Eaton Financial Corporation v. Commissioner of Revenue (July 20, 2000)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


EATON FINANCIAL CORPORATION	v.	 COMMISSIONER OF REVENUE
     

Docket Nos. F206441-F206443		 Promulgated:
							 July 20, 2000


 	These are consolidated appeals under the formal procedure pursuant to G.L. c. 62C, § 39, from the refusal of the appellee Commissioner of Revenue ("Commissioner") to abate corporate excises assessed to Eaton Financial Corporation for the taxable years ending March 31, 1986, March 31, 1987 and March 31, 1988. 
	Commissioner Scharaffa heard these appeals and was joined in the decision for the appellant by Chairman Burns, former Chairman Gurge and Commissioner Lomans.  Commissioner Gorton took no part in the deliberations or decision of these appeals.
	These findings of fact and report are promulgated at the request of the appellant pursuant to G.L. c. 58A, §13 and 831 CMR 1.32.

John S. Brown, Esq., George P. Mair, Esq., and 
Donald-Bruce Abrams, Esq. for the appellant. 

Donald E. Gorton, III, Esq. for the appellee.

FINDINGS OF FACT AND REPORT
	The parties presented these appeals to this Board on the basis of a stipulation of agreed facts, accompanying exhibits and briefs.  Based on the undisputed facts agreed to by the parties, the Appellate Tax Board ("Board") made the following findings of fact.
	During the tax years ending March 31, 1986, March 31, 1987 and March 31, 1988 ("tax years at issue"), appellant Eaton Financial Corporation ("Eaton") was a Massachusetts corporation.  Eaton maintained its corporate headquarters in Framingham, Massachusetts, but operated its business on a nationwide basis, with up to eighteen offices located throughout the United States.
	During the tax years at issue, Eaton was in the business of providing financing for its customers' purchase of "small ticket" office and business equipment, generally costing $50,000 or less.  Eaton's contracts with its customers were denominated as "leases" or "lease agreements" ("leases").  Eaton did not maintain a stock of equipment for which it provided financing to its customers. Instead, a prospective customer seeking to acquire specific equipment would submit a "credit application" to Eaton.  If approved, Eaton would provide the funds for the customer to acquire the equipment directly from a third-party vendor.    Eaton did not take possession of the leased equipment.  The customer, as "lessee," made periodic payments to Eaton as "lessor."  At the expiration of the lease, Eaton typically sold the equipment at its then fair market value.
	Eaton's books and financial accounting records ("books"), including those from which it prepared financial reports sent to shareholders, were kept in accordance with Generally Accepted Accounting Principles ("GAAP.") In particular, Eaton relied on the portion of GAAP that determines how leases are to be treated on the books of the corporation maintained for making financial reports to shareholders, entitled the Statement of Financial Accounting Standards No. 13 ("FAS 13.")  
As a publicly-owned corporation whose stock was listed and traded on the NASDAQ National Market System, Eaton was required to file audited financial statements with the Federal Securities and Exchange Commission and to include audited financial statements in solicitations sent to shareholders for annual meeting proxies.  Eaton's financial statements were audited by Deloitte, Haskins and Sells, an independent certified public accounting firm.  Each year, Eaton also sent annual reports to its shareholders, which included summaries of its audited financial statements.  
In preparing the above described accounting records and financial reports, Eaton classified the leases at issue as "direct financing leases" or "capital leases" as required by FAS 13.  Accordingly, the leases were classified and recorded on Eaton's books as loans that generated interest income. The underlying equipment which Eaton financed for its customers was not included on Eaton's books as a corporate asset. 
	For each of the tax years at issue, Eaton timely filed its Massachusetts corporate excise returns as an intangible property corporation, subject to the net worth tax.  In calculating its taxable net worth, and consistent with its books and financial accounting records, Eaton treated the leases at issue as intangible receivables and did not treat the equipment covered under the leases as corporate assets.
The parties agreed that by Interdepartmental Memorandum 


