G. L. c. 63, § 30, cl. 1, 2] 2. "Foreign corporation," every corporation, association or organization established, organized or chartered under laws other than those of the commonwealth, for purposes for which domestic corporations may be organized under chapter one hundred and fifty-six, which has a usual place of business in this commonwealth, or is engaged here, permanently or temporarily, in the construction, erection, alteration or repair of a building, bridge, railroad, railway or structure of any kind. In accordance with the foregoing statute domestic business corporations consist of all corporations having a capital stock and established for the purpose of carrying on business for profit and organized under the general laws of the commonwealth, other than corporations of the classes enumerated in the following paragraph, and all such corporations created by special law except such as were organized before March 11, 1831, and whose charters, containing provisions inconsistent with these statutes, are not subject to amendment, alteration or repeal and also excepting such as were organized after June 17, 1903 and the charters of which contain provisions inconsistent with these statutes.1 The term does not include corporations organized under general or special laws of this commonwealth for the purpose of carrying on the business of a bank, savings bank, co-operative bank, trust company, credit union, surety or indemnity company, or safe deposit company, or for the purpose of carrying on within the commonwealth' the business of an insurance company, railroad, electric railroad, trolley motor or street railway company, telegraph or telephone company, gas or electric light, heat or power company, canal, aqueduct or water company, cemetery or crematory company or any other corporations which now have or may hereafter have the right to take land within the common 1 March 11, 1831 is the date of the going into effect of the statute (St. 1830, c. 81) enacted to counteract the effect of the decision of the Dartmouth College case by providing that all charters thereafter granted should be subject to amendment, alteration or repeal. June 17, 1903, is the date of the enactment of the Business Corporation Law (St. 1903, c. 437). There were formerly special provisions regarding the taxation of corporations organized under the laws of this commonwealth for the purpose of building railroads in foreign countries. See Pratt v. Street Commissioners of Boston, 139 Mass. 555 (1885). Since 1903 such corporations have been subject only to the domestic franchise tax. Mexican Central Ry. Co. v. Commonwealth, 192 Mass. 129 (1906). [G. L. c. 63, § 30, cl. 3 wealth or to exercise franchises in public ways granted by the commonwealth or by any county, city or town. Corporate Excess-Valuation and Deductions 3. "Corporate excess, in the case of a domestic business corporation, the fair cash value of all the shares constituting the capital stock of a corporation on the first day of April when the return called for by section thirty-five is due, less the value of the following: (a) The works, structures, real estate, machinery, poles, underground conduits, wires and pipes owned by it within the commonwealth subject to local taxation, except such part of said real estate as represents the interest of a mortgagee. (b) Securities, the income of which, if any, if received by a natural person resident in this commonwealth, would not be liable to taxation, except shares in national banks and voluntary associations, trusts and partnerships. (c) Its real estate, machinery, merchandise and other tangible property situated in another state or country, except such part thereof as represents the interest of a mortgagee. (d) If any portion of its cash and accounts and bills receivable, excluding notes, is attributable to an office outside the commonwealth, the same proportion of its cash and accounts and bills receivable, excluding notes, which its real estate, machinery and merchandise situated in another state or country bear to its total real estate, machinery and merchandise, to the extent that such proportion fairly represents, in the judgment of the commissioner, the amount which is properly allocable to such other state or country. VALUATION OF SHARES The first step in determining the "corporate excess" of any corporation is for the commissioner to ascertain the fair cash value of all the shares constituting the capital stock of the corporation on the first day of April of the year for which the tax is assessed. Before shares can be considered as constituting part of the capital stock of a corporation they must have been issued; it is not sufficient that they have been subscribed for. Moreover they must have been issued by authority of law; and when a statute requires the approval of a commission before a cor Boston & Albany R. R. Co. v. Commonwealth, 157 Mass. 69 (1892). G. L. c. 63, § 30, cl. 3] poration of a certain class can issue its shares, a corporation of that class which has issued its shares without obtaining such approval is not liable to the franchise tax, for the shares so issued were void. Mere failure on the part of the corporation to comply with some directory provision of statute in regard to the issuance of shares would not however exempt the corporation from taxation on such shares.3 The valuation is based upon the fair market value of the shares, and not upon the value of the property of the corporation which is represented by such shares. If the shares are commonly bought and sold, and have a readily ascertainable market value, such value is for all practical purposes conclusive, and it is idle to even consider the "book value" of the shares, or to attempt to value them merely as fractional interests in the net assets of the corporation." If however the shares are not commonly bought and sold, their fair market value must be ascertained by whatever other methods are available, and any evidence which throws light upon value may be considered. Prior to the enactment of the present law in 1919, when there were no sales to guide the commissioner he commonly