cypher, Kafker, Wendlandt, 
& Georges, JJ. 
 
 
Constitutional Law, Taxation, Commerce clause.  Due Process of 
Law, Taxation.  Taxation, Foreign corporation, Capital 
gain, Apportionment of tax burden, Corporate excise, 
Nonresident, Waiver. 
 
 
 
Appeal from a decision of the Appellate Tax Board. 
 
The Supreme Judicial Court granted an application for 
direct appellate review. 
 
 
Michael J. Bowen for the taxpayer. 
Brett M. Goldberg for Commissioner of Revenue. 
The following submitted briefs for amici curiae: 
Bruce Fort, of New Mexico, for Multistate Tax Commission. 
Richard L. Jones, David J. Nagle, & Caroline A. Kupiec for 
American College of Tax Counsel. 
 
 
 
WENDLANDT, J.  This case requires us to consider the 
constitutional constraints on the Commonwealth's ability to tax 
a nondomiciliary corporation on the capital gain it reaped from 
2 
 
the sale of its fifty percent membership interest in an in-State 
limited liability company.  The nondomiciliary corporation, VAS 
Holdings & Investments LLC (VASHI), maintains that the "unitary 
business principle" is the only constitutionally permissible 
methodology pursuant to which the Commonwealth may impose a tax 
on such capital gain.  Under that principle, the Commonwealth 
may tax the capital gain only where (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. 
The Commissioner of Revenue (commissioner) concedes that, 
under the unitary business principle as applied to the facts of 
this case, the capital gain is not taxable in the Commonwealth.  
Nevertheless, he contends that the capital gain may be taxed 
because it reflects the in-State entity's growth in the 
Commonwealth.  Because the nondomiciliary corporation reaped the 
benefit of that growth, the commissioner maintains, the 
Commonwealth may impose a tax on the nondomiciliary, consistent 
with the due process clause and the commerce clause of the 
United States Constitution.  The Appellate Tax Board (board) 
agreed, and this appeal followed. 
The constitutionality of the imposed taxes was the only 
issue raised before the board and before this court, and all 
3 
 
parties, including the board, have a significant interest in its 
resolution.  Because we are persuaded that the constitutional 
limitations on the Commonwealth's authority to tax a 
nondomiciliary corporation may be satisfied where, as here, the 
nondomiciliary corporation has reaped the financial benefits (in 
the form of a capital gain) from its fifty percent ownership 
interest in an in-State entity whose growth is tied inextricably 
to the protections, opportunities, and benefits afforded to it 
by the Commonwealth, we agree that the capital gain could be 
subject to the Commonwealth's tax.  Before the board, the 
parties did not dispute the statutory authority of the 
commissioner to deviate from the unitary business principle.  
Yet, any tax beyond that which is authorized by statute is 
invalid; accordingly, following oral argument before this court, 
we asked the parties to address whether the Legislature had 
authorized the tax asserted by the commissioner; having reviewed 
the parties' postargument briefs and the pertinent statutes, we 
conclude that the commissioner lacked the requisite statutory 
authority and reverse the decision of the board.1 
 
1 We acknowledge the amicus briefs submitted by the 
Multistate Tax Commission and the American College of Tax 
Counsel. 
4 
 
1.  Background.  a.  Facts.  Based on the parties' agreed 
statement of facts, exhibits, and witness testimony, the board 
found the following facts. 
i.  Pre-merger operations.  VASHI was formed in 1999 as an 
S corporation2 with its commercial domicil and headquarters in 
Illinois.  VASHI's headquarters housed its administrative, 
sales, marketing, and financial functions; it had approximately 
fifteen employees.  Through its wholly owned subsidiaries, 
Virtual-Agent Services Canada, Inc. (VAS USA), and Virtual-Agent 
Services Canada Corp. (VAS Canada),3 VASHI operated call centers 
in Canada, which primarily served clients in the hospitality 
industry.  VASHI, VAS USA, and VAS Canada had no clients or 
business connections in Massachusetts. 
Thing5, LLC (Thing5), was a Massachusetts limited liability 
company owned by two Massachusetts residents, David Thor, who 
 
2 An S corporation is a "small business corporation" that 
elects to pass its taxable income through to its shareholders in 
proportion to their "distributive shares."  The distributive 
share is a shareholder's pro rata ownership.  See G. L. c. 62, 
§ 17A; 26 U.S.C. §§ 1361-1363, 1366.  A small business 
corporation may not have more than one hundred shareholders, all 
of whom must be individuals.  26 U.S.C. § 1361(b). 
 
3 VASHI was the sole shareholder of VAS USA, which was an 
Illinois S corporation.  VAS USA was a holding company with no 
employees and no active business activity.  VAS USA was, in 
turn, the sole shareholder of VAS Canada, which was a Canadian C 
corporation that operated twenty-nine call centers throughout 
eastern Canada.  VAS Canada had approximately 1,400 employees, 
all of whom were located in Canada.  Substantially all of 
VASHI's revenues were derived from the operations of VAS Canada. 
5 
 
served as Thing5's chief executive officer (CEO), and his wife, 
Maura Thor.  Thing5 had between forty and fifty employees; it 
was headquartered in Massachusetts and conducted all business 
from its offices in Springfield and Longmeadow, with its day-to-
day operations managed by David Thor.  Thing5 provided hosted 
telephone systems and voicemail, mobile applications, and 
support for legacy telephone systems for clients in the hotel 
business. 
ii.  2011 merger.  In August 2011, Cloud5 LLC (Cloud5), a 
Massachusetts limited liability company, was formed to effect 
the merger of VASHI and Thing5.  Each business was valued 
separately at $17.5 million.  In October 2011, in a single 
integrated transaction, VASHI contributed its shares of stock in 
VAS USA to Cloud5 in exchange for fifty percent of the 
membership units of Cloud5, and David and Maura Thor contributed 
their membership units in Thing5 to Cloud5 in exchange for fifty 
percent of the membership units of Cloud5.  The total value of 
the merged business was estimated to be $35 million. 
As a result of the merger, Thing5 became a wholly owned 
subsidiary of Cloud5, operating essentially as a division of 
Cloud5 for tax purposes.  VAS USA also became a wholly owned 
subsidiary of Cloud5; VAS USA was restructured as a C 
corporation, and thus a separate taxable entity such that its 
property, activities, and income did not pass through to Cloud5 
6 
 
for either Federal or Massachusetts tax purposes.  VAS Canada 
remained a wholly owned subsidiary of VAS USA. 
iii.  Post-merger operations.  Following the merger, the 
business operations of VAS Canada and Thing5 were integrated.  
David Thor, who remained at all relevant times a Massachusetts 
resident, became the CEO of both Cloud5 and VAS Canada, assuming 
responsibility for the call center operations of VAS Canada in 
addition to his prior responsibilities at Thing5.4  Employees of 
Thing5 in Massachusetts performed the functions previously 
conducted by VASHI employees.  The operations of Cloud5's 
subsidiaries consisted of the Thing5 headquarters and offices in 
Springfield and Longmeadow; a newly established Thing5 call 
center in Springfield that served as a satellite to the VAS 
Canada call centers; the VAS Canada call center operations in 
Canada; and one employee, Thing5's chief financial officer, who 
was located in Illinois. 
Following the merger, VASHI had no employees or operations, 
did not own or lease any real or tangible property, and was not 
involved in the operations of Cloud5; other than bank accounts, 
 
