Sasol North America, Inc. v. Commissioner of Revenue (September 5, 2007)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


SASOL NORTH AMERICA, INC.     v.     COMMISIONER OF REVENUE


Docket No. C273084		 		  Promulgated:
							  September 5, 2007


	This is an appeal under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39 from the refusal of the appellee Commissioner of Revenue ("appellee" or "Commissioner") to grant an abatement of corporate excise assessed against appellant Sasol North America, Inc. ("Sasol"), formerly known as Condea Vista Co., under G.L. c. 63, § 39 for the taxable years ending June 30, 1995, June 30, 1996, and June 30, 1997.
	Commissioner Gorton heard this appeal. With Commissioner Gorton materially participating in the deliberations of this appeal, Chairman Hammond and Commissioners Scharaffa, Egan, Rose and Mulhern joined in the decision for the appellant.	These findings of fact and report are made on the Appellate Tax Board's own motion under G.L. c. 58A, § 13 and 831 CMR 1.32 and are promulgated simultaneously with its decision.

	William E. Halmkin, Esq., and Richard L. Jones, Esq., for the appellant.

	Christopher M. Glionna, Esq., and Frances M. Donovan, Esq., for the appellee.


FINDINGS OF FACT AND REPORT

	Appellant Sasol challenged the validity of a corporate excise deficiency assessment predicated on the allocation of 100% of its distributive share income from a Massachusetts limited partnership to the Commonwealth for the fiscal years ending June 30, 1995, June 30, 1996, and June 30, 1997 (the "years at issue".) Sasol contended that the income was subject to apportionment pursuant to G.L. c. 63, § 38. On the basis of the parties' Agreed Statement of Facts and the testimony and exhibits presented at trial, the Board made the following findings of fact, relying on and adopting the recommendations of the hearing officer as to issues of witness credibility.
	Sasol, a Delaware corporation with its headquarters situated in the State of Texas, produced commodity and specialty chemicals at manufacturing plants in Louisiana, Maryland, and Massachusetts. In 1992, Sasol, then known as Condea Vista Co., purchased an 11% stake in Ampersand Specialty Materials and Chemicals II Limited Partnership ("ASMC-II LP"), based in Wellesley, Massachusetts, for $5,000,000. On or about March 14, 1996, March 17, 1997, and March 16, 1998, Sasol filed Form 355B, Massachusetts Foreign Business or Manufacturing Corporation Excise Returns, for the years at issue. Sasol included the distributive share income it received from ASMC-II LP in its taxable net income subject to apportionment.
	Pursuant to valid extensions of time to assess taxes, the Commissioner issued a Notice of Intention to Assess ("NIA") dated April 22, 2001, proposing additional assessments of corporate excise for the years at issue. On January 22, 2001, Sasol filed a Form DR-1 requesting a hearing with the Department of Revenue's Office of Dispute Resolution. On March 6, 2002, Sasol filed an Appeal and Review Bureau Pre-Assessment Conference Request, also requesting a hearing with the Office of Appeal and Review. The hearing occurred on July 18, 2002. 
	The Office of Appeals denied Sasol's appeal and issued a Letter of Determination on August 12, 2003. A Notice of Assessment was timely issued on October 8, 2003. The Commissioner assessed $68,800, $270,640, and $5,501 respectively in additional corporate excise for the years at issue.
	On December 2, 2003, Sasol filed an Application For Abatement on Form CA-6 seeking abatement of the additional corporate excise for the years at issue. By Notice of Abatement Determination dated April 6, 2004, the Commissioner denied the Appellant's abatement application. On June 4, 2004, Sasol filed a Petition Under Formal Procedure commencing the instant appeal. On the basis of the foregoing facts, the Board found that it had jurisdiction over this appeal. 
	Sasol maintained its principal place of business at 900 Threadneedle, P.O. Box 19029, Houston, Texas 77079. During the years at issue, Sasol produced commodity and specialty chemicals for sale to a wide variety of customers for incorporation into their finished products. Testifying for Sasol at trial was Robert R. Whitlow, Jr., who was Manager of Finance (effectively Chief Financial Officer) for the company. Mr. Whitlow described Sasol's business operations during the years at issue, when the manufacture of commodity and specialty chemicals occurred in plants in Louisiana, Maryland, and Massachusetts. For example, Sasol took a raw material like ethane and refined it to produce ethylene, a commodity chemical which is in turn used to make vinyl chloride monomer, also a commodity chemical. Vinyl chloride monomer is used to make P.V.C. or polyvinyl chloride, a commonly used plastic. Sasol also used the raw materials kerosene and benzene to manufacture surfactants, ingredients used in making such things as cleaning agents and cosmetics. Sasol's business was vertically integrated in that its operations used raw materials to produce commodity chemicals, which were in turn used to make specialty chemicals "downstream." 
	Mr. Whitlow testified that during the years at issue Sasol was a highly leveraged company with no excess cash flow. The company's Planning Division was an important operational component which oversaw research and development and investigated capital investment opportunities. The Planning Division considered general improvements to manufacturing operations, e.g. to enhance safety or productivity, and potential acquisitions of other chemicals companies. Because profit margins on sales of commodity chemicals were thin, Sasol's objective was to expand its presence in the specialty chemicals field, where profit potential was greater.
	According to Mr. Whitlow, Sasol was dissatisfied with the outcome of acquisitions initiated by the Planning Division and deemed its internal screening process to be inadequate. Sasol was contacted by Ampersand Ventures, a Wellesley-based private equity firm, about the prospect of investing in a fund focused on promising start-ups in the specialty chemicals industry. Sasol's Management Committee, on which Mr. Whitlow served, became interested in the possibility of using an investment in the limited partnership as a means of improving its capacity to investigate strategic investment opportunities. As an investor in ASMC-II LP, Sasol could gain access to information gathered by fund managers to vet prospective investments in the P.V.C. field, to further its goal of greater vertical integration downstream in specialties chemicals manufacturing.
	In a memorandum dated July 12, 1992, Sasol employee Brenda Myers of the Manufacturing Division recommended that Sasol proceed with the purchase of an 11% limited partnership interest in ASMC-II LP for $5,000,000. The memorandum was submitted to Tom Huffman, Vice President of Manufacturing and accompanied a form request for "Authority for Expenditure" which Sasol used for giving approval to capital outlays. Funding for the investment was charged against the budget of the Manufacturing Division, an important operational component of Sasol's business. In the memorandum, Ms. Myers explained the reasons Sasol decided to purchase the ASMC-II LP limited partnership interest:  
Return aside, the major attraction of this investment to Vista is the opportunity to see approximately 300 new business proposals per year. Our past experience is that established companies sell for premium prices. [ASMC-II LP] provides the opportunity to screen a large number of new business opportunities at the ground floor and thus potentially to invest in a new business at a stage where significant return is possible.

