Commonwealth of massachusetts appellate tax board




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COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD

NATIONAL AMUSEMENTS, INC. v. COMMISSIONER OF REVENUE
Docket No. F251216 Promulgated:

July 27, 2001


This is an appeal under the formal procedure pursuant to G.L. c. 62C, § 39, from the refusal of the appellee to abate corporate excises assessed against the appellant under G.L. c. 63, § 38.

Commissioner Scharaffa heard the appeal and was joined in the decision for the appellant by Chairman Burns and Commissioners Gorton, Egan and Rose.

These findings of fact and report are made at the requests of the appellant and the appellee pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.
John S. Brown, Esq., Joseph L. Kociubes, Esq., George P. Mair, Esq., Donald-Bruce Abrams, Esq. and Matthew D. Schnall, Esq. for the appellant.



Harvey M. Pullman, Esq. and Frances M. Donovan, Esq. for the appellee.

FINDINGS OF FACT AND REPORT

On the basis of a Statement of Agreed Facts and testimony and exhibits introduced at the hearing of this appeal, the Appellate Tax Board (“Board”) made the following findings of fact. The appellant, National Amusements, Inc. (“National Amusements”) is a privately-owned Maryland corporation with its headquarters in Dedham, Massachusetts. National Amusements and its subsidiaries own and operate numerous motion picture cinemas within the United States and the United Kingdom. During the tax years 1991 through 1995, National Amusements, a Maryland corporation, was considered a “foreign corporation” under G.L. c. 63, § 30(2) and was also considered an intangible property corporation under G.L. c. 63, § 30(11)1. As a foreign intangible property corporation, National Amusements was subject to the Massachusetts corporate excise formula in G.L. c. 63, § 39.

During those same tax years, National Amusements was a stockholder in Viacom, Inc. (“Viacom”), a publicly-traded Delaware corporation. Viacom had outstanding shares of voting and non-voting stock. National Amusements held more than 60% of such voting stock during tax years 1994 and 1995, the tax years at issue in this appeal (the “tax years at issue”). On its Massachusetts corporate excise returns for the tax years at issue, National Amusements reported its investments in Viacom and its other subsidiaries using the cost method of accounting for purposes of calculating the net worth component of the excise under G.L. c. 63, § 30.

The Board heard testimony from three witnesses regarding National Amusements’ internal bookkeeping practices. The first witness was Peter I. Isenberg, a certified public accountant who participated in the audits of National Amusements’ financial statements from 1971 through 1999, including all of the tax years at issue when he was with Coopers & Lybrand2 (“Coopers”). Mr. Isenberg testified that National Amusements had always used the cost method of accounting to record its investment in Viacom on all of its audited financial statements, as well as on its ledgers and other financial records prepared to facilitate the preparation of financial statements. These financial statements were prepared for lending institutions and management and shareholders of National Amusements. Mr. Isenberg stated that National Amusements’ lenders required that the cost method be used in financial statements, so that they could evaluate National Amusements’ financial condition as a separate entity. Mr. Isenberg also testified that National Amusements kept no books or records that used the equity method of accounting to show its interest in Viacom.

The next witness was Jerome Magner, an accountant who has served as senior vice president and treasurer of National Amusements since 1986. Mr. Magner confirmed Mr. Isenberg’s testimony that lenders required that National Amusements use the cost method to report its investment in Viacom on its financial statements. He explained that the cost method was preferred over the equity method because the cost method better reflected National Amusements’ operations as a stand-alone entity, and lenders did not want National Amusements’ financial data to be distorted by any of Viacom’s figures.

Finally, Sari A. Rapkin, a certified public accountant who joined Coopers in 1986 and has been the firm’s audit partner responsible for National Amusements since 1996, confirmed the testimony that National Amusements had consistently used the cost method to record its investment in Viacom on its books and records maintained for purposes of making its financial statements to its shareholders and lenders.3 She then explained that under Generally Accepted Accounting Principles (“GAAP”), the equity method of accounting is not a substitute for the consolidated method of accounting. She also testified, and the Commissioner’s expert, Professor Mahendra Gujarathi agreed, that if a company does not consolidate its tax returns, then the approach typically used by companies for its books and records is the one that is most meaningful to the users of its financial statements.

