FMR Corp. v. Commissioner of Revenue (September 25, 2003)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD



FMR CORP. 	 	  	   v.   	COMMISSIONER OF REVENUE

Docket No. C258694				 Promulgated:
							 September 25, 2003


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 appellee to abate corporate excises self-assessed by the appellant under G.L. c. 62 § 26 (a) and G.L. c. 63 § 32 for tax years 1993, 1994, and 1995. 
Commissioner Scharaffa heard the appeal and was joined in the decision for the appellee by Chairman Burns and Commissioners Gorton, Egan, and Rose.
These findings of fact and report are made at the joint request of the appellant and the appellee pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.   

John S. Brown, Esq., George P. Mair, Esq., Donald-Bruce Abrams, Esq., Darcy A. Ryding, Esq., and Matthew D. Schnall, Esq., for the appellant.

Laura S. Kershner, Esq., Lutof George Awdeh, Esq., and Anne T. Foley, Esq., for the appellee.


FINDINGS OF FACT AND REPORT
On the basis of a Statement of Agreed Facts, the Appellate Tax Board ("Board") made the following findings of fact.  At all times relevant to this appeal, the appellant, FMR Corp. ("FMR") was the parent corporation of a group of affiliated corporations that participated in the filing of a federal consolidated tax return ("consolidated group").  FMR was also the principal reporting corporation for the members of the consolidated group that participated in the filing of a combined return for Massachusetts corporate excise tax purposes ("Massachusetts group").  
For each of the tax years 1993, 1994, and 1995 (the "tax years at issue"), FMR filed federal consolidated returns on behalf of the consolidated group and timely filed Massachusetts combined returns on behalf of the Massachusetts group.  FMR and the Commissioner of Revenue ("Commissioner") agreed to extend the period for making assessments until September 30, 2000 for each of the tax years at issue.  On May 8, 2000, FMR timely filed an application for abatement for each  of  the years at issue, 

claiming that the Massachusetts group did not claim the full amount of charitable deductions to which it was entitled.  FMR did not consent to the Commissioner's failure to act on its applications for abatement within six months.  Accordingly, FMR's applications for abatement were deemed denied on November 8, 2000.  On December 15, 2000, FMR timely filed a petition with the Board appealing the Commissioner's deemed denial of its applications for abatement.  On the basis of these facts, the Board found that it had jurisdiction over the subject appeal.
For each of the tax years at issue, certain members of the consolidated group made "charitable contributions," as that term is defined for purposes of Internal Revenue Code ("Code") § 170.  Code § 170 limits the amount of the deduction that is allowed to a corporation to 10 percent of its taxable income, with certain adjustments not relevant here.  Code § 170(b)(2).  For federal income tax purposes, the charitable contributions deduction for the tax years at issue was computed on a consolidated basis, and total contributions by all members were limited to 10 percent of the total of the taxable incomes for all members.  In each of the tax years at issue, charitable contributions made by some, but not all, of the individual members of the consolidated group exceeded the limits that would have been allowed pursuant to Code § 170 had the members filed separate federal income tax returns for those tax years.  Pursuant to Code § 170(d)(2), excess charitable contributions deductions that are not allowed to be taken in one tax year may be carried forward to the next five succeeding tax years.
For tax year 1993, the total amount of the deductible contributions made by the members of the consolidated group did not exceed the limitation on the deductions imposed by Code § 170.  Therefore, all of the charitable contributions made by members of the consolidated group were deductible on its federal consolidated return.  For tax year 1994, the total amount of deductible contributions made by the members of the consolidated group exceeded the limitation on the deductions imposed by Code § 170.  Therefore, approximately 82.8 percent of the consolidated group's total charitable contributions, amounting to $68,585,194, was deductible on its federal consolidated return.  The remaining 17.2 percent, amounting to $14,245,639, was included in a consolidated carryover of charitable contributions for federal income tax purposes.  For tax year 1995, the total amount of deductible contributions made by the members of the consolidated group was less than the limitation on the deductions imposed by Code § 170.  In addition, approximately 81.17 percent of the total carryover deduction from 1994, amounting to an additional $11,562,983, was deductible on the federal consolidated return.  The remaining 18.83 percent of the 1994 carryover deduction was carried over to the consolidated group's 1996 tax year.   
As the principal reporting corporation for the Massachusetts group, FMR filed Massachusetts combined corporate excise returns and paid taxes on the combined net income of the members of the Massachusetts group.  On the original returns for each of the tax years at issue, FMR calculated the separate taxable net income of each member by claiming separate charitable contributions deductions for the charitable contributions made by each individual member of the Massachusetts group.  FMR applied the 10 percent limitation to these charitable contributions on a company-by-company basis, as if each member had filed separate Massachusetts returns.  For each tax year at issue, the total charitable contributions deduction that FMR claimed on the Massachusetts combined returns was less than the deduction that FMR claimed and that was allowable on the federal consolidated returns.  FMR later filed amended returns for each tax year at issue claiming that the charitable contributions deduction for Massachusetts tax purposes should be the same as the amounts that were actually allowable for federal tax purposes, i.e., 10 percent of the total of the taxable incomes for all members.  The amounts of tax FMR requested to be abated in its petition to the Board are as follows:  $2,968,010 for 1993; $1,224,953 for 1994; and $251,663 for 1995.  The total abatement requested was $4,444,626.
For the reasons stated in the Opinion, the Board found that the method employed by FMR on its original returns was the correct method for claiming the Massachusetts charitable contributions deductions at issue.  The Board accordingly issued a decision for the appellee in this appeal.
OPINION
Domestic and foreign corporations that conduct business in the Commonwealth are required to pay a corporate excise based in part on their net income derived from  business  activities  carried  on  in  Massachusetts. 

