Massachusetts Electric Company v. Commissioner of Revenue (February 24, 2016)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD



MASSACHUSETTS ELECTRIC      v.	COMMISSIONER OF REVENUE
COMPANY

Docket No. C310170				Promulgated:
                                   February 24, 2016
	

	This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39(c) from the refusal of the Commissioner of Revenue ("appellee" or "Commissioner") to abate public service corporation franchise tax assessed against Massachusetts Electric Company ("appellant") for the appellant's tax year ended March 31, 2008.
	Commissioner Scharaffa heard the appellee's Motion for Summary Judgment and the appellant's Cross Motion for Summary Judgment and was joined in the decision for the appellee by Chairman Hammond and Commissioners Rose, Chmielinski, and Good.
	These findings of fact and report are made at the requests of the appellant and the appellee pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.

	John S. Brown, Esq., George P. Mair, Esq., Donald-Bruce Abrams, Esq., Darcy A. Ryding, Esq., and Sydney B. Leavens, Esq. for the appellant.

	Bensen V. Solivan, Esq., and Michael Clifford, Esq. for the appellee.



FINDINGS OF FACT AND REPORT
	This appeal was presented through pleadings and the parties' Motion and Cross Motion for Summary Judgment with accompanying memoranda, all of which incorporated relevant and undisputed facts. On the basis of the foregoing, the Appellate Tax Board ("Board") made the following findings of fact.
	The appellant is a public utility company that was incorporated in Massachusetts on July 6, 1887. The appellant is subject to the tax imposed on utility corporations by G.L. c. 63, § 52A ("Section 52A") and therefore filed a Public Service Corporation Franchise Tax Return ("Form P.S.1") for its tax year ended March 31, 2008 ("taxable year 2007").
	During December of 2008, nine months after the end of taxable year 2007, New England experienced a severe ice storm, after which the Federal Emergency Management Agency declared various Massachusetts counties federal disaster areas. The affected counties included the appellant's service territories, and the appellant suffered a loss to its electric transmission and distribution property in the amount of $61,820,647 (the "Storm Loss"), which was deductible as a disaster loss under § 165 of the Internal Revenue Code ("I.R.C."). 
On June 12, 2009, the appellant filed an amended Form 1120, U.S. Corporate Income Tax Return, electing to have the Storm Loss "taken into account" for taxable year 2007 - rather than the following taxable year in which the loss occurred - consistent with the provisions of I.R.C. § 165 and Treas. Reg. § 1.165-11(d).  
	On September 9, 2009, the appellant timely filed a Massachusetts Form CA-6, Application for Abatement/Amended Return for taxable year 2007, claiming a deduction for the Storm Loss and an abatement in the amount of $4,018,342. On August 26, 2010, the Commissioner denied the appellant's abatement application on the ground that the Storm Loss had been sustained in the appellant's taxable year ended March 31, 2009 ("taxable year 2008") and was therefore not allowable under Section 52A for taxable year 2007. 
Based on the record before it, the Board found and ruled that this appeal presented a question of law with respect to which there was no genuine issue of material fact. The Board further found and ruled that the appellant was not entitled to a deduction for the Storm Loss for taxable year 2007 because the loss was sustained in another taxable year within the meaning of G.L. c. 63, § 52A(1)(b)(ii). The Board therefore granted the Commissioner's Motion for Summary Judgment, denied the appellant's Cross Motion for Summary Judgment, and issued a decision for the appellee. 

OPINION

Pursuant to Rule 22 of the Board's Rules of Practice and Procedure, 831 CMR 1.22, "[i]ssues sufficient in themselves to determine the decision of the Board or to narrow the scope of the hearing may be separately heard and disposed of in the discretion of the Board." The Commissioner and the appellant both filed motions effectively stipulating that there were no issues of material fact and urging judgment in their favor with respect to a discrete issue of law. Though the Massachusetts Rules of Civil Procedure, including Rule 56, which provides for Summary Judgment, are not directly applicable to Board proceedings, see G.L. c. 58A, § 8A, the Board looks to Rule 56 for guidance when there is no genuine issue of material fact and a party is entitled to judgment as a matter of law. See generally Anthony J. Rossi v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2003-473, 475-76; Omer v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1999-586, 591; see also Correllas v. Viveiros, 410 Mass. 314, 316 (1991) ("The purpose of summary judgment is to decide cases where there are no issues of material fact without the needless expense and delay of a trial followed by a directed verdict.").  
The parties agreed and the Board found and ruled that this appeal presented only an issue of law and no genuine issue of material fact. Accordingly, the Board ruled that disposition of the appeal by summary judgment was appropriate pursuant to 831 CMR 1.22.	
	The legal issue presented for the Board's consideration is whether the appellant was entitled to a deduction for the Storm Loss and a consequent abatement of public service corporation franchise tax for taxable year 2007, notwithstanding that the loss occurred in taxable year 2008. Resolution of this issue depends on proper application of Section 52A, which in part depends on the effect, if any, of the appellant's election to claim a federal tax deduction for the Storm Loss for taxable year 2007 under I.R.C. § 165. 
Section 52A requires that a utility corporation doing business solely in Massachusetts pay an annual tax on its corporate franchise "equal to six and one-half percent of net income during the taxable year." G.L. c. 63, § 52A (2). Section 52A defines net income as follows:     
"Net income" means the gross income from all sources . . . less the deductions, but not credits, allowable under the provisions of the Federal Internal Revenue Code, as amended and in effect for the taxable year. Deductions with respect to the following items, however, shall not be allowed:--

