The Gillette Company v. Commissioner of Revenue (September 28, 2007)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD

THE GILLETTE COMPANY		v. 	COMMISSIONER OF REVENUE

Docket No. C266836				Promulgated:
							September 28, 2007
	

	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 Commissioner of Revenue ("Commissioner" or "appellee") to abate corporate excise assessed against The Gillette Company (USA) Inc. ("Gillette USA")  for the tax year 1998 ("tax year at issue").  The appellant, the Gillette Company ("Gillette"), is the successor to Gillette USA.  
	Commissioner Scharaffa heard the appeal and was joined in the decision for the appellant by Commissioners Egan, Rose, and Mulhern.  Chairman Hammond took no part in the deliberation or decision of this appeal.  
	These findings of fact and report are promulgated at the request of both 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., and Darcy Ryding, Esq. for the appellant.
	
Thomas W. Hammond, Esq., Christopher M. Glionna, Esq., and Brett M. Goldberg, Esq. for the appellee.  
FINDINGS OF FACT AND REPORT 

There is no dispute concerning the underlying facts of this appeal.  The parties filed a Statement of Agreed Facts with accompanying exhibits, on the basis of which the Appellate Tax Board ("Board") made the following findings of fact.  
At all material times, Gillette was a Delaware corporation whose stock was traded publicly on the New York Stock Exchange.  Gillette, along with its subsidiaries, manufactured and sold consumer products primarily in the personal hygiene and paper products fields.  The central issue in this appeal arises from the liquidation of two corporations within the Gillette group of companies prior to and during the tax year at issue and the treatment of investment tax credits ("ITC's") under G.L. c. 63, § 31A ("§ 31A") subsequent to those liquidations.  Specifically, this appeal presents the issue of whether the tax-free liquidation of a subsidiary corporation by its parent under § 332 ("§ 332") of the Internal Revenue Code ("Code") constitutes a disposition of assets for purposes of § 31A (e).  
Throughout 1997, Gillette Manufacturing (USA) Inc. ("Gillette Manufacturing") was a wholly-owned subsidiary of Gillette USA.  Gillette Manufacturing owned and operated a shaving products manufacturing plant in Boston, Massachusetts ("Boston Factory").  On December 31, 1997, Gillette Manufacturing was merged into Gillette USA in a tax-free liquidation under § 332 ("Merger 1").  Following the liquidation, Gillette USA succeeded to all of Gillette Manufacturing's assets, including the Boston Factory and the assets associated therewith which qualified for ITC's ("Original ITC Assets").  During the 1998 calendar year, Gillette USA also purchased property that qualified for ITC's ("1998 ITC Assets").  Gillette USA was in turn merged into Gillette on December 31, 1998 in a tax-free liquidation under § 332 ("Merger 2").  Prior to Merger 2, Gillette had owned 80.1% of the stock of Gillette USA.  The appellee did not dispute that either merger qualified as a § 332 liquidation.  The parties agreed that the mergers did not effect a material change in the operations of the Boston Factory, which continued to house the manufacturing of shaving products.  
The parties stipulated that for the tax year at issue, Gillette, as the principal reporting corporation, filed a combined Massachusetts corporate excise return on Form 355C-B, while Gillette USA, as a member of the combined group, filed its corporate excise return on Form 355C-A.  Both of these returns were filed on December 13, 1999.  Subsequent to an audit, the Commissioner issued to Gillette USA a Notice of Intention to Assess dated October 16, 2002, which proposed an additional assessment of corporate excise in the amount of $4,812,419 plus statutory penalties and interest.  For reasons unexplained in the record, the Commissioner issued another Notice of Intention to Assess, entitled "02 Version," also dated October 16, 2002, which reflected a proposed additional assessment in the amount of $4,812,418 plus statutory penalties and interest.  The one-dollar discrepancy between the two proposed assessments is immaterial as the parties have stipulated that the amount at issue is $4,812,418 in corporate excise plus statutory penalties and interest.  The proposed assessment reflected the recapture of ITC's under § 31A(e), based on the Commissioner's treatment of Merger 2 as a disposition of assets prior to the end of their useful life.  
On November 21, 2002, the Commissioner issued to Gillette USA a Notice of Assessment reflecting the additional assessment of $4,812,418 plus penalties and interest.  On December 30, 2002, Gillette, as the successor to Gillette USA, filed an Application for Abatement on Form CA-6 for abatement of the additional corporate excise assessed for 1998.  By Notice of Abatement Determination dated February 12, 2003, the Commissioner gave notice to Gillette that its Application for Abatement had been denied.  On March 19, 2003, Gillette filed a Petition at the Board.  On the basis of these facts, the Board found and ruled that it had jurisdiction to hear this appeal.  
	Subsequent to the filing of the Post-Hearing Briefs and Reply Briefs by the parties, the appellant filed a Motion to Strike New Arguments raised in the appellee's Reply Brief.  The appellant's motion centered on the appellee's apparent change in the characterization of the assessment at issue from a "recapture" of ITC's taken previously, under the second sentence of § 31A(e), to a reduction in the amount of ITC's for the tax year at issue under the first sentence of § 31A(e).  The Board found and ruled that the appellee had not asserted this claim in his Answer or at any time prior to filing his Reply Brief, and therefore that it amounted to a new argument raised for the first time.  However, as discussed in the following Opinion, the Board found that neither the first sentence nor the second sentence of § 31A(e) applied to the facts of this appeal as there had not been a disposition of assets.  The Board therefore denied the appellant's Motion to Strike because the issue was moot.  
	On the basis of all of the evidence of record, the Board found, for the reasons discussed in the following Opinion and to the extent that it is a finding of fact, that the tax-free liquidation of a subsidiary corporation by its parent did not result in a disposition of assets for purposes of § 31A(e).  Accordingly, the Board issued its decision in favor of the appellant in this appeal and granted an abatement in the amount of $4,812,418 in tax together with penalties and interest.  

