Nynex Corporation v. Commissioner of Revenue (December 19, 2002)

COMMONWEALTH OF MASSACHUSETTS 

APPELLATE TAX BOARD



NYNEX CORPORATION 	        v.	COMMISSIONER OF REVENUE

    

Docket No. F233865				Promulgated:
							December 19, 2002


	This is an appeal under the formal procedure pursuant to G.L. c. 62C, § 39, from the refusal of the appellee Commissioner of Revenue to abate corporate excise assessed against the appellant for the tax year ending December 31, 1987.  
	Commissioner Scharaffa heard this appeal.  Chairman Burns, Commissioner Gorton, and former Commissioner Lomans joined him in a decision for the appellee.  These findings of fact and report are promulgated at the request of both the appellant and the appellee pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.

	Edward F. Hines, Jr., Esq., Kevin J. Lesinski, Esq., and Kathleen King Parker, Esq. for the appellant.

	Thomas K. Condon, Esq. for the appellee.


FINDINGS OF FACT AND REPORT
	Based on the testimony and exhibits entered into evidence at the hearing of this appeal, the Appellate Tax Board ("Board") made the following findings of fact.
	At all times material to this appeal, the appellant, NYNEX Corporation ("NYNEX"), was a Delaware corporation, with its principal place of business in New York.  During its tax year ending December 31, 1987 ("tax year at issue"), NYNEX was a publicly-traded corporation principally engaged in telecommunications.  No corporation owned more than fifty percent of NYNEX's voting stock.  
 	 For tax year 1987, NYNEX and thirteen of its subsidiaries subject to tax in Massachusetts ("Taxpayer Group") timely filed a combined Massachusetts corporate excise return and timely paid the excise shown as due.  The Taxpayer Group also filed a consolidated federal income tax return for its 1987 tax year.  NYNEX owned one hundred percent of the voting stock of each of the subsidiaries included in this combined return.  During the tax year at issue, neither NYNEX nor any of the subsidiaries within the Taxpayer Group had been in existence for more than five years.  
In calculating its corporate excise liability for tax year 1987, the Taxpayer Group determined its combined net income as a single entity.  In doing so, it included carryover deductions for net operating losses sustained in 1984 and 1986 by six of the subsidiaries.  The net operating loss carryovers totaled $187,539,336.  NYNEX itself was a profitable company during each of the years 1984 and 1986.  The Taxpayer Group applied the net operating loss carryovers to reduce its combined corporate excise liability to zero. 
Beginning in May 1991, NYNEX entered into a series of consent agreements with the Commissioner of Revenue ("Commissioner") extending the time for the assessment of corporate excise for the tax year at issue.  Following an audit of the Taxpayer Group's combined corporate returns for tax years 1987 through 1989, the Commissioner disallowed NYNEX's deductions for net operating loss carryovers accumulated by its wholly-owned subsidiaries in 1984 and 1986.  Specifically, the Commissioner disallowed the deductions because the voting stock of each subsidiary claiming an operating loss was more than fifty percent owned by another corporation in violation of the restriction at G.L. c. 63, § 30(5)(b), as then in effect.  
On November 8, 1994, the Commissioner issued to the taxpayer a notice of intention to assess ("NIA") additional corporate excise for the tax year at issue in the amount of $2,888,587, plus interest.  Following an Appeal and Review Bureau pre-assessment conference on May 2, 1995, the Commissioner upheld the proposed assessment by letter dated July 13, 1995.  Accordingly, by a notice of assessment ("NOA") dated August 1, 1995, the Commissioner assessed the Taxpayer Group additional corporate excise in the amount of $2,888,587 plus interest for the tax year at issue.  NYNEX timely paid the assessment in full together with all accrued interest.
On December 13, 1995, NYNEX timely filed its application for abatement requesting abatement of the entire additional assessment and interest for the tax year at issue.  The Commissioner denied this application for abatement by notice dated March 4, 1996.  On May 1, 1996, NYNEX seasonably filed its petition with this Board.  On the basis of the above facts, the Board determined that it had jurisdiction over the subject appeal.  
The Taxpayer Group attempted to use the net operating loss carryovers during the first five years of the existence of all members of the Taxpayer Group.  However, these losses were generated by corporations whose voting stock was one hundred percent owned by another corporation, NYNEX.  The Board found and ruled that pursuant to the plain language of G.L. c. 63, § 30(5)(b), as then in effect, the taxpayer was precluded from deducting the net operating loss carryovers for the tax year at issue.
Accordingly, and for the reasons detailed in the following Opinion, the Board issued a decision for the appellee. 

