Applicable Massachusetts Rules
For taxable years beginning on or after January 1, 2009, Massachusetts requires certain corporations to file a corporate excise return as a member of a combined group. M.G.L. c. 63, § 32B. A corporation is subject to this combined reporting requirement when it is engaged in a unitary business with one or more other corporations under common control, and it is subject to tax or would be subject to tax if doing business in the commonwealth, under M.G.L. c. 63, §§ 2, 2B, 32D, 39 or 52A. Id. The Massachusetts Department of Revenue (the “Department”) has promulgated rules that apply under M.G.L. c. 63, § 32B in the Combined Reporting regulation, 830 CMR 63.32B.2.
Common ownership for the purposes of M.G.L. c. 63, § 32B generally means that more than 50% of the voting control of each member of the group is directly or indirectly owned by a common owner or owners, either corporate or non-corporate, whether or not the owner or owners are members of the combined group. 830 CMR 63.32B.2(2). In determining common ownership, the Commissioner may take into account any plan or arrangement, whether existing by operation of law, by contract, or otherwise, for bestowing or shifting ownership or voting control, in addition to the terms of any actual stock ownership or control. Id. The term “voting control” is not defined in either M.G.L. c. 63, § 32B or 830 CMR 63.32B.2(2), and has not been the subject of prior written guidance.
Federal Determination of “Voting Power”
Under § 1501 of the Code, certain corporations that are members of an affiliated group may elect to file a consolidated return. Code § 1504(a) defines an “affiliated group” generally as a chain of certain corporations that meet an 80-percent voting and value test. The test requires, inter alia, that a parent corporation own stock in another corporation that “possesses at least 80 percent of the total voting power of the stock of such corporation.” I.R.C. § 1504(a)(2)(A).
In Revenue Ruling 69-126, the Internal Revenue Service (the “IRS”) ruled that voting power is defined primarily by the ability to elect directors to a corporation’s board. The IRS went on to establish a mechanical test (the “Federal Test”) that looks to the power of each class of shares to elect directors, and then determines a shareholder’s proportionate amount of such power based on the number of shares of each class of stock held. In the ruling, holders of a subsidiary’s common stock elected 5 of its 8 directors, and holders of the subsidiary’s preferred stock elected the remaining 3. The parent corporation held 100% of the common stock and 50% of the preferred stock. The parent therefore held [100% x 5/8] + [50% x 3/8] = 81.25% of the voting power.
In Technical Advice Memorandum 9714002 (the “TAM”), the IRS ruled that the Federal Test must be satisfied in order to meet the 80-percent voting test in § 1504(a) of the Code; effective control of a subsidiary’s board of directors achieved through the holding of noncumulative voting stock was not itself sufficient. In the TAM, the parent corporation held 74% of the voting power as calculated using the Federal Test. Because the subsidiary’s charter provided for noncumulative voting, however, the parent had the practical ability to elect every member of the subsidiary’s board of directors. The IRS focused on the fact that Code § 1504(a)(2)(A) requires a parent to own “stock possessing” at least 80% of a corporation’s total voting power, and that on the facts the stock held possessed only 74% of the voting power. As a practical matter, the IRS recognized that the minority shareholders had no ability to change the outcome in an election of directors, but concluded that the inability to change the outcome of a vote did not mean that these minority shareholders possessed no voting power.