OPINION
The sole legal issue raised in this appeal is whether the tax-free liquidation of a subsidiary corporation by its parent under § 332 constitutes a disposition of assets for purposes of ITC's under § 31A(e). Resolution of this issue depends on an analysis of each of those statutes, applicable case law, and other relevant authority for an interpretation of the term "disposition" in such a context.  In deciding this issue, the Board is "faced with a question of statutory interpretation that arises with some frequency in the area of Massachusetts tax law, one which requires balancing the State's independent development of its individual tax code against the Legislature's consistent references to, and incorporation of, Federal tax provisions."  Commissioner of Revenue v. Franchi, 423 Mass. 817, 821-22 (1997).  As discussed below, the Board ruled that the tax-free liquidation of a subsidiary corporation by its parent does not result in a disposition of assets for purposes of § 31A(e), and accordingly, issued a decision in favor of the appellant. 
SECTION 332 AND RELATED CODE SECTIONS
The principal federal statute at issue in this appeal, Code § 332, is found in a part of the Code addressing the tax treatment of certain corporate liquidations.  Code § 331 provides the general rule that "amounts received by a shareholder in a distribution in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock."  The exception to that general rule is found in § 332, which provides that "no gain or loss shall be recognized on the receipt by a corporation of property distributed in a complete liquidation of another corporation." Section 332 applies to liquidations in which the parent corporation owns at least 80 percent of the liquidated subsidiary corporation, along with certain other requirements.  In addition, Code § 334(b) specifies that in the event of a § 332 liquidation, the basis of the property distributed to the acquiring corporation "shall be the same as it would be in the hands of the transferor," i.e., a carryover basis.  Additionally, Code § 381 provides that when a corporation acquires assets from another corporation in a § 332 liquidation, the acquiring corporation "shall succeed to and take into account" numerous tax attributes of the liquidated corporation, including methods of accounting and depreciation.  
SECTION 31A
Section 31A is the ITC provision adopted by the Massachusetts Legislature in 1970 in order to encourage certain industries to locate in Massachusetts or to expand their presence, and therefore job opportunities, within the commonwealth.  See Walter Kidde & Company v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports, 1982-208, 210, aff'd 389 Mass. 577 (1983), ("[T]he legislature's purpose was to encourage investment in certain types of manufacturing property with a view to stimulating the economy and increasing employment.") (citing State Tax Commission v. La Touraine Coffee Company, Inc., 361 Mass. 773 (1972)).  The statutory predecessor to § 31A was § 30(7), which provided a tax exemption rather than a credit against the corporate excise, for certain manufacturing property acquired by a corporation.  Though the mechanics of the two provisions differed slightly, the legislative intent behind them was identical.  See Emhart Corp. v. State Tax Commission, Mass. ATB Findings of Fact and Reports 1971-395, 403, aff'd 363 Mass. 429 (1973). ("[I]t is our opinion that the intent and purpose of the legislature was, in essence, to provide the exemption for that kind of investment in machinery and equipment by corporations which would stimulate the economy by increased production and employment.")  Section 31A(i) provides, in pertinent part, that a manufacturing corporation is allowed a credit against its corporate excise equal to "three percent of the cost or other basis for Federal income tax purposes of qualifying tangible property acquired, constructed, reconstructed or erected during the taxable year."  
However, ITC's generated under this provision are subject to reduction under the first sentence of § 31A(e) in the event that property for which a credit is to be taken is "disposed of or ceases to be in qualified use prior to the end of the taxable year in which the credit is to be taken."  ITC's taken in previous tax years are subject to recapture under the second sentence of § 31A(e) in the event that "property for which the credit has been taken is disposed of or ceases to be in qualified use prior to the end of its useful life," unless the property has been in qualified use for more than 12 consecutive years.  
THE BOARD'S ANALYSIS
A. THE PLAIN MEANING AND USAGE OF THE TERM "DISPOSITION" IN OTHER LEGAL CONTEXTS SUPPORT THE CONCLUSION THAT THE TRANSFER OF ASSETS FOLLOWING A SUBSIDIARY'S LIQUIDATION IS NOT A DISPOSITION