The Board found the testimony of the appellant’s witnesses to be persuasive. To the extent that it is a finding of fact, the Board found that during the tax years at issue, National Amusements consistently used the cost method of accounting to record the value of its subsidiaries on the books that it maintained for purposes of making financial reports to its shareholders. The Board also found that National Amusements did not use the equity method of accounting on any of its audited financial statements, nor on  its  ledgers or other financial records

prepared to facilitate the preparation of its audited financial statements. Finally, the Board found no evidence to indicate that National Amusements prepared financial statements for any users other than its managers, shareholders, and creditors.

On audit, the Commissioner of Revenue (“Commissioner”) made adjustments to reflect National Amusements’ investments in Viacom and its other subsidiaries using the equity method of accounting rather than the cost method. On the basis of these adjustments, the Commissioner issued two notices of intention to assess (“NIAs”), one relating to the 1991 and 1992 tax years,4 and one relating to the 1993 through 1995 tax years. The Commissioner subsequently issued notices of assessment (“NOAs”) for the 1991 and 1992 tax years, and one relating to the 1993 through 1995 tax years, the tax years at issue in this appeal. National Amusements timely filed applications for abatement for each tax year 1991 through 1995. The Commissioner denied these applications. National Amusements seasonably filed an appeal with the Board protesting the Commissioner’s refusal to grant the abatements requested. On the basis of the foregoing, the Board found it had jurisdiction over this appeal.

The parties agreed that as a result of the application of the Department of Revenue (“DOR”) Directive 99-1 and Technical Information Release 99-3, the tax amounts at issue for tax years 1991 through 1993 would be abated in full, together with accrued interest and penalties. The tax years remaining at issue were 1994 and 1995. The issue for these tax years remaining in dispute was whether, for the purposes of calculating National Amusements’ taxable net worth under G.L. c. 63, § 30, the cost method or the equity method was the appropriate method for valuing National Amusements’ interests in subsidiaries in which it owned a majority interest. For the reasons stated in the Opinion which follows, the Board found that the Commissioner improperly used the equity method to value National Amusements’ interests in Viacom and its other subsidiaries for purposes of calculating the net worth component of the corporate excise. Accordingly, the Board found and ruled that National Amusements was entitled to an abatement of its corporate excise based upon the use of the cost method of accounting in calculating the net worth component of the excise for tax years 1994 and 1995.


OPINION


The issue raised by this appeal is whether the Commissioner properly valued National Amusements’ investment in Viacom5 using the equity method for purposes of G.L. c. 63, § 30(9), which provides the formula for the net worth component of the corporate excise. Essentially, the Commissioner claimed that GAAP required that National Amusements’ interest in Viacom be calculated using the equity method of accounting, which records the investment at its historical cost with adjustments to recognize the appellant’s share of net earnings or losses on the investment, rather than the cost method of accounting, which records the investment at its historical cost.

“Financial accounting principles under GAAP have been held to be relevant to the net worth component of the excise.” Bayer Corp. v. Commissioner of Revenue, 2000 ATB Adv. Sh. 543, 561 (Docket Nos. F239697, F239698, F245722, July 20, 2000), citing Xtra, Inc. v. Commissioner of Revenue, 380 Mass. 277 (1980). See also Web Industries, Inc., et al. v. Commissioner of Revenue, 1999 Mass. ATB Adv. Sh. 122, 128-130 (March 26, 1999) and  Eaton Financial



Corporation v. Commissioner of Revenue, 2000 Mass. ATB Adv. Sh. 526 (July 20, 2000). There is “no basis, however, for assuming that the Legislature intended to import accounting practice into its statutory language” in all instances. First Federal Sav. & Loan Ass’n of Boston v. State Tax Commission, 372 Mass. 478, 483 (1977), aff’d, 437 U.S. 255 (1978). See also Xtra, Inc. v. State Tax Commission, 1979 Mass. ATB (Docket Nos. 75312, 75313, February 27, 1979), aff’d, 380 Mass. 277 (1980)(“However, the Board did not make its decision in this case simply because the treatment . . . by the appellant was in accord with a generally accepted accounting principle. Such a principle, of itself, and standing alone, cannot necessarily dictate the result in tax cases . . . .”)