dated May 6, 1987, the Commissioner's Deputy Chief of the Audit Division issued audit guidelines requiring that FAS 13 be used to characterize leases for purposes of the net worth component of the corporate excise.  Specifically, these audit guidelines provided that leased equipment should be treated as tangible property in computing the lessor's net worth component only in the case of leases characterized as operating leases under FAS 13, and not in the case of capital leases.  No evidence was submitted by the Commissioner to demonstrate that these audit guidelines were rescinded, modified, or revoked.  For reasons which are unclear on the present record, the Commissioner did not follow these audit guidelines in the instant appeals.
After an audit of Eaton's corporate excise returns for the tax years at issue, the Commissioner treated the leased equipment as tangible assets owned by Eaton. As a result, the Commissioner reclassified Eaton as a tangible property corporation, and therefore recomputed its corporate excise.  Subsequently, the Commissioner issued a Notice of Intention to Assess ("NIA") dated June 30, 1989.  A second NIA, dated August 17, 1989, was issued by the Commissioner and showed a proposed deficiency assessment of the same amount of excise as shown on the first NIA, plus additional interest.  By Notice of Assessment dated December 28, 1989, the Commissioner notified Eaton that it had assessed deficiencies for the years at issue in these appeals. All additional assessments were paid in full by Eaton.
	On or about August 25, 1989, Eaton timely filed an application for abatement requesting an abatement of the additional assessments for the tax years at issue. Following a hearing on June 4, 1992, the Commissioner issued a determination letter dated December 3, 1992, upholding the audit adjustments in full.  By Notice of Abatement Denial, dated January 20, 1993, the Commissioner denied Eaton's abatement application.  On March 19, 1993, Eaton timely filed petitions with the Board, appealing the Commissioner's refusal to grant the requested abatements.  Accordingly, the Board found that it had jurisdiction to hear and decide these appeals.
	On the basis of the foregoing, and to the extent that it is a finding of fact, the Board found that the subject leases were "capital leases" and that Eaton was not, and could not properly be treated as, the owner of the underlying assets for purposes of the net worth component of the corporate excise.  Accordingly, for the reasons detailed in the following Opinion, the Board found and ruled that Eaton was an "intangible property corporation" for purposes of §§ 30 and 32 and issued an abatement of Eaton's corporate excise.

OPINION
	The question raised by the present appeals is whether Eaton is properly classified as a "tangible property corporation" or as an "intangible property corporation" for purposes of the corporate excise.
	A domestic corporation doing business in Massachusetts is subject to a corporate excise under G.L. c. 63, § 32.  The corporate excise is composed of a "property" or "net worth" component and a net income component.  G.L. c. 63, § 32(a)(1)(i) and (ii); see Dana Lease Finance Corp. v. Commissioner of Revenue, 1999 Mass. A.T.B. Adv. Sh. 325, 335 (Docket No. F232408, July 15, 1999).  With regard to the first component, § 32(a)(1) imposes an excise on domestic corporations in the amount of seven dollars per thousand on the value of:
its tangible property as determined to be taxable under paragraph 7 of section thirty if a tangible property corporation; or
its net worth as determined to be taxable under paragraph 8 of section thirty if an intangible property corporation.

Accordingly, whether the first component of the excise will be based on the value of a corporation's assets or its "net worth" depends on whether the corporation is classified as a "tangible property corporation" or as an "intangible property corporation."  If determined to be a "tangible property corporation," the non-income component of the excise will be based on the gross value of its tangible property, without reduction for liabilities.  See G.L. c. 63, § 30(7).  If determined to be an "intangible property corporation," the non-income component will be based on the portion of its net worth (assets less liabilities) that is allocable to Massachusetts under the formula set forth in G.L. c. 63, § 30(8). 
	A corporation's classification as a "tangible property corporation" or as an "intangible property corporation" depends on the percentage of the corporation's assets that constitute tangible personal property physically present in Massachusetts that are not subject to local Massachusetts property taxes. Specifically, a "tangible property corporation," pursuant to G.L. c. 63, § 30(10), is 

a corporation whose tangible property situated in the commonwealth on the last day of the taxable year and not subject to local taxation is ten per cent or more of such portion of its total assets on the last day of the taxable year less those assets as are situated in the commonwealth on the last day of the taxable year and are subject to local taxation…. 

An "intangible property corporation," pursuant to 
G.L. c. 63, § 30(11), in turn, has tangible property constituting less than 10 percent of its relevant assets subject to local taxation. Under both §§ 30(10) and (11), the assets of the corporation, either tangible or intangible, "shall be valued at book value."
Accordingly, in order to determine whether a corporation is a tangible or intangible property corporation, a comparison of the book values of its tangible and intangible assets must be made.  The issue in these appeals arises primarily because although there is a specific reference in § 30 to "book value" in the valuation of the assets, there is no explicit provision in § 30 requiring that the treatment of an asset as tangible or intangible for purposes of the net worth component must follow the corporation's treatment of the asset on its books.  Reading § 30 as an integrated whole, however, it appears that the Legislature intended to incorporate the treatment of an asset on the books of a corporation, consistent with GAAP, into the calculation of the net worth component of the corporate excise.  See Web Industries, Inc. v. Commissioner of Revenue, 1999 Mass. A.T.B. Adv. Sh. 122, 129-130.
Section 30 is replete with references to the "book value" of a corporation's assets.  All five of the statutory formulas governing the application of the net worth tax, §§ 30(7) through (11), are based on the book value of the taxpayer's assets. 
The term "book value" is defined under G.L. c. 63, § 30(7) as:

the original cost of such property, less the depreciation or amortization taken against such property on the books of the corporation maintained for making financial reports to shareholders. 