Sasol drew on a revolving credit facility with Chase Manhattan Bank to obtain the cash to purchase of the ASMC-II LP limited partnership interest. Its returns on its ASMC-II LP holding went to debt repayment. The company lacked excess cash to invest, and accordingly held no other equities, bonds, C.D.'s or mutual funds. Mr. Whitlow said both the funds used to purchase the limited partnership interest and the income distributed to Sasol constituted part of Sasol's working capital. 
Following Sasol's purchase of its limited partnership holding, Mark Schneider, the head of its Planning Division, met periodically with Charles Yie, who was general partner of Ampersand Ventures, the private equity firm which had created ASMC-II LP. Mr. Yie was a key participant in the investment activities of ASMC-II LP. Their discussions touched on potential acquisitions of start-up specialty chemicals concerns and opportunities for Sasol to make sales of its commodities chemicals to companies in which ASMC-II LP had invested. 
	The specialty products firm Western Pacific was one possible strategic investment opportunity arising out of Sasol's discussions with Ampersand Ventures. For two or three months, Sasol actively explored whether to acquire Western Pacific, performing due diligence to gauge the merits of the prospective investment. Mr. Yie of Ampersand visited Houston to discuss Western Pacific with Sasol officials. Ultimately, Sasol decided not to acquire Western Pacific. 
Sasol also used its link to Ampersand to identify potential sales prospects in the chemicals industry. Sasol considered Western Pacific as a possible customer. Sasol also used its ASMC-II LP holding to strengthen its position as a supplier to another company in which ASMC-II LP had invested, Toma Chemical of Wisconsin.
Testifying also at trial were Dr. Richard Charpie and Mr. Yie of Ampersand Ventures. Ampersand Ventures started ASMC-II LP in 1992 to raise funds for the sole purpose of investing in chemical and specialty product companies. Dr. Charpie indicated that Ampersand Ventures participated in the corporate activities of the companies it invested in. This participation included membership on the Boards of Directors and assisting in various aspects of management.
	Dr. Charpie testified that there were two types of investors in ASMC-II LP: financial investors and strategic investors. Financial investors were financial institutions including pension funds and endowments. Strategic investors were operating companies whose reasons for buying into ASMC-II LP went beyond mere pursuit of the financial returns. Acquiring a stake in ASMC-II LP gave strategic investors a window into new developments in the specialty chemicals industry and leads on potential acquisition opportunities. Dr. Charpie described Sasol as a strategic investor.
	Dr. Charpie testified that Ampersand Ventures had meetings with strategic investors to keep them abreast of what was happening with the companies in which ASMC-II LP had invested, and potential opportunities for synergies which might arise. He indicated that Mr. Yie was the "relationship manager" with Sasol and would have attended most of the meetings, along with a number of other Ampersand Ventures' partners over time. Dr. Charpie indicated that Ampersand Ventures was very aware of Sasol's strategic interest in learning about smaller start-up companies, new technologies, market opportunities, and potential acquisitions Sasol might pursue. Sasol's access to this information depended on its having a limited partnership interest in ASMC-II LP. Sasol's goal of expanding its presence in the specialty chemicals area, especially P.V.C. materials production, dovetailed with ASMC-II LP's venture capital activities. 
	Sasol's access as a strategic investor to information developed by Ampersand Ventures was not formalized in the ASMC-II LP, Second Amended and Restated Limited Partnership Agreement. As a limited partner, it had no right to take part in the conduct of ASMC-II LP's business or the affairs of the partnership. The "special treatment" Ampersand Ventures accorded to strategic investors was a matter of practice, not contractual obligation. ASMC-II LP received hundreds of investment proposals each year, but all limited partners did not see all of the proposals. 
Given its rigorous screening process, Ampersand Ventures acted on approximately one proposal out of a hundred for investment by ASMC-II LP. The limited partnership would typically take an equity position and hold it for on average six years. At the end of that period, the company in which ASMC-II LP had invested would either be sold or taken public, leaving ASMC-II LP with liquid securities holdings.
Mr. Yie, a general partner in Ampersand Ventures, also testified at trial. Mr. Yie's job entailed seeking out new investment opportunities and serving on the Boards of companies selected for investment. He helped investees accomplish their business objectives to the point that the equity holding would generate liquidity through either a sale or an Initial Public Offering. 