G.L. c. 63, §§ 32, 38, and 39.  The "gross income" of a corporation is generally equal to gross income as defined under the Code as amended and in effect for the taxable year with some exceptions not relevant to this appeal.  G.L. c. 63, § 30(3).  A corporation's "net income," a Massachusetts-specific concept, is equal to gross income "less the deductions, but not credits, allowable under the provisions of the Federal Internal Revenue Code . . . ." again with some exceptions not relevant to this appeal.  G.L. c. 63, § 30(4).  One of the deductions that is allowable under the Code is the charitable contributions deduction at Code § 170.  This provision allows a corporation to deduct its charitable contributions made during a tax year up to 10 percent of its taxable income.  Code § 170(a), (b)(2).
Code § 1501 authorizes an affiliated group of corporations, defined as a parent and one or more corporations connected through eighty-percent ownership, to file a consolidated federal return.  Code § 1502 requires the  Secretary  of   the   Treasury  (the "Secretary")   to 
prescribe regulations "in order that the tax liability of any affiliated group of corporations making a consolidated return and of each corporation in the group . . . may be returned, determined, computed, assessed, collected, and adjusted . . . ."  Code § 1502.  Massachusetts taxpayers that file a federal consolidated return may "at their option" file a return under G.L. c. 63, § 32B and "be assessed upon their combined net income . . . ."  The appellant in the instant appeal participated in the filing of a federal consolidated return and a Massachusetts combined return.
At issue is how the charitable contributions deduction provided in Code § 170, particularly the 10 percent limitation on the deduction pursuant to Code § 170(b)(2) and the related carryover provisions, should be determined when affiliated corporations file a Massachusetts combined return.  For federal purposes, Treasury Regulation § 1.1502 provides a mechanism for calculating the 10 percent limitation on the charitable deduction of a consolidated group.  First, the "separate taxable income" of each member of the group is  computed  as  if  the member were filing a 
separate return.  Treas. Reg. § 1.1502-12.  Second, the separate taxable incomes of the members are added together to determine the group's consolidated taxable income.  Treas. Reg. § 1.1502-11(a)(1).  Third, the consolidated taxable income is then adjusted for certain items that are computed on a consolidated basis.  Treas. Reg. § 1.1502-11(a).
Certain items are not taken into account in determining an individual member's taxable income in step one but instead as part of the consolidated adjustment in step three.  One of these items is the deduction for charitable contributions.  See Treas. Reg. § 1.1502-11(a)(5).  As a result, a consolidated charitable contributions deduction is computed for the group by aggregating the contributions of all of the individual members, subject to a 10 percent limitation based on the group's consolidated taxable income.  Treas. Reg. §§  1.1502-11(a)(5), 1.1502-24(a).  If the group's aggregate charitable contributions do not exceed 10 percent of the total taxable income of all members of the consolidated group, then there is no limit on the deductions, even if certain members' contributions exceeded 10 percent of their individual taxable incomes if they had filed separate returns.  In this manner, deductions that are accrued by one member of the group may be used to offset income received by other members.  If the aggregate charitable contributions exceed the consolidated 10 percent limitation, then the allowable deduction is prorated among the contributions made by each individual member based on their contributions.  See Tech. Adv. Mem. 9006002 (Oct. 20, 1989).  The resulting excess deduction is allowed as a carryover to succeeding tax years pursuant to the rules in Code § 170(d)(2).  
The parties agreed that the statute governing Massachusetts combined returns, G.L. c. 63, § 32B, requires that the net incomes of each member of the Massachusetts group must be separately calculated before they are combined and apportioned to Massachusetts.  However, the appellant argues that the amount of the Massachusetts charitable contributions deduction should be the same as the figure used for purposes of the federal consolidated return, because the definition of "net income" in G.L. c. 63, § 30(4) relies on the provisions of the Code that govern the computation of taxable income for federal tax purposes, including "the deductions . . . allowable under the provisions of the Federal Internal Revenue Code."  