G.. c. 63, §§ 40, 41]

Returns

SECTION 40.

Corporate Excess Employed Within the

Commonwealth

Every foreign corporation shall make returns as provided in sections thirty-five and thirty-six; and all provisions of said sections shall apply to such corporations, except that the term "corporate excess" in said section thirty-five shall, in the case of a foreign corporation, mean the corporate excess employed by it within the commonwealth.

With respect to a foreign corporation, a state has no power to tax the entire capital, even with deductions for taxable property actually located elsewhere, but only so much of the capital as is employed within the state imposing the tax. The present method of taxing foreign corporations was designed to comply with this constitutional limitation. The definition of "corporate excess employed within the commonwealth" is found in the fourth clause of section thirty.

Permanent investments are not deemed to be assets employed in business unless the corporation which owns them is incorporated for the express purpose of making investments or unless such investments are employed in the ordinary course of business. Tangible property employed in business is deemed to be employed at the place where it is physically present and in use or kept. Merchandise in transit will be deemed to be employed at the factory or storehouse from which it was shipped. In the case of intangible property employed in the business, the same proportion of the property will be deemed to be employed in Massachusetts as the proportion of the remainder of the income allocated to Massachusetts under section forty-one; although if this method of apportionment does not fairly reflect the true proportion, another method will be employed by the commissioner, either at his own motion or upon the request of the corporation.

In determining the non-taxable securities "held in the commonwealth" which are subjects of deduction, only those customarily and usually kept in Massachusetts will be considered.

Allocation of Income

SECTION 41. The commissioner shall determine in the manner provided in this section the part of the net income of a foreign cor

[G. L. c. 63, §§ 41, 42

poration derived from business carried on within the commonwealth.

The following classes of income shall be allocated as follows:

(a) Gains realized from the sale of capital assets, if such assets consist of real estate or tangible personal property situated in the commonwealth, shall be allocated to this commonwealth.

(b) Interest received from any corporation organized under the laws of the commonwealth or from any association, partnership or trust having transferable shares and having its principal place of business in the commonwealth, or from any inhabitant of the commonwealth, except interest received on deposits in trust companies or in national banks doing business in the commonwealth, shall be allocated to this commonwealth.

(c) Gains realized from the sale of capital assets other than those named in paragraph (a) above shall not be allocated in any part to this commonwealth.

Income of the foregoing classes having thus been allocated, the remainder of the net income as defined in section thirty shall be allocated as follows:

If a foreign business corporation carries on no business outside this commonwealth, the whole of said remainder shall be allocated to this commonwealth.

If a foreign business corporation carries on any business outside this commonwealth, the net income taxable under this chapter shall be determined as provided in section thirty-eight.

SECTION 42. A foreign corporation carrying on part of its business outside the commonwealth may, in lieu of the allocating method required by the preceding section for determining the amount of business assignable to this commonwealth, refuse to accept such determination by notification thereof to the commissioner on or before the time when its income tax return under this chapter is due to be filed. Such a foreign corporation shall, within thirty days thereafter, file with the commissioner, under oath of its treasurer, a statement in such detail as the commissioner shall require, showing the amount of its annual net income derived from business carried on within the commonwealth. The commissioner may require such further information with reference thereto as he may deem necessary for the assessment of the tax, and shall determine the proportion of the net income received from business carried on within the commonwealth.

G. L. c. 63, §§ 42, 43]

The net income upon which a foreign corporation is taxable is the income upon which it is taxable under the federal law, deducting interest received from bonds, notes and certificates of indebtedness of the United States which are taxed by the United States but which the state has no power to, tax. In this respect there is no difference between a domestic and a foreign corporation. But a domestic corporation, being in effect an inhabitant of the commonwealth, is also taxable on interest and dividends which would be taxable if received by an individual resident of the commonwealth but which are not taxable by the United States. A foreign corporation, on the other hand, not being an inhabitant of the commonwealth, is not taxable on this class of income.

In the allocation of income, with respect to gains from sales of capital assets, as the foreign corporation is not an inhabitant of the commonwealth, it is not taxable on gains from the sale of intangible assets; the taxability of gains from the sale of tangible assets depends upon the location of the assets. With respect to income consisting of interest received by a foreign corporation, the whole of such interest received from inhabitants of the commonwealth or from Massachusetts corporations and unincorporated associations (except interest from deposits in national banks and trust companies) is allocated to Massachusetts. The remainder of the taxable net income is allocated in precisely the same manner as in the case of domestic corporations, except that in section forty-two provision is made for allocation by some other method at the request of the corporation, based on income actually received from business carried on in this commonwealth.