Mr. Yie developed expertise in the specialty chemicals field as a result of a 1994 investment in Kroy Industries of Nebraska, which made P.V.C. irrigation pipes. Mr. Yie indicated that industry pricing patterns were different for commodity and specialty chemicals. Commodity chemicals are high volume, lower-priced products, while specialty chemicals are produced in smaller quantities with a higher profit margin. Mr. Yie indicated that Ampersand Ventures would screen three hundred to five hundred business proposals per year and select four to six for investment by ASMC-II LP. Mr. Yie had the most contact with Sasol because of his involvement with Kroy Industries, to which Sasol was a supplier of P.V.C. resin. Mr. Yie and his contacts at Sasol discussed industry trends relative to the supply of P.V.C resin. The flow of information was of benefit to Ampersand Ventures because it gave them insight into "supply and demand dynamics" affecting the market for P.V.C resin. Among the Sasol officials Mr. Yie met with were Mark Schneider (head of the planning division), Paul Carrico, and Mr. Whitlow. Meetings took place in Houston, at Kroy in Nebraska, and in Wellesley. 
Ampersand Ventures on one occasion approached Sasol about a P.V.C. business being considered for investment, and inquired about the possibility of Sasol being a supplier for that business. Moreover, Ampersand Ventures had discussions with Sasol about the possibility of their teaming up to buy a business, Pacific West Pipe Company. Mr. Yie corroborated Dr. Charpie's characterization of Sasol as a strategic investor. He indicated that Ampersand Ventures met with all its strategic investors with some frequency to discuss business opportunities. 
ASMC-II LP was managed by its general partner ASMC-II Management Company Limited Partnership (the general partner of which, in turn, was ASMC-II MCLP LLP.) The general partners of Ampersand Ventures ran the business operations of ASMC-II LP, which had no employees or tangible property of its own. The general partner of ASMC-II LP exercised sole voting and investment power with respect to all of the shares held of record by ASMC-II LP.
The hearing officer found the testimony of these three fact witnesses to be credible, consistent, and probative. The Board adopted this determination based on the information supplied by the hearing officer in support of his observations. 
On the basis of the foregoing, the Board found that Sasol had a corporate strategy of pursuing possible acquisitions in the specialty chemicals industry where the profit potential was greater. This strategy furthered a goal of greater vertical integration in the specialty chemicals area downstream of its commodity chemicals production. Given what Sasol considered the poor track record of its own Planning Division in identifying targets for acquisition, Sasol made a strategic decision to partner with Ampersand Ventures by investing in ASMC-II LP. The purchase of the limited partnership interest gave Sasol access to extensive inside information on developments in the specialty chemicals industry. By sharing information with Ampersand Ventures, Sasol intended to learn of attractive opportunities to acquire new specialty chemicals firms, to strengthen its position in that area.
Funding for the purchase of the ASMC-II LP holding came from the working capital of Sasol, a revolving credit facility with the Chase Manhattan Bank. Distributive share income went back to Sasol's working capital. For budgeting purposes, the allocated funds were charged to Sasol's Manufacturing Division, a key operating arm of the business enterprise.
Ampersand Ventures considered Sasol to be a strategic investor, such that both entities would benefit from the exchange of information about market conditions and investment opportunities in the specialty chemicals industry. Mr. Yie, the "relationship manager" for the Sasol account, had a series of meetings with Sasol officials in at least three states, including Massachusetts, where they considered ways of collaborating to their mutual benefit. Sasol's relationship with Ampersand Ventures also brought to light potential sales opportunities for Sasol's products. While no significant acquisitions followed on Sasol's collaboration with Ampersand Ventures, Sasol embarked on the relationship to improve a key corporate business function, so as to strengthen its future business operations and profitability. The relationship was of benefit to Sasol's business model.
While the relevant partnership documents gave no particular status to "strategic investors," as a matter of practice Ampersand Ventures met frequently with investors like Sasol to explore possible business synergies. Sasol's access to Ampersand Ventures' partners and inside information was dependent on Sasol's acquiring its limited partnership interest in ASMC-II LP. Sasol and investors like it were distinct from what Ampersand Ventures called "financial investors," who did not have discussions or collaborations with fund managers about the specialty chemicals industry. 
The Board found and ruled that Sasol's ownership interest in ASMC-II LP, which was focused on investments in the same line of business where Sasol had a strategy of making corporate acquisitions, served an operational as distinct from a passive investment function for Sasol's business. Given the operational character of Sasol's stake in ASMC-II LP, the Board held that the distributive share income Sasol received from ASMC-II LP was subject to apportionment as part of the taxpayer's taxable net income, and not subject to 100% allocation to the Commonwealth. Accordingly, the Board decided this appeal for the appellant, and ordered an abatement of $344,941 in corporate excise, plus statutory additions. 