The appellant reasons that, in the case of a corporate group filing a federal consolidated return, the only deduction that is "allowable" to a taxpayer corporation for its charitable contributions is the actual deduction reported on the federal consolidated return.  See Treas. Reg. 1.1502-12(l) (disallowing any deduction for charitable contributions to any individual members in computing their separate taxable incomes).  Therefore, the appellant concludes, in order to foster greater consistency between Massachusetts tax law and the federal tax law upon which it is based, the charitable contributions deduction should be the same amount as that allowed for federal purposes rather than a "hypothetical" amount based on filing a separate return.  
The appellant cites several cases, including Commissioner of Revenue v. Franchi, 423 Mass. 817, 823 (1996) ("This court has consistently adhered to the meaning of Federal tax language incorporated into our tax law where no contrary legislative intent is apparent."); Parker Affiliated Cos. v. Department of Revenue, 382 Mass. 256, 263 (1981) (finding that the "State policy was to use the literal Federal gains figure as a base for its own calculations") and Dogon v. State Tax Commission, 370 Mass. 699, 701 (1976) (stating that Massachusetts tax provisions defined with reference to federal provisions follow the "literal" meaning of those provisions "unless a particular provision of the [state] tax statute" provides otherwise) as support for its contention that Massachusetts tax law should mirror federal tax law where the Massachusetts tax concept is defined with reference to the federal concept. 
However, Massachusetts courts and this Board have repeatedly ruled that federal tax concepts are often not dispositive of the interpretation of Massachusetts corporate excise statutes.  See e.g., Rohrbough, Inc. v. Commissioner of Revenue, 385 Mass. 830, 832 (1982) (finding that gross income on a federal return will not always be the same for state tax purposes); Weston Marketing Corp. v. Commissioner of Revenue, 16 Mass. App. Tax Bd. Rep. 17, 80 (1994)(finding no Massachusetts tax significance attached to "a fictitious transaction deemed to have taken place for [federal] tax purposes"), aff'd, 40 Mass. App. Ct. 1108 (1996); T.H.E. Investment Corp. v. Commissioner of Revenue, 8 Mass. App. Tax Bd. Rep. 12, 15 ("We do not think that the term 'gross income' in G. L. c. 63, § 30(5)(a) was intended to include amounts which do not represent real increases in wealth to the taxpayer in the taxable year merely because the federal government has chosen to make adjustments for federal tax reasons that do not represent income subject to tax in Massachusetts.").  Because the concept of "net income" is a Massachusetts-specific concept, the Board ruled that federal tax concepts are not persuasive authority in determining the amount of a charitable contributions deduction for "net income" purposes.  
Furthermore, the Legislature has wide latitude to deny deductions.  "Deductions are to a large extent a matter of legislative grace.  The burden is on a taxpayer seeking a deduction to point to a particular statutory provision which authorizes the deduction."  Drapkin v. Commissioner of Revenue, 420 Mass. 333, 343 (1995).  The Supreme Judicial Court has consistently ruled that provisions creating tax deductions are to be construed strictly.  See, e.g., Boston Safe Deposit & Trust Co. v. Commissioner of Revenue, 406 Mass. 195, 198-199 (1989), Commissioner of Corps. & Tax'n v. Adams, 316 Mass. 484, 487 (1944).
The Board ruled that the appellant's application of the charitable contributions deduction in arriving at Massachusetts net income was inconsistent with the clear provisions of § 32B, the statute that governs the filing of combined returns in Massachusetts.  G.L. c. 63, § 32B provides in pertinent part:
If two or more domestic business corporations or foreign corporations participated in the filing of a consolidated return of income to the federal government, the net income measure of their excises imposed under section thirty-two or section thirty-nine may, at their option, be assessed upon their combined net income . . . .
Where such election is made . . . [t]he combined net income shall be determined as follows: (a) the taxable net income of each such corporation apportioned to this commonwealth pursuant to the provisions of section thirty-eight shall first be separately determined; and (b) the taxable net income of each such corporation, as so determined, shall then be added together and shall constitute their combined net income taxable under the chapter    . . . . (emphasis added).