Neither the Massachusetts courts nor this Board have previously found that accounting principles should take precedence over a tax statute where the two conflict. For example, when the Board in Eaton found that the Commissioner should have used Statement of Financial Accounting Standards (“FAS”) 13 to characterize operating leases, the Board explained as its reasoning that the appellant had relied on FAS 13 for the books it maintained for making its financial reports to shareholders. Eaton, 2000 ATB Adv. Sh. at 528. Therefore, the use of FAS 13 was consistent with G.L. c. 63, § 30(7), which specifically required a valuation of the “book value” of a corporation’s assets reflecting the cost of the assets “on the books of the corporation maintained for making financial reports to shareholders.” Eaton, 2000 ATB Adv. Sh. at 535. Moreover, DOR’s own audit guidelines specifically required consistency with FAS 13 for the characterization of operating leases. Eaton, 2000 Mass. ATB Adv. Sh. at 530 and 540.

In this appeal, the Commissioner argued that Accounting Principles Board 18 (“APB 18”) required that interests in unconsolidated subsidiaries be valued using the equity method of accounting. He agreed with the taxpayer that this principle in APB 18 has been overruled in part by FAS 94, which now requires that a “controlling financial interest,” ownership of more than 50% of the outstanding vote of a subsidiary, be valued using the consolidated method of accounting. Consolidation accounts for a parent’s investment in a subsidiary as if the parent and subsidiary were a single entity. Both the taxpayer and the Commissioner agreed that the consolidated method of accounting should not be applied to value Viacom, because the Massachusetts statute requires returns to be on a per-company basis rather than on a consolidated basis. See G.L. c. 63, § 32B6. However, the Commissioner further argued that the equity method of accounting more closely represents the results of consolidation. Therefore, he maintained, because GAAP should be followed in calculating the net worth measure, the equity method rather than the cost method should have been used to value National Amusements’ investment in Viacom.

The Board disagreed with the Commissioner. In the present appeal, the Board found that GAAP did not adequately resolve the issue of how National Amusements should record its interest in Viacom for purposes of calculating the net worth component of the corporate excise. As the Board has noted previously, “[c]ourts do not require conformity between book/financial accounting and tax accounting where tax accounting objectives differ.” Bayer Corp., 2000 Mass. ATB at 560-61. The inquiry should not be which method more closely parallels a sole GAAP principle, but rather, which method is consistent with the Commonwealth’s tax statute as a whole. See Xtra, 380 Mass. at 280 (In interpreting a term in § 30, the Board properly

“looked to history of the statute of which the term is a part to ascertain its proper meaning.”) Determining which method is consistent with the statute requires an understanding that the statute does not even permit reporting on the consolidated basis.7

Pursuant to G.L. c. 63, § 30(9), the net worth of a foreign corporation is defined with reference to the “book value” of its tangible and intangible assets. Additionally, § 30(11), defining “intangible property corporation,” specifies that “the assets of the corporation shall be valued at their book value.” In § 30(7), “book value” is defined as “the original cost of such property, less the depreciation or amortization taken against such property on the books of the corporation maintained for making financial reports to shareholders.” (Emphasis added.) As the Board has previously noted, although this definition is set forth in § 30(7)8, “in accordance with established principles of statutory construction, the same definition applies to the other provisions of § 30.” Eaton, 2000 Mass. ATB Adv. Sh. at 535.9 See also Connolly v. Div. of Pub. Employee Retirement Admin., 415 Mass. 800, 802-03 (1993)(“A word used in one part of a statute in a definitive sense should be given the same meaning elsewhere in the statute, barring some plain contrary indication.”) citing Plymouth County Nuclear Info. Comm., Inc. v. Energy Facilities Siting Council, 374 Mass. 236, 240 (1978).