The issue presented in this appeal requires the interpretation of the term "disposition" for purposes of § 31A following a § 332 transaction.  Because the issue is one of statutory interpretation, the Board "look[s] to dictionary definitions and accepted meanings in other legal contexts… [provided] their interpretations must remain faithful to the purpose and construction of the statute as a whole."  American Honda Motor Co. v. Bernardi's, Inc., 432 Mass. 425, 430 (2000), quoting Heritage Jeep-Eagle, Inc. v. Chrysler Corp., 39 Mass. App. Ct. 254, 258, (1995).  Additionally, 
a statute must be interpreted according to the intent of the Legislature ascertained from all its words construed by the ordinary and approved usage of the language, considered in connection with the cause of its enactment, the mischief or imperfection to be remedied and the main object to be accomplished, to the end that the purpose of its framers may be effectuated.

Industrial Finance Corp. v. State Tax Commission, 367 Mass. 360, 364, (1975), citing Hanlon v. Rollins, 286 Mass. 444, 447 (1934), Lincoln-Sudbury Regional Sch. Dist. v. Brandt-Jordan Corp. of New Bedford, 356 Mass. 114, 117-118 (1969). 
Definitions of the term "disposition" cited by the appellee in his Post-Hearing Brief included the following:  "The act of transferring something to another's care or possession, esp. by deed or will; the relinquishment of property." Black's law dictionary 484 (7th ed. 1999); and "a placing somewhere, a giving over to the care and possession of another, or a relinquishing... the transfer of property from one to another (as by gift, barter, sale or will)." webster's third new international dictionary of the english language unabridged 654 (1986).  While the appellee emphasized the use of the words "transfer" or "transferring" in each of these definitions, because it is a term used in § 332 itself, he failed to similarly highlight the fact that, by definition, these transfers of property must be to another.  Applied in the context of Merger 1 and Merger 2, the Board found that there had not been a transfer of property to a third-party.  Rather, there had been a change in "only the form and not the facts of ownership and use," of the relevant assets.  Emhart Corp. v. State Tax Commission, 363 Mass. 429, 432 (1973).
	Similarly, in other contexts, courts have relied on the absence of a transfer of control outside the parent-subsidiary relationship in ruling that no disposition of assets had occurred. In Dickson v. Riverside Iron Works, Inc., the Massachusetts Appeals Court considered whether there had been a disposition of assets following the liquidation by a parent of its wholly-owned subsidiary and the merger of that subsidiary into the parent corporation.  Dickson v. Riverside Iron Works, Inc., 6 Mass. App. Ct. 53 (1978).  The court was presented with this issue in the context of an employment contract, which provided for a termination of the contract and all of the employer's obligations under the contract "[i]n the event of any sale, liquidation or other disposition of all the employer's capital assets."  Id. at 54.  An employee whose contract had been terminated shortly after the merger brought suit against the corporation.  In agreeing with the employee that there had not been a disposition of assets, the Court noted in particular: "[T]here was no loss of control over [the subsidiary]. [The subsidiary's] business did not cease, and except for the consolidation of the financial records of [the subsidiary and the parent], the business was conducted in the same way after as before the merger."  Id. at 56.  
	Federal courts, too, have had the opportunity to decide whether a disposition of assets had occurred in a situation similar to the instant case.  In Centennial Oil Co. v. Thomas, Collector of Revenue, the Fifth Circuit Court of Appeals considered whether a disposition of assets had occurred upon the liquidation and dissolution of a subsidiary and the subsequent assumption of all of its assets by its sole corporate shareholder.  Centennial Oil Co. v. Thomas, Collector of Revenue, 109 F.2d 359, 360 (5th Cir. 1940).  The Collector of Revenue had assessed a surtax on the profits, which the taxpayer challenged, claiming that the transfer of assets was really a dividend to its sole shareholder, and that it was entitled to a credit against the tax for the dividends paid.  Id. at 360.  In affirming the lower court's holding for the Collector of Revenue, the Court stated:
[t]here are transfers and distributions of corporate assets to other corporations, which for tax purposes are considered mergers, reorganizations, or the like, and not to make any such real change in ownership as to generate taxes.  Among them is [the receipt by one company of the assets of another company after liquidation.] It is considered that the assets concerned stand in the hands of the receiving corporation just as they did before the transfer, and not until the receiving corporation makes a disposition of them do the tax consequences accrue. 