4 Cloud5 was nominally managed under the direction of a 
board of managers, which initially consisted of five 
individuals, including David and Maura Thor.  The board was 
neither functional nor active and met only twice during Cloud5's 
existence -- once immediately after the merger, and again to 
approve the sale of the interests in Cloud5 to a third party, 
which is at the center of the present dispute. 
7 
 
its only material asset was its fifty percent membership 
interest in Cloud5.  In December 2012, VASHI reincorporated in 
Florida after closing its Illinois offices. 
iv.  Growth of Cloud5.  Between 2011 and 2013, under David 
Thor's management, the value of Cloud5 increased, which the 
parties attribute to business activities that took place 
primarily in Massachusetts.  Cloud5 consolidated the business 
operations of VAS Canada and increased its over-all 
profitability.  The staffing model of VAS Canada was changed 
based on data and tools available to Thing5, and the number of 
VAS Canada's employees was reduced from 1,400 to approximately 
800.  Unprofitable client contracts were not renewed, and the 
total number of VAS Canada's clients was reduced. 
Meanwhile, Thing5's operations grew significantly.  Thing5 
established a call center in Springfield, leasing approximately 
10,000 square feet of office space.  Thing5's product offerings 
expanded, and its number of customers increased. 
Cloud5 filed State tax returns in Massachusetts in 2011, 
2012, and 2013.  For tax purposes, Cloud5 was a partnership.  
Accordingly, VASHI's distributive share of Cloud5's business 
income –– that is, its income derived from Cloud5's regular 
business operations -- was apportioned or allocated to 
Massachusetts under G. L. c. 63, § 38; VASHI's distributive 
share was subject to (i) State personal income tax under G. L. 
8 
 
c. 62, § 5A, as if realized directly by VASHI's shareholders 
under G. L. c. 62, § 17A, and (ii) corporate excise tax under 
G. L. c. 63, § 32D.5 
v.  Sale of Cloud5 and capital gain.  In October 2013, 
VASHI sold its fifty percent membership interest in Cloud5 to an 
unrelated third party, realizing a capital gain of $37,280,849 
(Cloud5 gain).  The board found that "the increase in value, and 
likewise the [Cloud5] [g]ain, were inextricably connected to and 
in large measure derived from property and business activities 
in Massachusetts." 
VASHI, being a pass-through entity for Federal tax 
reporting purposes,6 was not required to and did not pay tax to 
the Federal government on the Cloud5 gain; instead, VASHI's 
shareholders each paid personal income tax to the Federal 
government on the gain, and those shareholders who were required 
to report and pay tax on the Cloud5 gain to their State of 
 
5 This case does not concern the taxes VASHI's shareholders 
paid on VASHI's distributive share of Cloud5's income from 
Cloud5's regular business operations; instead, the present 
dispute centers on the tax owed by VASHI on the capital gain it 
received when it sold its fifty percent membership interest in 
Cloud5, as described infra. 
 
6 "Pass-through taxation" is "[t]he taxation of an entity's 
owners for the entity's income without taxing the entity 
itself."  Black's Law Dictionary 1762 (11th ed. 2019).  S 
corporations, such as VASHI, are typically taxed under this 
method.  Id. 
9 
 
residence did so.  None of the shareholders of VASHI was a 
resident of Massachusetts. 
b.  Massachusetts taxation of the capital gain.  For the 
2013 tax year, VASHI made estimated payments of Massachusetts 
corporate excise taxes and nonresident composite taxes, which 
included the Cloud5 gain.  VASHI later reported that no tax was 
due on the Cloud5 gain, and the commissioner issued refunds to 
VASHI. 
The commissioner audited VASHI for the 2013 tax year and 
timely issued notices of assessment, reflecting the position 
that the Cloud5 gain was taxable.  VASHI timely filed for an 
abatement, which the commissioner denied.  VASHI filed petitions 
with the board pursuant to G. L. c. 58A, § 7, and G. L. c. 62C, 
§ 39, appealing from the assessment of the tax on its Cloud5 
gain. 
Following a hearing, the board upheld the assessments.  
Specifically, the board rejected VASHI's contention that the 
only permissible methodology pursuant to which the Commonwealth 
could tax its Cloud5 gain was the "unitary business principle."  
Instead, the board held that the Commonwealth could, consistent 
with the due process and commerce clauses, tax the Cloud5 gain.  
The board concluded that because Cloud5 had grown in value as a 
result of its business activities in the Commonwealth, VASHI's 
Cloud5 gain was taxable even though VASHI had no other 
10 
 
Massachusetts presence.  VASHI appealed, and we granted its 
application for direct appellate review. 
2.  Discussion.  a.  Standard of review.  We defer to the 
board's expertise with respect to the interpretation of tax laws 
in the Commonwealth.  See WB&T Mtge. Co. v. Assessors of Boston, 
451 Mass. 716, 721 (2008); French v. Assessors of Boston, 383 
Mass. 481, 482 (1981) (respecting "expertise of the board in tax 
matters involving interpretation of the laws of the 
Commonwealth").  We apply our "independent judgment," however, 
as to both law and facts on constitutional issues.  WB&T Mtge. 
Co., supra.  Board decisions will be set aside for an error of 
law.  See General Mills, Inc. v. Commissioner of Revenue, 440 
Mass. 154, 161 (2003), cert. denied, 541 U.S. 973 (2004).  When 
challenging a tax assessed by a State, "[t]he burden is on the 
taxpayer to show by clear and cogent evidence that [the State 
tax] results in extraterritorial values being taxed" (quotation 
omitted).  Id. at 162, quoting Container Corp. of Am. v. 
Franchise Tax Bd., 463 U.S. 159, 164 (1983) (Container Corp.). 
b.  Constitutional limitations on State taxing authority.  
Under the due process7 and dormant commerce8 clauses of the 
 
7 The due process clause prohibits the taking of property 
without due process of law.  Fourteenth Amendment to the United 
States Constitution, § 1. 
 
