W. R. Grace & Co. v. Commissioner of Revenue

• Decision Date: 31 July 1979
• Parties: W. R. GRACE & CO. v. COMMISSIONER OF REVENUE.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 330

393 N.E.2d 330

378 Mass. 577

W. R. GRACE & CO. v. COMMISSIONER OF REVENUE.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued April 4, 1979.

Decided July 31, 1979.

Chester M. Howe and Paul H. Frankel, New York (Maxwell D. Solet, Watertown, with them), for plaintiff.

Maureen Dewan, Asst. Atty. Gen. (Mitchell J. Sikora, Jr., Asst. Atty. Gen., with her), for defendant.

Before HENNESSEY, C. J. and QUIRICO, KAPLAN, LIACOS and ABRAMS, JJ.

LIACOS, Justice.

W. R. Grace & Co. (Grace, or the company), a Connecticut corporation doing business in Massachusetts, sold its stock interests in the Miller Brewing Company and several other companies in 1969, realizing a significant net gain. ¹ This appeal from a decision of the Appellate Tax Board (board) presents the question whether the Commissioner of Corporations and Taxation of the State Tax Commission (Commissioner) ² properly included that gain as income subject to apportionment under the Massachusetts corporation excise, G. L. c. 63, § 38.

General Laws c. 63, § 39, requires that every foreign corporation doing business in the Commonwealth pay an annual excise which is the sum of a percentage of the value of its taxable tangible property or its net worth, plus 8.33% Of its taxable net income. Taxable net income, for corporations doing business both within and without Massachusetts, is denoted in G. L. c. 63, § 38, as the amount "derived from business carried on within the commonwealth." This figure is ascertained by applying to the corporation's net income, determined according to the Federal Internal Revenue Code (with certain Massachusetts statutory adjustments), a three-factor formula based on a ratio of the local corporate property, payroll, and sales to such factors everywhere. ³ Finally, G. L. c. 63, § 42, as amended through St. 1969, c. 599, § 1, provides in pertinent part that, "(i)f the allocation and apportionment provisions of this chapter are not reasonably adapted to approximate the net income derived from business carried on within this commonwealth, a corporation may apply to the commissioner to have its income derived from business carried on within this commonwealth determined by a method other than that set forth in section thirty-eight."

Grace is a corporation which operates in several foreign countries and is qualified to do business in all States and in the District of Columbia. Its multistate business activities, which are conducted partly within and partly without Massachusetts, relate primarily to chemicals and consumer products. In 1969, Grace maintained fourteen business facilities in ten Massachusetts municipalities, all of which operations related to its chemical business. During 1969, Grace's involvement in the Commonwealth included a payroll of $13,907,897 for 1407 employees, real and personal property valued at $12,477,171, and sales of $16,044,571. The payroll represented 6.76%, the property 2.72%, and the sales 1.78%, respectively, of Grace's total payrolls, property, and sales.

In September, 1966, Grace acquired a 52.754% Interest in the Miller Brewing Company. As noted above, it sold its share in 1969 for a substantial gain, more than offsetting losses incurred as a result of its divestment of several other corporate stock holdings. Having been granted an extension of time to file its 1969 corporation excise return, Grace filed in November, 1970, a return for 1969 which showed an aggregated Massachusetts income of $897,386, including an apportionate share of the Miller gain. Simultaneously, it submitted an application to the Commissioner, pursuant to G. L. c. 63, § 42, to make an alternative allocation of income to the Commonwealth which excluded the Miller gain. ⁴ This alternative allocation reported a 1969 "total excise due" of $58,684, which Grace satisfied. The Department of Corporations and Taxation rejected the application, and in June, 1971, assessed Grace an additional $75,858.68 in corporate excise for 1969, attributable to the inclusion of the Miller gain.

Grace filed an application for abatement of the additional tax with the State Tax Commission. Pursuant to G. L. c. 58A, § 6, Grace initially consented to the Commissioner's failure to act on the application within six months of the filing date, but in December, 1975, it withdrew its consent, ⁵ effectuating the constructive denial of the application. In January, 1976, Grace appealed the denial to the board, and in December, 1978, the board affirmed that denial. Grace appealed to this court under G. L. c. 58A, § 13. The record before us includes a stipulation of facts, documentary exhibits, certain testimony, and the extensive findings of fact, report, and opinion of the board. We affirm.

Grace challenges the inclusion of the Miller gain in the apportionment formula as impermissible under the language of G. L c. 63, §§ 38, 42, and under the United States and Massachusetts Constitutions. We address these contentions serially.