Id. at 360 (emphasis added).  

The Fifth Circuit's use of language in this passage is telling. While the Court used the terms "transfer" and "distribution" to describe what happened to the assets upon liquidation, it used the term "disposition" only in a prospective fashion.  Clearly the Court did not consider what had transpired in the liquidation to be a disposition of the assets.  
The appellee cited the Tax Court's decision in Rome I, Ltd. v. Commissioner, 96 T.C. 697 (1991) as an example of a federal court's construction of the term "disposition" for the purposes of determining whether a recapture of rehabilitation tax credits, similar to the ITC's at issue, was warranted.  In that case, the taxpayer had made a charitable contribution of a façade easement of a building that had qualified for rehabilitation tax credits.  Id. at 702.  In determining that a disposition had occurred, the Tax Court noted "We find that 'disposition' means to transfer or otherwise relinquish ownership of property."  Id. at 704. (emphasis added)  Because the liquidation of a subsidiary by its parent is a change in "only the form and not the facts of ownership and use" of the relevant assets as in Emhart, 363 Mass. at 432, and no "relinquishment of ownership" of the assets took place as in Rome I 96 T.C. at 704, the Board's determination that no disposition occurred in either Merger 1 or Merger 2 is in harmony with the Tax Court's interpretation of the term.
On the basis of the foregoing, the Board found and ruled that the plain meaning of the term "disposition" and its use in other legal contexts support the conclusion that the liquidation of a subsidiary by its parent does not result in a disposition of the subsidiary's assets. 
B.  THE SUPREME JUDICIAL COURT'S DETERMINATION IN EMHART STANDS FOR THE PROPOSITION THAT THE SURVIVING CORPORATION RETAINS THE ITC'S OF THE LIQUIDATED SUBSIDIARY CORPORATION    

In Emhart Corp., the court considered a situation in which the taxpayer acquired machinery and equipment from subsidiaries subsequent to a tax-free merger.  At issue was the exemption from tax under G.L. c. 63, § 30(7), the statutory predecessor to § 31A.  Prior to the merger, the taxpayer owned no machinery or equipment in Massachusetts, and there was no evidence that the merged subsidiaries owned property to which the statutory exemption applied.  Id. at 430.  In seeking to take advantage of the exemption, the taxpayer in Emhart argued that the mergers resulted in acquisitions of the relevant assets, giving rise to exemptions in the hands of the parent. Id.  In rejecting the taxpayer's argument, the court reasoned that because the tax incentive at issue was determined with respect to the "adjusted basis" of the assets, and because that adjusted basis remained exactly the same with the assets now in the hands of the parent corporation, the legislative intent of the statute was in "no way served by granting the exemption solely by virtue of a tax-free reorganization which [did] not increase investment in machinery and equipment in Massachusetts."  Id. at 431-432.  
	Although the facts and issue in Emhart bear close resemblance to those in the instant case, there is one significant difference: While the taxpayer in Emhart was seeking to claim tax advantages to which neither parent nor subsidiaries were entitled prior to the merger, the appellant in this case is merely seeking to maintain the amount of ITC's to which its subsidiary was entitled prior to the liquidation.  The court, however, spoke to both situations in Emhart, noting that "[a] mere paper transfer, affecting only the form and not the facts of ownership and use, and not changing the 'adjusted basis' of the property in question, neither adds to nor subtracts from the  otherwise available.  Id. at 432 (emphasis added).
More specifically, the court rejected the notion that such a transaction should be cause to eliminate the available exemption, "even though a predecessor corporation qualified for it and then ceased to exist."  Id. at 432.  While the exact statute and factual background at issue in Emhart were not identical to those in the instant case, the legislative intent behind the exemption of § 30(7) and the credit of § 31A was the same, and the Board found the court's deference to that legislative intent compelling.  Applying the Emhart analysis to the instant case, the Board found and ruled that Gillette succeeded to the ITC's associated with the Boston Factory when it succeeded to the Boston Factory following Merger 2.  
THE FEDERAL AND STATE STATUTORY SCHEMES FROM WHICH § 31A IS DERIVED COMPEL THE CONCLUSION THAT THE LIQUIDATION OF A SUBSIDIARY BY ITS PARENT UNDER § 332 DOES NOT RESULT IN A DISPOSITION OF ASSETS 