8 The commerce clause expressly authorizes Congress to 
"regulate Commerce with foreign Nations, and among the several 
11 
 
United States Constitution, a State may not "tax value[s] earned 
outside its borders."  Container Corp., 463 U.S. at 164, quoting 
ASARCO Inc. v. Idaho State Tax Comm'n, 458 U.S. 307, 315 (1982) 
(ASARCO).  This principle "rests on the fundamental requirement 
of both the Due Process and Commerce Clauses that there be 'some 
definite link, some minimum connection, between a [S]tate and 
the person, property or transaction it seeks to tax.'"  Allied-
Signal, Inc. v. Director, Div. of Taxation, 504 U.S. 768, 777 
(1992) (Allied-Signal), quoting Miller Bros. Co. v. Maryland, 
347 U.S. 340, 344–345 (1954).  It ensures that the State has "a 
connection with the corporation's activities that produce the 
income that the [S]tate seeks to tax," and permits taxation on 
"only the portion of the corporation's income that is fairly 
attributable to the corporation's income producing activities in 
the [S]tate," Hellerstein, State Taxation of Corporate Income 
from Intangibles:  Allied-Signal and Beyond, 48 Tax L. Rev. 739, 
744 (1993), by requiring "a connection to the activity itself, 
rather than a connection only to the actor the State seeks to 
tax," Allied-Signal, supra at 778. 
"The 'broad inquiry' subsumed in both constitutional 
 
States."  Art. I, § 8, United States Constitution.  It has been 
construed as having a negative sweep, referred to as the 
"dormant" commerce clause, which prohibits States from levying 
"taxes that discriminate against interstate commerce or that 
burden it by subjecting activities to multiple or unfairly 
apportioned taxation."  MeadWestvaco Corp. ex rel. Mead Corp. v. 
Illinois Dep't of Revenue, 553 U.S. 16, 24 (2008). 
12 
 
requirements[9] is 'whether the taxing power exerted by the 
[S]tate bears fiscal relation to the protection, 
opportunities and benefits given by the [S]tate' -- that 
is, 'whether the [S]tate has given anything for which it 
can ask return.'" 
 
MeadWestvaco Corp. ex rel. Mead Corp. v. Illinois Dep't of 
Revenue, 553 U.S. 16, 24-25 (2008) (MeadWestvaco), quoting 
ASARCO Inc., supra. 
i.  Protections, opportunities, and benefits provided by 
the Commonwealth to VASHI's investment in Cloud5.  The 
commissioner contends that the protections, opportunities, and 
benefits provided by the Commonwealth to Cloud5, VASHI's 
investee, suffice to meet the constitutional requirement of a 
nexus between the Commonwealth and VASHI; and, because the tax 
imposed by the Commonwealth reflects the apportionment formula 
of Cloud5, the tax is circumscribed to capture the value of 
those protections and benefits.  The commissioner asserts that 
Cloud5 flourished within the Commonwealth and that nexus 
satisfies the due process and the dormant commerce clauses, 
permitting the Commonwealth to extend its taxing authority to 
the fiscal measure of Cloud5's growth -- the Cloud5 gain 
realized by VASHI, Cloud5's fifty percent owner.  We agree. 
 
9 VASHI does not suggest that the analyses under the due 
process and the dormant commerce clauses differ as they pertain 
to the tax imposed on the Cloud5 gain. 
13 
 
The question presented in this case is similar to one 
answered by the United States Supreme Court in a pair of cases 
decided in the first half of the Twentieth Century.  See 
International Harvester Co. v. Wisconsin Dep't of Taxation, 322 
U.S. 435, 437 (1944) (International Harvester); Wisconsin v. 
J.C. Penney Co., 311 U.S. 435, 444 (1940) (J.C. Penney).  These 
cases concerned Wisconsin's "privilege tax," which required a 
nondomiciliary corporation conducting business in Wisconsin to 
deduct a tax from the dividends it paid to its investors, 
regardless of whether those investors were domiciled in 
Wisconsin.10  The Court twice upheld the tax against 
constitutional challenge, concluding that the nondomiciliary 
corporation benefited from "[t]he substantial privilege of 
carrying on business in Wisconsin."  J.C. Penney, supra at 444-
445.11  Because the tax was apportioned to reflect the 
nondomiciliary corporation's Wisconsin activities, "the 
 
10 The nondomiciliary corporation already was required to 
pay corporate income tax to Wisconsin based on the portion of 
its income attributable to its Wisconsin activities.  J.C. 
Penney, 311 U.S. at 441.  The additional privilege tax was 
collected directly from the nondomiciliary corporation.  Id. at 
441-442. 
 
11 In J.C. Penney, 311 U.S. at 443, the nondomiciliary 
corporation challenged the tax on the ground that the events 
triggering the privilege tax occurred outside the State.  
Specifically, the decision to declare a dividend happened at 
corporate meetings in New York, and the dividend was paid from 
New York bank accounts.  Id. 
14 
 
incidence of the tax as well as its measure is tied to the 
earnings which the State of Wisconsin has made possible, insofar 
as government is the prerequisite for the fruits of civilization 
for which, as Mr. Justice Holmes was fond of saying, we pay 
taxes."  Id. at 446, citing Compañía Gen. de Tabacos de 
Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100 
(1927) (Holmes, J., dissenting) ("Taxes are what we pay for 
civilized society . . ."). 
For the same reason, the Court later upheld the same tax 
even though it acknowledged that, in effect, the tax was levied 
against the nondomiciliary corporation's nonresident investors, 
whose sole connection with the State was their investment in the 
corporation, which did some of its business in Wisconsin.  See 
International Harvester, 322 U.S. at 437, 445; id. at 440 
(recognizing that dividend tax, although ostensibly paid by 
nondomiciliary corporation based on its in-State activities, is 
"in point of substance, laid upon and paid by the 
stockholders").  The Court explained that the nonresident 
shareholders, through their investment in the nondomiciliary 
corporation, which in turn was doing business in Wisconsin, had 
nevertheless availed themselves of the privileges, protections, 
and benefits of conducting business in Wisconsin. 
"We think that Wisconsin may constitutionally tax the 
Wisconsin earnings distributed as dividends to the 
stockholders.  It has afforded protection and benefits to 
15 
 
appellants' corporate activities and transactions within 
the [S]tate.  These activities have given rise to the 
dividend income of appellants' stockholders and this income 
fairly measures the benefits they have derived from these 
Wisconsin activities." 
 