OPINION
	The issue raised by the present appeal is whether, for purposes of determining its combined corporate excise, a corporate parent and its wholly-owned subsidiaries filing a combined Massachusetts corporate excise return for tax year 1987 may carry forward net operating losses incurred by the parent's wholly-owned subsidiaries in tax years 1984 and 1986. 
	Domestic and foreign corporations that conduct business in the Commonwealth are required to pay a corporate excise based in part on their net income derived from business activities carried on in Massachusetts.  G.L. c. 63, §§ 32, 38, and 39.  
Pursuant to the version of G.L. c. 63, § 30(5)(b) that was in effect during the tax year at issue, the "net income" of a corporation for Massachusetts corporate excise purposes was generally equal to its gross income as defined under the Federal Internal Revenue Code ("Code") in effect for the taxable year (with exceptions not relevant to this appeal), minus the deductions but not credits allowable under the Code.  G.L. c. 63, § 30(5)(b).  However,         § 30(5)(b) denied or restricted the application of certain deductions for purposes of calculating net income.  
One deduction which was allowed but restricted by     § 30(5)(b) for the tax year at issue was the carryover of net operating losses sustained in prior taxable years.  The carryover of net operating losses was allowed at the federal level pursuant to Code § 172.  However, the Massachusetts net operating loss deduction as then in effect specifically allowed carryovers only under the following circumstances: 

for the first five consecutive taxable years of a corporation, measured from the dates of its organization whether or not organized under the laws of the commonwealth, so much of the loss as determined under section one hundred and seventy-two of the Federal Internal Revenue Code, as amended and in effect for the taxable years, as is represented by net operating loss carryovers for taxable years ending December thirty-first, nineteen hundred and seventy-three and thereafter shall be deducted; provided, however, that such carryover losses shall not be allowed to any corporation fifty per cent or more of whose voting stock is owned by another corporation whether or not such owning corporation is taxable in this commonwealth . . . .