The court's determination in Emhart was not only consistent with the legislative intent behind the ITC provisions, but also consistent with the federal statutory scheme upon which they were based.  As both parties to this appeal have agreed, § 31A, as enacted in 1970, was based on former Code § 47 ("§ 47"), which itself had been enacted in 1962.  See Revenue Act of 1962, Pub. L. No. 87-834, § 2, 76 Stat. 960, 962-73 (1962).  Because it is apparent that § 31A was based largely on a federal statute, the Board, as it has in the past, looked to interpretations of that federal statute for guidance.  See Oliver v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2001-141, 151-53, aff'd, 436 Mass. 467 (Mass. 2002), quoting B.W. Co. v. State Tax Commission, 370 Mass. 18, 22-23 (1976).  
Prior to 1990, the federal counterpart to § 31A(e) was found in § 47.  The pertinent language of § 47, which was moved in 1990 to Code § 50(a)(1)(A) (See Omnibus Budget Reconciliation Act of 1990, Pub. L. No. 101-508, § 11813, 104 Stat. 1388-546-548 (1990)), is as follows: 
RECAPTURE IN CASE OF DISPOSITIONS, ETC. Under regulations prescribed by the Secretary-

EARLY DISPOSITION, ETC-
(A) GENERAL RULE. If, during any taxable year, investment credit property is disposed of, or otherwise ceases to be investment credit property with respect to the taxpayer, before the close of the recapture period, then the tax under this chapter for such taxable year shall be increased by the recapture percentage

Express exclusions from the recapture provisions set forth in § 50(a)(1)(A) are set out in § 50(a)(4), which provides:
(4) SUBSECTION NOT TO APPLY IN CERTAIN CASES.-
Paragraphs (1) and (2) shall not apply to- 

(A) a transfer by reason of death, or
(B) a transaction to which section 381(a) applies.
           
For purposes of this subsection, property shall not be treated as ceasing to be investment credit property with respect to the taxpayer by reason of a mere change in the form of conducting the trade or business so long as the property is retained in such trade or business as investment credit property and the taxpayer retains substantial interest in such trade or business. 

	Because Code §381(a) encompasses "distributions to which section 332 applies," the federal ITC statutory scheme, both as originally enacted and as in effect during the tax year at issue, expressly excluded from the recapture provisions property acquired from one corporation by another in the context of a § 332 liquidation. The exclusion from recapture in such a circumstance is logical and consistent with the overall tax treatment of § 381(a) transactions, under which the transferee "succeed[s] to and take[s] into account" many tax attributes, including methods of depreciation and accounting, of the transferor.  The Massachusetts ITC statutory scheme, as the appellee pointed out, makes no corresponding express exclusion from recapture as does § 50(a)(4).  The appellee argued that the Board should infer from the statutory silence on this matter a deliberate intent by the Legislature to include asset transfers occurring in transactions to which 381(a) apply as dispositions for the purposes of § 31A(e).  The Board, however, was not persuaded that the absence of a specific exclusion in the Massachusetts statute, which was based on a federal statute including such an express exclusion, compelled the conclusion that asset transfers made pursuant to § 332 liquidations were therefore dispositions for the purposes of §31A(e).  Rather, the Board found that because the Massachusetts statute was based on the federal statute, which clearly does not treat § 332 liquidations as dispositions of assets, it should be inferred that such asset transfers are not to be considered dispositions for Massachusetts purposes either.  
	Although § 31A does not contain the express exclusion found in § 50(a)(4), the statutory language does evince an intent to track the Massachusetts ITC with the federal ITC.  Specifically, § 31A (i), which provides for the credit, states, in pertinent part:
The amount of such credit shall be three percent of the cost or other basis for Federal income tax purposes of qualifying property acquired… during the taxable year, after deduction therefrom of any Federally authorized tax credit taken with respect to such property.  [emphasis added].  