 (i) dividends received,
 (ii) losses sustained in other taxable years,
 (iii) taxes on or measured by income, franchise taxes measured by gross or net income, franchise taxes for the privilege of doing business and capital stock taxes imposed by a state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, a territory or possession of the United States or a foreign country or a political subdivision of any of the foregoing,
 (iv) the deduction allowed by section 168(k) of the Code,
 (v) the deduction allowed by section 199 of the Code, and
 (vi) the deduction described in section 163(e)(5) of the Code. . . .

G.L. c. 63, § 52A(1)(b)(emphasis added)
I.R.C. § 165 addresses deductions for losses sustained during a taxable year including "disaster losses," which "occur[] in a disaster area and [are] attributable to a federally declared disaster." I.R.C. § 165(i)(1). Pursuant to I.R.C. § 165(a), a disaster loss may be deducted for federal purposes in the taxable year in which it occurs. Alternatively, a taxpayer may elect to take the deduction "for the tax year immediately preceding the taxable year in which the disaster occurred." I.R.C. § 165(i)(1). Consistent with the provisions of I.R.C. § 165(i)(2):
If such an election is made, the disaster to which the election relates will be deemed to have occurred in the taxable year immediately preceding the taxable year in which the disaster occurred, and the loss to which the election applies will be deemed to have been sustained in such preceding taxable year.

Treas. Reg. § 1.165-11(d).

There is no dispute that the appellant was entitled to elect to take a disaster loss deduction for the Storm Loss for taxable year 2007 pursuant to I.R.C. § 165(i) for federal tax purposes. The dispute centers on whether the loss, which was "deemed" to have been sustained in taxable year 2007 for federal tax purposes under I.R.C. § 165(i), was also allowable under Massachusetts law for that same year. The appellant argued that the "losses sustained in other taxable years" disallowed by Section 52A(b)(ii) do not include disaster losses allowed under I.R.C. § 165 and that the fiction created by the I.R.C. as to when the Storm Loss was sustained should be followed for Massachusetts tax purposes. The Board found these arguments, which would render ineffective Section 52A's explicit exclusion from deductible losses those "losses sustained in other taxable years," unavailing. G.L. c. 63, § 52A(1)(b)(ii). 
	It is well settled that "Massachusetts tax law can and does depart from Federal tax law." Macy's East, Inc., v. Commissioner of Revenue, 441 Mass 797, 803 (2004), cert. denied, 543 U.S. 957 (2004). It is also a longstanding rule that:
where there is, in the same statute, a particular enactment, and also a general one, which, in its most comprehensive sense, would include what is embraced in the former, the particular enactment must be operative, and the general enactment must be taken to affect only such cases within its general language as are not within the provisions of the particular enactment. 