"Where, as here, the language of the statute is clear, it is the function of the judiciary to apply it, not amend it."  Commissioner of Revenue v. Cargill, Inc., 429 Mass. 79, 82 (1999).  Pursuant to its plain language, § 32B requires that "the taxable net income of each group member must be 'separately determined,'" first by calculating each individual member's gross income (G.L. c. 63, § 30(3)), then calculating each individual member's net income (§ 30(4)), and finally, determining each individual member's taxable net income (§ 38(a)).  Farrell Enterprises, Inc. v. Commissioner of Revenue, 46 Mass. App. Ct. 564, 568 (1999).  "Then, as set forth in § 32B, par. Second (b), the apportioned, taxable net incomes of all of the individual members are merely 'added together' to determine the group's combined taxable net income."  Id.  
"[U]nlike the federal consolidated return, the Massachusetts 'combined return' calculates the group's combined net income by first determining the taxable net income of each member of the corporate group separately, thereby retaining the individual tax assets and liabilities of each taxpayer before allowing them to file a combined return."  Macy's East, Inc. v. Commissioner of Revenue, 27 Mass. App. Tax Bd. Rep. 391, 395 (2002) (emphasis added).  See also Combustion Engineering, Inc. v. Commissioner of Revenue, 25 Mass. App. Tax Bd. Rep. 758, 759 (2000) (finding that when filing a combined return under § 32B, "[t]he corporations' combined net income is ascertained by first separately determining the taxable net income of each corporation apportioned to this Commonwealth and then adding together each corporation's separately determined net income.").  In the instant appeal, the Board found and ruled that the appellant's method of calculating the charitable contributions deduction for purposes of Massachusetts net income would ignore the explicit mandate in § 32B that each corporation's separate taxable income be calculated, because the calculation of separate taxable income requires that each corporation's individual tax attributes be preserved and taken into account on an individual-entity basis.  See Macy's East, 27 Mass. App. Tax Bd. Rep. at 395.  
Moreover, the Board ruled that the definition of "net income" in § 30(4) does not incorporate the provisions of Treas. Reg. § 1.1502-12 that require the charitable contributions deduction to be taken on a consolidated basis.  The Treas. Reg. § 1.1502-12 provisions are specific adjustments that are made for the federal consolidated return; they are not part of Massachusetts net income because they are not "deductions . . . allowable under the provisions of the Federal Internal Revenue Code" (G.L. c. 63, § 30(4)) but rather "modifications" to those adjustments that apply specifically to federal consolidated returns.  See Treas. Reg. § 1.1502-12 ("The separate taxable income of a member . . . is computed in accordance with the provisions of the Code . . . subject to the following modifications: . . . (l) No deduction under section 170 with respect to charitable contributions shall be taken into account . . .") (emphasis added); see also Code § 1502 (authorizing the Secretary to prescribe regulations affecting how tax liability of consolidated group will be "returned, determined, computed, assessed, collected, and adjusted") (emphasis added).  
Accordingly, the Board found and ruled that there is no explicit authority in § 30(4) that mandates the calculation of the charitable contributions deduction by reference to Treas. Reg. § 1.1502-12 in the case of a combined return.  To the contrary, the plain language of § 32B requires that each corporation take its own tax attributes on an individual-entity basis.  See Macy's East, 27 Mass. App. Tax Bd. Rep. at 395 ("[U]nlike the federal consolidated return, the Massachusetts 'combined return' calculates the group's combined net income by first determining the taxable net income of each member of the group separately, thereby retaining the individual tax assets and liabilities of each taxpayer before allowing them to file a combined return." (citing G.L. c. 63, § 32B) (emphasis added).  "[T]he retention of the individual tax attributes of each entity subject to tax has been a consistent theme throughout the various forms of the corporate excise statute."  Nynex Corporation v. Commissioner of Revenue, 2002 ATB Adv. Sh. 704, 717 (2002).  
The appellant conceded that the individual tax attributes of each corporate entity should be retained.  