OPINION
The question for decision was whether the distributive share income Sasol received from ASMC-II LP was subject to apportionment under G.L. c. 63, § 38, as appellant contended, or subject to separate allocation to Massachusetts, such that the Commonwealth permissibly taxed 100% of the income without apportionment. In support of the disputed assessment, the Commissioner argued that the decision of the United States Supreme Court in Allied-Signal, Inc. v. Director, Div. of Taxation, 504 U.S. 768 (1992) precluded apportionment of the ASMC-II LP income. In Allied-Signal, the Supreme Court held that a capital gain realized by Bendix Corporation (Allied-Signal's predecessor-in-interest) on its sale of a passive stock holding in ASARCO, Inc. could not be taxed as part of Bendix's unitary business. As the Court explained, "[a] State may not tax a nondomiciliary corporation's income … if it is 'derive[d] from 'unrelated business activity' which constitutes a 'discrete business enterprise." 504 U.S. at 773.
Typically, it is the taxpayer who argues that income comes from a non-unitary source, such that the income cannot be apportioned and taxed by a particular state. Roles are reversed in this case, however, where there is no dispute that Massachusetts may apply its corporate excise to the income at issue. Here the Commissioner maintained that Sasol and ASMC-II LP were in a non-unitary relationship, such that other states in which Sasol did business would be unable to tax the ASMC-II LP distributive share income. And because other states such as Texas and Louisiana assertedly could not reach the ASMC-II LP distributions absent a showing of a unitary business enterprise encompassing both Sasol and ASMC-II LP, the income was said to be taxable in Massachusetts without apportionment.
In Allied-Signal, New Jersey was seeking to tax the gain Bendix realized on selling its 20.6% equity holding in ASARCO, Inc., notwithstanding the parties' stipulation that "Bendix and ASARCO were unrelated business enterprises each of whose activities had nothing to do with the other." The Court held that the parties' stipulation precluded taxation of the gain as part of Bendix's apportionable net income. 504 U.S. at 788-89. Significantly, Bendix, a manufacturer,
was in a separate line of business from ASARCO, a mining concern, and there was no overlap in their business activities. 
While Allied-Signal clearly has bearing on the question of apportionability before the Board, legal analysis logically begins with the relevant statute, G.L. c. 63, § 38. "No method of determining tax liability is valid unless authorized by statute and assessed in conformity to its terms." Gillette Co. v. Commissioner of Revenue, 425 Mass. 670, 675 (1997). Sasol argued that the statute mandated an all-or-nothing approach to apportionment of income received by a foreign corporation taxable both in Massachusetts and in other states. In support of this contention, Sasol invoked the following language from the Technical Information Release that the Commissioner issued following the decision in Allied-Signal: "Under Massachusetts law, either all of a taxpayer's taxable net income is allocated to Massachusetts, or it is all apportioned. General Laws, Chapter 63, Section 38, does not allocate certain items of income to Massachusetts while apportioning others." TIR 92-5. Since Sasol, a foreign corporation with the bulk of its operations out-of-state, obviously earned income from
multi-state operations that Massachusetts must apportion in order to tax, it maintained that apportionment of all of its taxable net income was required, consistent with the interpretative gloss applied to G.L. c. 63, § 38 by TIR 92-5. 
The Commissioner countered that the "statute is a full apportionment statute only to the extent that the taxation of an item of income does not offend federal constitutional principles…." Commissioner's Brief at p. 10. Because, in the Commissioner's view, other states faced a constitutional impediment to taxing the ASMC-II LP income, an exception to the rule of full apportionment under G.L. c.  63, § 38 would apply. 
The statute by its plain terms provides for apportionment unless the corporation has no income taxable in another state. See G.L. c. 63, § 38(a)(2).  At subsection c, the rule is stated as follows: 
   If a corporation … has income from business activity which is taxable both within and without this commonwealth, its taxable net income … shall be apportioned to this commonwealth by multiplying said taxable net income by a fraction, the numerator of which is the property factor plus the payroll factor plus twice times the sales factor, and the denominator of which is four. 
 G.L. c. 63, § 38(c). 
 