U.S. v. Chase, 135 U.S. 255, 260 (1890) (internal quotations and citations omitted); see also Morales v. Trans World Airlines, Inc., 504 U.S. 374 (1992). 
  	In the present appeal, there is no dispute as to the viability of either of the cited legal principles. Regarding the latter, Section 52A, generally, incorporates deductions allowable under the provisions of the I.R.C. in the calculation of net income, while specifically excluding certain deductions, including those for "losses sustained in other taxable years." Chase, 135 U.S. at 260. This explicit and plainly-worded departure from deductions allowed for federal tax purposes places no limit on the type of losses disallowed. That is, by disallowing "losses," without restriction, the Legislature clearly intended to exclude all types of losses sustained in other tax years, including disaster losses under I.R.C. § 165. Indeed, where, as here, "the language of a statute is clear and unambiguous, it is conclusive as to legislative intent." Pyle v. School Commission, 423 Mass. 283, 285 (1996)(citing Allen v. Commissioner of Corps. & Taxation, 272 Mass. 502, 508 (1930)); see also New England Medical Center Hospital, Inc. v. Commissioner of Revenue, 381 Mass. 748, 750 (1980) (stating that where the statutory language is sufficiently clear, a court need not seek further guidance from other sources).
Any argument that Section 52A was not intended to apply to disaster losses is also undermined by the provisions of G.L. c. 63, § 30 ("Section 30"), which relates to business corporations. Section 30, like Section 52A, generally incorporates deductions allowable under the I.R.C. in the calculation of a corporation's net income. G.L. c. 63, § 30(4). Also like Section 52A, Section 30 disallows certain deductions, which include those for "losses sustained in other taxable years, except for the net operating losses as provided in paragraph five of this section." G.L. c. 63, § 30(4)(ii)(emphasis added). By narrowing the scope of loss deductions to which Section 30's exclusion applies, the Legislature unequivocally demonstrated its awareness of different types of losses as well as its intention, when desired, to selectively allow deductions for losses sustained in other tax years. Such an intent is conspicuously absent from Section 52A, which places no limit on the types of losses to which it applies. The inescapable conclusion is that for purposes of Section 52A, the Legislature intended to exclude all losses sustained in other tax years.       
The appellant also argued that the Storm Loss was "sustained," for purposes of G.L. c. 63, § 52A(1)(b)(ii), in taxable year 2007. To accept this argument would require adoption of the temporal fiction created by I.R.C. § 165(i) and Treas. Reg. § 1.165-11(d), pursuant to which the Storm Loss was "deemed" to have occurred and been sustained in the taxable year prior to its actual occurrence. Given the explicit provisions of Section 52A, the Board rejected the appellant's argument.
A fiction created under federal tax law will be recognized for Massachusetts purposes if recognition is warranted under Massachusetts law. For example, in General Mills v. Commissioner of Revenue, 440 Mass. 154 (2003), the Supreme Judicial Court, affirming the Board's decision, recognized an election under I.R.C. § 338(h)(10) to treat General Mill's sale of the stock of Talbots, its subsidiary located in Massachusetts, as a sale of assets for purposes of determining Talbot's gross income under Section 30. Id. at 170-71. In reaching its conclusion, the Court reasoned that "[b]ecause § 338(h)(1) treated the gain from the deemed sale of Talbots assets as includable in its Federal gross income, the literal wording of G.L. c. 63, § 30, requires that it also be included in Talbots Massachusetts gross income." Id. For purposes of Section 30, "gross income" was "gross income as defined under the provisions of the Federal Internal Revenue Code, as amended and in effect for the taxable year." G.L. c. 63, § 30 (1988). Thus, recognition of the fiction created by I.R.C. § 338(h)(10) was entirely consistent with applicable Massachusetts law.
In situations where Massachusetts law conflicts with a federal tax fiction, the Supreme Judicial Court and the Board have declined to recognize the fiction. In Combustion Engineering v. Commissioner of Revenue, Mass. ATB Findings of Facts and Reports 2000-207, the Board, as it did in General Mills, considered the implications of a taxpayer's election under I.R.C. § 338(h)(10) to treat a sale of stock as a sale of assets. The issue, unlike the issue in General Mills, involved application of the three-factor apportionment formula used to apportion income, and in particular the taxpayer's sales factor under G.L. c. 63, § 38(f)("Section 38(f)"). The Board observed that Section 38(f) defined the term "sales" as the "gross receipts of the corporation except . . . gross receipts from . . . the disposition of securities" (emphasis added). Mindful of this explicit definition, the Board did not recognize the federal fiction treating the sale as a sale of assets and found that "[w]hatever the transaction may be 'deemed' to be for federal purposes, it is, in actuality, a sale of stock, the proceeds from which are specifically excluded from the sales factor." Combustion Engineering, Mass. ATB Findings of Facts and Reports at 2000-216. Just as the provisions of Section 38(f) required exclusion of the sale of stock from the sales factor, Section 52A explicitly excludes "losses sustained in other taxable years" from the deductions available to utility corporations.
In Weston Marketing Corp. v. Commissioner of Revenue, Mass. ATB Findings of Facts and Reports 1994-34, affd., 40 Mass. App. Ct. 1108 (1996), the Board similarly declined to give effect to a federal tax fiction in light of applicable Massachusetts law. In Weston Marketing Corp., a Subchapter S corporation held "regulated futures contracts" with respect to which I.R.C. § 1256 required recognition at year's end of a gain or loss as if the contracts had been sold. Because the aggregate market value of the contracts was less than the taxpayer's cost on December 31, 1981, the taxpayer reported a net capital loss on its 1981 Federal return, which was not allowed on its Massachusetts return because at the time Massachusetts did not recognize Subchapter S status. The taxpayer sold a portion of the contracts in 1982 and reported a net capital gain on its federal tax return, part of which reflected recapture of the prior year's loss. The taxpayer excluded the loss recapture on its Massachusetts return.
The Board, relying in large measure on principles set forth by the Court in Rohrbough, Inc. v. Commissioner, 385 Mass. 830 (1982), ruled that the taxpayer had properly excluded the loss recapture for which it had received no benefit for Massachusetts tax purposes, noting that "although the [I.R.C.] required, for federal tax purposes, the recapture of losses taken for the prior year's 'fictitious transaction,' there was no 'actual realization of income' subject to taxation in Massachusetts." Combustion Engineering, Mass. ATB Findings of Facts and Reports at 2000-215 (quoting Weston Marketing Corp., Mass. ATB Findings of Facts and Reports at 1994-41). Thus, the Board resolved the conflict between the federal fiction created by I.R.C. § 1256 and Massachusetts law by disregarding the federal fiction.
In both Combustion Engineering and Weston Marketing, applicable Massachusetts law conflicted with a federal tax fiction and the Board declined to recognize the fiction. There is a similar conflict in the present appeal. Specifically, Section 52A explicitly disallows deductions for losses sustained in other tax years while the federal tax fiction created under I.R.C. § 165(i) allows election of a loss in a tax year other than that in which it was, in actuality, sustained. As the Board has previously ruled, under these circumstances Massachusetts law must be respected in favor of the federal tax fiction. 
  	Finally, the appellant asserted that Form P.S.1 and its instructions indicate that the Commissioner has interpreted Section 52A as not applying to deductions for disaster losses under IRC § 165. The Board did not find support for this assertion in Form P.S.1, its instructions or, for that matter, in any ruling, regulation or other guidance published by the Commissioner. To the contrary, the Form P.S.1 Instructions provided, in pertinent part:
The tax for utility corporations is 6½% of net income. For tax purposes, net income is gross income from all sources, without exclusion . . . less deductions allowed by the Internal Revenue Code in effect for the taxable year. Deductions are not allowed for dividends received, losses sustained in other taxable years, and income, franchise and capital stock taxes.  