Code § 334(b) specifies that in the event of a § 332 liquidation, the basis of the property distributed to the acquiring corporation "shall be the same as it would be in the hands of the transferor."  The federal scheme, therefore, provides for a carryover basis following a § 332 liquidation.  Because § 31A (i) ties the calculation of the Massachusetts ITC to the "federal basis," of the property without further limitation, it follows that the calculation of the credit should remain the same when the property is in the hands of the transferee corporation.  
Moreover, "the starting point for calculating the corporate excise tax in Massachusetts is Federal gross income."  PMAG v. Commissioner of Revenue, 429 Mass. 35, 39 (1999), citing Polaroid Corp. v. Commissioner of Revenue, 393 Mass. 490, 498 (1984).  "Net income" for the purposes of the Massachusetts corporate excise is defined as "gross income, less the deductions, but not the credits, allowable under the provisions of the Federal Internal Revenue Code."  G.L. c. 63, § 30(4).  Massachusetts therefore generally adopts those provisions of the Code relative to the determination of income, unless the Legislature has expressed a clear intent to deviate from the Code for Massachusetts corporate excise purposes.  See BankBoston Corporation v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2005-450, 467, aff'd 68 Mass. App. Ct., 156, 166 (2007) ("[F]ederal law often guides Massachusetts as to recognition of income, see General Mills, Inc. v. Commissioner of Revenue, 440 Mass. 154, 171 (year); Johnson v. Department of Revenue, 387 Mass. 59, 61 (1982), the same is not necessarily true for authorizations of deductions.").  Where no contrary legislative intent is apparent "Massachusetts courts and this Board have generally adopted Federal interpretations in construing Massachusetts taxing statutes."  BankBoston Corporation at 472.  With respect to ITC's, as contrasted with the NOL for which Massachusetts has expressly deviated from the federal scheme as discussed in greater detail below, the Board found no clear legislative intent to deviate from the provisions set forth in §§ 50, 332, 334(b), and  381, and therefore found that Massachusetts follows the tax treatment of those Code provisions.  Accordingly, the Board found no reason to exclude the carryover treatment of ITC's while other tax attributes associated with the same property were permitted carryover treatment.  This logic is consistent with the court's conclusion in Emhart, that "[a] mere paper transfer, affecting only the form and not the facts of ownership and use, and not changing the 'adjusted basis' of the property in question, neither adds to nor subtracts from the exemption otherwise available."  Emhart at 432.  
Moreover, the Board found this interpretation of the statute more consistent with the legislative intent of § 31A.  First and foremost, it was undisputed that the property at issue was being used in the same place, for the same purposes, in the hands of Gillette as it was in the hands of Gillette USA.  The transition in formal ownership from subsidiary to parent in no way disturbed the operations of the Boston Factory, and in no way detracted from the employment opportunities within the commonwealth previously associated with such property.  The legislative intent of § 31A, to encourage investment in manufacturing and other industries within the commonwealth, thereby expanding job opportunities, would not be served by the recapture or adjustment of credits relating to such property.  The appellee's interpretation would plainly subvert the intent of rewarding industrial investment in Massachusetts.  
This was the exact observation made by the court in Emhart, in rejecting the notion that the absence of an express exclusion in the applicable Massachusetts statute while its federal counterpart contained provisions for such exclusion dictated the inference that no such exclusion was intended by the Legislature.  The court stated that a:
plausible reading would deny any exemption claimed by virtue of the acquisition of property in a reorganization, even though a predecessor corporation qualified for it and then ceased to exist.  Since no reference was made to mergers or other reorganizations until the 1969 amendment, and since the Federal law referred to contained elaborate provisions for such case.... We think, however that the statute 'must be fairly construed and reasonably applied in order to effectuate the legislative intent and purpose to... induc[e] new industries to locate here and ...steady employment afforded to our citizens.'  

Id. at 432, quoting Assessors of Boston v. Commissioner of Corps. & Tax'n, 323 Mass. 730, 741 (1949); Franki Foundation Co. v. State Tax Commn. 361 Mass. 614, 617-18.  (1972).   
	In addition, while § 31A may have been based on its federal equivalent, it is apparent that it was actually modeled on the New York state ITC statute, which was adopted just one year before § 31A was enacted.  See NY Consolidated Tax Laws § 210(12) (1969) ("§ 210(12)").  The New York and Massachusetts statutes use virtually identical language and structure, and even depart from the federal statute in the same manner.  For example, both allow ITC's for "buildings and structural components of buildings," while the federal statute does not.  Like § 31A, § 210(12) does not include an express exclusion from its recapture provisions for transfers of property in tax-free reorganizations.  However, the New York Department of Taxation and Finance has issued both a regulation and advisory opinions which state that tax-free transfers of property under Code § 351, § 368(a) and § 332 did not result in a disposition for the purposes of ITC recapture under § 210(12)(g).  See 20 NYCRR 5.2-8(e); Morrison & Foerster LLP, N.Y. Adv. Op. No. TSB-A-96(27)C (1996).  Enviro-Gro Technologies, Inc., N.Y. Adv. Op. No. TSB-A-97(9)C (1997).  
Similarly, Rhode Island enacted its own ITC statute, which contains essentially the same language as the federal statute, but like § 31A and § 210(12), does not include an express exclusion from its recapture provisions for transfers of property in tax-free reorganizations.  See R.I. Gen. Laws § 44-31-1.  Rhode Island has also issued a regulation interpreting its statute.  Despite the same statutory silence on the treatment of ITC property following a tax-free reorganization, Rhode Island has interpreted its statute as not triggering recapture of ITC's in the event that "property is transferred from one taxpayer to another by a transaction in which the basis of property in the hands of the transferee is determined in whole or in part by reference to the basis in the hands of the transferor, or a mere change in the form of the taxpayer's business."  R.I. Code R. § 03-04.  The Board found it compelling that those states that have enacted virtually identical ITC statutes and which have addressed the issue at hand have ruled that transfers of property like those in the instant case do not trigger a recapture of ITC's.  
Accordingly, the Board found that the applicable federal and state statutory schemes make clear that the liquidation of a subsidiary corporation by its parent under § 332 does not result in a disposition of assets for purposes of § 31A(e).
THE APPELLEE'S ANALYSIS OF § 31A BASED ON OTHER STATUTES AND CASE LAW IS UNPERSUASIVE 

