Massachusetts' treatment of Sec. 338(h) (10) election provides refund opportunity.

• Author: Tapajna, Joseph J.
• Position: State & Local Taxes

In Combustion Engineering, Inc., Mass. A.TB. Docket F228740 (3/29/00), the Massachusetts Appellate Tax Board (Board) held that no portion of the gross proceeds or the gain realized from a deemed asset sale under Sec. 338(h)(10) was to be included in either the numerator or the denominator of the subsidiary's sales factor under state law.

In 1988, Combustion Engineering, Inc. (CEI) sold all of its stock in a subsidiary (Jamesbury) and made a joint election with the purchaser under Sec. 338(h)(10) to treat the sale as a deemed asset sale. As a result of the election, for Federal tax purposes, Jamesbury recognized a gain equal to the difference between the basis of its assets and their fair market value, and CEI recognized no gain on the sale of Jamesbury's stock. By virtue of a Sec. 338(h)(10) election, the transaction resulted in an allocation of Massachusetts income to the subsidiary and not the parent, as Massachusetts law defines net income by reference to the Code. While the transaction resulted in an allocation of income to the subsidiary, the Board concluded that, for sales-factor purposes, the receipts from the transaction were attributable to the parent.

For purposes of determining a corporation's sales factor, Massachusetts law (G.L.c. 63, section 38(f)) defines the term "sales" as the "gross receipts of the corporation except ... gross receipts from the ... disposition of securities." Although Massachusetts follows the Code when determining the starting point of a taxpayer's state tax base, the Board noted that "[t]he apportionment formula contained in G.L.c. 63, [section] 38 makes no reference to the Code. Instead, this section defines the necessary terms. The statute is clear that receipts generated from the sale of stock are not `sales' for purposes of the sales factor."

Accordingly, the Board found that the Federal treatment of the sale did not determine whether the proceeds of the transaction should be treated as "sales" for purposes of the apportionment formula and that, because the transaction was actually a stock sale, the proceeds should be excluded from the factor. The Board...