Northeast Petroleum Corp. v. Commissioner of Revenue

• Decision Date: 13 June 1985
• Citation: 479 N.E.2d 163,395 Mass. 207
• Parties: NORTHEAST PETROLEUM CORPORATION v. COMMISSIONER OF REVENUE.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 163

479 N.E.2d 163

395 Mass. 207

NORTHEAST PETROLEUM CORPORATION v. COMMISSIONER OF REVENUE.

Supreme Judicial Court of Massachusetts,

Suffolk.

Argued March 6, 1985.

Decided June 13, 1985.

Robert M. Buchanan, Boston (Jonathan B. Dubitzky and Shelagh A. Ellman, Boston, with him), for plaintiff.

Jamie W. Katz, Asst. Atty. Gen., for Com'r of Revenue.

Before HENNESSEY, C.J., and WILKINS, ABRAMS, NOLAN and LYNCH, JJ.

LYNCH, Justice.

Northeast Petroleum Corporation (taxpayer) appeals from a decision by the Appellate Tax Board (board) denying an abatement of a tax on the distribution received by the taxpayer upon the liquidation of its fifty per cent owned subsidiary, Energy Corporation of Louisiana (Energy). The board upheld a refusal by the Commissioner of Revenue (Commissioner) to abate the taxpayer's corporate excise for the fiscal year ending June 30, 1977. ¹ We reverse the decision of the board and remand for further proceedings in light of our opinion in Commissioner of Revenue v. Shafner, 392 Mass. 256, 465 N.E.2d 788 (1984).

We summarize the parties' stipulation of agreed facts. The taxpayer is incorporated under the laws of the Commonwealth and is engaged in selling, distributing, trading, and transporting petroleum products, principally in New England. Its sole shareholder is Northeast Petroleum Industries, Inc., a Delaware corporation. In 1973, the taxpayer entered into a joint venture with Ingram Corporation (Ingram) to build a petroleum refinery in Louisiana. In May, 1973, the taxpayer and Ingram incorporated Energy under Delaware law. Energy issued all its stock to Ingram and the taxpayer, each receiving fifty per cent of the shares. In April, 1974, Energy organized a wholly-owned subsidiary, ECOL, Ltd. (ECOL), a Louisiana corporation which was to purchase the refinery site and then construct the refinery. ² Thereafter, ECOL purchased the stock of the corporation owning the site for the proposed refinery. ³ ECOL liquidated the corporation holding the site and commenced construction.

The taxpayer's investment in Energy never exceeded $10 million. The project eventually cost approximately $285 million. Substantially all the costs of constructing the refinery were financed by bank loans and advance payments for refinery output by a utilities company. As a condition to the $250 million credit agreement that financed substantially all the refinery construction costs, the taxpayer and Ingram jointly agreed to execute contracts to purchase 15% (by volume) of the refinery's output, on a cost-plus basis. ⁴ In fulfilment of this condition, the taxpayer and Ingram each separately contracted to purchase 7 1/2 of the refinery output.

In 1976, prior to completion of construction of the refinery, a change occurred in Federal law which adversely affected the economic feasibility of the project. Therefore, Energy accepted an offer from a subsidiary of Marathon Oil Company, a corporation unrelated to the taxpayer and Ingram, to pourchase its only asset, the stock of ECOL. On September 20, 1976, Energy sold all the ECOL stock for $140 million in cash. Energy was then liquidated, passing on a capital gain of $44,658,048 each to the taxpayer and Ingram. The refinery performed no commercial operations and sold no product during the period that it was owned by Energy.

Energy's gain from the sale of its stock in ECOL was taxed by the State of Louisiana. That tax was $3,721,444. The taxpayer paid one-half of this tax, or $1,860,722 on behalf of Energy. ⁵ Energy was completely liquidated on June 14, 1977, when it distributed to the taxpayer and Ingram the sale proceeds remaining after payment of expenses. For Federal income tax purposes, the taxpayer had a capital gain of $44,658,048 on its 50% share of Energy's net proceeds. After payment of Federal taxes, the taxpayer had a post-tax gain of $31,251,546. Within eight months after the liquidation of Energy, the taxpayer's parent corporation, Northeast Petroleum Industries, Inc., distributed approximately $25.3 million, or about 81% of the net liquidation proceeds, in complete redemption of the stock of certain of its shareholders.

