SAHI USA, Inc. v. Commissioner of Revenue (October 27, 2006)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


SAHI USA, INC.    	        v.	 COMMISSIONER OF REVENUE
	   

Docket No. C262668				 Promulgated:
							 October 27, 2006


This is an appeal under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39(c) from the refusal of the appellee to grant an abatement of corporate excise assessed pursuant to G.L. c. 63, 39 against SAHI USA, Inc. ("SAHI" or "appellant") for the tax year ended December 31, 1995 ("tax year at issue").     
Commissioner Scharaffa heard the appeal and was joined in the decision for the appellee by Commissioners Egan, Rose, and Gorton.  Chairman Hammond took no part in the consideration and decision of this appeal.  
These findings of fact and report are made at the requests of the appellant and appellee pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.


James F. Millea, Jr., Esq. and Philip S. Olsen, Esq. for the appellant.

John DeLosa, Esq. for the appellee.

FINDINGS OF FACT AND REPORT
On the basis of an agreed statement of facts and exhibits, the Appellate Tax Board ("Board") made the following findings of fact.  
At all times relevant to this appeal, SAHI was a corporation organized under the laws of Delaware.  On September 15, 1996, pursuant to a valid extension, SAHI timely filed its Massachusetts Foreign Business or Manufacturing Corporation Excise Return for the tax year at issue, in which it claimed it owed the minimum corporate excise of $456.  Following an examination of this return, the Commissioner of Revenue ("Commissioner") issued a Notice of Intention to Assess ("NIA"), dated August 27, 1998, in which he proposed to assess an additional corporate excise in the amount of $1,730,302.00, plus interest.  After a conference at the Commissioner's Appeal and Review Bureau, the Commissioner issued a revised NIA dated July 1, 1999 in which he reduced
the proposed assessment to $1,040,704.00, plus interest.  The Commissioner then issued a Notice of Assessment dated July 9, 1999 to SAHI assessing corporate excise in the amount of $1,040,704.00, plus interest.  On or about October 7, 1999, SAHI timely filed an abatement application with the Commissioner, seeking an abatement of corporate excise in the amount of $1,040,704.00, plus interest.  By Notice of Abatement Determination dated January 4, 2002, the Commissioner gave notice that he had denied SAHI's abatement application.  On March 4, 2002, SAHI seasonably filed its Petition with the Board.  On the basis of these facts, the Board found it had jurisdiction over this appeal.
The principal issue raised in this appeal is whether the appellant is taxable in Massachusetts on its distributive share of partnership income allocated to it by a partnership that sold its interest in another partnership that owned and operated a Boston hotel.  SAHI is the successor in interest to SAHI N.V. ("SAHI NV"), a Netherlands Antilles corporation.  On or about February 17, 1980, SAHI NV became a limited partner in Meridien Boston Group ("MBG"), a New York limited partnership.  MBG invested in Oliver Street Associates ("OSA"), a Massachusetts joint venture, which was formed to develop, own, and operate the Meridien Hotel in Boston, Massachusetts.  On February 26, 1980, MBG and the Pearl Street Company ("PSC"), a Massachusetts limited partnership, entered into a joint venture agreement resulting in the formation of OSA as a Massachusetts general partnership with a principal place of business in Boston.  At all times relevant to this appeal, the percentage interests of MBG and PSC in OSA were 60% and 40%, respectively.  SAHI NV's limited partnership interest in MBG was 58.125%.
On August 1, 1988, SAHI NV elected to be treated as a United States corporation under Section 897(i) of the Internal Revenue Code ("Code").  On August 25, 1988, SAHI was formed, and SAHI NV merged into SAHI.  As a result of the merger, SAHI became the successor limited partner in MBG.  On November 1, 1990, SAHI became the sole general partner in MBG.  As of that date and at all relevant times, SAHI owned a 3.125% interest as the sole general partner in MBG and continued to own a limited partnership interest in MBG, which was reduced to 56.875%.  
On October 12, 1995, MBG, PSC, and OSA entered into an agreement whereby MBG disposed of its entire interest in OSA and received the sales proceeds.  For federal tax purposes, MBG reported a gain in the amount of $31,494,076.00 with respect to the sale of its interest in OSA.  MBG allocated and distributed the income from that sale to its partners and then liquidated.  MBG allocated to SAHI a capital gain in the amount of $18,896,446.00 and ordinary income in the amount of $274,509.00.  SAHI received additional consideration for its partnership interest in MBG in the amount of $214,652.00.   
During the years when OSA operated the Meridien Hotel, SAHI filed returns with the Commissioner and paid the $456.00 minimum excise tax imposed on foreign corporations.  For the tax year at issue, SAHI reported the gain allocated to it by MBG but computed its apportionment percentage as zero.  SAHI thus paid the minimum tax of $456.00 imposed on foreign corporations.  SAHI also took the position that it did not have nexus with Massachusetts with respect to the gain or income relating to MBG's sale of its interest in OSA.  
During its existence, SAHI had no employees, offices, or property other than interests acquired as investments in real estate.  MBG has had no employees, offices, or property other than its partnership interest in OSA.  OSA had no employees during the period at issue.  However, OSA owned and operated the Meridien Hotel in Boston, and all of its property and sales were in Massachusetts.  
To the extent that it is a finding of fact, and for the reasons stated more fully in the Opinion, the Board found that SAHI, as a general and limited partner in MBG, which in turn was a partner in OSA, was "doing business" in the commonwealth.  SAHI, as general partner and owner of the majority of interest in MBG, effectively controlled and managed OSA's business.  Accordingly, SAHI was carrying on a business for profit and was "actually doing business" in the commonwealth, and therefore, SAHI had sufficient nexus in Massachusetts to subject it to the Massachusetts corporate excise.  
Further, SAHI's distributive share of the gain from MBG's share of the proceeds from the sale of its interest in OSA is properly allocable to Massachusetts.  The income-producing activity generating the gain from MBG's sale of its interest in OSA is properly attributable to Massachusetts because the gain was realized by MBG, which because of its interest in OSA was doing business in Massachusetts.  Accordingly, the portion of MBG's gain distributed to SAHI is also properly attributable to Massachusetts.  
For all of the foregoing reasons, the Board found that SAHI was subject to Massachusetts corporate excise on its distributive share of income derived from MBG's sale of its interest in OSA.  Accordingly, the Board issued a decision for the appellee in this appeal.

