Tenneco Inc. v. Commissioner of Revenue

• Decision Date: 24 December 1987
• Citation: 516 N.E.2d 1164,401 Mass. 380
• Parties: TENNECO INC. v. COMMISSIONER OF REVENUE.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 1164

516 N.E.2d 1164

401 Mass. 380

TENNECO INC. v. COMMISSIONER OF REVENUE.

Supreme Judicial Court of Massachusetts,

Suffolk.

Argued Nov. 6, 1987.

Decided Dec. 24, 1987.

Philip Burling (Joseph Halpern with him) for taxpayer.

Lisa A. Levy, Asst. Atty. Gen., for Com'r of Revenue.

Before HENNESSEY, C.J., and LIACOS, NOLAN, LYNCH and O'CONNOR, JJ.

NOLAN, Justice.

Tenneco Inc. appeals from a decision of the Appellate Tax Board (board) affirming the refusal of the Commissioner of Revenue (Commissioner) to abate additional taxes assessed against Tenneco pursuant to G.L. c. 63, § 52A, for the years 1977, 1978, and 1979. Tenneco claims that various conclusions of the board were erroneous as a matter of law, and that its decision violates Tenneco's State and Federal constitutional rights to due process and equal protection. We affirm the board's decision.

Tenneco Inc. is a Delaware corporation which has been certified to do business in Massachusetts since 1954. Since that time, Tenneco has filed Massachusetts public service corporation franchise tax returns under G.L. c. 63, § 52A. Following a review of Tenneco's tax returns, the Commissioner assessed additional franchise taxes against the corporation for the years 1977-1979 totalling $1,998,624. The additional taxes stemmed from the Commissioner's determination that Tenneco should have included as taxable income dividends totalling more than one billion dollars received from its nonutility subsidiary companies over the three years in issue.

Tenneco filed written applications to the Commissioner for abatement of the additional tax assessments. A hearing on the applications was held before the Commissioner's appeal and review bureau. Tenneco argued at the hearing that, in view of its diverse business operations, only its pipeline division should be taxed under the utility franchise provisions of G.L. c. 63, § 52A, and its four other nonpipeline divisions should be taxed as a business corporation under G.L. c. 63, §§ 30-42B. Tenneco urged the Commissioner to reclassify it as either a business corporation or a "hybrid" corporation for the purposes of determining its tax liability.

The Commissioner denied Tenneco's applications and refused to abate the taxes assessing, in addition, interest, late payment penalties, and demand charges. The corporation remitted a total of $2,793,881.69, representing full payment of the taxes plus penalties and charges, and then filed timely petitions appealing the Commissioner's decision to the board. The board found that Tenneco was a utility corporation notwithstanding the diverse activities of its other divisions and held that Tenneco was subject to tax on its net income as a utility and not as a business corporation. Tenneco filed a timely notice of appeal.

The company, now known as Tenneco Inc., was incorporated in 1943 as Tennessee Gas and Transmission Company (Tennessee Gas) for the purpose of constructing an interstate natural gas pipeline. In the decade that followed, the company expanded considerably by acquiring two additional pipeline companies and by enlarging its original system. By 1954, Tennessee Gas obtained a certificate of foreign corporation registration to do business in the Commonwealth. Since that time, the corporation has grown into a diversified, international conglomerate with interests and products in a variety of industries including: integrated oil and gas operations; natural gas pipelines; construction and farm equipment; chemicals; automotive parts; shipbuilding; agriculture and land management; packaging; and insurance.

Throughout the period that Tenneco conducted business in the Commonwealth, including the years 1977-1979, the company filed its tax returns as a utility corporation and not as a business corporation, using a Massachusetts public service corporation franchise tax return under G.L. c. 63, § 52A, rather than a foreign business or manufacturing corporation excise tax return. See G.L. c. 63, §§ 30-39. During the years in question, the statutory scheme for the taxation of business corporations differed in four pertinent respects from the scheme for taxing utility corporations: (1) In calculating net income, a business corporation was allowed to deduct dividends received from any corporation in which it owned at least 15% of the voting stock, whereas utility corporations could only deduct dividends received from certain other utility corporations; (2) business corporations were taxed at a rate of 8.33%; utilities were taxed at the lesser rate of 6.5%; (3) business corporations allocated their net income by apportionment based on three factors: income, property, and employment; a utility's net income was based solely on property holdings; (4) a business corporation had the right to apply for an alternative apportionment of its income allocable to Massachusetts; a utility did not.