However, the appellant argued that the individual deduction, as reflected on the federal consolidated return, should be used in calculating Massachusetts net income because that amount is the only charitable contributions deduction "allowable" (G.L. c. 63, § 30(4)) under the Code in the case of a corporate group that is filing a federal return.  For that position, the appellant relied on Treas. Reg. 1.1502-12(l), which disallows any deduction for charitable contributions to any individual members in computing their separate taxable income.  However, more to the point is the fact that the charitable contributions deduction, while reported on a consolidated tax form as allocated among individual corporations, is not actually allowable to any of the corporations individually.  The Supreme Court has determined that for purposes of the consolidated return, certain deductions, including the net operating loss ("NOL") and the charitable contributions deduction, accrue only on a consolidated basis, not on an individual-entity basis: "we think it fair to say . . . that the concept of a separate NOL 'simply does not exist.'" 



United Dominion Industries, Inc. v. United States, 532 U.S. 822, 830 (2001).  While the Court in that case discussed the consolidated NOL deduction in particular, it also frequently mentioned the consolidated charitable contributions deduction as also governed by Treas. Reg. 1.1502-12 and thus deserving analogous treatment.  In the instant appeal, the Board likewise ruled that, in the context of a federal consolidated return, the concept of a separate deduction for charitable contributions "simply does not exist".  Id.    
Notwithstanding the federal treatment for charitable contribution deductions on consolidated returns, the Board ruled that the proper approach in interpreting the meaning of "net income" in § 30(4) in the context of a combined return is to analyze the plain language of § 32B and the cases interpreting that provision, which require that deductions be allowed only on an individual-entity basis.  "We construe statutes to give reasonable effect to all the statutory provisions and create a consistent body of law."  Bill DeLuca Enterprises, Inc. v. Commissioner of Revenue, 431 Mass. 314, 321 (2000) (citing PGR Mgt. Co., Health Props. v. Credle, 427 Mass. 636, 640 (1998)).  The Board found and ruled that Treas. Reg. § 1.1502-12 is not consistent with § 32B, because the federal regulation requires certain items to be deducted on a consolidated basis while the Massachusetts statute specifically requires the taxable income of each corporation to be "separately determined" and the individual tax attributes to be retained.  See Macy's East, 27 Mass. App. Tax Bd. Rep. at 395 ("The Massachusetts courts and this Board have consistently recognized this individual-entity approach [in § 32B] and emphasized its distinction from federal tax law.").  The Board found and ruled that allowing the appellant to take the charitable contributions deduction amount as reported on the federal consolidated return would enable one member to benefit from the higher income limitation of the combined group and thus "would be tantamount to allowing one taxpayer to assume the tax attributes of another in direct contravention of the statute's individual-entity approach."  Id. at 396. 
The Commissioner's regulation at 830 CMR 32B.1(7)(a) is consistent with the individual-entity approach to applying  § 32B.  This regulation repeats the mandate of § 32B by providing that "[e]ach member of the combined group shall first separately determine its 'taxable net income,' as defined in M.G.L. c. 63, s. 38(a), as if it were filing a separate return."  The regulation then declares that: 
[m]odifications to the separate taxable incomes of federal consolidated group members under Treas. Reg. S. 1.1502-12 . . . are not used when determining the Massachusetts net income of combined group members . . . .  The net income of each corporation should, if necessary, be adjusted to compensate for any such federal modifications.    

