Macy's East, Inc. v. Commissioner of Revenue, SJC-09194 (MA 5/27/2004)
| Decision Date | 27 May 2004 |
| Docket Number | SJC-09194 |
| Parties | MACY'S EAST, INC. vs. COMMISSIONER OF REVENUE. |
| Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
Present: Marshall, C.J., Greaney, Ireland, Spina, Cowin, Sosman, & Cordy, JJ.
Taxation, Corporate excise, Deduction from income. Corporation, Merger, Reorganization. Constitutional Law, Taxation, Supremacy of Federal law, Commerce clause. Words, "Gross income," "Net income."
Appeal from a decision of the Appellate Tax Board.
The Supreme Judicial Court on its own initiative transferred the case from the Appeals Court.
Paul H. Frankel, of New York (Maxwell D. Solet with him) for the taxpayer.
Thomas K. Condon (Christopher M. Glionna with him) for Commissioner of Revenue.
We transferred this case to this court on our own motion to decide whether, under Massachusetts law, the taxpayer, Macy's East, Inc. (Macy's East), may carry forward and deduct, for State corporate excise tax purposes, premerger net operating losses (NOLs), generated by four entities it absorbed in various mergers. The Appellate Tax Board (board) concluded that Macy's East may not carry forward and deduct these NOLs, and affirmed the Commissioner of Revenue's (commissioner's) denial of Macy's East's applications for abatement and amended corporate excise tax returns for the taxable period that ended February 1, 1997 (taxable period). We affirm the decision of the board.
The board found the following facts.1 See G. L. c. 58A, § 13 (). During the taxable period, Macy's East was a corporation organized under Ohio law, and had its headquarters in New York. Macy's East is engaged in the business of operating retail department stores. During the taxable period, Macy's East operated eleven retail stores in Massachusetts, which previously had been operated as Jordan Marsh Stores Corporation (Jordan Marsh) retail stores.
Macy's East was the surviving corporation after a series of corporate reorganizations occurring between 1986 and 1994. One party to this series of reorganizations, Federated Department Stores, Inc. (Federated), was formed as a holding company by several department stores, including Abraham & Straus (A&S). On May 3, 1988, Campeau Corporation, which owned Jordan Marsh, acquired Federated. On January 15, 1990, Federated and some of its subsidiaries, including Jordan Marsh, filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code, in the United States Bankruptcy Court for the Southern District of Ohio.
On February 4, 1992, Federated emerged from bankruptcy pursuant to a plan of reorganization. Federated continued to conduct its retail business through the operation of its subsidiaries Jordan Marsh and A&S. Jordan Marsh operated retail department stores in Massachusetts, and A&S operated retail department stores primarily in New York.
On July 15, 1986, R.H. Macy & Company, Inc. (Macy's), then known as Macy Acquiring Corporation, acquired the former R.H. Macy & Company, Inc. (former Macy's), a retail department corporation, in a leveraged buyout. On January 27, 1992, Macy's, and some of its subsidiaries, filed petitions in bankruptcy for reorganization under Chapter 11 of the Bankruptcy Code, in the United States Bankruptcy Court for the Southern District of New York. Macy's continued to conduct its retail business through the operation of several subsidiaries, the principal subsidiaries being Macy's Northeast, Inc. (Macy's Northeast), and Macy's South, Inc. (Macy's South). Both Macy's Northeast and Macy's South were corporations organized under Delaware law.
On September 8, 1994, a Bankruptcy Court judge of the United States Bankruptcy Court for the Southern District of New York approved an agreement of merger between Federated and Macy's, pursuant to which Macy's would emerge as the surviving corporation of the combined company and would change its name to Federated. As part of the reorganization plan, Macy's East was created on December 13, 1994. Macy's East was organized for the purpose of operating the businesses of Macy's Northeast and Macy's South, which merged into Macy's East on their emergence from bankruptcy on December 14, 1994. Macy's East operated under the tax identification number previously used by Macy's Northeast. Unlike Macy's Northeast and Macy's South, the new Macy's East emerged as a corporation organized under Ohio law. Macy's East operated its business in both the northeastern and the southeastern regions of the country, districts which previously had been operated separately by Macy's Northeast and Macy's South, respectively. Prior to this merger, Macy's Northeast and Macy's South had accumulated NOLs during their 1991 through 1995 fiscal years.