	While no express provision is made for separate allocation of income to the Commonwealth, there is an implication that "income from business activity" which is not "taxable … without this commonwealth" is taxed without apportionment. Id. Enlarging upon this implication, the Commissioner has required separate allocation of items of income derived from "unrelated business activities…" by regulation, to be taxable in Massachusetts so long as the income falls within the taxing jurisdiction of the Commonwealth. See 830 CMR 63.38.1(3)(c). At 830 CMR 63.38.1(4)(d), the regulation imposes a rebuttable presumption that distributive share income from a limited partnership in which the corporate taxpayer owns less than a fifty percent interest constitutes "unrelated business activity." The Commissioner's position in this litigation is crystallized in the second sentence of 830 CMR 63.38.1(4)(d):
     If the business activities of the partnership and the corporate limited partner are unrelated, then the corporate limited partner must separately account for its limited partnership income and its other business income and must separately apportion to Massachusetts income from each unrelated activity (to the extent that Massachusetts has jurisdiction to tax income from each such activity), using only the apportionment factors applicable to that activity.


A "presumption of separate accounting" is articulated somewhat differently at 830 CMR 63.39.1(8)(f), which addresses taxation of foreign corporations specifically:
If a foreign corporation is subject to the tax jurisdiction of Massachusetts under M.G.L. c. 63, § 39, only by virtue of its status as a limited partner of a partnership that conducts business in Massachusetts, and if the foreign corporation owns no more than fifty percent of the interests in the partnership, the Commissioner will presume that income received by the corporation from sources other than either the partnership or the disposition of its limited partnership interest is not derived from business activity carried on within the commonwealth within the meaning of M.G.L. c. 63, § 38. Unless this presumption is rebutted either by the Commissioner or by the taxpayer, the Commissioner will require the foreign corporation to account separately for its partnership income and to apportion this separate income to Massachusetts in accordance with the rules of M.G.L. c. 63, §§ 38 or 42, using only the partnership's property, payroll, and sales to determine an apportionment percentage.
(Emphasis added.)

Therefore, where the income paid to a foreign corporation by a Massachusetts limited partnership is at issue, the regulatory presumption of separate accounting arises only where that corporation is not otherwise taxable in Massachusetts. This presumption of separate accounting for the distributive share income under 830 CMR 63.39.1(8)(f) would not apply to Delaware domiciliary Sasol, given that it is independently subject to Massachusetts' taxing jurisdiction by virtue of its manufacturing activities in this state.	
Irrespective of whether the presumption of separate accounting is applicable, the question of apportionability of the ASMC-II LP income under 830 CMR 63.38.1 hinged on whether that income was deemed to arise from related or unrelated business activity. Since Sasol bore the burden of proving that the ASMC-II LP investment constituted related business activity, it is safe to say that such a showing would rebut any presumption of separate accounting. See generally Costello v. Commissioner of Revenue, 391 Mass. 567, 568-69 (1984)(Taxpayer's burden of proof encompasses every element needed to establish its right to abatement.) The statute would allow for an exception to the rule of full apportionment only to the extent an item of income cannot be taxed outside the Commonwealth. Thus, the regulation follows Allied-Signal in recognizing that income from related business activities is constitutionally amenable to tax in other states and thus subject to apportionment. Cf.  504 U.S. at 787 ("'[I]n order to exclude certain income from the apportionment formula, the company must prove that 'the income was earned in the course of activities unrelated to [those carried out in the taxing] State.'") with 830 CMR 63.38.1(3)(b)("For Massachusetts tax purposes, a taxpayer's income subject to apportionment is its entire income derived from its related business activities within and outside of Massachusetts plus any other income subject to the tax jurisdiction of Massachusetts.")
	"Related business activities" are defined at 830 CMR 63.38.1(4)(a)1: 
Related business activities are activities where there is a sharing or exchange of value between … multiple entities such that the activities are mutually beneficial, interdependent, integrated, or such that they otherwise contribute to one another. … [T]he following activities are related business activities notwithstanding the absence of a unitary relationship:

The short term investment of capital  in a non-unitary business segment or activity; and
Any other investment of capital that serves an operational function.

By recognizing that income from an investment of capital that serves an operational purpose derives from a related business activity, the regulation squares with language in Allied-Signal that permits other states to tax such income, so as to require apportionment under G.L. c. 63, § 38(c):
We agree that the payee and the payor need not be engaged in the same unitary business as a prerequisite to apportionment in all cases. Container Corp. says as much. What is required instead is that the capital transaction serve an operational rather than an investment function. 463 U.S. at 180, n. 19. Hence in ASARCO, although we rejected the dissent's factual contention that the stock investments there constituted "interim uses of idle funds 'accumulated for the future operation of [the taxpayer's] … business [operation],'" we did not dispute the suggestion that had that been so the income would have been apportionable….

