Cross Country Motor Club, Inc. v. Commissioner of Revenue (May 29, 2008)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


CROSS COUNTRY MOTOR 	 v.	     COMMISSIONER OF REVENUE
CLUB, INC. 				

Docket No. C262701 				Promulgated:
							May 29, 2008

	
This is an appeal under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39, from the refusal of the Commissioner of Revenue ("Commissioner" or "appellee") to abate corporate excise assessed against Cross Country Motor Club, Inc. ("Cross Country" or "appellant") under G.L. c. 62C, § 26 and G.L. c. 63, § 32 for the tax year ending September 30, 1999 (the "year at issue").
Chairman Hammond heard the appeal.  Commissioners Scharaffa, Egan, Rose and Mulhern joined him in the decision for appellee.  
These findings of fact and report are made at the requests of appellant and appellee pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.

Philip S. Olsen, Esq., for appellant.
Kevin M. Daly, Esq., for appellee.

FINDINGS OF FACT AND REPORT
On the basis of the stipulated facts and documents and the testimony entered into evidence in the hearing of this appeal, the Appellate Tax Board ("Board") made the following findings of fact.
Cross Country was a Massachusetts corporation engaged in the business of providing roadside assistance services.  Cross Country was an operating subsidiary of its parent company, Cross Country Automotive Services, Inc., which was a holding company and the principal reporting company for a group of its subsidiaries.  For the purposes of this appeal, the distinction between the two entities is not determinative and therefore both are referred to herein as "Cross Country" or "appellant." 
Until 1999, Cross Country contracted exclusively with Original Equipment Manufacturers ("OEMs") to provide the roadside assistance service that consumers receive from a car dealership upon purchasing a new car.  Car dealerships would sell the service packages, but Cross Country provided the actual services.  OEMs earned commissions by selling Cross Country's services.  In 1999, Cross Country expanded its business by selling directly to consumers.  Cross Country did this by reaching out to individuals whose roadside assistance program had expired.  Instead of renewing the program through an OEM, the consumer could renew its coverage directly through Cross Country.  
In connection with its new initiative, Cross Country incurred deferred membership costs, a type of expense which it had not previously incurred.  Deferred membership costs encompassed the costs associated with acquiring a member, which typically included items such as advertising, literature, brochures, and telemarketing.  Cross Country also took deductions for membership/fulfillment kit costs ("membership kits").  Membership kit costs were those costs incurred in producing and providing membership kits to Cross Country's members.  Membership kits were essentially large envelopes that included information booklets, bumper stickers, key chains and other miscellaneous items.  In addition to these expenses, Cross Country also claimed deductions for commissions paid to various entities, which marketed its service packages, including, for example, auto insurance brokers.    
Cross Country's  original  federal  tax  return  for  the year  at issue followed Generally Accepted Accounting Principles ("GAAP").  Accordingly, Cross Country capitalized and amortized its costs over the twelve-month membership period, which straddled two tax years.  On July 15, 2000, Cross Country filed a Form 355C-A Combined Corporate Excise return for the year at issue with the Commissioner pursuant to a valid six-month extension and paid the excise shown to be due thereon, which was also based on GAAP treatment of its expenses.  
After it filed its federal tax return, Cross Country's tax adviser, Arthur Andersen, advised Cross Country that, rather than follow GAAP, it should deduct its costs as they were incurred, pursuant to Internal Revenue Code ("I.R.C.") § 461.  Accordingly, on or about May 21, 2001, Cross Country filed an amended federal return resulting in increased deductions being taken in 1999, the period in which the costs were allegedly incurred.  Cross Country reported a decreased tax liability for that year and sought a refund of $907,120.  
On or about June 13, 2001, Cross Country filed a Form CA-6 Application for Abatement seeking an abatement of the corporate excise paid for the year at issue in the amount of $416,937, based on its deduction of expenses pursuant to I.R.C. § 461.  On January 9, 2002, the Commissioner issued Cross Country a Notice of Abatement Determination denying its abatement application.
On March 8, 2002, Cross Country filed a Petition Under Formal Procedure with the Board, appealing from the Commissioner's refusal to grant an abatement for the year at issue. On July 30, 2002, the United States Treasury issued Cross Country a refund check for the year at issue in the amount of $1,040,606.37, of which $133,486.37 was interest.
On September 5, 2003, Mr. James Faulkner, Assistant Treasurer for Cross Country, executed Form 3363, Acceptance of Proposed Disallowance of Claim for Refund or Credit ("Form 3363") for the year at issue.  According to its terms, by executing Form 3363, Cross Country accepted a proposal of the IRS to disallow its claim, in the amount of $909,690, that was filed on June 18, 2001.  Mr. Faulkner testified at the hearing of this appeal that Form 3363 related to a tax year subsequent to the year at issue.  
Based on the foregoing, the Board found that it had jurisdiction to hear and decide this appeal.
Mr. Faulkner testified that he was responsible for corporate tax matters, treasury functions, risk management, and tax compliance for Cross Country.  Mr. Faulkner began his employment at Cross Country in September of 2002, after Cross Country's original federal tax return and amended federal tax return for the year at issue had already been filed.  Further, Mr. Faulkner testified that he did not directly consult any source documents in preparation for the hearing.  To the extent that it is a finding of fact, the Board found that Mr. Faulkner had no personal knowledge of the deductions claimed by Cross Country for the year at issue. 
Mr. Faulkner additionally testified that as a result of the Commissioner's discovery requests during the litigation of this appeal, Cross Country conducted a search for certain documents relevant to the issues in dispute.  Mr. Faulkner testified that trial balance sheets for the year at issue had been located just days before the hearing, but he had not had a chance to review them, and he declined to bring them to the hearing.  Mr. Faulkner testified that he believed that there was going to be a continuance or delay of the hearing.  Appellant did not ask for the hearing to be re-opened or to remain open for the submission of additional evidence at any time during or subsequent to the hearing of this appeal.  
For the reasons discussed in the Opinion below, the Board found and ruled that appellant failed to establish that it was entitled to the deductions which it claimed, and therefore failed to prove that it was entitled to an abatement.  Accordingly, the Board issued a decision for appellee in this appeal.  