The appellee advanced several other arguments regarding the statutory language of § 31A and other purportedly relevant Massachusetts statutes, but each of his arguments was off the mark.  In making yet another argument imputing significance to the Legislature's silence on this issue in § 31A, the appellee likened § 31A to two other credit provisions found in chapter 63, namely § 38(M) and § 38(N).  Those sections provide credits for research and development and investments in qualified economic opportunity areas, respectively.  As the appellee pointed out, each of those sections contain language expressly allowing for the sharing of credits earned under those sections within the combined corporate group.  The appellee argued that by not including such language in § 31A, the Legislature must have wanted to make it very clear that ITC's were not to be shared among the corporate entities within a combined group.  
The appellee's argument is flawed on two levels: First, if the Legislature indeed wanted to be so clear on this point, it follows that it would have included language to that effect within § 31A itself, rather than indicating its intent by implication in two other sections addressing entirely different credits.  Second, the appellee's comparisons between §§ 38(M) and 38(N) and § 31A as it applies to the instant case are inapposite because the language included in those sections addresses the use of the credits by group members even in the absence of a merger or liquidation. Therefore, the "credit sharing" that the appellee attempted to compare with the instant case is much broader than the narrow circumstance presented here, specifically, the liquidation of a subsidiary by its parent under § 332.  While neither §§ 38(M)(e) nor 38(N)(e) speaks to this narrow circumstance specifically, the federal statutory scheme does, and is therefore a more apt yardstick against which to measure the appropriate treatment of the ITC's in this context.  
	The appellee's reliance on § 31A(h) was similarly misplaced.  That portion of the statute provides that ITC's earned by one corporation within a group consolidated for federal tax purposes cannot be applied against the excise of another corporation within the group pursuant to an election to file a combined return under § 32B.  As the appellee pointed out, this provision was enacted to remedy the situation presented in Walter Kidde  & Company v. Commissioner of Revenue, 389 Mass. 577 (1983), a case in which one corporation within the combined  group used the ITC's earned by another corporation, absent any sort of merger or liquidation.  Section 31A(h) does not apply to the instant case, where, by virtue of the liquidation, the parent corporation steped into the shoes of the subsidiary with respect to the assets.  Therefore, § 31A(h), which applies expressly to elections made under § 32B, should not be invoked to disallow the carryover of the ITC's in this case.
	The appellee additionally argued that ITC's should be denied carryover treatment for Massachusetts' purposes, just as net operating losses ("NOL's") are treated, in accordance with Macy's East, Inc. v. Commissioner of Revenue, 441 Mass. 797 (2004).  However, the appellee's argument overlooks critical differences between the nature of the ITC and the NOL, and the long line of cases which have narrowly construed the NOL carryover.  See Parker Affiliated Companies v. Commissioner of Revenue, 382 Mass. 256, 261-263 (1981), Farrell Enterprises, Inc. v. Commissioner of Revenue, 46. Mass. App. Ct. 564, 573 (1999); Bill DeLuca Enterprises v. Commissioner of Revenue, 431 Mass. 314, 325 (2000), PMAG v. Commissioner of Revenue, 429 Mass. 35, 36 (1999).  In Macy's East, the Board noted that G.L. c. 63, § 30(5)(a), which defines the NOL for Massachusetts purposes, made a "specific reference to and definition of the 'Massachusetts net operating loss,'. . . which evidenced a legislative intent to create a state-specific concept of 'net operating loss' separate and distinct from the Federal concept of that term."  Macy's East, Inc. v. Commissioner of Revenue, ATB Findings of Fact and Reports 2002-522, 531, aff'd 441 Mass. 797 (2004).  The legislative intent to deviate from the federal scheme with respect to NOL's has been found by the Supreme Judicial Court as well.  "The Massachusetts Legislature has consistently chosen to treat excess deductions from a previous tax year in a different manner from the I.R.C. . . . These 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."   Id. at 534, quoting Bill DeLuca Enterprises at 325.  
The departure from the federal scheme lies in part in the fact that Massachusetts adopts a combined return approach, which is different than the federal consolidated approach.  Under the combined return approach, each entity within a corporate group separately calculates its income, "thereby retaining the individual tax assets and liabilities of each taxpaye[r]."  Id. at 531-532.  The NOL's of one member of a group cannot therefore be used to offset the income of another member, as is permissible under the federal consolidated approach.  
While NOL's are based on each entity's income and accumulation of loss, ITC's on the other hand are based on the purchase and use of assets within Massachusetts so as to encourage certain types of manufacturing, thereby stimulating the economy and increasing employment.  Since the assets, the adjusted basis of those assets and other tax attributes such as depreciation and accounting methods transfer to the parent corporation in a § 332 liquidation, the Board found that ITC's based on those assets should transfer to the parent as well.  
Furthermore, the transaction at issue in Macy's East involved a Code § 368(a)(1)(A) reorganization ("A reorganization") rather than a § 332 liquidation.  As the Board found in Macy's East, "an A reorganization does not involve a 'mere change in identity, form, or place of organization of one corporation,'" but rather "involves a process whereby a corporation becomes a different entity."  Id. at 540, quoting Letter Ruling 95-4.  Conversely and as discussed above, the § 332 liquidation at issue in the instant appeal more closely resembled a mere change in form of doing business than did the reorganization at issue in Macy's East.  Accordingly, because there had been no change in substance but merely form, the Board found that the carryover of the ITC's was warranted.  
Finally, the appellee's own application of § 31A(e) to the facts of the instant case appears to have been flawed.   Subsequent to the Post-Hearing Briefs and Reply Briefs filed by the parties, Gillette filed and argued a Motion to Strike New Arguments in the Commissioner's Reply Brief. The appellant's motion was centered on the appellee's apparent change of position in his characterization of the assessment at issue from a "recapture" of ITC's taken in previous years, under the second sentence of § 31A(e), as had been clearly articulated in his Post-Hearing Brief, to a reduction in the amount of ITC's for the current year, which was the position argued in the appellee's Reply Brief.   This change seemingly resulted from the appellee's realization that a recapture of credits taken in previous years was technically impossible, because Gillette succeeded to the Boston Factory only upon the liquidation of Gillette USA on December 31, 1998.  Because the tax year at issue is 1998, only the first sentence of § 31A(e) could apply.  Although the Board found that the appellee's change in position did amount to raising a new argument for the first time in his Reply Brief, the Board denied the appellant's Motion to Strike because its determination that neither Merger 1 nor Merger 2 resulted in a disposition of assets rendered the appellee's tardy argument moot.  See G.L. c. 58A, § 7; Deveau v. Commissioner of Revenue, 51 Mass. App. Ct. 420, 421 (2001). 