We did not purport [in ASARCO and Woolworth] to establish a general requirement that there be a unitary relation between the payor and the payee to justify apportionment, nor do we do so today.

504 U.S. at 787.

	Accordingly, a finding that Sasol's acquisition of the ASMC-II LP limited partnership interest "serve[d] an operational function," 830 CMR 63.38.1(4)(a)1.b., would establish that the distributive share income must be apportioned under G.L. c. 63, § 38(c). See Allied-Signal, 504 U.S. at 787. See also Mead Corp. v. Department of Revenue, 861 N.E.2d 1131, 1139 (Ill. App. 2007). The Supreme Court has stated that "capital transactions can serve either an investment function or an operational function." Container Corp. of America v. Franchise Tax Board, 463 U.S. 159, 180 n.19 (1983), citing Corn Products Co. v. Commissioner, 350 U.S. 46, 50-53 (1955). The Supreme Court concluded in Container Corp., 463 U.S. at 180 n.19: "[A]ppellant's loans and loan guarantees were clearly part of an effort to ensure that '[the] overseas operations of [appellant] continue to grow and to become a more substantial part of the company's strength and profitability.'" (Citation omitted.) 
In Corn Products, 350 U.S. at 50, the Court rejected a contention that the taxpayer's transactions in commodities futures stood "separate and apart from its manufacturing activities." The Court noted that the taxpayer's corn futures acquisitions were "vitally important to the company's business as a form of insurance against increases in the price of raw corn." Id. "Under these facts it is difficult to imagine a program more closely geared to a company's manufacturing enterprise or more important to its successful operation." Id. 
The Appellate Court of Illinois, First Division, offered further guidance in applying the "operational function" test in Zebra Technologies Corp. v. Topinka, 799 N.E.2d 725, 735 (Ill. App. 2003):
The relevant inquiry in determining whether an asset serves an investment or operational function "focuses on the objective characteristics of the asset's use and its relation to the taxpayer and its activities within the taxing state." Allied-Signal, 504 U.S. at 785. The United States Supreme Court has noted that "a State may include within the apportionable income of a nondomiciliary corporation the interest earned on short-term deposits in a bank located in another State if that income forms part of the working capital of the corporation's unitary business, notwithstanding the absence of a unitary relationship between the corporation and the bank." [Id. at 787-788.] The Court concluded that the apportionability of interest turns on whether the interest is part of the working capital of the unitary business.

In Zebra Technologies, funds drawn from working capital were used to fund a business acquisition and corporate reorganization by the taxpayer's subsidiary. The State of Illinois sought to tax an apportioned share of the resulting income. While it found no dispositive unitary relationship the Illinois court relied on the use of the funds as working capital of the business to conclude that the "operational function" test had been satisfied. See 799 N.E.2d at 736. 
However, some of the subsidiary's interest income was held to be non-apportionable: "We conclude, as did the court in Home Interiors, that taxpayer's 'use of the funds, not the mere availability of the funds, is the guiding factor in determining whether the income sought to be apportioned has an operational or investment function.'" Id., citing Home Interiors and Gifts, Inc. v. Department of Revenue, 741 N.E.2d 998, 1004 (Ill. App. 2000). The Appellate Court affirmed the trial court's finding "that the income of ZIH [the subsidiary] was taxable in Illinois to the extent that the income was used to fund corporate acquisitions, but not taxable as to any amount not used in business operations." Zebra Technologies, 799 N.E.2d at 730. 
	The Oregon Tax Court took a similar view in Department of Revenue v. Terrace Tower U.S.A., 15 O.T.R. 168 (Or. Tax Ct. 2000). The Court explained that investments of operating capital "directly affect and influence the operation of the business and therefore play an active role in the operation of the business." Id. at 171. Expanding on this analysis, the Court continued:
An "operational function" test suggests that the court is looking at an asset as it would in a property tax case. Whether an asset is taxable as part of a unit of property for property taxation depends upon its function. A railroad tie or telephone pole is part of the taxable unit because it is an integral part of and functions interdependently with the other parts of the unit. Similarly, if the court applies a functional test for investments, it would seem to be looking to whether the investment functions interdependently with the other assets. An investment that performs an "operational function" such as operating capital functions interdependently because it will ebb and flow in direct relationship to the needs of the business. On the other hand, a 'passive' investment is not interdependent with the operating business….

[T]o serve an "operational function" there must be a flow of value between the investment and the activities sought to be taxed. When a corporation makes a 'passive' investment, there is a flow of value to the corporation, the actor, but not to the unitary business activities it conducts. On the other hand, an "operational investment" results in a flow of value between the investment and the activities that constitute the business.