On August 26, 1995, Jordan Marsh and A&S were absorbed into Macy's East. The directors and officers of Macy's East became the directors and officers of the merged corporation, and each previously issued and outstanding share of A&S and Jordan Marsh common stock were canceled and retired. After the merger, Macy's East operated the retail stores previously owned by Jordan Marsh and A&S. A&S had not conducted business in Massachusetts. Before the merger, Jordan Marsh and A&S had accumulated NOLs during their 1991 through 1995 fiscal years.
On May 8, 1998, Macy's East filed with the commissioner an application for abatement and an amended combined corporate excise tax return for the taxable period showing an overpayment of tax and requesting a refund of the income portion of the corporate excise equal to $1,349,808. Macy's East attributed the requested refund amount to the use of NOL carryforwards previously incurred by Jordan Marsh during its 1991 through 1995 fiscal years. The commissioner denied the application for abatement on October 27, 1998, on the ground that a regulation, promulgated in 1993, 830 Code Mass. Regs. § 63.30.2 (11) (1993) (), prohibits a surviving corporation of a merger to deduct or carry forward the NOLs of a corporation it absorbs. Macy's East then filed various amended returns for the taxable period seeking to deduct premerger NOLs attributable to A&S, Macy's Northeast, and Macy's South.
After further proceedings that need not be detailed, an evidentiary hearing was held before the board. The board rendered a decision in favor of the commissioner, and subsequent to that decision, issued its written findings and conclusions. The board noted that the Massachusetts corporate excise tax statutory scheme, contrary to the Federal scheme, retains the individual tax attributes of each entity subject to the tax, and concluded that Macy's East failed to meet its burden of proving that it qualified for the statutory deduction for using the premerger NOLs incurred by other corporations. The board further concluded that its interpretation was supported by the commissioner's reasonable regulation interpreting the statute, and rejected several constitutional challenges to the regulation. This appeal followed.
1. "We will not reverse a decision of the board `if it is based on substantial evidence and on a correct application of the law.'" Bill DeLuca Enters., Inc. v. Commissioner of Revenue, 431 Mass. 314, 315 (2000), quoting Koch v. Commissioner of Revenue, 416 Mass. 540, 555 (1993). Macy's East argues that the board incorrectly determined that the Massachusetts corporate excise tax provisions do not allow it to deduct the premerger NOLs of Jordan Marsh, A&S, Macy's Northeast, and Macy's South. The statutory provision at the heart of this dispute is G. L. c. 63, § 30 (5) (a ), as appearing in St. 1992, c. 133, § 403, and is called, for our purposes, the Massachusetts net operating loss provision or Massachusetts NOL provision. Before defining that provision, a brief overview of the State corporate excise tax scheme is in order.
General Laws c. 63, § 32, as amended through St. 1988, c. 202, § 14; § 38; and § 39, as amended through St. 1990, c. 150, § 349, impose an excise tax on domestic and foreign corporations. A portion of that tax is based on a corporation's net income derived from business activities carried on in Massachusetts. § 38. The starting point for calculating a corporation's net income involves first calculating a corporation's "gross income." See § 30 (4), as amended through St. 1992, c. 133, §§ 401, 402.2 General Laws c. 63, § 30 (3), defines "[g]ross income," as that term is "defined under the provisions of the Federal Internal Revenue Code [I.R.C.] as amended and in effect for the taxable year" with some exceptions not relevant here. Following the determination of a corporation's gross income, its "net income" must be calculated. "Net income" is defined in G. L. c. 63 as "gross income less the deductions, but not credits, allowable under the provisions of the [I.R.C.] as amended and in effect for the taxable year." G. L. c. 63, § 30 (4). The definition of "[n]et income" also provides:
"Deductions with respect to the following items, however, shall not be allowed:—
(i) dividends received(;)
(ii) [l]osses sustained in other taxable years, except for the net operating losses as provided in paragraph five of this section(;)
(iii) taxes on or measured by income, franchise taxes measured by net income, franchise taxes for the privilege of doing business and capital stock taxes imposed by any state" (emphasis added).
The relevant portion of the 1992 version of G. L. c. 63, § 30 (5), provides:
"For purposes of this chapter, the Massachusetts net operating loss incurred in a taxable year shall mean the amount by which the deductions allowed under paragraph four, including the dividends-received deduction allowed in section thirty-eight (a) (1) and not including the deductions for net operating losses under this paragraph, exceed gross income for the taxable year as defined in paragraph three of this section."
There is no dispute that, for Federal...
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