OPINION
Pursuant to G.L. c. 63, § 39, a foreign corporation "actually doing business in the commonwealth" is subject to tax on its net income derived from business conducted in the commonwealth.  The statute defines "doing business" to "mean and include each and every act, power, right, privilege, or immunity exercised or enjoyed in the commonwealth, as an incident to or by virtue of the powers and privileges acquired by the nature of such organizations . . . ."  G.L. c. 63, § 39(1).   
The primary issue presented to the Board in this appeal is whether SAHI's share of gain from MBG's sale of its interest in OSA was subject to the corporate excise.  This inquiry centers on two related issues: (1) whether SAHI was a corporation engaged in business in Massachusetts, and thus had nexus with Massachusetts, because of its ownership of interests in MBG, a partnership which held a majority interest in OSA, which itself was a partnership that owned and operated a Boston hotel; and (2) whether the gain distributed to SAHI from MBG's sale of its partnership interest in OSA was derived from business that SAHI carried on in Massachusetts and thus subject to the corporate excise.  
The appellant also raised two subsidiary issues: (1) whether the income distributed to SAHI from MBG's sale of its interest in OSA should be offset by SAHI's share of deductions, earned in previous years, associated with its interest in MBG; and (2) whether the calculations of SAHI's apportionment factor was consistent with G.L. c. 63, § 38. 
SAHI's ownership of partnership interests in MBG established nexus with Massachusetts for imposition of the corporate excise. 