 				   Conclusion
After taking into consideration the plain meaning of the term "disposition" as evidenced by its use in other legal contexts, Massachusetts legal precedent, and the federal and state statutory schemes upon which § 31A was based, the Board found and ruled that the tax-free liquidation of a subsidiary corporation by its parent under § 332 did not result in a disposition of assets for the purposes of ITC's under § 31A(e).  Accordingly, for all of the foregoing reasons, the Board issued a decision for the appellant in this appeal and granted abatement in the amount of $4,812,418 in tax plus all penalties and interest.     
 
				    THE APPELLATE TAX BOARD

			By: ___________________________________
				Frank J. Scharaffa, Commissioner

				    


A true copy,

Attest: _______________________________
             Clerk of the Board

							 

 While it is the appellee's position that both Merger 1 and Merger 2 resulted in asset dispositions, the amount at issue in this appeal relates only to Merger 2 as the Commissioner did not timely assess amounts related to Merger 1. 
 Former § 30(7) provided that certain manufacturing property acquired by a corporation was exempt from the property measure of the corporate excise.  In contrast, § 31A provides a credit against the corporate excise for manufacturing property.
 As enacted in 1970, the credit under § 31A was equal to one percent of the cost or other basis of qualifying property.  This section was later amended and the credit increased to three percent.  See St. 1973, c. 752, §11. 

ATB 2007-1064