United States

Massachusetts: Failure to Apply Precluded Company from Qualifying as a Security Corporation

Dec 05, 2016
From KPMG TaxWatch

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The Massachusetts Appellate Tax Board (Board) recently addressed whether a company qualified as a “security corporation” so that it was entitled to preferential corporate excise tax treatment and was not required to be included in the Massachusetts combined group for the tax years at issue. Although there was no dispute that the company was exclusively engaged in buying and selling securities, it had never applied to the Commissioner to be classified as a securities corporation, which was required under Massachusetts law. Specifically, a corporation must apply before the end of the taxable year or have a classification from a prior taxable year that has not been revoked. The company argued that the application process should be waived for various reasons. First, it asserted that the statute lacked details on the application process and that a directive outlining the application process was not promulgated under the Administrative Procedure Act. Therefore, in the company’s view, due to the lack of statutory and regulatory guidance, it was merely required to notify the Commissioner that it was a securities corporation, which it did on returns filed beginning in 2005. The Board rejected this argument, noting that the statute required that the company apply before the end of the tax year; thus, filing a return after the close of the tax year was not akin to applying to the Commissioner to be classified as a security corporation. Furthermore, the Board noted that a regulation promulgated in July 2006—and effective retroactively to January 1, 2006—outlined the application process. Finally, the Board rejected the company’s argument that the Commissioner’s failure to audit the company’s returns from earlier tax years meant that the Commissioner approved of the company’s status as a securities corporation. Having determined that the company was not a securities corporation and was therefore included in the combined group for the tax years at issue, the Board next addressed the imposition of penalties. A twenty percent penalty applies when an underpayment of tax is (1) attributed to negligence or disregard of the tax laws or written statements by the Commissioner, or (2) when the understatement of tax is substantial. The Board concluded that both of these tests were met. The company offered no evidence to establish that its actions were not negligent and the tax required to be shown on the returns greatly exceeded ten percent of the amount reported. Please contact George Burns at 617-988-6759 with questions on TechTarget, Inc. v. Commissioner of Revenue.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.