The Massachusetts partnership taxation system is based on the aggregate theory of partnership taxation, incorporated into Massachusetts tax law by G.L. c. 62, § 17.  Under the aggregate theory, a partnership is treated as an aggregate of its partners and thus income, losses, deductions, and credits "pass through" the partnership entity and are realized and reported by the individual partners.  In adopting G.L. c. 62, § 17, Massachusetts codified the aggregate theory for partnerships and aligned the state system with the federal system of partnership taxation.  See, e.g., Bernstein v. State Tax Commission, ATB Findings of Fact and Reports 1974-331, 336 ("By St. 1966 c. 698 Massachusetts changed radically its treatment of the taxation of partnerships and partners by abandoning the 'entity' theory, so called, and apparently putting Massachusetts on a basis very much like the federal IRC which taxes only the individual partner.").  
For purposes of the Massachusetts personal income tax, a nonresident individual partner is taxable under G.L. c. 62, §§ 17 and 5A on his distributive share of income from any partnership that is either engaged in Massachusetts business or owns or leases real property in Massachusetts.  Several Board decisions have applied the aggregate theory in ruling that individual partners, whether general or limited, were subject to Massachusetts income taxation because the activities of the partnership were imputed to its partners.  See, e.g., Neese v. Commissioner of Revenue, ATB Findings of Fact and Reports 1987-477, 488 (finding that a limited partner was engaged in the business of the partnership and, therefore, entitled to claim his distributive share of partnership losses as a deduction on his nonresident income tax return); Katz v. Commissioner of Revenue, ATB Findings of Fact and Reports 1998-537, 542-43, aff'd, 48 Mass. App. Ct. 1117 (2000) (finding a nonresident limited partner taxable on his distributive share of partnership income earned from the partnership's sale of real estate located in the commonwealth "to the same extent as if the gain were received directly by the Appellant and his wife").  
Recently, the Board applied the principle that a partner is engaged in the business of the partnership and ruled that an out-of-state corporate partner had nexus with Massachusetts.  Utelcom, Inc. v. Commissioner of Revenue, ATB Findings of Fact and Reports 2005-09.  The Board in Utelcom ruled that in G.L. c. 63, § 39, the statute addressing the commonwealth's power to assess a tax on a corporation, the definition of "doing business" is "broad enough to include earning income from a limited partnership interest" when those earnings are derived from the entity's activities within the state.  Id. at 17 (citing International Harvester v. Wisconsin Dep't of Tax'n, 322 U.S. 435, 441-42 (1944) and Borden Chemicals and Plastics and L.P. v. Zehnder, 726 N.E.2d 73, 79 (Ill. App. Ct. 2000)).  Accordingly, the Board ruled that the ruling in Neese - that an individual limited partner will be subject to tax on his distributive share of income earned by a partnership engaged in business in the commonwealth - also applied to subject to tax the distributive share of income allocated to a corporate limited partner by a partnership engaged in business in the commonwealth.  Utelcom, ATB Findings of Fact and Reports at 16.  
In addition, the Commissioner has promulgated a regulation at 830 CMR 63.39.1(8)(a), which provides that a foreign corporation which is a general or limited partner in a partnership "does business in Massachusetts" if the partnership's activities, "if conducted directly by a foreign corporation, would subject that corporation to the corporate excise under the provisions of M.G.L. c. 63, § 39."  Accordingly, a partnership's activities are imputed to the corporate partner to determine whether the necessary nexus exists to subject the corporate partner to the Massachusetts corporate excise.  
The regulation further provides that "[i]n the case of a tiered partnership, as defined in 830 CMR 63.39.1(8)(b)(3), the activities of the partnership(s) occupying the lower tier(s) of a tiered partnership arrangement are imputed, proportionally, to all partners holding interests in partnership(s) occupying higher tier(s)."  A "tiered partnership arrangement" is defined as "one in which some or all of the interests in one partnership (lower tier partnership) are held by a second partnership (upper tier partnership).  A tiered partnership arrangement may have two or more tiers."  830 CMR 63.39.1(8)(b)3.  
The partnership arrangement under which SAHI owned a general and limited partnership interest in MBG, which in turn owned a partnership interest in OSA, is a "tiered partnership arrangement" as defined by 830 CMR 63.39.1(8)(b)(3).  Pursuant to that regulation, OSA's activities of operating the Meridien Hotel in Boston, which undeniably qualified as "doing business" in the commonwealth, were imputed to SAHI by virtue of SAHI's interests in MBG, thereby providing nexus to the commonwealth for taxation of SAHI's distributive share of income from MBG. 
G.L. c. 62C, § 3 provides that "[t]he Commissioner may prescribe regulations and rulings, not inconsistent with law, to carry into effect the provisions of said statutes, which regulations and rulings, when reasonably designed to carry out the intent and purposes of said provisions, shall be prima facie evidence of their proper interpretation."  The Supreme Judicial Court and the Board have accorded weight to the Commissioner's interpretations of the commonwealth's taxing statutes.  See, e.g., Lowell Gas Co. v. Commissioner of Corps. & Tax'n, 377 Mass. 255, 262 (1979); Ace Heating Service, Inc. v. State Tax Comm'n, 371 Mass. 254, 256 (1976); FMR Corp. v. Commissioner of Revenue, ATB Findings of Fact and Reports 2003-550, 570-71, aff'd, 441 Mass, 810 (2004).  The Board found that 830 CMR 63.39.1(8)(a) and (b) were consistent with the aggregate theory of taxation of partnerships embodied in G.L. c. 62, § 17, and cases attributing a partnership's trade or business to its partners.  See, e.g., Neese, Katz, Utelcom, supra.  Moreover, the Commissioner's regulations prescribe the same result in this appeal as that in Utelcom, that the corporate partner appellant had nexus with the commonwealth by virtue of its membership in a partnership engaged in business in the commonwealth.  
The facts of this appeal are distinguishable from those of Commissioner of Revenue v. Dupee, 423 Mass. 617 (1996), and Cohen v. Commissioner of Revenue, ATB Findings of Fact and Reports 1995-179, two cases in which the Supreme Judicial Court and the Board, respectively, ruled that a nonresident individual partner was not subject to Massachusetts tax on the income derived from the sale of his partnership interest.  In Dupee, the Supreme Judicial Court held that a nonresident individual shareholder was not taxable on his share of gain from the sale of his interest in an S corporation, because the source of the gain was not a trade or business carried on by the taxpayer in the commonwealth, as is required by G.L. c. 62, § 5A(a)(1).  Dupee, 423 Mass. at 621.  Similarly, the Board in Cohen found that where the individual appellants sold their interests in the partnerships, "[t]he appellants are not subject to tax, absent a showing that the income in question was derived from or effectively connected with a trade or business which the appellants themselves were conducting."  Cohen, ATB Findings of Fact and Reports at 196.  Absent that finding, the Board in Cohen ruled that the income was not includible in the nonresident individual partner's income pursuant to G.L. c. 62, § 5A(a)(1).  Id.
The statute pursuant to which an individual nonresident is subject to Massachusetts tax, G.L. c. 62, § 5A, specifically provides that a nonresident individual is subject to tax only on certain items of income, including income derived from a trade or business personally carried on by the taxpayer in the commonwealth.  Accordingly, sales of tangible assets such as partnership interests, unlike distributive share income from a partnership, are not taxable to a non-resident individual.  
By contrast, for purposes of the corporate excise, G.L. c. 63, § 38 taxes corporations on their apportioned share of their total income, with certain modifications from federal gross income not relevant here.  Further, unlike the individual income tax under § 5A, sales of intangible property are specifically included in the numerator of the Massachusetts sales factor, if the income-producing activity is performed either entirely or in a greater proportion in Massachusetts than any other state.  Accordingly, unlike § 5A at issue in Cohen and Dupee, when nexus exists, the corporate excise apportionment statute governing the taxation of the gain at issue in the present appeal explicitly provides for the Massachusetts taxation of gain from the sale of intangibles.
For all of the foregoing reasons, the Board ruled that SAHI was engaged in business in Massachusetts during the tax year at issue by reason of its ownership of general and majority limited partnership interests in MBG, which in turn held partnership interests in a partnership that owned and operated Le Meridien Hotel in Boston.  Accordingly, the Board ruled that SAHI had nexus with Massachusetts sufficient for the imposition of the corporate excise.  
SAHI's distributive share of income realized from MBG's sale of its interest in OSA was attributable to an activity conducted in Massachusetts and thus subject to the corporate excise. 