From the date of the filing of its first return in the Commonwealth, through and including 1979, Tenneco computed its taxes as a utility corporation doing business in Massachusetts. Accordingly, the company allocated its net income pursuant to the single factor utility formula, taking advantage of the lower 6.5% franchise tax rate. However, acting as if it were a business corporation, Tenneco claimed deductions for dividends received from all its subsidiaries including nonutility divisions. After reviewing these returns, the Commissioner assessed a deficiency in the corporation's tax liability based on the disallowance of Tenneco's deductions for nonutility dividends in the following amounts: $606,912 for 1977, $658,494 for 1978, and $730,218 for 1979. The ruling was affirmed by the board.

A decision of the board will only be disturbed if it was not supported by "substantial evidence," or was tainted by an error of law. See Towle v. Commissioner of Rev., 397 Mass. 599, 601-602, 492 N.E.2d 739 (1986); New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 466, 420 N.E.2d 298 (1981). See also G.L. c. 58A, § 13 (1986 ed.). General Laws c. 30A, § 1(6) (1986 ed.), defines substantial evidence as "such evidence as a reasonable mind might accept as adequate to support a conclusion." See New Boston Garden Corp., supra, quoting Boston Edison Co. v. Selectmen of Concord, 355 Mass. 79, 92, 242 N.E.2d 868 (1968). In determining whether the board's decision was supported by substantial evidence, we consider the entire record. However, a finding of the board will not be set aside unless "the evidence points to no felt or appreciable probability of the conclusion or points to an overwhelming probability of the contrary." New Boston Garden Corp., supra, quoting L.L. Jaffe, Judicial Control of Administrative Action 598 (1965).

Tenneco argues that its corporate activities have become so diverse that only a portion of those activities may properly be classified as utility related. Therefore, the company asserts, it should be taxed as a business corporation, or, at a minimum, its nonutility operations should be taxed under c. 63. Relying on Assessors of Holyoke v. State Tax Comm'n, 351 Mass. 394, 221 N.E.2d 585 (1966), Tenneco claims that the board erred in failing to exercise its authority to reclassify the corporation for tax purposes. The company insists that had the board considered the evidence, it could not have properly concluded that Tenneco should be taxed as a utility under § 52A. The board, however, properly distinguished Tenneco's claim from the facts of Assessors of Holyoke by pointing out that the Holyoke Water Power Company had been classified as a manufacturing corporation by the Commissioner under G.L. c. 58, § 2, and that this court followed the plain language of c. 59, § 5, Clause Sixteenth, in ruling its machinery exempt from local taxation. Tenneco has not been so classified.

Tenneco attempts to include itself in the same class as the water power company on the basis that each corporation is involved in "cross strains of business and utility" activities. As evident from the board's ruling noted above, however, the status of the Holyoke Water Power Company was, by legislative decree, readily distinguishable from Tenneco's position.

The board rested its determination that Tenneco is properly classified as a utility on the plain language expressed in the applicable sections of c. 63a. ¹ These statutory provisions are neither vague nor ambiguous and provide no basis to conclude that a foreign utility doing business in the Commonwealth through both utility and nonutility divisions must be taxed as a business or "hybrid" business corporation. Rather, consistent with the definition that the term, utility corporation, includes any "foreign pipe line corporation engaged in the transportation or sale of natural gas," the correct conclusion is that Tenneco was a utility corporation within the meaning of § 52A, irrespective of its business activities conducted outside the Commonwealth. This determination is supported by the undisputed facts that for the tax years at issue, Tenneco conducted substantial natural gas transmission in Massachusetts through its pipeline division and filed public service corporation franchise tax returns, applied the lower utility tax rate, and utilized the single-factor apportionment formula provided under § 52A.

Tenneco also raises State and Federal constitutional claims that the inclusion in its net income of dividends paid to it by its nonpipeline subsidiaries operating outside the Commonwealth violated its equal protection and due process rights. Specifically, Tenneco claims that no reasonable connection exists between the value of its interstate business interests and the company's activities within the Commonwealth. The requisite nexus between the interstate activities of the corporate taxpayer and the taxing State is established once "the corporation avails itself of the 'substantial privilege of carrying on business' within the State." Mobil Oil Corp. v....