Letter Ruling  Letter Ruling 88-1: Filing Requirements on Merger of a Domestic Corporation Into a Foreign Corporation

Date:	01/19/1988
Referenced Sources:	Massachusetts General Laws

Corporate

You represent that [Corp. A] a domestic corporation, merged with and into [Corp. B] a foreign corporation, on [e.g. 5/31], 1986, in a transaction regarded as a "reverse acquisition" under the Internal Revenue Code. Before the merger both companies were calendar year taxpayers. As a result of the merger, former [Corp. A] shareholders became majority shareholders in [Corp. B] and the successor corporation is [Corp. B]. You further represent that under the Code [Corp. A] is treated as the "true acquiring" corporation and files a full year Federal tax return under the name [Corp. B] combining [Corp. A]'s 12 months of operations and [Corp. B]'s post-merger operations from [e.g. 6/1], 1986, through December 31, 1986. You state that the original [Corp. B] is treated under the Code as the "true acquired" corporation and ceases to exist for federal tax purposes on [e.g. 5/31], 1986. It files a final separate federal return for its activities from January 1, 1986, through [e.g. 5/31], 1986. Upon the merger the domestic corporation, [Corp. A] ceased to exist as a corporate entity. In documents filed with the Secretary of State the successor corporation, [Corp. B], qualified to do business as a foreign corporation in [e.g. 6] 1986. The original [Corp. B] did not do business in Massachusetts before the merger.

Upon the merger the domestic corporation, [Corp A] ceased to exist as a corporate entity. In documents filed with the Secretary of State the successor corporation, [Corp. B], qualified to do business as a foreign corporation in [e.g. 6] 1986. The original [Corp. B] did not do business in Massachusetts before the merger.

You ask what Massachusetts corporate excise returns these corporations should file for taxable year 1986. Our conclusions follow.

Discussion of Applicable Law

Every domestic corporation exercising its charter or qualified to do business or actually doing business in the commonwealth or owning or using any part or all of its capital or property in the commonwealth shall pay the excise on its tangible or intangible property in the commonwealth on the last day of the taxable year plus its taxable net income. G.L. c. 63, § 32. The payment of the excise is required for the right to exist as a corporation and for the enjoyment of the protection of the laws of the commonwealth and the powers, rights, privileges, and immunities derived from the corporate existence. Id. Similarly, a foreign corporation exercising its charter, qualified to do business, or actually doing business in the commonwealth or owning or using any part or all of its property in the commonwealth shall pay on account of each taxable year an excise on its tangible property in the commonwealth on the last day of the taxable year plus its taxable net income. G.L. c. 63, § 39. Net income is the gross income less deductions allowable under the Internal Revenue Code, as amended and in effect for the taxable year. G.L. c. 63, § 30(5)(b). The taxable year of a corporation is any fiscal or calendar year or period for which the corporation is required to make returns to the federal government. G.L. c. 63, § 30(6).

A reverse acquisition is one in which a (first) corporation acquires substantially all the assets of a (second) corporation in exchange for stock of the first corporation, and the stockholders of the second corporation own immediately after the acquisition more than fifty percent of the shares of the first corporation. U.S. Treas. Reg. § 1.1502-75(d)(3)(i). While in form the first corporation, which exchanged the stock and received the assets, is the acquiring corporation, in substance the more than fifty percent change in ownership indicates that the first corporation is the true acquired corporation. Rev. Rul. 72-322, 1972-1 C.B. 287.
The functions of the federal regulation on reverse acquisition are, among others, to identify which entity's net operating losses, unused investment credits, foreign tax credits, and capital loss carryovers and carrybacks will be subject to the separate return limitation rules, to identify which entity will be subject to continued filing requirements, and to determine which entity's taxable year will apply. Id. In a reverse acquisition the taxable year of the first corporation (the true acquired corporation, [Corp. B] here) is treated as a separate return limitation year ending on or before the date of acquisition. U.S. Treas. Reg. § 1.1502-1(f)(3). The second corporation (the true acquiring corporation, [Corp. A] here) is subject to continued filing requirements as the successor corporation, [Corp. B], and files tax returns on the basis of [Corp. A]'s usual taxable year. Although the regulation describing reverse acquisitions is in the consolidated return section of the federal regulations, the examples there refer to single corporations, and the regulation has been interpreted to apply to corporations which are not part of a group. Rev. Rul. 72-322, supra.

Since Massachusetts defines both net income and taxable years in terms of the Internal Revenue Code, the filing requirements in Massachusetts are consistent with those of the Internal Revenue Code. Returns must be filed in such form as the Commissioner prescribes and contain such information as he deems pertinent. G.L. c. 62C, § 5.

Filing Requirements

As it does for federal purposes, for Massachusetts purposes the successor corporation [Corp. B] should file a return which combines the twelve months of operations of the "true acquiring" corporation, [Corp. A], and the post-merger operations of the "true acquired" corporation, [Corp. B]. It should attach a statement to the return explaining that [Corp. A] ceased to exist in form on [e.g. 5/31], 1986, but its income along with the post-merger income of [Corp. B] is included in the return. It should file the return on Form 355B with a schedule attached showing the income of [Corp. A] to the date of the merger and the combined income after the merger. Since the original [Corp. B] did not do business in Massachusetts before the merger, it is not necessary for the original [Corp. B] to file a Massachusetts return for its final short taxable year ending on the date of the merger.

The successor corporation must apportion its taxable net income, using Schedule F, under the provisions of M.G.L. c. 63, § 38(c). It should determine the property factor by averaging [Corp. A] monthly values through [e.g. 5/31], 1986, and averaging the combined [Corp. A] and [Corp. B] values from [e.g. 6/1], 1986, through December 31, 1986. It should determine the payroll and sales factors for [Corp. A] through [e.g. 5/31], 1986, and for the combined corporations after the merger. It should attach a schedule showing the above computations to Schedule F. The non-income measure of the excise should be computed by adding the net worth of [Corp. A] on [e.g. 5/31], 1986, pro rated for [5] months activity, and the net worth of the successor corporation, [Corp. B], pro rated for [7] months.

Very truly yours,
Stephen W. Kidder
Commissioner of Revenue
January 19, 1988
LR 88-1