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On July 2, 2003, the Massachusetts Appeals Court affirmed, in major part, the decision of the Appellate Tax Board rejecting the Department of Revenue's attempt to treat as apportionable income the gains from W.R. Grace & Co.'s sale of stock in several subsidiaries held as investments. W.R. Grace & Co. -- Conn. v. Comm'r of Revenue, No. 00-P-254, 2003 Mass. App. LEXIS 731 (App. Ct. July 2, 2003).

The Appeals Court agreed with the Board that Massachusetts is constitutionally prohibited from taxing the income derived from Grace's sale of its 54% interest in Herman's Sporting Goods chain and 74% interest in El Torito Restaurants because those operations were not part of Grace's unitary business. The Court noted that (1) although "Grace exercised some supervision of the subsidiaries, [it was] " the kind of oversight that a parent would typically give to an investment in a subsidiary," and (2) the administrative services provided by Grace on an arm's-length basis after they became public companies "did not embody the requisite flow of value to create a unitary business relationship."

[Paul H. Frankel and Michael A. Pearl served as co-counsel for W.R. Grace & Co.]