G.L. c. 63, § 30(5)(b)(ii).  
The Board found that the plain language of            § 30(5)(b)(ii) precluded the wholly-owned subsidiaries from deducting the carryover losses which they had generated in prior tax years.  Pursuant to the unambiguous language of        § 30(5)(b)(ii), "carryover losses shall not be allowed to any corporation fifty per cent or more of whose voting stock is owned by another corporation."  The affiliates that generated the net operating losses at issue were wholly-owned by NYNEX and therefore, they "shall not be allowed" to deduct the net operating loss carryovers pursuant to the fifty percent-ownership restriction.  Id.  
The taxpayer, however, argued that it should be entitled to carryover and deduct the net operating losses attributable to its wholly-owned subsidiaries because the Taxpayer Group filed a combined return.  Two or more corporations participating in a federal consolidated return are permitted, at their option, to file a Massachusetts combined corporate excise return and "be assessed upon their combined net income . . . ."  G.L. c. 63, § 32B (emphasis added).  In the taxpayer's opinion, NYNEX and its affiliates should thus be treated as a "single entity," with NYNEX as the corporation and its affiliates considered as divisions of NYNEX.  Under this theory, the losses incurred by the affiliates would be treated as NYNEX's losses and, therefore, deductible because NYNEX was not barred by the fifty-percent ownership requirement of § 30(5)(b)(ii).
The Board, however, found that the taxpayer's interpretation of § 30(5)(b)(ii) as requiring aggregation of the individual deductions of each member of the Taxpayer Group did not fit into the overall statutory scheme of the Massachusetts corporate excise.  First, the Board found no support for the taxpayer's interpretation of § 30(5)(b) in the statute's plain language.  There is no specific provision in § 30(5)(b) supporting the taxpayer's theory that deductions of individual corporations should be aggregated as if the taxpayer group were a single entity.  In fact, the Board noted that § 30(5)(b)(ii), in calculating net income, specifically refers to the net operating losses of "a corporation" in the singular form, while § 32B, pertaining to the filing of a combined corporate excise return, specifically refers to "two or more domestic corporations," and continues to make references in the plural to "the net income measure of their excises," and "their combined net income."  The Board thus found that § 30(5)(b) by its terms requires the calculation of each individual corporation's net income prior to combination.  
Moreover, the Board found that the taxpayer's theory did not comport with the overall procedure for calculating taxable net income pursuant to § 30(5)(b) and § 38(a).  Pursuant to those statutes as then in effect, the determination of a corporation's taxable net income to be apportioned to Massachusetts involved two distinct steps under two separate statutory provisions:  (1) determination of the corporate "net income" under § 30(5)(b); and, (2) the determination of the "taxable net income" by applying the adjustments to net income specified in § 38(a).  See U.S. Shoe Corp. v. Commissioner of Revenue, 8 Mass. App. Tax Bd. Rep. 47, 50 (1987), aff'd sub nom. General Electric v. Commissioner of Revenue, 402 Mass. 523 (1988).  Reaffirming this characterization of the determination of net income, the Board in the instant appeal ruled that § 30(5)(b) and § 38(a) created a two-step process whereby net income was to be determined individually for each member of the combined group before each entity's net income could be added together to arrive at combined taxable net income for the group.  It is therefore the subsidiaries who must claim the net operating loss carryover in determining their individual net incomes, which are subsequently added to arrive at the combined taxable net income of the Taxpayer Group.  Accordingly, since § 30(b)(5) denies the wholly-owned subsidiaries the right to use the net operating loss carryovers, they are not available when determining the combined taxable net income of the Taxpayer Group. 
The Supreme Judicial Court and this Board "have frequently recognized that an exemption from taxation 'is a matter of special favor or grace,' and that statutes granting exemptions from taxation are therefore to be strictly construed."  South Boston Savings Bank v. Commissioner of Revenue, 418 Mass. 695, 698 (1994) (citing State Tax Commission v. Blinder, 336 Mass. 698, 703 (1958)) ("[A]n exemption [is] . . . to be recognized only where the property falls clearly and unmistakably within the express words of a legislative command.").  Accordingly, the Board declined to read into the statute a procedure (the aggregation of individual corporations' deductions) that the Legislature did not choose to include.  See Commissioner of Revenue v. Cargill, Inc., 429 Mass. 79, 82 (1999) (quoting King v. Viscoloid Co., 219 Mass. 420, 425 (1914))("we have no right to . . . read into the statute a provision which the Legislature did not see fit to put there, whether the omission came from inadvertence or of set purpose.").    
Moreover, General Electric Co. v. Commissioner of Revenue, 402 Mass. 523 (1988), cited by the taxpayer, actually upends the taxpayer's aggregation-of-deductions theory because, even considering the statements of dicta that espouse a so-called "single entity approach," General Electric clearly indicates that the determination of a combined group's taxable net income under the pre-1988 version of § 30(5)(b) required first a separate evaluation of the tax attributes of each individual entity.  As stated by the Supreme Judicial Court, the issue in that case was whether corporate taxpayers electing to file combined returns under the then-applicable version of § 32B should "first combine their net incomes, then adjust that sum under G.L. c. 63, § 38(a), to arrive at the group's taxable net income and, lastly, apportion the group's taxable net income to Massachusetts by using a combined apportionment factor, or should they first separately determine and apportion the taxable net income of each affiliated corporation, and then combine those sums to arrive at the group's income taxable in Massachusetts?"  Id. at 524 (emphasis added).  