While the definition of "book value" is present only in § 30(7), in accordance with established principles of statutory construction, the same definition applies to the other provisions of § 30.  Id. at 129, n. 6; See also Randall's Case, 331 Mass. 383, 386 (1954) ("if reasonably practicable, words used in one place in a statute with a plain meaning are given the same meaning when found in other parts of the same statute"); Arnold v. Commissioner of Corps. and Taxation, 327 Mass. 694, 700 (1951) ("a term appearing in different portions of a statute is to be given the same meaning.")  There is no reason to presume that the definition of "book value" found in § 30(7) should not apply to the "book value" of assets in other parts of § 30.
In addition to the financial accounting concept of "book value," other GAAP-based financial accounting concepts pervade the statutory language of G.L. c. 63, § 30. These include "net worth," "reserves," "original cost," "books of the corporation," and "financial reports to shareholders." Accordingly, the use of GAAP-based financial accounting concepts in § 30 supports the conclusion that the Legislature intended to incorporate standard accounting practice and concepts into the calculation of the net worth component of the corporate excise.  Web Industries at 129-130.
Even before § 30 was amended to include an explicit definition of book value (See St. 1982, c. 658, § 2), this Board recognized a legislative intent to rely on GAAP for determining the book value of assets for purposes of the net worth component of the corporate excise.  See Xtra, Inc. v. Commissioner of Revenue, 1979 Mass. A.T.B. Adv. Sh. (Docket Nos. 75312 and 75313, February 27, 1979), aff'd 380 Mass. 277 (1980)(statutory reference to "book value" in § 30(8) is "clearly in keeping with the accounting concept of net worth based on generally accepted accounting principles.") 
Although the Court and this Board in Xtra recognized that the interpretation of accounting terms given by the accounting profession may not necessarily dictate the result in tax cases (See First Federal Savings & Loan Association v. State Tax Commissioner, 372 Mass. 478, 483 (1977), aff'd 437 U.S. 255 (1978)), the Court upheld the Board's use of GAAP as an aid to interpreting § 30(8), finding that the Board was "influenced by the underlying reason and basis for the accounting principle…" 380 Mass. at 281.
	The Commissioner himself also understood that the statute at issue required application of GAAP.  The Commissioner's audit guidelines explicitly referred to GAAP, specifically FAS 13, in the treatment of leases for purposes of the corporate excise.  In addition, in his legislative recommendations made for the 1991 and 1992 legislative sessions, and renewed in his recommendations for the 1994 legislative session, the Commissioner proposed that the following be added to §§ 30(8) and (9):

The phrase "book value" for purposes of the net worth measure of the business corporation excise would be clarified to codify the administrative interpretation of its meaning.  It would be defined as the value shown on the corporation's books maintained for making financial reports to shareholders and which follows generally accepted accounting principles.  (Emphasis added.) 1992 Legislative Recommendations of the Commissioner of Revenue, at 60, 63 (November 6, 1991); 1991 Legislative Recommendations of the Commissioner of Revenue, at 66-67, 69-70 (November 7, 1990.)