A corporation which has nexus with Massachusetts is subject to the corporate excise as provided in G.L. c. 63, § 39.  The excise consists of a "net worth" measure (which is not at issue in this appeal) and a "net income" measure.  G.L. c. 63, § 30(4) provided during the year at issue that Massachusetts "net income" was a corporation's "gross income," as defined under the Code, less the deductions, but not the credits, allowable under the Code.  
A corporation's Massachusetts taxable net income is its net income with certain adjustments not relevant to this appeal.  The corporation's taxable net income is then apportioned to Massachusetts by multiplying it by a three-factor formula, which is "a fraction, the numerator of which is the property factor plus the payroll factor plus twice the sales factor, and the denominator of which is four."  G.L. c. 63, § 38(c).  Each of the respective factors is a fraction with a numerator containing Massachusetts property, payroll, or sales, and the denominator containing the corporation's total property, payroll and sales worldwide. 
There is no dispute that the gain distributed to SAHI from MBG's sale of its interest in OSA was properly includible in SAHI's Massachusetts taxable net income subject to apportionment.  SAHI reported its distributive share of the gain from the sale of OSA in its taxable net income to be apportioned to Massachusetts.  Neither MBG nor SAHI had payroll or property located in Massachusetts during the tax year at issue.  However, SAHI received its distributive share of the gain derived from the sale of MBG's partnership interest in OSA during the tax year at issue.  Accordingly, the issue to be resolved in this appeal is whether the proceeds distributed to SAHI from the sale of MBG's interest in OSA are properly treated as receipts from a Massachusetts sale.   
Under G.L. c. 63, § 38(f), the sales factor is calculated as "a fraction, the numerator of which is the total sales of the corporation in this commonwealth during the taxable year, and the denominator of which is the total sales of the corporation everywhere during the taxable year."  To determine whether the sale of the intangible interest in OSA is a Massachusetts sale, reference is made to § 38(f), which provides that:
Sales, other than sales of tangible personal property, are in this commonwealth if:

