This Technical Information Release (TIR) is being issued in response to a Supreme Judicial Court decision, General Electric Company v. Commissioner of Revenue, 402 Mass. 523 (1988), and to a subsequently adopted statute, Acts 1988, chapter 202 (hereafter cited as Chapter 202), both of which significantly affect corporations that elect to file returns under G.L. c. 63, § 32B (combined returns). Specifically, this TIR explains the effect of the General Electric decision on corporate filing options for taxable years ending before December 31, 1988, and announces the procedures by which corporations may amend their returns in accordance with the calculation methods of General Electric. The TIR also describes amendments to § 32B which were contained in Chapter 202 and their effect on combined filing for taxable years ending on or after December 31, 1988.
B. General Electric Decision
Since its enactment, G.L. c. 63, § 32B, has permitted corporations that file a consolidated federal income tax return to elect to be assessed on their "combined net income" for purposes of the Massachusetts corporate excise. However, before the amendment of § 32B by Chapter 202, the statute did not define the term "combined net income."
In 1979 the Department ruled that corporations filing combined returns should calculate their combined net income by, first, determining the taxable net income of each member of the corporate group, second, apportioning that income to Massachusetts and, third, combining the apportioned net incomes of the group members. See Letter Ruling 1979-42. (The method of calculating combined net income set out in Letter Ruling 1979-42 will be referred to in the remainder of this TIR as the "LR 79-42 method.") However, in 1988, the Court in General Electric ruled that the LR 79-42 method was not the proper procedure for calculating combined net income under § 32B, as then amended. The Court held that a Massachusetts corporate group must instead calculate its combined net income by, first, combining the net income of the member corporations, second, reducing this figure to taxable net income, and third, apportioning the combined taxable mount to Massachusetts under G.L. c. 63, § 38.
C. Chapter 202
Partly in response to the General Electric decision, the Massachusetts legislature amended § 32B. The amendments have two major effects. First, "combined net income" has been redefined so that the LR 79-42 method of calculation is now reimposed for all tax years ending on or after December 31, 1988. Second, § 32B elections may no longer be made annually. Corporations which elect to file combined returns for taxable years ending on or after December 31, 1988, will be required to continue to file combined returns unless and until they receive permission from the Commissioner to do otherwise. Chapter 202, 5 15, expressly provides that permission will be granted only for a valid business purpose other than a reduction of tax. Chapter 202 also specifies that the Massachusetts combined group must include all members of the federal consolidated group subject to taxation under G.L. c. 63, 55 32, 39, and that any 5 32B election must be made on or before the due date, including any extension of time, for the filing of the return required under G.L. c. 63, 62C of each participating corporation.
D. Relationship Between Chapter 202 and General Electric
As mentioned above, the amendments to 5 32B contained in Chapter 202 apply to taxable years ending on or after December 31, 1988. See Acts 1988, ch. 202, 5 32. The General Electric decision generally controls the interpretation of 5 32B for prior tax years.
In some circumstances, however, Chapter 202 limits the effect of the General Electric decision in past tax years. Section 31 of Chapter 202 provides that at the election of the taxpayer, the LR 79-42 method "shall apply to all taxable periods for which the taxpayer has filed a return based upon..." LR 79-42. The purpose of section 31 is to ensure that taxpayers that relied on LR 79-42 in filing their returns are not required to recalculate their past returns under the General Electric method and, possibly, to pay an unanticipated additional excise.
The effect of section 31 is as follows. Taxpayers that consistently filed combined returns under the LR 79-42 method before the General Electric decision clearly filed their returns "based upon" LR 79-4 . T e Department will not require these taxpayers to recalculate their combined returns using the General Electric method. Rowevar, no taxpayer could reasonably file e a return based upon LR 79-42 after the General Electric decision was issued on June 9, 1988. Therefore, all combine returns filed an or after June 9, 1988, for tax years ending before December 31, 1988, must employ the General Electric method. Furthermore, taxpayers that did not employ the LR 9-42 method on all combined returns filed before the General Electric decision clearly were not relying on LR 79-42. The apartment will require these taxpayers to use the General Electric method in any year, within the statute of limitations for assessment, in which they made a 5 32B election but failed to use the LR 79-42 method, and in any subsequent tax year, ending before December 31, 1988, in which they elected to file a combined return.
A taxpayer that elects, under section 31 of Chapter 202, to retain the LR 79-42 method on combined returns filed before June 9, 1988, must make this election for "all taxable periods" that are subject to the election. A taxpayer may not elect to employ the LR 79-42 method for some past tax years while seeking abatement under the General Electric decision for other tax years.
