G. L. c. 63, § 30, cl. 4, 5]

ject to local taxation, except such part of said real estate as represents the interest of a mortgagee;

(b) Securities held in the commonwealth, the income of which, if any, if received by a natural person resident therein, would not be liable to taxation, except shares in national banks, voluntary associations, trusts and partnerships. In determining the proportion of assets employed within the commonwealth, the commissioner may include such bank deposits in other states as are employed principally in the conduct of the business in the commonwealth.

The subject matter of the foregoing section will be discussed more at length in connection with the statutes specifically relating to the taxation of foreign corporations.1

Definitions Continued-Net Income

5. "Net income," except as otherwise provided in sections thirtyfour and thirty-nine, the net income for the taxable year as required to be returned by the corporation to the federal government under the federal revenue act of nineteen hundred and eighteen, and, in the case of a domestic business corporation, such interest and dividends, not so required to be returned as net income, as would be taxable if received by an inhabitant of this commonwealth; less, both in the case of a domestic business corporation and of a foreign corporation, interest, so required to be returned, which is received upon bonds, notes and certificates of indebtedness of the United States.

Many taxpayers have complained of the differences between the state and federal income tax returns, and no doubt it would make matters much easier for the taxpayers if the returns were identical in form; but in the case of the tax upon individuals the fundamental difference in purpose and character between the federal and the state income tax laws creates so many distinctions in substance that identity in form is impracticable.' In the case of the state tax on corporations it was however possible to use substantially the same measure of income as was employed in the federal income tax upon corporations; and for the convenience of the corporations taxed it was provided that the returns of income in the case of the state tax should be identical

[G. L. c. 63, § 30, cl. 5 with the return already filed for the federal tax. There are however certain additions and deductions which must be made, in order to adapt the law to the different constitutional limitations applicable to the state and federal governments. Accordingly a domestic corporation is obliged to include in its taxable net income, in addition to the income included in its federal return, interest and dividends which would be taxable by the state if received by an individual inhabitant but which are not subject to the federal income tax when received by a corporation, such as interest on bonds of another state or of municipal corporations therein, or of the commonwealth or of municipal corporations therein if issued before such bonds became exempt from taxation, all of which the United States has no power to tax, and dividends of corporations which themselves have paid a tax to the United States, and which are not subject to taxation a second time when received by another corporation but which have no such claim of exemption from the state. On the other hand interest on United States bonds is taxable by the United States but is not taxable by a state, and such interest is deducted from the federal return before it becomes the final measure of income for the purposes of the state.

2

As the statute specifically authorizes such deduction, the question whether it is constitutionally necessary, in view of the fact that the tax is an excise on the franchise of the corporation and the income is the measure and not the subject of the tax, is purely academic;3 but a similar question might arise in the case of interest on bonds of territorial governments and of other instrumentalities of the United States which are exempt from state but not from federal taxation and which are not permitted by the statute to be deducted from the net income of the corporation for purposes of state taxation.*

In order to prevent the confusion that would otherwise arise, in determining net income as defined in the federal act, federal regulations and decisions interpretative of the law are followed by the state authorities where applicable; but the commissioner will not necessarily follow the decision of the federal authorities on questions of fact.

G. L. c. 63, § 30, cl. 6; § 31]

Definitions Continued-Taxable Year

6. "Taxable year, "the fiscal or calendar year for which the corporation was required to make its last return to the federal government due prior to April first of the year in which the tax is to be assessed, or, if such return was for a fractional period, a full year, including and ending with such fractional period.

Deductions Not Allowed

SECTION 31. In determining the corporate excess of a domestic busines corporation, or the corporate excess employed within the commonwealth by a foreign corporation, there shall not be deducted the value of shares in national banks and in voluntary associations, trusts and partnerships, nor of other securities the income of which, if owned by a natural person resident in this commonwealth, would be liable to taxation, nor shall there be deducted the value of any shares of stock of the corporation itself owned directly or indirectly by it or for its benefit; and the commissioner, in determining for the purposes of taxation the value of the corporate excess of, or corporate excess employed within the commonwealth by, any such corporation, shall not take into consideration any debts of the corporation unless he is satisfied that no part of such debts was incurred for the purpose of reducing the amount of taxes to be paid by it, and, in the case of a domestic business corporation which is a subsidiary of a foreign corporation or closely affiliated therewith by stock ownership, that such debts represent only the fair value of the property given therefor.