			    OPINION
Cross Country sought an abatement under G.L. c., 62C, § 30, under which a taxpayer can apply for an abatement of Massachusetts tax following a final federal determination of a change in federal taxable income that results in a lower Massachusetts tax for the relevant tax year.  Final determinations may come in more than one form.  In Smolak v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1995-93, 99, the Board held that the acceptance of an amended federal return and the issuance of a notice advising the taxpayer of a decrease in taxable income was a final determination within the meaning of G.L. c. 62C,     § 30.   The Commissioner's regulation, 830 CMR 62C.30.2(a), contains other examples of final determinations, including an accepted offer in compromise, an executed closing agreement, a final decision or dismissal by a federal court or tax court, and a federal closing letter.  Cross Country proffered none of these, nor any other credible evidence showing a final federal determination for the year at issue.  
 The only documentary evidence before the Board in this case which remotely supported appellant's claim was its amended federal return and a refund check.  The production of an amended federal return and a refund check, without more, does not provide the Board with sufficient evidence that there was a final determination within the meaning of the statute, particularly in light of the conflicting evidence entered into the record.  
Cross Country signed Form 3363, indicating that it had accepted the IRS's proposal to disallow Cross Country's claim for the year at issue, after having received the refund check.  Mr. Faulkner testified that Form 3363, which he signed, related to a subsequent tax year and not the year at issue.  However, the document recited on its face that it related to the year at issue, and stated an amount - $909,609 - almost identical to the amount of refund claimed on Cross Country's amended federal return.  Further, in a statement attached to Cross Country's amended federal return, Cross Country stated that it had originally mailed its amended federal return for the year at issue on June 13, 2001, but was sending a second copy because the IRS had apparently misplaced the initial amended return.  The claim addressed on Form 3363 was filed with the IRS on June 18, 2001.  Given this evidence, the Board was not convinced that Form 3363 related to a subsequent tax year, as suggested by Mr. Faulkner.  The Board could not find the issuance of a refund check to be a final determination of a claim when, more than a year after the issuance of the check, the taxpayer executed a form agreeing to the proposed disallowance of that claim.  
Cross Country failed to introduce more probative records, such as a federal tax account transcript or federal revenue agent's report, demonstrating a final federal determination for the year at issue.  Given the paucity and conflicting nature of the evidence, the Board found that the record did not support the conclusion that a final federal determination had been made.  
Whether a final federal determination has been made is not the only relevant inquiry.  "A change in federal taxable income does not automatically result in a change in Massachusetts net income."  PMAG, Inc. v. Commissioner of Revenue, 429 Mass. 35, 39 (1999).  "G.L. c. 62, § 30 permits the Commissioner to determine whether a change by the federal government in taxable income results in a change in the Massachusetts tax."  Screenprint, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1983-10, 12.  
The record is less than clear on the actual basis for the claimed underlying deductions.  Appellant offered no original or contemporaneous documentary evidence supporting the expenditures for which it claimed deductions, such as invoices, cancelled checks, accounting ledgers or the like.  On the contrary, other than a copy of a refund check and Form 3363, the documents entered into evidence consist of tax returns and abatement applications.  Those documents merely articulate appellant's claim; they do not provide independent support for it.  
Moreover, appellant allegedly filed its amended return to follow the statutorily prescribed methods of accounting.  However, nothing in the record indicates that the adjustments which Cross Country made satisfied the statutory requirements.  I.R.C. § 461 allows deductions to be taken in the year in which they are incurred.  Expenses are incurred when all events establishing the fact and amount of the liability have taken place, and when economic performance with respect to the liability has occurred.  Treas. Reg. § 1.461-1(a)(2)(i).  Economic performance with respect to the liability has occurred when, and to the extent that, payment is made to the person to whom the liability is owed.  Treas. Reg. § 1.461-4(g)(1)(i).  No documentary evidence was offered which indicated that Cross Country had made actual payment of the expenses as of the year at issue.  Further, the testimony of appellant's sole witness, Mr. Faulkner, shed little light as to whether Cross Country was entitled to the deductions it claimed.  Mr. Faulkner was not employed at Cross Country during the relevant time periods, and had no personal knowledge of its accounting practices and tax filings until joining Cross Country in 2002, well after the year at issue.  Mr. Faulkner further testified that he did not review any source documents in preparing to testify at the hearing of this appeal, and also that, although trial balances from the year at issue had recently been located by appellant, he declined to bring those trial balances to the hearing.  The Board therefore found that the documents and testimony entered into the record by appellant were insufficient evidence on which to base a finding that appellant was entitled to the deductions which it claimed.  
 Significantly, given the nature of Cross Country's claim, an increase in deductions for the year at issue would have resulted in a decrease in deductions for the subsequent tax year.  The taxpayer offered no evidence of an amended federal return, signed agreement, assessment or other documentation showing a corresponding increase in taxable income in the subsequent tax year.  While such evidence in and of itself would not have been sufficient to sustain appellant's burden, it would have supported the credibility of the alleged accounting adjustments leading to the claimed increased deductions for the year at issue. Accordingly, the Board found that appellant had not demonstrated that it was entitled to the deductions which it claimed for the year at issue.  
A 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.  Staples v. Commissioner of Corp. & Tax., 305 Mass. 20, 26 (1940).  Having failed to prove that a final federal determination for the year at issue had been made, and having failed to prove that it was entitled to the deductions which it claimed, appellant failed to meet its burden of proving that it was entitled to an abatement.  Accordingly, the Board issued a decision for appellee in this appeal.  