830 CMR 63.32B.1(7)(a)(1).  This regulation was promulgated on June 23, 1989, within a year of the amendments to § 32B that added provisions relative to the individual-entity calculation of net income.  Administrative interpretations of the agency charged with interpreting a statute, if reasonable and adopted contemporaneously with the enactment or amendment of that statute, are accorded weight in interpreting that statute.  Lowell Gas Co. v. Commissioner of Corps. & Tax'n, 377 Mass. 255, 262 (1979); Ace Heating Service, Inc. v. State Tax Comm'n, 371 Mass. 254, 256 (1976); Assessors of Holyoke v. State Tax Comm'n, 355 Mass. 223, 243-44 (1960).  "The duty of statutory interpretation is for the courts.  Nevertheless, particularly under an ambiguous statute . . ., the details of legislative policy, not spelt out in the statute, may appropriately be determined, at least in the first instance, by an agency charged with the administration of the statute."  Cleary v. Cardullo's, Inc., 347 Mass. 337, 344 (1969).   
The Board ruled that 830 CMR 63.32B.1.7(a)(1), which reiterates the individual-entity approach explicitly stated in § 32B, clarifies that Treas. Reg. § 1.1502-12 does not create a "deduction" that is "allowable" under the Code in the determination of an individual entity's taxable net income pursuant to § 30(4).  The Board found and ruled that this regulation was "reasonably designed to carry out the intent and purposes" of § 32B and, accordingly, constitutes prima facie evidence of the proper interpretation of § 32B and is entitled to weight.  See Wellington v. Commissioner of Corps. & Tax'n, 359 Mass. 448, 452 (1971); Electronics Corp. of America v. Commissioner of Revenue,  18 Mass. App. Tax Bd. Rep. 40, 45-6 (1995).
R.J. Reynolds Tobacco Co. v. Commissioner of Revenue, 21 Mass. App. Tax Bd. Rep. 23 (1997), cited by the appellant for the proposition that the federal consolidated return regulations apply for the computation of Massachusetts net income, does not bolster the appellant's case.  Reynolds addresses the provisions governing the recognition of gain with respect to intercompany transactions between members of a taxpayer group filing a federal consolidated return.  Treas. Reg. § 1.1502-13(a)(2) authorizes a corporation which transfers property to another corporation within its federal consolidated group to defer recognition of any gain or loss until the property is disposed of outside the group.  Pursuant to that regulation, Reynolds distributed shares of stock to Nabisco, a member of its federal consolidated group, and classified the transaction as a "deferred intercompany transaction," thus deferring the gain to be recognized on its federal return.  21 Mass. App. Tax Bd. Rep. at 24.  However, because Nabisco did not elect to participate in the filing of Reynolds' Massachusetts combined return, the Commissioner claimed that the transfer was to an unrelated third party for purposes of the Massachusetts return and, therefore, the gain was recognized in Massachusetts.  Id. at 25. 
 