Form P.S.1 Instructions (2007)(emphasis added).

As with the provisions of Section 52A, the cited instructions exclude deductions for losses sustained in other taxable years without limitation or qualification of any kind. 
The burden is on the taxpayer to demonstrate entitlement to a claimed deduction. See, e.g. The South Boston Savings Bank v. Commissioner of Revenue, 418 Mass. 695, 698-99 (1994). Further, "the Supreme Judicial Court has consistently ruled that provisions creating tax deductions are to be construed strictly, and a taxpayer will not prevail on an argument unless it can show itself clearly to come within terms of the exemption." Macy's East, Inc., v. Commissioner of Revenue, Mass. ATB Findings of Facts and Reports 2002-522, 533, affd., 441 Mass. 797 (2004); see also South Boston Savings Bank v. Commissioner of Revenue, 418 Mass. at 698. Based on the record before it, the Board could not conclude that the appellant demonstrated its entitlement to the claimed deduction.
In sum, the Board found and ruled that the clear and unambiguous language of Section 52A required that, for Massachusetts tax purposes, a disaster loss deduction under I.R.C. § 165 be taken in the year in which it was sustained, i.e., the year in which it occurred. Thus, the appellant was not entitled to take a deduction for the Storm Loss under Section 52A in taxable year 2007, the taxable year preceding that in which it was sustained. Accordingly, the Board granted the appellee's Motion for Summary Judgment, denied the appellant's Cross Motion for Summary Judgement, and issued a decision for the appellee.


					  THE APPELLATE TAX BOARD




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


A true copy,


Attest: ____________________________
  	   Assistant Clerk of the Board 

 Section 52A was repealed by St.2013, c. 46, §§ 39, 84, effective January 1, 2014. References in these Findings of Fact and Report to Section 52A are to Section 52A as in effect at all times relevant to this appeal.
 In its Cross Motion for Summary Judgment, the appellant stated that the abatement application had been filed on August 26, 2009, but a copy of the application attached to the Commissioner's Motion reflected a filing date of September 9, 2009.

ATB 2016-21