the income-producing activity is performed in this commonwealth; or

the income-producing activity is performed both in and outside this commonwealth and a greater proportion of this income-producing activity is performed in this commonwealth than in any other state, based on costs of performance.

  In the present appeal, SAHI offered no evidence as to the performance of any income-producing activity outside of Massachusetts.  Neither SAHI nor MBG had any employees or property, either within or outside Massachusetts.  The one significant asset giving rise to the income at issue is the Meridien Hotel, a business enterprise and real estate holding located in Massachusetts.  OSA's business included the ownership, operation, and management of the Meridien Hotel; that business is attributable to its partner, MBG, and the partners of MBG, including SAHI.  See Utelcom, ATB Findings of Fact and Reports at 16.  The operation and management of the hotel were, on this record, exclusively performed in Massachusetts.
Further, in determining where income-producing activities take place for purposes of siting the sale of an intangible, it is proper to consider the "work and business effort that developed the value of [the] intangibles."  See, e.g., General Mills Inc. v. Commissioner of Revenue, 440 Mass. 154, 175 (2003), cert. denied, 541 U.S. 973 (2004) (rejecting taxpayer's argument that income-producing activity occurred where the intangible sale was negotiated because this argument "trivializes the years of work and business effort that developed the value of [the] intangibles").  
The value of the partnership interest giving rise to the gain at issue is directly related to the ownership, operation and management of the Meridien Hotel.  Because the work and business effort associated with these activities was, on this record, performed exclusively in Massachusetts, the receipts derived from the sale of MBG's interest in OSA is a Massachusetts sale for purposes of § 38(f).  
In addition, the Commissioner has promulgated a regulation specifically addressing the sale of a partnership interest held by a corporate partner:  
Income-producing activity includes the sale of a partnership interest . . . .  Gross receipts from the sale of a partnership interest are attributable to Massachusetts if the sum of the partnership's Massachusetts property and payroll factors for the taxable year in which the sale occurred exceeds the sum of its property and payroll factors for any other one state. 

830 CMR 63.38.1(9)(d)(3)(d). 
The Board found and ruled that the above regulation, which attributes sales of partnership interests to Massachusetts if the partnership's Massachusetts property and payroll factors exceed the sum of property and payroll factors in any other one state, is a reasonable interpretation of § 39(f), which requires that "a greater proportion of [an] income-producing activity" be performed in Massachusetts.  See, e.g., Surel International, Inc. v. Commissioner of Revenue, ATB Findings of Fact and Reports 1998-494 (finding that G.L. c. 64, § 38(f) "requires a comparison of costs between those incurred in Massachusetts and those incurred in other individual states").  A reasonable administrative interpretation of a statute by the agency charged with its enforcement, adopted contemporaneously with its enactment or amendment, is entitled to deference.  G.L. c. 62C, § 3 and G.L. c. 14, § 6.  See also Lowell Gas Co., Ace Heating Service, Inc., and FMR, supra.        
 OSA's only activity was the ownership, operation, and management, in Massachusetts, of the Meridien Hotel, and all of its property and sales were in Massachusetts.  Therefore, OSA's Massachusetts property and sales factors for the tax year at issue exceeded its property and sales factors for any other one state.  According to the statute, as further explained in 830 CMR 63.38.1(9)(d)(3)(d), SAHI's gross receipts attributable to the sale by MBG of a partnership interest in OSA is thus attributable to Massachusetts.    
For all of the foregoing reasons, the Board found and ruled that the gain distributed to SAHI from MBG was properly includible in SAHI's income subject to tax in Massachusetts.  
The appellant was not entitled to offset its distributive share of income with deductions which it claimed were suspended for future use against Massachusetts income. 