Id. at 442.  See id. at 444 ("the incidence of the tax as well 
as its measure is tied to the earnings which the State of 
Wisconsin has made possible" [citation omitted]).12 
These cases provide strong support for the commissioner's 
position that the tax imposed by the Commonwealth on VASHI, a 
nondomiciliary shareholder of Cloud5, passes constitutional 
muster.  The profit realized by VASHI in the Commonwealth (in 
the form of the Cloud5 gain from the sale of VASHI's fifty 
percent interest in Cloud5) reflects the benefits, 
 
12 In an earlier case, Curry v. McCanless, 307 U.S. 357, 
360, 367-368 (1939), the Court addressed the issue whether 
Tennessee and Alabama could both assert an inheritance tax on 
intangible assets –– shares of corporate stock held in trust by 
an Alabama trustee for the benefit of the decedent, a Tennessee 
domiciliary who bequeathed the trust assets to her family in her 
will.  Relevant to the present case, the Court concluded that 
"[s]hares of corporate stock may be taxed at the domicil[] of 
the shareholder and also at that of the corporation which the 
taxing [S]tate has created and controls; and income may be taxed 
both by the [S]tate where it is earned and by the [S]tate of the 
recipient's domicil[].  Protection, benefit, and power over the 
subject matter are not confined to either [S]tate.  The taxpayer 
who is domiciled in one [S]tate but carries on business in 
another is subject to a tax there measured by the value of the 
intangibles used in his [or her] business" (emphasis added).  
(Footnote omitted.)  Id. (rejecting rigid application of rule 
that only domiciliary State could impose tax on intangibles 
where "the taxpayer extends his activities with respect to his 
[or her] intangibles, so as to avail himself [or herself] of the 
protection and benefit of the laws of another [S]tate"). 
16 
 
opportunities, and protections afforded to Cloud5 and in turn to 
VASHI, its fifty percent owner, by the Commonwealth.13  Taxing 
VASHI on the Cloud5 gain it realized when it sold its 
significant interest in Cloud5 is permissible under the 
rationale of these cases because VASHI, through its substantial 
investment in Cloud5, reaped the benefits afforded to Cloud5 by 
the Commonwealth. 
The fact that the present case involves profit in the form 
of capital gains rather than dividends is of no constitutional 
significance.  The Supreme Court has concluded that "for 
constitutional purposes capital gains should be treated as no 
different from dividends."  Allied-Signal, 504 U.S. at 780.  
Reliance on these cases supports the commissioner's position 
that the Commonwealth's taxing power as applied to the Cloud5 
gain "bears fiscal relation to protection, opportunities and 
benefits given by" the Commonwealth to VASHI.  MeadWestvaco, 553 
U.S. at 25. 
ii.  Unitary business principle.  A taxpayer who contends 
that a taxing jurisdiction has transgressed constitutional 
limitations on its taxing authority bears the "distinct burden 
of showing by 'clear and cogent evidence' that [the challenged 
 
13 Specifically, the benefits, opportunities, and 
protections granted by Massachusetts allowed Thing5's 
operations, and thus Cloud5's operations, to grow significantly 
following the merger, as discussed supra. 
17 
 
tax] result[ed] in extraterritorial values being taxed."  
Container Corp., 463 U.S. at 164, quoting Exxon Corp. v. 
Wisconsin Dep't of Revenue, 447 U.S. 207, 221 (1980) (Exxon).  
In this case, VASHI purports to meet this heavy burden in 
reliance on the unitary business principle, which the Supreme 
Court has identified as the "linchpin of apportionability in the 
field of [S]tate income taxation."  Mobil Oil Corp. v. 
Commissioner of Taxes of Vt., 445 U.S. 425, 439 (1980) (Mobil 
Oil).  VASHI contends that the Court effectively has repudiated 
its jurisprudence embodied in J.C. Penney and International 
Harvester, and that the unitary business principle constitutes 
the only constitutionally permissible methodology when it comes 
to a State's authority to tax a nondomiciliary corporation's 
income from capital gains. 
A.  Development of unitary business principle.  The unitary 
business principle is based on the proposition that for a 
business whose activities extend to multiple States, often the 
value of the business cannot be compartmentalized neatly into 
its State-by-State activities.  The principle permits each State 
to tax its proportionate share of the annual income of the 
enterprise as a whole.  Pursuant to the principle, a State first 
calculates the tax base of a multistate corporation by defining 
the scope of the "unitary business" of which the taxed 
enterprise's activities in the taxing jurisdiction form one 
18 
 
part;14 then, the State may tax its fair share of the tax base on 
the basis of an apportionment formula,15 which comprises an 
objective measure of the corporation's in-State activities.  
Container Corp., 463 U.S. at 165. 
The principle developed initially as a way to value the 
activities of railroad or telegraph companies for property tax 
purposes, recognizing that the value of such a business was "the 
enterprise as a whole, rather than the track or wires that 
happen to be located within a State's borders."  Allied-Signal, 
504 U.S. at 778.  See, e.g., Massachusetts v. Western Union Tel. 
Co., 141 U.S. 40, 45 (1891).  The Court has held that, 
consistent with constitutional constraints, a State could tax 
"the proportionate part of the value resulting from the 
combination of the means by which the business was carried on, a 
value existing to an appreciable extent throughout the entire 
 
14 Briefly, to determine the scope of a unitary business, 
courts look to whether the contributions to income result from 
(1) functional integration, (2) centralization of management, 
and (3) economies of scale.  General Mills, Inc., 440 Mass. at 
162.  See MeadWestvaco, 553 U.S. at 30 (recognizing these 
factors as "hallmarks" of unitary business relationship).  In 
addition, income can be included where it serves an operational 
function in that business.  Id. at 28-29, citing Allied-Signal, 
504 U.S. at 787. 
 