       APPELLATE TAX BOARD

 By: __________________________________
    Thomas W. Hammond, Jr., Chairman




A true copy,


Attest: ____________________________
		  Clerk of the Board

 The amended federal return entered into evidence was filed on or about May 21, 2002.  In a statement attached to that return, Cross Country stated that it had originally mailed its amended federal return for the tax year at issue on June 13, 2001, but was sending a second copy because the Internal Revenue Service ("IRS") had apparently misplaced the initial amended return.
 The record is silent as to whether any adjustment was made, either by appellant or the IRS, to appellant's return for tax year 2000 to reflect that deductions originally taken in 2000 were now being claimed in the year at issue.  
 For reasons unexplained in the record, appellant filed two additional abatement applications for the year at issue with the Commissioner after filing its Petition with the Board.  The Commissioner denied both abatement applications.  Appellant did not amend its Petition to appeal from the denial of its additional abatement applications, nor did it file new Petitions appealing the Commissioner's denials, and therefore those abatement denials are not before the Board in this appeal.  
 Mr. Faulkner declined to bring relevant, original documents, including trial balances from the year at issue, with him to the hearing of this appeal.  Cross Country also failed to provide such documents to the Commissioner in the course of discovery, despite the Commissioner's request for them and the Board's Order to produce them.  The Commissioner filed a Motion in Limine at the hearing of this appeal, requesting that the Board draw the inference that the documents which Cross Country failed to produce contained evidence unfavorable to its position.  Mr. Faulkner's stated reasons for declining to bring the documents included that they had only recently been located, he had not yet had a chance to review them, and he believed there was going to be a continuance of the hearing.  Appellant did not ask for the hearing to be held open or re-opened in order to submit additional evidence.  Accordingly, the Board allowed the Commissioner's Motion in Limine and drew adverse inferences from appellant's failure to enter this evidence into the record.  

ATB 2008-666