The appellant claimed that its deductions of at least $12,388,865, from depreciation and other costs associated with its interest in MBG, should offset the gain it realized on MBG's distribution of SAHI's share of the proceeds from MBG's disposition of its interest in OSA.  According to the appellant's argument, it received no Massachusetts tax benefit from the depreciation deductions generated prior to the year of disposition of OSA, because while it had the ability to apply the deductions to other tax years for federal purposes, it had no Massachusetts income to which it could apply the deductions.  Therefore, it argued, the losses and deductions were "suspended" pursuant to Code § 704(d), and they became available to SAHI for Massachusetts tax purposes in the form of net operating losses.  SAHI concluded that the losses were available for use during the tax year at issue, when it received its distributive share of income from MBG, and therefore, it did not realize any net income during the tax year at issue.
Massachusetts "net income" is defined as "gross income less the deductions, [] allowable under the provisions of the [] Code."  G.L. c. 63, § 30(4).  Amounts of depreciation expenses as federally determined under Code § 167 were allowable for deduction against Massachusetts gross income at G.L. c. 62, § (d)(1), regardless of whether the appellant had claimed them.  Basis adjustments determined in accordance with the Code are applicable to the Massachusetts basis of property.  See G.L. c. 62, § 6F(c)(1) and Treat v. Commissioner of Revenue, 52 Mass. App. Ct. 208, 212 (2001) ("As G.L. c. 62, § 6F has incorporated Federal income tax provisions, it should be interpreted as it would be interpreted for Federal income tax purposes.").  As the Board in Insoft v. Commissioner of Revenue explained, "[t]he tax benefit rule enters into the scheme of G.L. c. 62 to the extent it varies the amount of federal gross income, the starting point for Massachusetts income." Insoft v. Commissioner of Revenue, ATB Findings of Fact and Reports 1998-741, 757.  
However, there is no ground for variation between federal and Massachusetts adjusted basis in this situation where depreciation deductions were allowed for federal income tax and were allowable under Massachusetts tax law.  "As the Supreme Court has stressed, tax benefits from allowable depreciation adjustments are irrelevant in arriving at the amount of adjusted basis."  Insoft, ATB Findings of Fact and Reports at 755  (citing United States v. Hill, 506 U.S. 546, 557 (1993) ("Whether or not the taxpayer ever took a depreciation, amortization, or depletion deduction with respect to the item he is selling, he must for purposes of [Code] § 1016 determine whether such deductions were allowable with respect to that item, and reduce his basis by at least that allowable amount.")).  See also, Bill DeLuca Enterprises, Inc. v. Commissioner of Revenue, ATB Findings of Fact and Reports 1999-252, 263-64, aff'd, 431 Mass. 314 (2000) (finding that the appellant was required to use the same depreciation methods at the state and federal level, and "[t]hat a tax benefit was not derived had little relevance to the matter.").  The Board thus ruled that the appellant was required to include the full amount of gain realized as Massachusetts income, regardless of whether it had received any benefit from earlier depreciation expenses.  
The facts of the instant appeal are analogous to those of Insoft v. Commissioner of Revenue.  The appellant in Insoft was a nonresident limited partner in a Massachusetts limited partnership, which realized gain on the sale of its real estate holdings.  Insoft, ATB Findings of Fact and Reports at 742.  The partnership claimed substantial depreciation deductions, which greatly reduced its federal basis in the properties sold.  Id. at 746.  The appellant used his distributive share of the partnership's depreciation expenses to offset income on his federal tax return for prior tax years.  Id.  However, the appellant had no other Massachusetts source income to be offset by his share of depreciation expense deductions, and he never filed nonresident Massachusetts personal income tax returns prior to the tax year at issue.  Id. 
In ruling against the appellant, the Board in Insoft distinguished that appeal from two earlier appeals, T.H.E. Investment Corp. v. Commissioner of Revenue, ATB Findings of Fact and Reports 1986-473 and Weston Marketing Corp. v. Commissioner of Revenue, ATB Findings of Fact and Reports 1994-34, aff'd, 40 Mass. App. Ct. 1108 (1996), in which the Board had ruled against inclusion in Massachusetts income of an item of federal gross income.  In T.H.E. Investment, the Board ruled that the taxpayer was not required to include in Massachusetts income the recapture of excess loss accounts resulting from the filing of consolidated federal returns, because the excess losses were never deductible in determining the taxpayer's income taxable in Massachusetts.  T.H.E. Investment, ATB Findings of Fact and Reports at 479.  Likewise, in Weston Marketing, the Board found that the taxpayer was not required to include in Massachusetts income the recapture of capital losses taken on its federal return under the mark-to-market rules, because while the capital losses were allowed federally, they were never allowable in determining the taxpayer's income taxable in Massachusetts because of differences between the calculations of taxable income under the two separate taxing schemes.  Weston Marketing, ATB Findings of Fact and Reports at 46 ("The Supreme Judicial Court has rejected the essence of the appellee's argument that gross income for Massachusetts purposes is the number reported on the taxpayer's federal return; the reference to the Code is to its 'provisions' rather than the amounts reported.") (citing Rohrbough, Inc. v. Commissioner of Revenue, 385 Mass. 830, 832 (1982)).  
Conversely, the gain at issue in Insoft was related to a basis adjustment which was still applicable for Massachusetts purposes, even though it was unclaimed because the appellant did not file Massachusetts returns.  As the Board noted, "T.H.E. Investment and Weston Marketing did not address situations where there was congruence in the applicability of relevant federal and state tax provisions in prior years."  Insoft, ATB Findings of Fact and Reports at 756.  In Insoft, there was congruence between the federal and Massachusetts provisions at issue, namely the federal basis calculations which were incorporated into Massachusetts law pursuant to G.L. c. 62, § 2.  Accordingly, the Board in Insoft ruled that the partnership's basis in the properties was the same for federal and Massachusetts purposes, and the gain generated from the sale of the real estate interest was to be recognized regardless of whether the taxpayer had received a prior Massachusetts benefit from depreciation deductions. 
In the instant appeal, the federally-determined depreciation deductions generated prior to the year at issue were allowable as a deduction against Massachusetts
gross income, regardless of whether the appellant had claimed them.  The appellant here thus "did not prove that Massachusetts recognition of the federal gain impermissibly resulted in taxation of 'a mere paper profit.'"  Parker Aff. Cos., Inc. v. Dep't of Revenue, 382 Mass. 256, 264 (1981) (citing Bryant v. Commissioner of Corps. & Taxation, 291 Mass. 498, 501 (1915)).  Accordingly, the Board ruled that the allowable depreciation expenses reduced MBG's basis in its interest in OSA, and the appellant was required to include the gain realized as Massachusetts income regardless of whether it had received any benefit from those earlier depreciation expenses.  The Board thus upheld the Commissioner's determination on this issue.
The sales and payroll apportionment factors applied to SAHI's income taxable to Massachusetts were calculated consistently with the Commissioner's regulation.
 