The Board, however, ruled that the Commissioner's contention in Reynolds was erroneous, because Treas. Reg.  § 1.1503-13 is a recognition of income provision, which is a very different provision than one pertaining to a consolidated deduction:  "[t]he present appeal involves an issue where the income at issue was a creation of Federal tax law."  Id. at 27.  Therefore, because the gain in Reynolds "was not included in Reynolds' federal gross income" then "it was also not includible in Massachusetts gross income."  Id.  
Unlike provisions governing deductions, provisions governing the recognition of income are integral to the very definition of federal gross income and, accordingly, are most often incorporated by G.L. c. 63, § 30(3) into Massachusetts tax law unless specifically excluded.  See, e.g., Johnson v. Department of Revenue, 387  Mass. 59,
61 (1982) (finding that the date when gain on an installment sale became recognized for the federal return pursuant to Code § 453(b) was also controlling for Massachusetts purposes) (citing Dogon, 370 Mass. at 701).  Reynolds addressed a Code § 1502 regulation pertaining to the recognition of income, rather than an adjustment to net income.  "However, the exclusion of an item from income has no relevance to the determination of whether two corporate entities can combine their individual items of income and deductions before arriving at net income."  Nynex, 2002 ATB Adv. Sh. at 718.  Moreover, the taxpayer in Reynolds did not file a Massachusetts combined return with the entity to which it transferred the stock and, therefore, § 32B did not apply in that case.  Accordingly, Reynolds is clearly distinguishable from the instant appeal.
Central & Southern Companies, Inc., v. Weiss, 3 S.W.3d 294 (1999), another case cited by the appellant, is also distinguishable.  The Supreme Court of Arkansas in Weiss addressed the effect of the federal consolidated return regulations on that state's charitable contributions deduction, finding that the federal consolidated deduction amount was the same as the amount to be used on the state's consolidated return.  The Arkansas consolidated return statute provided that "the separate net income or loss of each corporation which is entitled to be included in the affiliated group shall be included in the consolidated net income or loss to the extent that its net income or loss is separately apportioned or allocated to the State of Arkansas in accordance with the provisions of § 26-51-701 et seq."  Ark. Code Ann. § 26-51-805(f) (quoted in Weiss, 3 S.W.3d at 80).  However, the court found an inconsistency with another provision, Ark. Code Ann. § 26-51-805(g), which specifically provided that the filing of Arkansas consolidated corporate income tax returns "is based upon the concept of filing federal consolidated tax returns."  Weiss, 3 S.W.3d at 81.  The court also found paragraph (f) to be inconsistent with the legislative intent of the Arkansas consolidated return statute, which in its purpose clause specifically provided that "[t]his Act is based upon the concept of filing Federal consolidated income tax returns."  Section 1 of Act 708 of 1979 (quoted in Weiss, 3 S.W.3d at 83).  
The Arkansas Department of Revenue had promulgated a regulation at DFA Reg. 1980-1 that specifically adopted Treas. Reg. § 1502-12 with respect to net operating losses:  "[n]et operating loss deductions shall not be taken into account in computing separate net income or losses."   DFA Reg. 1980-1 (quoted in Weiss, 3 S.W.3d at 84).  The court found an inconsistency in treating the NOL deductions in a manner disparate from the charitable contributions deduction:  "[t]he Department's application of Ark. Code Ann. § 26-51-805 leads us to the conclusion that it has interpreted the statutory language to require the taxpayer to look to the federal concepts in the area of filing Arkansas consolidated tax returns for some but not all deductions" that are treated in the same manner for purposes of the federal consolidated return.  Weiss, 3 S.W.3d. at 84.  The Weiss court therefore "conclude[d] that the legislative intent [was] to follow the federal concept of allowing deductions for charitable contributions to be taken at the consolidated-entity level."  Id. at 300.    
The Board in the instant appeal found that the statutory scheme for the Massachusetts combined returns is very different from the statutory scheme for the Arkansas consolidated return.  Unlike the Arkansas statute, there is no specific reference stating that the Massachusetts return is "based upon the concept of filing federal consolidated returns."  In fact, the different designation of the Massachusetts return as a "combined" rather than a "consolidated" return highlights the Massachusetts tax statutes' non-reliance upon the concepts of federal consolidated return filing.  See Macy's East, 27 Mass. App. Tax Bd. Rep. at 395.  Moreover, unlike the Arkansas regulation, the Commissioner's regulation at 830 CMR 32B.1 et seq. does not create an inconsistency between NOL deductions and the charitable contributions deduction.  The Supreme Judicial Court, the Appeals Court, and the Board have consistently found that NOL deductions are determined on a separate basis for taxpayer groups filing a combined Massachusetts return.  See, e.g., Bill DeLuca Enterprises, 431 Mass. at 325 (finding that excess deduction statutes "evince a persistent and conscious legislative decision to take a different path from that of the Federal government in ameliorating the transactional inequities that arise from annual taxation."); PMAG v. Commissioner of Revenue, 429 Mass. 35, 36 (1999) (emphasizing that "although the Federal tax liability did not change because of the net operating loss, similar deductions were not allowed in Massachusetts for the year in question."); and Macy's East, 27 Mass. App. Tax Bd. Rep. at 396 ("The body of Massachusetts law espouses the denial of net operating loss carryforwards accumulated by corporations other than the taxpayer."); see also Parker, 382 Mass. at 262; Farrell, 46 Mass. App. Ct. at 572.  