15 This formula often constitutes a ratio of the taxpayer's 
in-State payroll, property, and sales divided by the taxpayer's 
total payroll, property, and sales.  See Container Corp., 463 
U.S. at 170. 
19 
 
domain of operation."  Adams Express Co. v. Ohio State Auditor, 
165 U.S. 194, 220-221 (1897). 
The principle was expanded beyond property as a way for a 
State to determine taxes on its fair share of corporate income 
for multistate corporations.  See Mobil Oil, 445 U.S. at 436 
("[T]he entire net income of a corporation, generated by 
interstate as well as intrastate activities, may be fairly 
apportioned among the States for tax purposes by formulas 
utilizing in-state aspects of interstate affairs" [citation 
omitted]).  Thus, in Underwood Typewriter Co. v. Chamberlain, 
254 U.S. 113, 120 (1920), the Supreme Court considered 
application of the principle to the profits of a large 
manufacturing corporation, which "were largely earned by a 
series of transactions beginning with manufacture in Connecticut 
and ending with sale in other States."  In these cases, the 
"physical unity existing in" the railroad and telegraph cases 
"is lacking . . . but there is the same unity in the use of the 
entire property for the specific purpose, and there are the same 
elements of value arising from such use."  Allied-Signal, 504 
U.S. at 779, quoting Adams Express, 165 U.S. at 221. 
In cases where the business is unitary, the Court has 
instructed that "a State need not 'isolate the intrastate 
income-producing activities from the rest of the business' but 
'may tax an apportioned sum of the corporation's multistate 
20 
 
business'" based on its activities within the taxing State.  
MeadWestvaco, 553 U.S. at 25, quoting Allied-Signal, 504 U.S. at 
772.  See, e.g., Container Corp., 463 U.S. at 175-179 (taxpayer 
and overseas subsidiaries constituted unitary business, and 
California's apportionment scheme did not result in taxation of 
extraterritorial values).  See also Exxon, 447 U.S. at 210, 221, 
229 (unitary business principle permits State to include in 
apportionable tax base income from vertically integrated 
operations of corporation, which benefited from centralized 
management and controlled interactions, so long as apportionment 
formula of that total tax base was grounded in corporation's in-
State marketing and sales activities). 
Relevant to the present case, the Court has also approved 
the use of the unitary business principle to determine the tax 
base of a parent corporation whose business income included 
dividends it received from legally separate entities structured 
as subsidiaries and affiliated companies of the parent.  See 
Mobil Oil, 445 U.S. at 435.  "So long as dividends from 
subsidiaries and affiliates reflect profits derived from a 
functionally integrated enterprise, those dividends are income 
to the parent earned in a unitary business.  One must look 
principally at the underlying activity, not at the form of 
investment, to determine the propriety of apportionability."  
Id. at 440.  Thus, even though the subsidiaries and affiliates 
21 
 
were legally separate entities, the State could include the 
dividends received by the parent in the apportionable tax base 
so long as, as a matter of economic reality, the subsidiaries 
and affiliates were part of a unitary business with the 
taxpayer.  Id. at 440-441. 
By the same token, the Court cautioned that a State may not 
include all dividend payments received by a corporation 
conducting interstate business in the corporation's tax base and 
subject to apportionment based on the corporation's in-State 
activities.  "Where the business activities of the dividend 
payor have nothing to do with the activities of the recipient in 
the taxing State, due process considerations might well preclude 
apportionability, because there would be no underlying unitary 
business."  Mobil Oil, 445 U.S. at 442. 
Thus, in ASARCO, the Court struck down Idaho's application 
of the unitary business principle to justify inclusion of 
dividends and capital gains received from foreign corporations 
in calculating ASARCO's apportionable tax base.  ASARCO's 
business and the foreign corporations' businesses did not 
include any hallmarks of centralized management or control, and 
thus were "insufficiently connected to permit the two companies 
to be classified as a unitary business."  ASARCO, 458 U.S. at 
322.  The Court rejected Idaho's plea to capture income in the 
form of dividends and capital gains whenever the income served a 
22 
 
broadly defined corporate purpose, stating that such an 
expansion 
"would destroy the concept [underlying the unitary business 
principle].  The business of a corporation requires that it 
earn money to continue operations and to provide a return 
on its invested capital.  Consequently all of its 
operations, including any investment made, in some sense 
can be said to be 'for purposes related to or contributing 
to the [corporation's] business." 
 
Id. at 326.  See F.W. Woolworth Co. v. Taxation & Revenue Dep't 
of N.M., 458 U.S. 354, 372 (1982) (holding New Mexico could not 
employ unitary business principle to justify tax of dividends 
received from nondomiciliary corporate taxpayer's foreign 
subsidiaries, absent unitary relationship).  In these cases, 
there was no nexus between the taxing State and the entity that 
was the source of the dividend or capital gain; instead, the 
taxing State exclusively relied on the unitary business 
principle to defend the asserted tax. 
More recently, however, the Court has considered the tax 
treatment of dividends and capital gains where there is a nexus 
between the source of that income and the taxing State in that 
the source of the income is domiciled or headquartered in the 
taxing State.  For example, in Allied-Signal, 504 U.S. at 773-
774, the Court examined a New Jersey tax on the capital gain 
realized by a Delaware corporation doing business in New Jersey 
from the sale of stock in an unrelated entity, which was 
incorporated in New Jersey and did business there.  New Jersey 
23 
 
relied on the unitary business principle to justify the tax; 
however, the Court concluded that, because the Delaware 
corporation and the New Jersey entity were "unrelated business 
enterprises each of whose activities had nothing to do with the 
other," and thus were not engaged in a unitary business, New 
Jersey could not tax the gain.  Id. at 788. 
Similarly, in MeadWestvaco, 553 U.S. at 19-20, 30, Illinois 
relied on the unitary business principle to justify its tax on 
capital gains reaped by Mead, an Ohio corporation, from its sale 
of Lexis, which was headquartered in Illinois; the Court 
remanded for determination whether the unitary business factors 
were satisfied.  Significantly, in each of these cases, the 
taxing State relied on the unitary business principle to reach 
the dividend or capital gains; in addition, the State sought to 
apply the apportionment percentage of the nondomiciliary 
corporate taxpayer rather than the percentage of the entity that 
was the source of the income.  See MeadWestvaco, supra at 23; 
Allied-Signal, 504 U.S. at 776. 
VASHI contends that these more recent cases concerning the 
treatment of dividend and capital gains income prohibit the 
Commonwealth's tax in the present case because, according to 
VASHI, they stand for the proposition that the unitary business 
principle is the only apportionment methodology that may be used 
by taxing States.  For the reasons discussed infra, we disagree. 
24 
 
B.  Unitary business principle is not the only 
apportionment methodology.  To begin, the Supreme Court has not 
held that the unitary business principle is the exclusive 
methodology permissible under the Constitution to determine the 
limits of a State's taxing power.  To the contrary, the Court 
has declined repeatedly to prescribe a particular formula for 
State taxation, admonishing that 
"[n]othing can be less helpful than for courts to go beyond 
the extremely limited restrictions that the Constitution 
places upon the [S]tates and to inject themselves in a 
merely negative way into the delicate processes of fiscal 
policy-making.  We must be on guard against imprisoning the 
taxing power of the [S]tates within formulas that are not 
compelled by the Constitution but merely represent judicial 
generalizations exceeding the concrete circumstances which 
they profess to summarize." 
 
