On November 29, 1984, the Commissioner of Revenue promulgated Corporate Excise Regulation 830 CMR 63.02, Combined Income of a Unitary Business, which set forth the rules by which the Commissioner could require and taxpayers could request combined reporting of income.

On December 11, 1984, the Supreme Judicial Court issued a decesion in favor of the plaintiffs in Polaroid Corporation v. Commissioner of Revenue, 393 Mass. 490 (1984).

The Court concluded that General Laws Chapter 63, Section 39A did not authorize the Commissioner to employ the unitary combination of income in the circumstances of the Polaroid case -- i.e., in the absence of applicable regulations and in the absence of a finding that Polaroid and its affiliates were not conducting business at arm's length.

The Court indicated that the Commissioner does have authority to make adjustments if a finding is made that affiliated corporations are not dealing at arm's length. Therefore, the Department of Revenue will, upon audit, make appropriate adjustments if intercompany transactions are found not to be at arm's length.

The Court also stated that Chapter 63, Section 42 did not authorize the Commissioner to use a worldwide unitary approach but is applicable only when a corporation seeks to use alternative allocation and apportionment methods. The Court declared that Section 42 has "nothing to do with determining a corporation's taxable net income but only concerns the formula used to apportion that income." The Court closed its discussion of Section 42 by noting that the Section did not authorize the worldwide approach even by a corporation seeking relief under Section 42.

As a result of this conclusion by the Court, taxpayers may not file returns or applications for abatement on a unitary basis pursuant to Section 42 as an authorized alternative method of reporting income.

Since Corporate Excise Regulation 830 CMR 63.02 adopted an approach consistent with that rejected by the Supreme Judicial Court in the Polaroid case, the Commissioner has moved to repeal the regulation.

Ira A. Jackson
Commissioner of Revenue

January 8, 1985

TIR 85-2