Contrary to the Commissioner’s argument, the Board did not find that the Legislature could have intended that the same term, used in two or more paragraphs of the same section, should have two different meanings, without an explicit statement to this effect. “Tax laws ‘should be construed and interpreted as far as possible so as to be susceptible of easy comprehension and not likely to become pitfalls for the unwary.’” Board of Assessors of Brookline v. Prudential Ins. Co., 310 Mass. 300, 313 (1941), quoting Hemenway v. Town of Milton, 217 Mass. 230, 233 (1914). Accordingly, the Board found that the term “book value” in § 30(9) and § 30(11) should be interpreted consistently

with the definition in § 30(7) and thus refer to the value of an asset as reflected “on the books of the corporation maintained for making financial reports to shareholders.” G.L. c. 63, § 30(7).

National Amusements’ interest in Viacom was consistently carried on its audited financial statements, as well as on its ledgers and other financial records prepared to facilitate the preparation of these financial statements, at its historical cost, consistent with the cost method of accounting. These books and records were maintained using the cost method for a legitimate purpose, so that National Amusements could readily prepare the financial statements required by its lenders, who requested an evaluation of National Amusements as a stand-alone company. Therefore, based on the language of § 30(7), the cost method is the method which the Commissioner should have used to calculate the value of National Amusements’ interest in Viacom. See, e.g., Commissioner v. Dupee, 423 Mass. 617, 620 (1996)(“The general and familiar rule is that 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 . . .”)

Interpreting “book value” to be consistent with “the books of the corporation maintained for making financial reports to shareholders” will not grant taxpayers free reign to select the accounting method that most reduces their tax liability. Rather, this interpretation requires that the Commissioner’s assessments be consistent with principles of accounting that are actually employed by taxpayers. To require taxpayers to maintain two separate sets of books, one for financial accounting purposes and one for tax accounting purposes, would create an undue compliance burden and at the same time would be inconsistent with the words of the statute. See Xtra, 380 Mass. at 281 (Approving the Board’s statutory interpretation, which was “consistent with the literal meaning of the statute, and in keeping with ‘the clear intent of the Legislature’” which was “to create a more favorable climate for business in Massachusetts than had existed before by virtue of a less workable tax standard”)(Citations omitted).

The Board also found that Web Industries, upon which the Commissioner relied to a great extent, is distinguishable from the appeal at issue. In Web Industries, the Commissioner relied on principles of GAAP,

including APB 1810, in its assessment against the taxpayers11, claiming that the equity method of accounting was to be applied in evaluating the unconsolidated subsidiaries for purposes of making financial reports to shareholders. Therefore, the Commissioner argued that the equity method was also the method required for purposes of computing the parent corporations’ net worth amounts. The taxpayers in that appeal, however, did not reveal the method they used to record the value of their subsidiaries on the books and records that they maintained for purposes of making financial reports to their shareholders. By failing to present this evidence, which is the key to “book value” as defined in G.L. c. 63, § 30(7), the taxpayers did not meet their burden of proving that the Commissioner’s assessment was improper. Accordingly, the taxpayers in Web Industries did not establish their entitlement to an abatement of corporate excise.


A party 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). See also Stone v. State Tax Commission, 363 Mass. 64, 65-66 (1973), Commissioner of Corp. & Tax. v. Filoon, 310 Mass. 374, 376 (1941). The taxpayer must produce persuasive evidence on each and every fact upon which the claim for abatement is based.

By contrast to Web Industries, the Board in this appeal found that the taxpayer did meet its burden of proving that the Commissioner’s assessment was improper. National Amusements showed that it consistently used the cost method and did not use the equity method on the books and records it maintained for purposes of making financial reports to its shareholders. Accordingly, National Amusements demonstrated that, for the calculation of its net worth, the “book value” of its assets, as that term is defined pursuant to G.L. c. 63, § 30(7), should have been determined according to the cost method. To rely on Web Industries in this appeal for the proposition that a taxpayer must use the equity method of accounting to determine book values, even though it did not maintain its books and records using this method, would not accurately reflect the record of that appeal and would contravene the plain meaning of the applicable statute. The Board thus found that Web Industries did not support the Commissioner’s use of the equity method to calculate National Amusements’ net worth.

