General Elec. Co. v. Commissioner of Revenue

• Decision Date: 09 June 1988
• Docket Number: No. S-4512,S-4512
• Citation: 402 Mass. 523,524 N.E.2d 90
• Parties: GENERAL ELECTRIC COMPANY v. COMMISSIONER OF REVENUE (and two consolidated cases). 1
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 90

524 N.E.2d 90

402 Mass. 523

GENERAL ELECTRIC COMPANY v. COMMISSIONER OF REVENUE (and two consolidated cases).

¹

No. S-4512.

Supreme Judicial Court of Massachusetts,

Suffolk.

Argued Jan. 6, 1988.

Decided June 9, 1988.

Jane S. Schacter, Asst. Atty. Gen., for the Com'r of Revenue.

Kenneth A. Cohen, Boston, for CDE, Inc. & others.

Edward F. Hines, Jr. (Stephen G. Hennessy, Boston, with him), for General Elec. Co. & others.

Before HENNESSEY, C.J., and WILKINS, ABRAMS, LYNCH and O'CONNOR, JJ.

O'CONNOR, Justice.

These three consolidated cases present the following question: Should corporate taxpayers who elect to file a combined Massachusetts tax return under G.L. c. 63, § 32B, first combine their net incomes, then adjust that sum under G.L. c. 63, § 38(a ), to arrive at the group's taxable net income and, lastly, apportion the group's taxable net income to Massachusetts by using a combined apportionment factor, or should they first separately determine and apportion the taxable net income of each affiliated corporation, and then combine those sums to arrive at the group's income taxable in Massachusetts? In each case, favorably to the taxpayers, the Appellate Tax Board concluded that combination of net income should precede apportionment. The Commissioner appealed, and we granted direct appellate review. We now affirm the decision of the Appellate Tax Board in each case.

General Laws c. 63, § 32, imposes on domestic corporations an excise which is the sum of two separate measures; a property measure and an income measure. Section 39 imposes a similar excise on foreign corporations. In calculating the income measure of the excise assessed under §§ 32 and 39, a corporation first reduces its "Net income," as defined in § 30(5)(b ), to "taxable net income" pursuant to § 38(a ). It then apportions the proper share of its taxable net income to Massachusetts pursuant to § 38(b )-(j ). See §§ 38A and 42A.

Under G.L. c. 63, § 32B, inserted by St.1973, c. 927, § 2, if corporations participate in the filing of a consolidated Federal income tax return, "the net income measure of their excises imposed under section thirty-two or section thirty-nine may, at their option, be assessed upon their combined net income, in which case the excise shall be assessed to all said corporations and collected from any one or more of them." The taxpayers assert, and the Board agrees, that corporations which elect to file a combined Massachusetts return under § 32B should combine each individual corporation's net income, reduce it to taxable net income, and then apportion that combined amount to Massachusetts pursuant to § 38. The Commissioner asserts that each corporation should determine its own taxable net income and then apportion it to Massachusetts. According to the Commissioner, the resulting apportioned taxable net incomes of the several corporations are then combined.

The facts in these cases are not in dispute. The United States Shoe Corporation (U.S. Shoe) is an Ohio corporation that was qualified to do business in Massachusetts in the fiscal year ending July 31, 1976. U.S. Specialty Retailing, Inc. (Specialty Retailing), also an Ohio corporation, was a wholly-owned subsidiary of U.S. Shoe during that fiscal year and was qualified to do business in Massachusetts. U.S. Shoe and Specialty Retailing participated in the filing of a consolidated Federal tax return for that fiscal year.

After filing separate Massachusetts corporate excise returns, and paying the amount due according to those returns, $145,602, U.S. Shoe and Specialty Retailing elected to amend their separately filed returns by filing a combined Massachusetts corporate excise return. The taxpayers calculated the net income measure of the corporate excise by combining their net incomes, reducing combined net income to combined taxable net income, and then apportioning that amount to Massachusetts. This method of calculating the tax showed a total corporate excise of $126,474. The two corporations sought an abatement of $19,128 plus interest, which represented the difference between the total excises paid and the amount shown as due on their combined return. The Commissioner denied the application on the ground that "combined net income" taxable in Massachusetts is determined by first separately determining and apportioning the Massachusetts taxable net income of each affiliated corporation and then combining the separately apportioned net incomes of all the affiliated corporations. On appeal, the Board awarded an abatement in the amount of $19,128.