J.C. Penney, 311 U.S. at 445.  See id. at 444 ("The Constitution 
is not a formulary.  It does not demand of [S]tates strict 
observance of rigid categories nor precision of technical 
phrasing in their exercise of the most basic power of 
government, that of taxation"). 
Instead, the Court has stated that a "[S]tate is free to 
pursue its own fiscal policies, unembarrassed by the 
Constitution, if by the practical operation of a tax the [S]tate 
has exerted its power in relation to opportunities which it has 
given, to protection which it has afforded, to benefits which it 
has conferred by the fact of being an orderly, civilized 
society."  Id.  See Mobil Oil, 445 U.S. at 436 (noting that 
25 
 
"traditional rule" that dividend income is attributable to 
corporate recipient's State of incorporation is not rule "of 
constitutional dimension"); Curry v. McCanless, 307 U.S. 357, 
367-368 (1939) (cautioning against "substitut[ing] a rule for a 
reason" when determining constitutional constraints on States' 
taxing authority). 
Indeed, the Court has acknowledged that the existence of a 
unitary relationship between the taxpayer and the investee "is 
one justification for apportionment, but not the only one."  
Allied-Signal, 504 U.S. at 787.  See generally Hellerstein, 
Substance and Form in Jurisdictional Analysis:  Corrigan v. 
Testa, 80 State Tax Notes 849, 852-853 (2016) ("Given the 
geographically indeterminate 'location' of intangible property 
and the existence of various competing rules for determining the 
deemed location of such property and the income it generates, it 
would be difficult as a matter of principle to maintain that the 
due process clause prescribes a single location [or theory of 
location] to which intangibles and the income they generate must 
be assigned"). 
Next, the cases applying the unitary business principle to 
dividends and capital gains income to the nondomiciliary 
corporate taxpayer differ from the present case in two 
significant ways:  either the taxing State had no connection to 
the entity, which was the source of the dividend or capital 
26 
 
gain, and thus the State chose to rely on the unitary business 
principle to reach the out-of-State income;16 or where the taxing 
State had such a connection, the taxing State did not rely on 
that nexus and instead chose to rely on the unitary business 
principle and to use the apportionment percentage applicable to 
 
16 See, e.g., F.W. Woolworth Co., 458 U.S. at 372 (applying 
unitary business principle to conclude New Mexico lacked 
authority to assert tax on dividends from foreign subsidiaries 
where subsidiaries had had no connection to New Mexico and, 
although owned by nondomiciliary corporate taxpayer, were not 
part of taxpayer's unitary business); ASARCO, 458 U.S. at 328-
329 (applying unitary business principle to conclude Idaho 
lacked authority to tax dividends and capital gains from foreign 
entities where entities had no connection to Idaho and, although 
owned or partially owned by nondomiciliary corporate taxpayer, 
were not part of taxpayer's unitary business); Mobil Oil, 445 
U.S. at 442 (applying unitary business principle to conclude 
Vermont could assert tax on dividends from foreign subsidiaries 
and affiliates where subsidiaries and affiliates had no 
connection to Vermont, but were part of unitary business with 
nondomiciliary corporate taxpayer). 
 
The Supreme Court also framed the issue in these cases 
narrowly, suggesting that the Court did not intend for the 
unitary business principle to be the exclusive test in all 
interstate taxation cases.  See, e.g., F.W. Woolworth Co., 458 
U.S. at 356 ("The question is whether the Due Process Clause 
permits New Mexico to tax a portion of dividends that appellant 
F.W. Woolworth Co.[, a New York corporation doing some business 
in New Mexico,] received from foreign subsidiaries that do no 
business in New Mexico" [emphasis added]); ASARCO, 458 U.S. at 
308-309 ("The question is whether the State of Idaho 
constitutionally may include within the taxable income of a 
nondomiciliary parent corporation doing some business in Idaho a 
portion of intangible income -- such as dividend and interest 
payments, as well as capital gains from the sale of stock -- 
that the parent receives from subsidiary corporations having no 
other connection with the State" [emphasis added]).  See also 
Matter of Allied-Signal Inc. v. Commissioner of Fin., 79 N.Y.2d 
73, 80 n.9 (1991). 
27 
 
the recipient of the income, the nondomiciliary corporate 
taxpayer, rather than the entity that was the source of the 
income at issue.17  Here, the commissioner has not chosen to rely 
on the unitary business principle.  Instead, the commissioner 
relied on the Commonwealth's connection to Cloud5 -- the entity 
that is the source of the capital gain; Cloud5 is domiciled and 
headquartered in the Commonwealth, and its growth, the board 
found, is attributable to the benefits, opportunities, and 
privileges afforded to it by the Commonwealth.  Accordingly, 
unlike in the cases cited by VASHI, the commissioner has chosen 
to rely on this connection to Cloud5 to satisfy the 
constitutional requirement of a nexus between the Commonwealth 
and the activities that produced the income that the State seeks 
to tax.  See Allied-Signal, 504 U.S. at 777; Hellerstein, 48 Tax 
L. Rev. at 744. 
Furthermore, unlike in the cases where the taxing State 
relied on the unitary business principle and used the 
apportionment percentage of the recipient of the dividend or 
 
17 See, e.g., MeadWestvaco, 553 U.S. at 30 (applying unitary 
business principle to conclude Illinois lacked authority to tax 
capital gains from nondomiciliary corporate taxpayer's sale of 
Illinois headquartered entity based on nondomiciliary's 
apportionment formula); Allied-Signal, 504 U.S. at 776 (applying 
unitary business principle to conclude New Jersey lacked 
authority to assert tax on capital gain from nondomiciliary 
corporate taxpayer's sale of New Jersey entity based on 
nondomiciliary's apportionment formula). 
28 
 
capital gain, the tax asserted by the Commonwealth in this case 
is based on Cloud5's apportionment percentage, not VASHI's.  The 
use of Cloud5's apportionment percentage satisfies the 
constitutional requirement that there be a rational relationship 
between the tax and the activities of the entity that is the 
source of the value.  See MeadWestvaco, 553 U.S. at 31 n.4 
(recognizing that where constitutionally sufficient link between 
taxing State and value it wishes to tax is founded on State's 
contacts with source of value, "apportioned tax base should be 
determined by applying the State's . . . apportionment formula" 
to entity that is source of value).  See also Moorman Mfg. Co. 
v. Bair, 437 U.S. 267, 273 (1978) ("income attributed to the 
State for tax purposes must be rationally related to values 
connected with the taxing State" [quotation and citation 
omitted]).18 
 