The appellant also contended that its sales factor should be adjusted to exclude the proceeds from the sale of MBG's partnership interest in OSA because, pursuant to 830 CMR 63.38.1(9)(d)(3)(c) as in effect during 1995, the use of the partnership interest, an item of intangible
property, was deemed to occur in the state of commercial domicile of the purchaser, which was Delaware.  
The appellant failed to raise this issue in its pleadings or at the hearing but raised it for the first time in its post-trial brief.  Pursuant to G.L. c. 58A, § 7, "the board shall not consider, unless equity and good conscience so require, any issue of fact or contention of law not specifically set out in the petition upon appeal or raised in the answer."  As the Appeals Court explained in Deveau v. Commissioner of Revenue, 51 Mass. App. Ct. 420, 427 (2001), that section "is straightforward and plain" in its prohibition of the Board "entertain[ing] fact issues or legal arguments that the parties failed to raise in their pleadings unless the board determines that equity and good conscience require it to do so."  The appellant provided no basis upon which the Board could find that equity and good conscience would require it to consider this issue.  
Furthermore, even if the issue were properly raised, the appellant faces a heavy burden in overturning apportionment factors calculated pursuant to established Massachusetts tax law.  It has long been held that the "Constitution imposes no single [apportionment] formula on the States," Wisconsin v. J. C. Penney Co., 311 U.S. 435, 445 (1940).  Moreover, the taxpayer has the "'distinct burden of showing by "clear and cogent evidence" that [the state apportionment formula] results in extraterritorial values being taxed . . . .'" Exxon Corp. v. Dept. of Revenue of Wisconsin, 447 U.S. 207, 221 (quoting Butler Bros. v. McColgan, 315 U.S. 501, 507 (1942) (other citations omitted).  In Becton, Dickinson  & Co. v. Department of Revenue, 383 Mass. 786 (1981), the Supreme Court ruled that: 
If a company is a unitary  business, then a State may apply an apportionment formula to the taxpayer's total income in order to obtain a rough approximation of the corporate income that is reasonably related to the activities conducted within the taxing State. We have upheld apportionment under G. L. c. 63, § 38, in such cases, unless the taxpayer "bears the burden of showing by clear and cogent evidence" that apportionment "resulted in extraterritorial values being taxed."