E. Abatements Under General Electric
Subject to any applicable statute of limitations, corporate taxpayers that filed a consolidated federal income tax return for any tax year ending before December 31, 1988, may wish to amend their corresponding Massachusetts corporate excise returns to incorporate the § 32B calculation method set out in General Electric. In particular, corporations that filed a combined return and calculated their "combined net income" under the LR 79-42 method may wish to recalculate their combined net income in accordance with General Electric. Alternatively, affiliated corporations that filed a consolidated federal return, but that chose to file separate returns in Massachusetts, may now wish to elect a combined return. In either of these circumstances, the appropriate procedure for the taxpayer to follow is to file an application for abatement, with the statute of limitations for abatements, G.L. c. 62C, § 37, accompanied by an amended return. The procedures for filing an abatement application are outlined below.
1. Modifying Existing Combined Returns
Those corporations which elected combined filing under the LR 79-42 method, and which now wish to recalculate their combined net income in accordance with the General Electric method must take the following steps.
(a) The principal reporting corporation must file an application for abatement.
(b) The principal reporting corporation must file with the abatement application a Form 355C (Affiliations Schedule) listing each subsidiary or affiliated corporation in the Massachusetts group. (The Form 355C is not necessary if it has already been filed with the original return.)
(c) The § 32B group must include all affiliated corporations subject to Massachusetts corporate excise under G.L. c. 63, §§ 32, 39. Without limitation, this includes any corporation in the federal group which, for the relevant tax year, was qualified to do business in the Commonwealth.
(d) A list of the complete federal consolidated group, including those corporations without nexus to Massachusetts, must be provided.
(e) The principal reporting corporation must provide schedules showing: the separately computed income and deductions of each member of the Massachusetts group; all adjustments and eliminations; and the Massachusetts combined net income.
2. New Combined Returns
The following rules apply to qualifying corporations which, for any past tax year within the statute of limitations for abatement, did not previously file a combined return under G.L. c. 63, § 32B, and now wish to do so.
(a) In general, corporations which participated in the filing of a consolidated federal income tax return may elect to file under G.L. c. 63, § 32B.
(b) The principal reporting corporation must file one Application for Abatement (DOR Form CA-6) representing the entire Massachusetts group. In order for the election to be considered timely, the Application for Abatement must be filed within the statute of limitations provided for abatements, G.L. c. 62C, § 37. Each individual member of the group filing for abatement must satisfy the statute of limitations for the year in question.
(c) The principal reporting corporation must file with the Application for Abatement a DOR Form 355C (Affiliations Schedule) listing each subsidiary or affiliated corporation in the Massachusetts group.
(d) The principal reporting corporation must provide written, signed consent from each corporation filing on the § 32B return. An example of a consent statement would be:
The X Corporation consents to the filing of a combined return with Y corporation in accordance with Mass. General Laws, Chapter 63, section 32B.
(e) The § 32B group must include all affiliated corporations subject to Massachusetts corporate excise under G.L. c. 63 §§ 32, 39. Without limitation, this include any corporation in the federal group which, for the relevant tax year, was qualified to do business in the Commonwealth.
(f) The principal reporting corporation must provide a list of the complete federal consolidated group, including those corporations without nexus to Massachusetts.
(g) The principal reporting corporation must provide schedules showing: the separately computed income and deductions of each member of the Massachusetts group; all adjustments and eliminations; and the Massachusetts combined net income.
(h) All corporation must use the method of calculating combined net income prescribed by General Electric.
(I) Refunds resulting from an abatement will be made to the corporation which paid the corporate excise unless that corporation specifically indicates otherwise.
3. Intercompany Transactions
In calculating "combined net income" under the General Electric method, generally-recognized intercompany transactions within the Massachusetts group which would result in distortion or duplication of income must be eliminated from the combined taxable income base. All adjustments and eliminations must be identified in the combined return.
As a general guideline only, the following adjustments and eliminations are appropriate:
(1) In computing the cost of goods sold, intercompany profits are eliminated from beginning and ending inventories.
(2) Intercompany dividends are eliminated.
(3) A taxpayer may elect to defer gain or loss on intercompany sales of business fixed assets or capitalized intercompany charges. The gain or loss will remain deferred so long as the seller and the purchaser remain in the Massachusetts group and the asset is not sold to outsiders.
When either the seller or the purchaser is eliminated from the Massachusetts group, the deferred gain or loss is reportable by the seller in the first year after elimination. If a third-party sale takes place, the deferred gain or loss is reportable by the group in the year of such sale.
(4) Where gain or loss is deferred on a sale, the basis for the property factor for purposes of calculating the corporate excise is the seller's cost.
(5) Intercompany sales and other intercompany revenue items are eliminated in computing the numerator and denominator of the sales factor.
(6) Intercompany rent charges are eliminated from the capitalized rent computation for the property factor.
Stephen W. Kidder
Commissioner of Revenue
September 15, 1988