18 We find persuasive the Court of Appeals of New York's 
decision in Matter of Allied-Signal Inc., 79 N.Y.2d at 80-83, 
rejecting an argument similar to the one pressed here by VASHI 
that the only constitutionally permissible method of taxing 
capital gains and dividend income was the unitary business 
principle.  Instead, the court upheld New York City's taxing 
methodology, which applied a tax that reflected the nexus 
between New York City and the entities that generated the 
taxpayer's investment income.  See id. at 82.  See also Matter 
of Allied-Signal, Inc. v. Tax Appeals Tribunal, 229 A.D.2d 759, 
762-763 (N.Y. 1996) (adopting reasoning of Court of Appeals of 
New York to conclude that New York State could impose tax based 
on investee apportionment approach).  By contrast, the Ohio 
Supreme Court's decision in Corrigan v. Testa, 2016-Ohio-2805, 
which rejected application of any methodology other than the 
unitary business principle, is based on a misreading of 
29 
 
We see nothing in the Court's jurisprudence that would 
preclude the Commonwealth from asserting its taxing authority 
based on the nexus to Cloud5 and to determine the tax using 
Cloud5's apportionment percentage.  See generally Hellerstein, 
80 State Tax Notes at 854 (discussing State's authority to tax 
capital gains reaped by nonresident from in-State entity based 
on in-State entity's apportionment formula).  Whether such an 
assertion is good fiscal policy is a different question, as to 
which we must defer to the Legislature –– a subject to which we 
turn now. 
c.  Statutory limitations on State taxing authority.  "No 
method of determining tax liability is valid unless authorized 
by statute and assessed in conformity to its terms."  Gillette 
Co. v. Commissioner of Revenue, 425 Mass. 670, 675 (1997) 
(Gillette).  Both the commissioner and VASHI did not dispute 
before the board or before this court that the Legislature 
authorized, by statute, the taxes imposed.  We asked for 
postargument briefing on the subject sua sponte.  These statutes 
establish that the Legislature has chosen to adhere to the 
unitary business principle in formulating its taxing policy.  
See, e.g., G. L. c. 63, § 32B (discussing taxation of 
corporation "engaged in a unitary business"); G. L. c. 63, § 32D 
 
International Harvester.  See Hellerstein, 80 State Tax Notes at 
855-858 (discussing errors in Ohio Supreme Court's reasoning). 
30 
 
(discussing taxation of S corporations, and directing 
commissioner to apply limits set forth therein "on an aggregate 
basis to S corporations engaged in a unitary business"); G. L. 
c. 63, § 38 (discussing net income of business carried on within 
Commonwealth, and dividing same into apportionable income and 
allocatable income); id. (defining apportionment formula for 
corporations doing business in multiple States).  Regulations 
promulgated in conformity with these statutes similarly reflect 
an adherence to the unitary business principle.  See, e.g., 830 
Code Mass. Regs. § 63.38.1 (2015) (explaining apportionment and 
allocation of income, and discussing income subject to 
apportionment based on unitary business principle); 830 Code 
Mass. Regs. § 62.5A.1 (2008).  Thus, although the Constitution 
does not prevent the taxes asserted by the commissioner, see 
supra, the taxes -- a corporate excise tax in the amount of 
$914,489, and a nonresident composite tax in the amount of 
$1,717,40619 -- are invalid because there is no statutory 
authority for the taxes so asserted.20 
 
19 VASHI was also assessed a penalty of $182,898 and 
interest of $106,578.27 on the corporate excise tax and a 
penalty of $349,481 and interest of $161,432 on the nonresident 
composite tax, which VASHI does not separately dispute. 
 
20 Jurisdictions that have authorized the approach adopted 
by the commissioner, such as New York City, New York, and Ohio, 
have passed specific legislation expressly authorizing the 
approach.  See N.Y. Tax Law § 210.3, repealed by N.Y. St. 2014, 
c. 59, pt. A, § 15; Ohio Rev. Code Ann. § 5747.212; N.Y. City 
31 
 
i.  Corporate excise tax.  Under G. L. c. 63, § 39, "every 
business corporation . . . actually doing business in the 
commonwealth, or owning or using any part or all of its capital, 
plant or any other property in the commonwealth, shall pay" 
annual taxes on "its net income determined to be taxable in 
accordance with [c. 63]."  G. L. c. 63, § 39 (a) (2) (iv).  
General Laws c. 63, § 38, in turn, directs the commissioner to 
distinguish between income that is subject to apportionment and 
income that is subject to allocation.  Apportionable income is 
defined by reference to the unitary business principle.  See 830 
Code Mass. Regs. § 63.38.1(3) ("a taxpayer's income subject to 
apportionment is its entire income derived from its related 
business activities within and outside of Massachusetts not 
including any allocable items of income that either are or are 
not subject to the tax jurisdiction of Massachusetts"); 830 Code 
Mass. Regs. § 63.38.1(4)(a) (defining related business 
activities as those activities that "are mutually beneficial, 
interdependent, integrated or such that they otherwise 
contribute to one another," and include two activities of 
taxpayer "unless the two segments or activities are not 
unitary").  Allocable income also is defined by reference to the 
 
Admin. Code § 11-604.3(a).  Here, there is no such statute; 
rather, the commissioner claims authorization for the investee 
apportionment methodology from statutes and regulations that are 
based on the unitary business principle. 
32 
 
unitary business principle; it includes, inter alia, an "item of 
income [that] was not derived from a unitary business or from 
transactions that serve an operational function."  830 Code 
Mass. Regs. § 63.38.1(2).  An "allocable item of income" is not 
allocated to Massachusetts if the taxpayer's commercial domicil 
is outside the Commonwealth.  830 Code Mass. Regs. 
§ 63.38.1(3)(c).  Because there is no unitary business between 
VASHI and Cloud5,21 and because VASHI's commercial domicil is 
Florida, the asserted corporate excise tax is not authorized by 
statute either as apportionable or allocable income. 
ii.  Nonresident composite tax.  A similar fate attaches to 
the asserted nonresident composite tax pursuant to G. L. c. 62, 
§ 5A, which authorizes taxation of nonresidents on income 
"derived from or effectively connected with . . . any trade or 
business . . . carried on by the taxpayer in the commonwealth, 
whether or not the nonresident is actively engaged in a trade or 
 