1. Is the Miller gain includible as an element of net income "derived from business carried on within the commonwealth," within the meaning of G. L. c. 63, § 38? Grace argues that the Miller gain must be excluded because (a) it is not income "derived from Business " and (b) even if it is income "derived from Business " within the purview of the statute, it is not income "derived from Business carried on within the commonwealth " (emphasis added). The board rejected both components of Grace's argument. The Commissioner now argues that our review of the board's determinations with respect to these issues is at best "limited to the legal question whether they are supported by substantial evidence." While this may be true as to factual determinations, we do not view the board's ultimate conclusions as to both parts (a) and (b) of Grace's argument as merely findings of fact, see G. L. c. 58A, § 13; New Bedford Gas & Edison Light Co. v. Assessors of Dartmouth, 368 Mass. 745, 749, 335 N.E.2d 897 (1975), but as determinations combining both findings of fact and conclusions of law. We therefore consider the board's implicit conclusions of law within the full scope of review appropriate thereto. Cf. American Smelting & Ref. Co. v. Idaho State Tax Comm'n, 99 Idaho 924, 933, 592 P.2d 39, 48 (1979) (hereafter ASARCO ).

(a) Income "derived from business." Grace contends that the Miller holdings must be characterized as a "passive investment" and, consequently, that the gain realized therefrom constituted "non-business" income not subject to apportionment under § 38. In support of this position, it claims that the Miller holdings were described to the Grace board of directors at the time of acquisition, and to the New York Stock Exchange in the listing application, as an "investment." Grace further argues that the relationship between Grace and Miller was "arm's length," and that, according to testimony presented to the board, ownership by Grace of the Miller stock was irrelevant to the increase in Miller stock value. In conclusion, Grace maintains that although it held investment assets of substantial value, including the Miller stock, it was not in the "business" of buying and selling securities, and the Miller gain, therefore, cannot be included as income "derived from business."

We are not persuaded. Contrary to Grace's contentions, the board characterized the purchase of a majority stock interest in Miller as "the acquisition of an operating subsidiary." We agree with that description. While Grace was technically not in the business of buying and selling securities, the record is replete with evidence that its business included the purchase and sale of operating subsidiaries. ⁶ The Miller acquisition was no exception. In its listing application to the New York Stock Exchange, Grace stated: "The Company wishes to acquire the Miller capital stock in order to expand the Company's operations." These intentions were echoed by Grace's counsel ⁷ and by its treasurer. Full ownership active management, and national expansion of Miller were anticipated. Owing to the minority shareholder's disinclination to sell his interest, however, none of these expectations were realized.

Grace's inability to acquire full control and its failure to exercise active management of the fuller holding do not strip that holding of its "business" character. The focus of the inquiry should be on the purpose and use of the stock by Grace prior to its disposition. See ASARCO, supra at 936, 592 P.2d at 52. Cf. Johns-Manville Prods. Corp. v. Commissioner of Revenue Administration, 115 N.H. 428, 343 A.2d 221 (1975), appeal dismissed, 423 U.S. 1069, 96 S.Ct. 851, 47 L.Ed.2d 79 (1976); Corn Prods. Ref. Co. v. Commissioner, 350 U.S. 46, 50-52, 76 S.Ct. 20, 100 L.Ed. 29 (1955). Grace acquired Miller in order to operate it. During the two and one-half years of majority ownership, Grace regarded Miller as a member of its Consumer Products Group, which was engaged in the operation and development of consumer business in the United States, Europe, and the Far East. ⁸ In its 1969 Annual Report's "Financial Review," Grace cited Miller's $70,000,000 contribution to its consolidated sales. These factors point to the conclusion that Grace acquired and maintained its ownership interest in Miller as an integral component in its total operation, and that the income from the sale of that interest was "derived from business" within the meaning of G. L. c. 63, § 38. See ASARCO, supra; Montgomery Ward & Co. v. Commissioner of Taxation, 276 Minn. 479, 483-484, 151 N.W.2d 294 (1967); Cleveland-Cliffs Iron Co. v. Michigan Corp. & Sec. Comm'n, 351 Mich. 652, 88 N.W.2d 564 (1958).

(b) Income "derived from business carried on within the commonwealth." During 1969, Grace's operations in Massachusetts were exclusively related to its chemical business. Miller Brewing Company, with its principal base of operations in Milwaukee, Wisconsin, had no base of activities in Massachusetts....