15 O.T.R. at 173. 
In Hercules Inc. v. Department of Revenue, 753 N.E.2d 418, 426 (Ill. App. 2001), by contrast, the Appellate Court of Illinois held that the operational function test was not satisfied where taxpayer had formed a separate corporation "to divest itself from an operational relationship to the polypropylene business." Only years after the divestiture did the taxpayer sell its stock holding in the separate corporation that had been created. The Court "reject[ed] the Department's argument that the [initial] contribution of substantial assets … demonstrated an operational relationship." Id. at 427. See also Southland Corporation v. Comptroller of the Treasury, 1999 Md. Tax LEXIS 10, 7-8 (Md. Tax Court 1999)(Taxpayer's gain on sale of an intangible asset, Citgo stock, not subject to apportionment where the investment was passive in character.) 
These cases suggest that the "operational function" test of Allied-Signal, adopted at 830 CMR 63.38.1(4)(a)1.b., would look to 1) the character of the funds used to purchase an intangible asset as "working capital", and 2) whether the investment resulted in an operational benefit to the ongoing business of the corporation, beyond a passive monetary return to the corporate treasury. These criteria, applied in the instant appeal, supported a finding that Sasol's investment in ASMC-II LP served an operational function in the conduct of the taxpayer's business. First, Sasol drew on its working capital to acquire its stake in ASMC-II LP, and returned the distributive share income it received to working capital. Sasol, a highly leveraged business, used a revolving credit facility with the Chase Manhattan Bank as a source of working capital. Sasol authorized the funds it needed to purchase the ASMC-II LP limited partnership interest out of the budget of its Manufacturing Division, a key operational arm of its business. $5,000,000 was borrowed to buy the ASMC-II LP holding. Income received from ASMC-II LP was applied to the Chase Manhattan debt and thus returned to working capital. If shares of stocks were included in the distributions received, Sasol immediately liquidated the stock so it could apply the cash value to the revolving debt which comprised its working capital. 
	Second, there was a clear interrelationship between the ASMC-II LP holding and the business operations of Sasol. Sasol was attracted to the investment opportunity because it saw potential synergies in partnering with a private equity fund which had access to 300-500 business proposals from specialty chemical start-ups each year. Dissatisfied with the work of its Planning Division, an operational arm of its business, Sasol was looking for other ways to further its goal of greater vertical integration, by making acquisitions of specialty chemicals firms. The taxpayer sought to reap the added profits available downstream from its commodities chemicals business, in the specialty chemicals area where profit margins were higher. While established specialty chemicals firms could be acquired only at a premium, promising start-ups were potentially available at more economical prices. 
	ASMC-II LP offered a window on new developments in the specialty chemicals field, so that through its purchase of the limited partnership interest, Sasol could more effectively survey the landscape of the industry and identify promising opportunities for acquisitions. Furthermore, the strategic partnership with Ampersand Ventures enabled by the limited partnership holding could serve as a means of identifying new customers, and strengthening existing customer accounts, for its sales of commodities chemicals. Investing in ASMC-II LP opened doors through which Sasol could optimally pursue its own strategic business objectives, given the private equity firm's practice of sharing information with its "strategic investors." Cf. Container Corp., 463 U.S. at 180, n.19.
	In contrast to the Bendix investment in ASARCO in Allied-Signal, ASMC-II LP operated exclusively in the same business niche in which Sasol sought to expand its own presence. ASMC-II LP and Sasol were both tightly focused on uncovering profit-making opportunities in the specialty chemicals industry. This overlap in the respective lines of business of Sasol and ASMC-II LP reinforced the conclusion that Sasol's investment in the partnership was operational in character.
It is inconsequential for purposes of the operational function test that Sasol did not consummate any major acquisitions it learned about through its relationship with Ampersand Ventures. Not all business undertakings pan out as originally intended. It is sufficient that Sasol had a good-faith business operational justification for embarking on its collaboration with Ampersand Ventures during the years at issue. Sasol was dissatisfied with the results of the activities of its own Planning Division, but there can be no question that strategic business planning is an operational function. 
In sum, Sasol invested in ASMC-II LP because it saw an opportunity for a strategic partnership which had the potential to advance its own business operational objectives. The evidence indicated that Sasol made few, if any, passive investments solely for the purpose of securing a financial return. Accordingly, the Board concluded that Sasol met its burden of proof to show that its purchase of the limited partnership interest served an operational function.
The finding of an operational function for the ASMC-II LP investment is dispositive of the question of apportionability. Because Delaware, Texas, and other jurisdictions in which Sasol conducted business operations were entitled to tax an apportioned share of the limited partnership income consistent with Allied-Signal, 504 U.S. at 787, it followed that the income in question arose from "business activity which is taxable both within and without this commonwealth…" G.L. c. 63, § 38(c). The ASMC-II LP distributive share income "shall be apportioned to this commonwealth…" under the plain terms of the controlling statute. See id. See also Milton v. Boyd, 434 Mass. 754, 758 (2001) ("Because the language of the statute is clear, we must 'enforce it according to its terms.'") (Citations omitted.) Given that disputed assessment did not apportion the ASMC-II LP income, the assessment is improper. The Board decided this appeal for the appellant, and ordered an abatement of $344,941 tax, plus statutory additions.