The first part of this section appears to have been enacted ex majore cautela to make it clear that securities which would be taxable either directly or indirectly, on principal or income, to an individual resident are not deducted in determining the corporate excess. Shares in national banks are included in the corporate excess, although they are also subject to the national bank tax. Shares in voluntary associations, trusts and partnerships are included in the corporate excess whether they would be taxable in the hands of an individual resident or reached by a tax on the association itself; other securities are not included in the excess unless they would be taxable in the hands of an individual resident.

1A. J. Tower Co. v. Commonwealth, 223 Mass. 371 (1916).

[G. L. c. 63, §§ 31, 32 The other provisions of this section were adopted to meet methods of evasion which had become common.

Rate of Tax Upon Domestic Corporations

SECTION 32. Except as otherwise provided in sections thirtythree and thirty-four, every domestic business corporation shall pay annually, with respect to the carrying on or doing of business by it, an excise equal to the sum of the following, provided that every such corporation shall pay annually a total excise not less in amount than one twentieth of one per cent of the fair cash value of all the shares constituting its capital stock on the first day of April when the return called for by section thirty-five is due:

(1) An amount equal to five dollars per thousand upon the value of its corporate excess.

(2) An amount equal to two and one half per cent of that part of its net income, as defined in this chapter, which is derived from business carried on within the commonwealth.

The rate of the corporate franchise tax as originally enacted was one and one-sixth per cent of the valuation of all the shares of each corporation after the authorized deductions had been made, and there was no maximum or minimum limitation. In 1865 it was enacted that the rate was to be fixed by an apportionment of the whole amount of money to be raised by taxation upon property in the commonwealth during the same current year upon the aggregate valuation of all the cities and towns in the commonwealth for the preceding year. No. substantial change was made until the enactment of the Business Corporation Law in 1903, when the maximum and minimum limitations were first inserted. The tax on any corporation was not to exceed by more than twenty per cent a tax on the tangible property and taxable1 securities of the corporation at the same rate, thus limiting the possibility of a heavy tax based upon the high speculative value of the stock, and the tax was not to fall below one-tenth of one per cent of the market value of the entire capital stock even if the deductions authorized by the statute equaled the valuation of all the shares.

1In the original statute, apparently by error, it was provided that the maximum tax should be based on securities which if owned by a natural person resident within the commonwealth would not be liable to taxation, but by St. 1904, c. 261, §1, the word "not" was stricken out.

G. L. c. 63, § 32]

In 1906 the method of fixing the rate upon domestic business corporations was altered so that it was based upon the average annual rate of the three preceding years, the annual rate for this purpose being ascertained as before; and in 1909 this method of fixing the rate was extended to all corporations subject to the corporate franchise tax.3

When the present law was adopted in 1919 the maximum limitation was wholly done away with; the minimum limitation was reduced to one twentieth of one per cent of the fair cash value of the aggregate capital stock; the rate of taxation upon the corporate excess which was approaching and would doubtless have soon passed twenty dollars per thousand was reduced to a fixed rate of five dollars per thousand, and, to counterbalance this decrease, a tax of two and one-half per cent of the net income derived from business carried on in this commonwealth was added.

A distinction is to be noted between the phraseology of the foregoing section and that of the corresponding provision of the earlier law. In the earlier law it was provided that every corporation subject to the act should pay a tax upon its corporate franchise at the specified rate; and under this provision it was held that a corporation could not relieve itself from liability to taxation by neglecting to do business, or ceasing to do business, and that nothing short of the loss of its franchise could exonerate it from the tax.

In the present law it is provided that every domestic business corporation shall pay the specified excise "with respect to the carrying on or doing of business by it" and the question at once arises whether a corporation which does not carry on or do business within the taxable year is liable to the tax. With the large class of corporations which fail to conduct a profitable business and are abandoned by their stockholders and exist only in name until finally dissolved by act of legislature, the question is purely *St. 1906, c. 271, §§9, 12.

St. 1909, c. 513.

It was provided by St. 1921, c. 361 that the tax assessed under G. L. c. 63, §32, in the year 1921, should not be less than one-twentieth of one per cent of the corporation's gross receipts from business assignable to this commonwealth under G. L. c. 63, §38, cl. 6. This statute was applicable to the year 1921 only and was enacted to protect the state from loss of revenue due to the business conditions prevailing in 1920.

6

St. 1909, c. 490, III, §43.

Attorney-General v. Massachusetts Pipe Line Gas Co., 179 Mass. 15 (1901).