Financial accounting principles, including those under GAAP, should not take precedence over a Massachusetts tax statute where the two conflict. See Xtra, Inc. v. State Tax Commission, 1979 Mass. ATB (Docket Nos. 75312, 75313, February 27, 1979), aff’d, 380 Mass. 277 (1980). Under the facts of this appeal, GAAP would prescribe the use of the consolidated method of accounting for valuing National Amusements’ interests in Viacom. However, both parties agree that the consolidated method should not be used here, because Massachusetts does not provide for consolidated filing of tax returns. Therefore, the Board found that the statute itself, and not GAAP concepts, should control. Under the relevant statute, which defines “book value” for purposes of the net worth calculation, the assets of National Amusements should have been valued using the same method of accounting that the taxpayer used on its books and records maintained for the purpose of making financial reports to its shareholders. The method used by National Amusements for this purpose was the cost method. Accordingly, the Board found and ruled that the Commissioner improperly assessed National Amusements using the equity method of accounting to calculate net worth.

With regard to the tax years 1991 through 1993, the Board issued a decision for the appellant and, in accordance with the agreement of the parties as expressed in the Statement of Agreed Facts, granted the abatements of tax plus all statutory additions. With regard to the tax years 1994 and 1995, the Board issued a decision for the appellant and granted abatements of $379,003 for tax year 1994 and $406,874 for tax year 1995, plus all statutory additions.



APPELLATE TAX BOARD

By:____________________________

Abigail A. Burns, Chairman

A true copy:


Attest: _____________________

Clerk of the Board


1 For tax years 1991 through 1993, National Amusements originally filed returns reflecting a status of tangible property corporation. It then filed a pro forma amended return for 1993 reflecting a status of intangible property corporation. Subsequent audits by the Commissioner for tax years 1991 and 1992 resulted in a reclassification of National Amusements as an intangible property corporation for those tax years as well.

2 The former accounting firm of Coopers & Lybrand has since merged with the former accounting firm of Price Waterhouse. The merged firm is now known as PricewaterhouseCoopers.

3 Ms. Rapkin testified that any consolidating information relating to Viacom in the notes of National Amusements’ financial statements was derived solely from Viacom’s publicly issued financial statements, not from National Amusements’ own books and records.

4 The Commissioner also issued two revised NIAs, one each for the 1991 and 1992 tax years. However, these years are no longer contested in this appeal due to the agreement by the parties, discussed infra.

5 The value of the Viacom stock substantially outweighed the value of the stock in other subsidiaries and therefore accounted for substantially all of the tax at issue. Accordingly, the parties focused primarily on the value of the Viacom stock for this appeal.

6 Consolidated reporting is not allowed under Massachusetts law. However, if a group of two or more corporations “participated in the filing of a consolidated return of income to the federal government” then the group may elect to file as a combined group for purposes of “the net income measure of their excises imposed under section thirty-two or section thirty-nine.” M.G.L. c. 63, § 32B.

7 Moreover, contrary to the Commissioner’s assertion, the equity method does not approximate the results of consolidation. With consolidated filing, National Amusements and Viacom would be treated as a single entity, subject to tax once on their combined earnings. However, under the equity method as it would be applied in Massachusetts where consolidated filing is not permitted, the result would be to tax the earnings of Viacom twice, once as included in National Amusements’ net worth for its corporate excise and once as included in Viacom’s net worth for its corporate excise as a separate taxpayer. Without speaking to the wisdom of such an approach, it is sufficient to note that such a result would not approximate consolidation.

8 M.G.L. c. 63, § 30(7) applies to tangible property corporations. National Amusements was an intangible property corporation at all times during the tax years at issue.

9 The Board notes that in Web Industries, the Commissioner made this very same assertion, that the “book value” definition set forth in § 30(7) should also apply to other provisions of § 30, which he now disputes in this appeal.

10 At that time, APB 18 had been overruled by FAS 94 with respect to subsidiaries of which the parent held a controlling financial interest. The Commissioner did not cite FAS 94 in his arguments or his brief. However, the Commissioner in his brief did alert the Board that when a corporation owns a controlling financial interest in another corporation, GAAP provides that the investor must consolidate itself with the subsidiary for purposes of financial reporting.

11 The Commissioner assessed additional corporate excise under the net worth provision to both Web Industries, Inc. (“Web Industries”) and its subsidiary, Web Converting, Inc. (“Converting”), for their interests in their respective subsidiaries.


ATB 2001 -




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