APPELLATE TAX BOARD


				By: ___________________________________
					Thomas W. Hammond, Jr., Chairman



A true copy,


Attest:	______________________________
		 Assistant Clerk of the Board

  On September 11, 2006, Commissioner Gorton was sworn as a temporary member of the Appellate Tax Board pursuant to G.L. c. 58A, § 1, his status as a member of the Board having terminated on that date with the appointment and qualification of his successor. See G.L. c. 30, § 8. Commissioner Gorton's material participation in the deliberations of this appeal included, inter alia, drafting proposed findings of fact, supplying a report on the evidence and his observations as to witness credibility. He also made oral presentations of his recommendations to the Board. 

   ASMC-II LP was created by and offered through Ampersand Ventures, a private equity firm focused on investments in technology and industrial market companies. ASMC-II LP had the sole business purpose of investing in chemical and specialty product companies.
 On or about January 19, 2001, Sasol and the Commissioner executed a Form B-37, Special Consent Extending the Time for Assessment of Taxes, extending the deadline for excise assessments for the taxable periods commencing July 1, 1994 and ending June 30, 1997, at any time up to and including 90 days after the date of the final disposition of this matter by the Appeal and Review Bureau or the Office of Dispute Resolution.
 Sasol was formerly Condea Vista Company and prior to that was Vista Chemical Company. While it was called Condea Vista Company during the years at issue, the company is referred to herein as Sasol, the entity which prosecuted this appeal. 
   "Downstream" is a term of art in the petrochemicals industry. The following explanation appears in the decision of the Sixth Circuit Court of Appeals in PDV Midwest Refining LLC v. Armada Oil and Gas Co., 305 F.3d 498, 503, n.3 (6th Cir. 2002): "'upstream is basically extracting oil, petroleum products from the ground. Downstream [involves the processes] from the refinery all the way to the marketplace, meaning refineries, terminals, marketing outlets. And midstream generally refers to pipelines.'" (Citation omitted.)
   Sasol's distributive share of ASMC-II LP income included shares of stock as well as cash. Sasol would immediately liquidate any shares it received to apply the proceeds to its revolving debt payments. 
 Mr. Whitlow recollected that Sasol made four or five small acquisitions. Sasol invested in a natural alcohol facility in Indonesia, but management decided against an acquisition. 

 Bradford Blue, Tax Manager of Sasol, also offered brief testimony that corroborated aspects of Mr. Whitlow's testimony. The credibility of Dr. Charpie's and Mr. Yie's testimony was bolstered by the fact they appeared under subpoenas issued by the appellee.
   The hearing officer's participation in the deliberations of this case, which included the preparation of recommended findings of fact and rulings of law and consultations with Board members, satisfied the requirements of Bayer v. Commissioner of Revenue, 436 Mass. 302 (2002), as interpreted in the Board's decision in Mayflower Emerald Square, LLC v. Board of Assessors of the Town of North Attleborough, Mass. ATB Findings of Fact and Report 2007-421, 517-18.
   While the Commissioner's brief argues extensively against the existence of a unitary relationship between the taxpayer and the limited partnership, "[a] state's apportionment of income of a multistate nondomiciliary corporation  ... is constitutional in two circumstances: where there is a unitary business relationship between the payor and the payee or where the intangible asset served an operational rather than an investment function." Mead Corp. v. Department of Revenue, 861 N.E.2d 1131, 1139 (Ill. App. 2007). 
 The Commissioner is bound by the terms of his public written statements, including Technical Information Releases. See Commissioner of Revenue v. BayBank Middlesex, 421 Mass. 736, 739-40 (1996). 
   It is clear that Sasol's distributive share income from ASMC-II LP, together with its income from other sources, had to be included in "net income" for purposes of G.L. c. 63, § 30, ¶ 4. See 830 CMR 63.38.1(13). See generally Utelcom, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Report 2005-9; Sahi USA, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Report 2006-794.

   Since ordinarily a more specific rule in a statute or regulation takes precedence over a general rule, see generally Doe v. Attorney General (No. 1), 425 Mass. 210, 215-16 (1997), it is doubtful that the presumption of separate accounting at 830 CMR 63.38.1(4)(d) would apply to a foreign corporation's receipt of Massachusetts limited partnership income, where that corporation is otherwise subject to the taxing jurisdiction of the Commonwealth. Cf. 830 CMR 63.39.1(8)(f).
  While 830 CMR 63.39.1(8)(f) suggests that proof of a unitary relationship is required to rebut the presumption of separate accounting, apportionment is also warranted where an intangible asset such as a limited partnership interest serves an operational function. See Mead, 861 N.E.2d at 1139.
 Given that the taxpayer's showing rebutted any presumption of separate accounting, the Board need not address its argument that 830 CMR 63.38.1(4)(d) is invalid.

ATB 2007-942