relied upon the net book value of the assets of a corporation as shown by its return as a test of the value of its aggregate capital stock. The present statute, which necessarily resulted in furnishing the commissioner with a statement of the income of each corporation while at the same time it repealed the statute which limited the valuation of the aggregate capital stock of a corporation to a sum not more than twenty per cent in excess of the value of the tangible property and taxable securities owned by it, has given the commissioner the opportunity of using the net income of a prosperous corporation not only as itself the basis of a tax but as indicating a value in the stock in excess of the amount reflected by the value of the assets, and as thus furnishing a justification for an increase in the valuation of the franchise over the amount fixed under the statute 8 Attorney-General v. Massachusetts Pipe Line Gas Co., 179 Mass. 15 (1901). Attorney-General v. Massachusetts Pipe Line Gas Co., 179 Mass. 15 (1901). • Commonwealth v. Lowell Gas Light Co., 12 Allen 75 (1866); Commonwealth v. Cary Improvement Co., 98 Mass. 19 (1867). "National Bank of Commerce v. New Bedford, 155 Mass. 313 (1891); National Bank of Commerce v. New Bedford, 175 Mass. 257 (1900). • Thus the effect of a dividend earned and declared but not yet paid should be considered, Boston & Lowell R. R. Co. v. Commonwealth, 100 Mass 399 (1868). [G. L. c. 63, § 30, cl. 3 previously in force. While there is no doubt that the annual net income is a material factor in determining the value of stock in a corporation, the business conditions which affect the value of stock in different corporations are so diverse that a capitalization of net income by a formula which does not take into consideration these different conditions is an uncertain guide; and yet it is clearly impossible for the commissioner or his assistants to make an individual study of the peculiar facts applicable to each of the many thousand corporations chartered in this commonwealth. Under these circumstances, if the officers of a corporation feel that the commissioner has overvalued its shares, they should not hesitate to bring the matter to his attention. DEDUCTIONS-IN GENERAL The deductions to which a domestic business corporation was entitled under the original corporate franchise tax consisted only of real estate and machinery situated within the commonwealth and locally taxed, and it was held that corporations were not entitled to deductions not specifically mentioned in the statute. A corporation was given no credit for real estate situated outside the commonwealth, for shares of another corporation on which it paid taxes in this commonwealth," or even for bonds of the United States which were not taxable at all.10 Inasmuch as the tax is an excise and not a property tax, corporations have no constitutional right to any deductions whatever, but the 8 At the present time the method used by the commissioner to determine the value of the aggregate shares of a business corporation, domestic or foreign, is to capitalize the average net income for the preceding five years at 121⁄2% and to give the figure thus obtained one-half the weight given to the net value of the assets of the corporation. Reduced to a formula the method is as follows: λ= net value of the assets (excess of assets over liabilities). b = average net income of the corporation for five preceding years. c = value of aggregate shares. 2a + 8b 3 In 1920 it was attempted to give a decreasing weight to the income of the preceding years proportioned to their distance from the time of assessment, but this method proved unsatisfactory and was abandoned. 8 Commonwealth v. New England Slate & Tile Co., 13 Allen 391 (1866). 10 Commonwealth v. Hamilton Manufacturing Co., 12 Allen 298 (1866); s. c. sub nom Hamilton Co. v. Massachusetts, 6 Wall. 632 (1867); Manufacturers' Insurance Co. v. Loud, 99 Mass. 146 (1868). G. L. c. 63, § 30, cl. 3] legislature has consistently endeavored to deal fairly with them and to avoid everything that might indirectly result in double taxation. In 1865 it was provided that the value of their real estate and machinery subject to local taxation "wherever situated" should be deducted." In 1902 underground conduits, wires and pipes were made locally taxable and their value was deducted from the corporate franchise tax.12 In the Business Corporation Law of 1903 the subject was gone into comprehensively and the value of securities which if owned by a natural person resident within this commonwealth would not be liable to taxation and the value of property other than real estate and machinery situated in another state or country and subject to taxation therein were added to the items to be deducted.13 In 1909 poles were included in the deductible items1 and in 1917 it was provided that cash on hand or in bank and accounts receivable should be regarded as property situated in another state or country if the corporation had a usual place of business in such other state or country and such property was taxable therein.15 In 1919, by a statute going into effect before the new corporation tax law, which was enacted in the same year, it was provided that so much of the real estate of a corporation as was represented by a mortgage debt should not be deducted. Thus the statutes in regard to deductions in force when the 1919 law was enacted were very much the same as the provisions contained in that act. 16 DEDUCTIONS (a) REAL ESTATE, MACHINERY AND STRUCTURES The deduction of real estate and machinery within the commonwealth from the tax on stock of domestic corporations was established in 1832 and was continued in force when the corporate franchise law was established. The only changes in this portion of the statute have been the addition of conduits, wires and pipes in 1902, and poles in 1909, and the provision enacted in 1919 that the part of the real estate representing the interest of a mortgagee should not be considered. This last provision was enacted to prevent the amount of a mortgage from being "St. 1865, c. 283, §5. 12 St. 1902, c. 342. |