The Commissioner's audit guidelines and legislative proposals are evidence of departmental practice.  Departmental practice, if established contemporaneously with the enactment of a statute and long continued, is entitled to weight in interpreting an ambiguous statutory provision.  See. e.g., Lowell Gas Co. v. Commissioner of Corporations & Taxation, 377 Mass. 255 (1979); Ace Heating Service, Inc. v. State Tax Comm'n, 371 Mass. 254 (1976); Wellington v. Commissioner of Corps. & Taxation, 359 Mass. 
448, 452 (1971).  Although the audit guidelines, contained in an unpublished internal memorandum issued by a deputy bureau chief, are not binding on the Commissioner because the memorandum was not a public written statement upon which the public had a right to rely (compare Commissioner of Revenue v. BayBank Middlesex, 421 Mass. 736 (1996)), the audit policy and legislative recommendations evidence the department's longstanding interpretation and are therefore entitled to some weight in interpreting the statutory provision at issue.
The use of FAS 13 to characterize leases allows the computation of the net worth tax to depend on objective standards set forth in FAS 13 and on information readily available from the taxpayer's financial records, as verified by the taxpayer's independent, certified public accountants. This treatment, consistent with the legislative purpose of § 30, allows for a more simple, equitable and easily computed tax. See Xtra, 380 Mass. at 280-281.  In addition, this approach harmonizes the treatment of leased property with the provision of § 30(7), which reduces the book value of tangible property by the depreciation or amortization taken on the corporation's books. Recognizing the statutory reliance on the use of GAAP to determine book values thus makes the statute "a consistent and harmonious whole capable of producing a rational result in consonance with the presumed intent of the Legislature." DeBlois v. Commissioner of Corps. and Taxation, 376 Mass. 437 (1931).
	The Commissioner's audit guidelines are also consistent with the plain meaning of the statute and with the Commissioner's own understanding of the statute, as reflected in his legislative recommendations. These guidelines require the application of GAAP, specifically FAS 13, when conducting audits involving leases, for purposes of the corporate excise.  This further establishes that this interpretation is "not inconsistent with the statute.") See First National Bank of Boston v. Commissioner of Revenue, 15 Mass. App. Tax. Bd. Rep. 91, 115 (September 30, 1993.)  
	The Commissioner's reliance on Springfield Sugar & Products Co. v. State Tax Commission, 381 Mass. 587 (1980) is misplaced.  The court in Springfield Sugar did not address or decide the issue presented in the present appeals regarding how a lease should be characterized for purposes of the corporate excise.  In addition, Springfield Sugar was decided prior to the amendment of § 30 in 1982, which required the use of GAAP-based financial concepts in the calculation of the net worth component.  Accordingly, Springfield Sugar has no bearing on the issue before the Board.
	Based on the foregoing, the Board ruled that the appellant Eaton met its burden of proving that it was properly classified as an "intangible property corporation" for purposes of calculating its corporate excise. Staples v. Commissioner of Corporation and Taxation, 205 Mass. 20, 26 (1940) (person who claims to be aggrieved by the refusal of the Commissioner to abate a tax in whole or in part has the burden of establishing the right to an abatement.) 








Accordingly, the Board issued a decision for the appellant and granted abatements in the amount of $42,605 in docket number F206441, $50,349 in docket number F206442, and $47,370 in docket number F206443. 

						APPELLATE TAX BOARD

					By:						
					   Abigail A. Burns, Chairman 






A true copy,


Attest:_______________________
        Clerk of the Board

 FAS 13, "Accounting for leases" is promulgated by the Financial Accounting Standards Board.  It establishes general financial accounting and reporting standards for "leases" and other agreements conveying the right to use property, plant or equipment for a stated period of time.  It thus establishes a uniform and consistent set of rules for both the "lessors" and the "lessees" that are parties to such transactions.
 Under FAS 13, a lease transaction will be classified either as a "capital lease" or as an "operating lease."  Pursuant to FAS 13, a "capital lease" or "direct financing lease" is treated as a loan or receivable, an intangible asset that generates interest income.  The leased equipment itself is not listed as a corporate asset.  In contrast, in an "operating lease," the lessor is treated as the owner of the underlying tangible asset, which is subject to depreciation and generates rental income. 
 G.L. c. 63, § 30(9) contains formulas for computing the taxable net worth of foreign intangible property corporations. 
 See G.L. c. 63, § 30(7) ("the book value…of its tangible property situated in the commonwealth"); § 30(8) ("such portion of the book value of its total assets"); § 30(9) ("such portion of the book value of its intangible assets"); § 30(10) ("the assets of the corporation shall be valued at their book value); § 30(11) ("the assets of the corporation shall be valued at their book value.")   (Emphasis added.)
 In addition to the statutory context and purpose, the dictionary definition of "book value" confirms that it is a financial accounting concept: "The value at which an asset is carried on the balance sheet.  Book value is the cost less the accumulated depreciation or the valuation allowance.  Book value is based on the historical cost of an asset."  Black's Law Dictionary, 6th Ed., West Pub. Co. 1990 (Emphasis added.)  The term has also been defined as meaning values "as shown in or according to the books of account of a business." Webster's Third New International Dictionary, G. & C. Merriam Co., 1966.

 The Commissioner made no legislative recommendations for the 1993 legislative session.
 In the Commissioner's 1994 legislative recommendations, language identical to the 1991 and 1992 language was used, but the provision stated only that the section "clarified" the definition of book value. 1994 Legislative Recommendations of the Commissioner of Revenue, at 61, 67-68 (November 3, 1993.)
 Since FAS 13 is controlling, property subject to a lease is treated as tangible property only in the hands of the lessor or lessee who actually depreciates the property on its books, so the book value of the tangible property can correspondingly be reduced by the depreciation on the taxpayer's books.

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