When the taxpayer filed its Form 355A Massachusetts corporate excise return for the year ending June 30, 1977, it also filed a statement in accordance with G.L. c. 63, § 42, requesting approval of the use of an alternative method of apportioning its income to Massachusetts. The tax return reported no Massachusetts income and reflected a $518,478 loss, of which 58.6% was apportioned to Massachusetts. After an audit, the Commissioner issued to the taxpayer a notice of assessment of an additional $2,521,470 corporate excise for the year ending June 30, 1977, together with interest of $789,776.55. ⁶ The assessment, issued on March 30, 1981, was in accordance with the apportionment formula provided in G.L. c. 63, § 38. The assessment allocated 58.6% of the taxpayer's income to Massachusetts, but excluded from that computation the property, payroll, and sales of Energy and ECOL. On May 5, 1981, the taxpayer filed an application for a $2,486,113 abatement of the corporate excise assessed, together with all interest thereon. On June 10, 1981, the taxpayer was notified of the Commissioner's refusal to abate the tax. On June 17, 1981, the taxpayer paid the entire amount of the assessed tax.

On August 7, 1981, the taxpayer appealed the Commissioner's decision to the board, which issued a decision in favor of the Commissioner on May 16, 1983. Pursuant to the taxpayer's request, the board issued findings of fact and report on June 25, 1984. The board found that under G.L. c. 63, § 38, the taxpayer had received "income derived from business carried on within the commonwealth" when it redeemed the Energy stock and received the $44,658,048 capital gain. ⁷ The board concluded that the gain was taxable because it was derived from an investment in a Delaware corporation and constituted the carrying on of business in Massachusetts, not in Louisiana. The board found that the taxpayer, which had never conducted business operations in Louisiana, made a decision to invest in an out-of-State venture from which it hoped to reap capital appreciation without a large commitment of time and energy toward the project's management. The board concluded that the Commissioner was not seeking to tax the income of an ongoing business engaged in interstate commerce. It found rather that the tax was imposed on the taxpayer for the privilege of transacting business as a Massachusetts corporation.

The board concluded, furthermore, that the taxpayer's payment of one-half of Energy's tax liability to Louisiana was not dispositive of the issue whether the gain was derived from the taxpayer's business in Louisiana or Massachusetts. The board stated that under Louisiana law, La.Rev.Stat.Ann. § 47:135 (West Supp.1985), Energy was liable for a tax on the transaction, not the taxpayer. The board also concluded that, since the project constituted the carrying on of business in Massachusetts, the taxpayer's gain was not grossly disproportionate to its Massachusetts business. The board found, therefore, that the Commissioner correctly allocated a portion of the taxpayer's capital gain in the calculation of its corporate excise. The board concluded that the taxpayer had not carried its burden of establishing that the calculation of the excise under G.L. c. 63, § 38, was not reasonably adapted to approximate the taxpayer's income derived from its Massachusetts business.

The taxpayer argues on several grounds that the board erred in upholding the Commissioner's refusal to abate the corporate excise on the distribution received by the taxpayer upon the liquidation of Energy. The taxpayer contends, first, that the distribution was a dividend received in a liquidation under I.R.C. § 337 and is exempt from corporate taxation under G.L. c. 63, § 38(a )(1). It finds support for this argument in our decisions in Dow Chemical Co. v. Commissioner of Revenue, 378 Mass. 254, 267-272, 391 N.E.2d 253 (1979) (deemed distribution from foreign subsidiary is deductible from taxable income as dividend under G.L. c. 63, § 38[a ], where it had already been taxed to the subsidiary), and Commissioner of Revenue v. Shafner, 392 Mass. 256, 465 N.E.2d 788 (1984) (distribution which shareholders received from a liquidation under I.R.C. § 337 of a corporate trust is a dividend exempt from tax under G.L. c. 62, § 8 [c ] ). We decided Shafner, however, after the board had issued its decision in this case and just five days prior to the issuance of its findings of fact and report. We hold that it is appropriate to remand this case to the board for further consideration in light of Shafner. We conclude, therefore, that it is unnecessary to consider the other arguments raised by the taxpayer on appeal.

The Commissioner contends that the taxpayer may not claim that the distribution is a dividend exempt from tax under G.L. c. 63, § 38(a )(1), because the taxpayer has waived this argument by failing to raise it before the board. It is well established that failure to raise a statutory or constitutional question before the board generally bars a party from raising it on appeal. See G.L. c. 58A, § 13; Minchin v. Commissioner of Revenue, 393 Mass. 1004, 1004-1005, 471 N.E.2d 53 (1984); Johnson v. Department of Revenue, 387 Mass. 59, 62-63, 438 N.E.2d 1059 (1982); Commissioner of Revenue v. McGraw-Hill, Inc., 383 Mass. 397, 404-405, 420 N.E.2d 293 (1981); New Bedford Gas and Edison Light Co. v....