CDE, Inc., is a Connecticut corporation that did business in Massachusetts in 1975. CDE and thirteen Massachusetts subsidiaries participated in the filing of a consolidated Federal return for that calendar year. They elected to file a combined Massachusetts corporate excise return for 1975, calculating the net income measure of the excise by combining the net income of CDE and its subsidiaries, reducing net income to taxable net income, and apportioning that sum to Massachusetts. The combined return showed a total corporate excise owing to Massachusetts of $64,764, which was paid. The Commissioner sent CDE a notice of assessment of additional excise, based in part on the recomputation of "combined net income" utilizing the Commissioner's method of apportionment preceding combination. An application for abatement was denied in so far as it was based on the taxpayers' method of computing "combined net income." On appeal, the Board awarded the taxpayers an abatement in the amount of $86,199.29.

General Electric Company (G.E.) is a New York corporation which was qualified to do business as a foreign corporation in Massachusetts during the fiscal year ending December 31, 1973. During that fiscal year, G.E. owned all the stock of seven subsidiary corporations qualified to do business in Massachusetts as foreign corporations. G.E. and these subsidiaries participated in the filing of a consolidated Federal income tax return, and then filed a combined Massachusetts corporate excise tax return for that fiscal year. The taxpayers combined their taxable net incomes prior to apportionment. Under this method, the aggregate excise liability of G.E. and its subsidiaries amounted to $3,936,874.14, which was paid in full. Thereafter, G.E. received a notice of assessment of additional excise in the amount of $18,540.33 plus interest. The basis of the additional assessment was the same as in the other cases. G.E. filed a timely application for abatement, which the Commissioner denied. On appeal, the Board awarded G.E. an abatement in the amount of $18,540.33.

General Laws c. 63, § 32B, provides that the "net income measure of [the participating corporations'] excises ... may ... be assessed upon their combined net income...." The term "combined net income" suggests that the Legislature intended that corporations electing to utilize a consolidated return should combine their net incomes, not their apportioned net incomes. The language itself of § 32B, therefore, although not conclusive, supports the Board's view since it is only under the Board's view that the net income of the affiliated corporations will be combined. Under the Commissioner's view, it is the apportioned, taxable net income of each corporation that is combined.

More persuasive than the statutory language itself are the principles underlying combined returns, as well as the legislative history of § 32B. State Tax Comm'n v. La Touraine Coffee Co., 361 Mass. 773, 282 N.E.2d 643 (1972), makes it clear that the basic principle underlying a consolidated net income return is the treatment of the corporations involved as a single entity. In that case, we were faced with the question whether an intercompany dividend paid by one corporation to another corporation, both of which corporations were included in a Massachusetts consolidated income tax return, had to be counted in the "combined net income" of the group. In holding that it did not, we said, " 'The purpose of consolidated financial statements is to reflect the financial condition of a parent corporation and its subsidiaries as if they were a single organization ' " (emphasis added). Id. at 779, 282 N.E.2d 643, quoting Hills, The Law of Accounting and Financial Statements § 1.9, at 36-39 (1957).

Similarly, in Walter Kidde & Co. v. Commissioner of Revenue, 389 Mass. 577, 451 N.E.2d 420 (1983), we once again treated corporations electing to file a combined return under § 32B as a single entity over the objections of the Commissioner. In that case, we allowed an investment credit claimed by one of the corporations to offset the total excise due under the combined return, even though the credit due that corporation exceeded what would have been its own excise liability had it filed a separate return. We rejected the Commissioner's attempt to narrow the scope of the single entity theory as applied to that case. Id. at 580, 451 N.E.2d 420.

A single corporation would, of course, first combine the net income of its divisions before apportionment to Massachusetts. There is no question, therefore, that if we are to treat corporations electing to file a § 32B combined return as a single entity, in accordance with the basic concept underlying combined returns, it is the Board's view which must prevail in this case rather than the Commissioner's.

Furthermore, the legislative history of § 32B demonstrates that the Legislature intended that combination should precede apportionment under § 32B and its predecessors. Under St.1919, c. 355, §§ 2 & 15, the forerunners of § 32B, either two or more domestic corporations, or two or more foreign corporations, ² that participated in filing a consolidated Federal return, were allowed to have the net income measure of the Massachusetts corporate excise assessed upon their combined net incomes. However, those sections also required such corporations to file separate...