As evidenced from the carefully-worded statement of the issue quoted above, and contrary to NYNEX's interpretation of the case, the Court affirmed the Board's ruling in General Electric that the calculation of a corporate group's taxable net income under § 38(a) begins with the individual net incomes of each corporate entity:  "the taxpayers assert, and the Board agrees, that corporations which elect to file a combined Massachusetts return under § 32B should combine each individual corporation's net income, reduce it to taxable net income, and then apportion that combined amount to Massachusetts pursuant to § 38."  Id. at 524-25.  The Court clearly specified here that the calculation of a taxpayer group's taxable net income combines the net income of each entity, not the gross income and the individual items of income and deductions that comprise individual net income figures.  Therefore, the combined taxable net income figure calculated under § 38 retains the individual tax attributes of each individual entity.  This premise holds true even if the corporate taxpayer group were to be treated as a single entity because even a single corporation "would, of course, first combine the net income of its divisions" in determining taxable net income under § 38(a).  Id. at 527 (emphasis added).  General Electric thus espouses an individual-entity approach, which preserves the individual tax attributes of each entity prior to the calculation of the corporate group's taxable net income.  Accordingly, General Electric supports the notion that a combined group member's net operating loss carryovers must be used, if at all, by the member which generated the loss to arrive at its individual net income, which is then combined with the net incomes of the other members to arrive at the combined taxable net income of the Taxpayer Group.
The Board found that the retention of the individual tax attributes of each entity subject to tax has been a consistent theme throughout the various forms of the corporate excise statutes.  In the recent decision of Macy's East v. Commissioner of Revenue, 2002 ATB Adv. Sh. 522 (November 5, 2002), the Board ruled that the current Massachusetts provision governing net operating loss carryovers, § 30(5)(a), does not permit the appellant to carry forward net operating losses sustained by corporations before they had merged into Macy's East.  In that decision, the Board espoused the individual-entity approach to the net operating loss deduction, finding that "pursuant to the principles of combined accounting in G.L. c. 63, § 32B, net operating losses must be carried forward separately by each member of a combined group, thereby retaining the individual tax attributes of each member of the combined group."  Id. at 532 (citing Farrell Enterprises, Inc. v. Commissioner of Revenue, 46 Mass. App. Ct. 564 (1999) (affirming the Board's finding that principles of combined accounting in post-1988 version of G.L. c. 63, § 32B dictate that net operating losses be carried forward separately by each member of a combined group, thus retaining the individual tax attributes of each member of the combined group)).  The Board here ruled that the long-standing individual-entity approach also applied to the version of § 30(5)(b) that was in existence at the time of this appeal.  See Macy's East, 2001 ATB Adv. Sh. at 535 (citing Farrell Enterprises, 46 Mass. App. Ct. at 572).  
The Board also found that the taxpayer's reliance on State Tax Commission v. LaTouraine Coffee Company, Inc., 361 Mass. 773 (1972) and Walter Kidde & Company, Inc. & others v. Commissioner of Revenue, 389 Mass. 577 (1983) was misplaced.  First, the issue in LaTouraine Coffee Company was whether a corporate taxpayer group filing a combined corporate excise return could exclude an intercompany dividend from the income reported on the combined return.  However, the exclusion of an item from income has no relevance to the determination of whether two corporate entities can combine their individual items of income and deductions before arriving at net income.  Accordingly, the Board ruled that LaTouraine Coffee Company did not further NYNEX's argument.
Likewise, Walter Kidde & Company was not relevant to the instant appeal.  In that case, the Court allowed an investment tax credit of one member of a combined group to be used to offset the total excise due from the combined group.  Id. at 578.  As the Commissioner correctly pointed out, a tax credit is taken against the tax itself, after deductions have been made from the individual gross income of each corporate entity.  Credits do not affect the calculation of each entity's net income, which figures are combined to arrive at the taxable income apportioned to Massachusetts.  Moreover, unlike the present appeal, there was no suggestion in Walter Kidde that the corporation claiming the investment tax credit was prohibited from claiming the credit because more than fifty percent of its stock was owned by another corporation.  Therefore, the Board found that Walter Kidde was inapposite to this appeal.
	Furthermore, the taxpayer's aggregation-of-deductions theory would lead to anomalous results in contravention of sound policies of statutory interpretation.  As noted earlier, the election to file a Massachusetts combined return is permitted to those corporations filing a federal consolidated return.  See G.L. c. 63, § 32B.  Pursuant to Code § 1504, affiliated corporations are permitted to file a consolidated federal return with a parent corporation that owns at least eighty percent of their voting stock.  As pointed out by the Commissioner, NYNEX's theory would allow a corporation to deduct net operating loss carryovers if either (1) the corporation participated in a combined return, in which case at least eighty percent of its voting stock would be owned by another corporation, or (2) the corporation did not participate in a combined return and less than fifty percent of its voting stock was owned by another corporation.  Under NYNEX's theory, a corporation in which fifty to seventy-nine percent of its voting stock was owned by another corporation would be trapped in a "net operating loss limbo," unable to carry forward its net operating losses on its own or within a combined taxpayer group.  A statute should be construed as "'a consistent and harmonious whole, capable of producing a rational result consonant with common sense and sound judgment.'"  La Touraine Coffee, 361 Mass. at 778 (quoting Haines v. Town Manager of Mansfield, 320 Mass. 140, 142 (1946)).  The Board ruled that the Legislature could not have intended this anomalous result.  
	Therefore, the Board ruled that pursuant to the applicable version of § 32B, as interpreted in General Electric, each individual member of the combined group at issue was required to arrive at its own net income before the calculation of the combined taxable net income of the Taxpayer Group.  "Net income," as defined by statute, specifically disallowed the net operating loss carryovers at issue to be taken by NYNEX's subsidiaries, because the subsidiaries failed the fifty-percent ownership test of G.L. c. 63, § 30(5)(b)(ii).  Moreover, pursuant to the individual-entity approach of determining net income, as required by § 30, NYNEX could not deduct net operating loss carryovers which were accumulated by corporations other than NYNEX.  Accordingly, the Board ruled that the Commissioner's assessment was proper and issued a decision for the appellee in this appeal.