Id. at 788-89 (quoting W.R. Grace & Co. v. Commissioner of Revenue, 378 Mass. 577, 586 (1979)).
In the instant appeal, the appellant simply makes a bare assertion, unsupported by evidence and advanced for the first time in its post-trial brief.  The Board thus ruled that the appellant failed to meet its burden of proving its assertion that the application of the apportionment formula prescribed by G.L. c. 63, § 38 resulted in extraterritorial values being taxed.

Conclusion
SAHI was both a general and limited partner in a tiered partnership which, by virtue of the Massachusetts activities of OSA, the entity on the lowest tier, was also conducting business in the commonwealth.  Furthermore, the income at issue was SAHI's distributive share of income earned from its interest in MBG, a partnership that was doing business in Massachusetts.  Therefore, the Board ruled that SAHI had nexus with the commonwealth and was subject to tax on its distributive share of the gain realized by MBG from the sale of its interest in the OSA partnership.  The Board also ruled that SAHI could not use its deductions earned in previous years to offset its Massachusetts income subject to tax.  Finally, the Board ruled that the appellant failed to properly raise its argument concerning the inclusion of certain values in its apportionment formula and, even if the argument could be considered, it failed to meet its burden of proving by clear and cogent evidence that the § 38 apportionment formula resulted in extraterritorial values being taxed. 
Accordingly, the Board issued a decision for the appellee in this appeal.  

THE APPELLATE TAX BOARD

By: ________________________________
    Frank J. Scharaffa, Commissioner


   

A true copy,



Attest:_____________________________
                Assistant Clerk of the Board

  While the appellant did not raise it as an issue in the Application for Abatement filed with the Commissioner or in the Petition filed with the Board, the appellant, in its written submissions to the Board, argued that SAHI was entitled to apply passive losses of $1,325,746.00 and of $2,527,207.00 incurred in tax years 1988 and 1989, respectively, to offset the gain it earned in 1995, when it received income from the passive activity of Meridien Boston Group's disposition of its interest in Oliver Street Associates.  The Commissioner's written submission to the Board included a letter, dated May 26, 1999, which indicated that at the hearing before the Commissioner's Appeal and Review Bureau, the parties agreed that "the Taxpayer [was] entitled to the full net operating loss deduction of $5,093,259.00."  The Board noted that the revised NIA, issued after this letter, reduced the appellant's assessment and, therefore, appeared to resolve this issue between the parties. 
  Two other limited partners, HFI USA, a Delaware corporation, and OUFI NV, a Netherlands corporation, each owned a 20% limited partnership interest in MBG.  HFI USA and OUFI NV are not at issue in this appeal. 
  The opposing theory is the entity theory, which treats a partnership as a separate entity apart from its partners.  Subchapter K of the Code, which contains the partnership provisions, adopts the aggregate theory for some income tax purposes but follows the entity theory for others.
 This Act was codified as G.L. c. 62, § 17.
  Nor was the gain attributable to the ownership of real or tangible personal property located in the Commonwealth.  See G.L. c. 62, § 5A(a)(2). 
 Exception not relevant to this appeal.
 The appellant also contended that its Massachusetts payroll factor should be adjusted to zero to reflect SAHI's interest in two Florida partnerships.  The appellant failed to elaborate on this argument, which appears to be directly contrary to the parties' stipulation that SAHI had no employees, and SAHI's tax returns showing a zero payroll factor. 

ATB 2006-794