Credit for Dividends Taxed to the Stockholders

SECTION 43. After determining the amount of tax due from any foreign corporation under paragraph (2) of section thirty-nine, the commissioner shall then credit the corporation with a sum equal to five per cent of the dividends paid by it, during the previous calendar year, to inhabitants of this commonwealth, and the amount then remaining due shall be the amount of tax to be levied upon the corporation under said paragraph; provided, that if more than one half of the capital stock of any such corporation is owned by another

[G. L. c. 63, § 43 foreign corporation not subject to taxation under sections thirty to fifty-one, inclusive, but has stockholders who are inhabitants of this commonwealth and are subject to taxation upon their income under section one of chapter sixty-two, such corporation, upon filing with the commissioner such information as he shall deem necessary for the purpose, shall be credited with a sum equal to five per cent of such a proportion of its total dividends as will prevent double taxation of the income of the corporation and of the dividends of such other foreign corporation actually taxed to inhabitants of this commonwealth.

Dividends from stock in domestic corporations are not taxed in this commonwealth; whereas dividends from stock in foreign corporations are subject to the income tax when received by inhabitants of this commonwealth. If a foreign corporation is taxed on its income and the same income is taxed in the hands of the individual stockholders the same income would be taxed twice; and while double taxation of this character is not unconstitutional, it is not considered equitable, and the legislature has attempted to avoid it by allowing a deduction from the tax on foreign corporations on account of dividends paid by them to residents of this commonwealth. This deduction however does not fully cover the tax paid by such residents, since it amounts to but five per cent of such dividends, and as the rate of the income tax on dividends of foreign corporations is six per cent, one per cent of the amount of such dividends is taxed twice.

The deduction extends to dividends paid to a foreign business corporation not subject to taxation under this chapter but which owns more than one half of the stock of a foreign business corporation which is taxable. A corporation is entitled to a credit for the stockholders of the corporation so holding its stock who are residents of this commonwealth, provided it files with the commissioner a statement of the number of its shares owned by such other corporation, the names and addresses of the inhabitants of Massachusetts to whom such other corporation has paid dividends, the amounts so paid and actually taxed, the respective earnings of both corporations and such other information as may be required to determine the amount of the credit.

G. L. c. 63, § 44]

ASSESSMENT AND COLLECTION OF EXCISE ON BUSINESS CORPORATIONS

Assessment of Excise Tax

SECTION 44. The commissioner shall determine, from the returns required by this chapter and from any other available information, the net income derived from business carried on within the commonwealth and the corporate excess of every domestic business corporation, and the net income derived from business carried on within the commonwealth of, and the corporate excess employed within the commonwealth by, every foreign corporation, and shall assess thereon the tax provided for in this chapter. Except as otherwise provided in this chapter, the part of said tax which is based upon the value of the corporate excess, or corporate excess employed within the commonwealth, shall be assessed and collected in the same manner and with the same powers as provided in this chapter for the taxation of corporate franchises, and shall be subject to the other administrative provisions thereof. He shall not determine the income of any such corporation, which has filed a return within the time prescribed by law, to be in excess of the income shown by such return, without notifying the corporation and giving it an opportunity to explain the apparent incorrectness of the return. For the purpose of verifying any such return, the commissioner may, within two years after September first of the year in which such return was due, examine personally or by deputy or agent the books and papers of the corporation, which shall be open to such officer for verification.

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This section, at least so far as it relates to the taxation of the corporate excess of business corporations, follows in general the provisions of the earlier law. It is to be noted that the commissioner, with respect to the tax on the corporate excess of a corporation which has filed a return, is not bound by the return as the assessors of a city or town are bound in the case of the local property tax, but may determine the value of the corporate excess from the return or from any other information available, and may disregard the return without notifying the corporation of his intent so to act. He may exercise this power without examining the returns personally, and may make his determination of value through his deputies and assistants. With respect Old Colony Trust Co. v. Commonwealth, 220 Mass. 409 (1915). 'Commonwealth v. New England Slate & Tile Co., 13 Allen 391 (1866).