In the instant appeal, the Board was not persuaded by the appellant's arguments that the charitable contributions deduction should be treated differently than the NOL deduction.  Instead, the Board found and ruled that the charitable contributions deduction should be determined on an individual-entity basis, consistent with the treatment of other Massachusetts combined tax return items like the NOL.  Contrary to the appellant's argument, the individual-entity treatment of NOL deductions is not simply based on the provisions of G.L. c. 63, § 30(5).  Rather, the Board has made it clear that this treatment is required "pursuant to the principles of combined accounting in G.L. c. 63, § 32B . . . ."  Macy's East, 27 Mass. App. Tax Bd. Rep. at 395.  Accordingly, the Board affirmed the Commissioner's denial of the appellant's applications for abatement, ruling the Commissioner's method of retaining the individual tax attributes of each corporation was consistent with the Massachusetts combined reporting scheme.




The Board found and ruled that each corporate entity must deduct its charitable contributions on an individual-entity basis and be subject to the 10 percent limitation on its own individual income.  Accordingly, the Board issued a decision for the appellee in this appeal.

	    					APPELLATE TAX BOARD
	

							
																	By:____________________________
				    Abigail A. Burns, Chairman 



A true copy:


Attest: _____________________
          Clerk of the Board
 

  G.L. c.  62C, § 37, as amended by St. 1993, c. 110, § 122, provides that an agreement to extend the period of assessment also extends the time within which an abatement application may be filed.  See also TIR 93-11. 
 See G.L. c. 58A, § 6.
  In addition, the consolidated group had no charitable contributions deductions that were carried over from previous years for federal income tax purposes.
 These amounts were based on amended figures submitted by FMR subsequent to its applications for abatement.
 Code § 170(b)(2) provides that a corporation's total charitable deduction for the taxable year shall not exceed 10 percent of its taxable income as computed without regard to the charitable deduction, part VIII (special deductions for corporations) except § 248, any net operating loss carryback under § 172, and any capital loss carryback under § 1212(a)(1).
  Code § 170(d)(2) permits a corporation to carry forward its excess charitable contributions deductions to the five succeeding tax years.  See § 170(d)(2)(A) and (B) for specific rules limiting the amounts of carryover deductions.
 This cite was to an earlier version of G.L. c. 63.  For the tax years at issue in the instant appeal, "gross income" was defined at G.L. c. 63, § 30(3).
 United Dominion Industries addressed whether an affiliated group could include a consolidated net operating loss ("CNOL") on a consolidated return in determining product liability losses ("PLLs"), where the CNOL exceeded the sum of the members' total product liability expenses ("PLEs"), but where several member companies, when considered separately, generated positive taxable income.  532 U.S. at 827.  The Government argued for a "separate-member" approach, whereby the PLEs incurred by an affiliate with positive separate taxable income could not contribute to a PLL eligible for the 10-year carryback.  Id. at 828.  The Supreme Court, however, ruled in favor of the taxpayer's approach, finding that "by expressly and exclusively defining NOL as CNOL, the regulations support the position that group members' PLEs should be aggregated and the affiliated group's PLL determined on a consolidated, single-entity basis."  Id. at 834.    
 See, e.g., id. at 826 (explaining that in calculating the "separate taxable income" of each group member, the modifications at Treas. Reg. § 1.1502-12 require the group member "to disregard, among other items, its capital gains and losses, charitable-contribution deductions, and dividends-received deduction" which "are accounted for on a consolidated basis") (emphasis added).
  The Board, however, noted exceptions to this general rule where no actual realization of income has occurred in Massachusetts that would merit inclusion in Massachusetts gross income.  See Rohrbough, 385 Mass. at 832 ("For State tax purposes, applying the definition of capital gains in the Internal Revenue Code, there is no gain."); Weston, 16 Mass. App. Tax Bd. Rep. at 82 (excluding income amounts attributable to recapture of prior years' capital losses taken on federal returns because "the appellant did not realize Massachusetts income when a loss from prior years taken on its federal, but not state, return were recaptured."); T.H.E. Investment, 8 Mass. App. Ct. at 4 (loss recaptured for federal tax purposes included in federal but not Massachusetts gross income).  The basic principle to be drawn from these cases is that income must represent an actual increase in wealth to be included in Massachusetts gross income.  Bingham v. Commissioner of Corps. & Tax'n, 249 Mass. 79 (1924); Brown v. Commissioner of Corps. & Tax'n, 242 Mass. 242 (1922).     

ATB 2003-550