21 VASHI and Cloud5 lacked the functional integration, 
centralization of management, and economies of scale that are 
the "hallmarks" of a unitary business relationship.  
MeadWestvaco, 553 U.S. at 30.  Following the merger, VASHI had 
"zero" involvement with the operations of Cloud5, did not 
participate in its management or activities, and did not provide 
services or loan money to Cloud5.  Although some shareholders of 
VASHI were members of Cloud5's board, the board was neither 
functional nor active, and met only twice during the existence 
of Cloud5 -- once immediately after the merger, and again to 
approve the sale of VASHI's interest in Cloud5 to a third party.  
Indeed, the parties agreed before the board and on appeal that 
none of the unitary business factors was present between VASHI 
and Cloud5. 
33 
 
business . . . in the commonwealth in the year in which the 
income is received" (emphasis added).  As we held in 
Commissioner of Revenue v. Dupee, 423 Mass. 617 (1996), the 
emphasized language precludes the Commonwealth from taxing the 
capital gain realized by a nonresident shareholder on the sale 
of his or her interest in a Massachusetts entity where the 
shareholder himself or herself did not actively participate in 
the activities of the entity.  Id. at 621-623.22,23 
 
22 The commissioner contends that Dupee is distinguishable 
from the present case because it concerned a shareholder of an S 
corporation, whereas here, VASHI was effectively a partner of 
Cloud5, a limited liability company that was treated as a 
partnership for tax purposes.  However, nothing in Dupee 
suggests that its construction of G. L. c. 62, § 5A, turned on 
the form of the shareholder's investee.  See generally 
Hellerstein, 80 State Tax Notes at 849 ("when a nonresident 
realizes gain from the disposition of an interest in a flow-
through entity [whether a partnership, an S corporation, or an 
LLC], the [S]tates typically attribute the source of the gain 
under the rules governing income from the sale of intangibles" 
regardless of type of flow-through entity). 
 
23 Section 5A was amended in 2003, after the Dupee decision, 
to state that the income of a nonresident doing business in the 
Commonwealth may be taxed "whether or not the nonresident is 
actively engaged in a trade or business or employment in the 
commonwealth in the year in which the income is received."  St. 
2003, c. 4, § 7.  See G. L. c. 62, § 5A.  Prior to the 
amendment, Massachusetts courts had interpreted § 5A to prohibit 
"taxation of nonresident income 'derived from or effectively 
connected with' past Massachusetts employment where the taxpayer 
has not 'carried on' any business in the Commonwealth during the 
taxable year of receipt" (emphasis added).  Commissioner of 
Revenue v. Oliver, 436 Mass. 467, 474 (2002) (holding that § 5A 
did not permit taxation of pension benefits earned through 
taxpayer's employment in Massachusetts but received after he 
became nonresident because he did not carry on business in 
Massachusetts in relevant year).  As amended, the statute now 
34 
 
Although the statute was amended to state that income 
"shall include, but not be limited to, gain from the sale of a 
business or of an interest in a business . . . [or] distributive 
share income," G. L. c. 62, § 5A (a), the regulations clarify 
that such income "may" include capital gains and further set 
forth rules for the treatment of the apportionment and 
allocation of income for nonresident members of a pass-through 
entity.  See 830 Code Mass. Regs. § 62.5A.1(6).  These 
regulations clearly limit the income subject to tax to that 
falling within the unitary business principle.  See, e.g., 830 
Code Mass. Regs. § 62.5A.1(6)(a) (defining income subject to 
apportionment as entire net income of pass-through entity 
derived from "related business activities"); 830 Code Mass. 
Regs. § 62.5A.1(2) (defining "related business activities" as 
those that would fall under unitary business principle); 830 
Code Mass. Regs. § 62.5A.1(6)(d) (defining "related business 
activities" by reference to unitary business principle as 
discussed in Allied-Signal, 504 U.S. 768); id. ("In general, any 
two segments or activities of a single pass-through entity are 
 
permits a tax on a nonresident who did business in the 
Commonwealth regardless of whether the business was conducted in 
that particular year.  Indeed, in a Technical Information 
Release following the amendment, the commissioner explained that 
the effect of the added language was to alter only the requisite 
timing of the taxpayer's business activities in Massachusetts.  
TIR 03-13 (July 28, 2003).  The amendment did not affect the 
language construed in Dupee. 
35 
 
related business activities unless the two segments or 
activities are not unitary"). 
The commissioner argues that the tax is allowable under the 
regulations, relying on 830 Code Mass. Regs. § 62.5A.1(3)(c)(8) 
and example (3)(c)(8.1), which state that "[i]f a non-resident 
has a trade or business . . . carried on in Massachusetts, 
Massachusetts source income includes, among other things:  . . . 
income that results from the sale of a business," which includes 
capital gains from the sale of an interest in a partnership or 
limited liability company, even where the partner "took no part 
in its management or operations."  Here, however, VASHI does not 
carry on a trade or business in Massachusetts. 
iii.  Waiver.  In general, "[a] party is not entitled to 
raise arguments on appeal that he [or she] could have raised, 
but did not raise, before the administrative agency."  Albert v. 
Municipal Court of Boston, 388 Mass. 491, 493 (1983), citing 
Shamrock Liquors, Inc. v. Alcoholic Beverages Control Comm'n, 
7 Mass. App. Ct. 333, 335 (1979).  Here, VASHI did not raise 
before the board its contention that the imposed taxes were not 
authorized by statute.  As the Supreme Court has recognized, 
however, 
"[t]here may always be exceptional cases or particular 
circumstances which will prompt a reviewing or appellate 
court, where injustice might otherwise result, to consider 
questions of law which were neither pressed nor passed upon 
by the court or administrative agency below." 
36 
 
 
Hormel v. Helvering, 312 U.S. 552, 557 (1941).  See, e.g., 
Hoffer v. Commissioner of Correction, 412 Mass. 450, 457 (1992); 
Cruz v. Commissioner of Pub. Welfare, 395 Mass. 107, 111 (1985); 
McLeod's (Dependents') Case, 389 Mass. 431, 434 (1983).24  
Because the commissioner lacked statutory authority to tax the 
capital gain realized by VASHI based on Cloud5's connection to 
Massachusetts, the decision of the board must be reversed.  See 
Gillette, 425 Mass. at 675 (tax liability invalid unless 
authorized by statute).25  The decision of the board is reversed. 
 
 
 
 
 
 
 
So ordered. 
 
24 In addition, courts are not bound by stipulations when 
such stipulations are based on incorrect applications of the 
law.  See, e.g., Goddard v. Goucher, 89 Mass. App. Ct. 41, 45 
(2016), quoting Texas Instruments Fed. Credit Union v. DelBonis, 
72 F.3d 921, 928 (1st Cir. 1995) ("Parties may not stipulate to 
the legal conclusions to be reached by the court"). 
 
25 Having concluded on this basis that the taxes cannot be 
sustained, we need not consider VASHI's challenge to the 
apportionment percentage applied by the commissioner.