  	
					APPELLATE TAX BOARD

				By:	__________________________
					Abigail A. Burns, Chairman

A true copy,

Attest: __________________
	   Clerk of the Board

 NYNEX was incorporated in 1983 as part of an anti-trust settlement with the United States Department of Justice.  Pursuant to the settlement, the many so-called "Baby Bell" operating companies owned by American Telephone and Telegraph Company (AT&T") were divested from AT&T and held by one of seven regional holding companies.  NYNEX was the regional holding company for the former New England Telephone and Telegraph Company and New York Telephone Company.  NYNEX became the owner of these two operating companies on January 1, 1984 and began operations at that time.
 The net operating losses carried forward from 1984 totaled $121,814,625, and those from 1986 totaled $65,724,711.
 St. 1988, c. 202, § 15 amended G.L. c. 63, § 32B by providing the following paragraph:
When such election is made, each and every member of the consolidated group subject to taxation under section thirty-two or thirty-nine shall be included in such return of combined net income.  The combined net income shall be determined as follows:  (a) the taxable net income of each such corporation apportioned to this commonwealth pursuant to the provisions of section thirty-eight shall first be separately determined; and (b) the taxable net income of each such corporation, as so determined, shall then be added together and shall constitute their combined net income taxable under this chapter.
(emphasis added).  This amendment was made effective for tax years ending on or after December 31, 1988 and was therefore not in effect for the tax year at issue.
  After the amendments to § 32B, effective for tax years ending on or after December 31, 1988 (see note 3 above), the Appeals Court affirmed the Board's ruling in Farrell Enterprises, Inc. v. Commissioner of Revenue, 46 Mass. App. Ct. 564, 570 (1999), in which the court questioned the applicability of General Electric's statements promoting a single-entity theory of combined returns to the post-1988 version of § 32B:  "The introduction of the § 32B method of calculating 'combined net income' of a corporate group after July 26, 1988, leaves no room for the General Electric construct of a 'single organization.'" (citing Morrison v. Lennett, 415 Mass. 857, 863 (1993)("It can be assumed that new legislation alters existing law.")).

ATB 2002-721