CABOT CORPORATION vs. STATE TAX COMMISSION.

CUTTER, J. This case involves the net income measure of the 1960 corporation excise assessed under G. L. c. 63, Section 32, with respect to Cabot Shops, Inc. (Shops), a Massachusetts corporation, which on September 30, 1960, was merged into Cabot Corporation (Cabot), a Delaware corporation. Cabot thereafter performed various procedural acts as successor to Shops by statutory merger. [Note 1] For purposes of the Massachusetts 1960 excise, Shops was a domestic manufacturing corporation (G. L. c. 63, Section 38C, as amended by St. 1937, c. 383, Section 1; later amended by St. 1964, c. 723, Section 3). [Note 2]

The situation before us in most respects resembles that considered in Smith Meal Co. Inc. v. State Tax Commn., ante, 509, with which this case was argued. The applicable provisions of the excise tax law, so far as relevant to our decision, have been set out in the Smith Meal Co. case, at pp. 510-511, in fn. 1, except for Section 38C, mentioned above, and for certain allocation formulae in Section 38, [Note 3] most of which it

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was not necessary to quote in the Smith Meal Co. case. As in that case, no question is now raised with respect to the "corporate excess" measure of the excise. See Section 32 (a) (1), as amended. The application of the statutes, in determining the net income measure of Shops' 1960 excise under Section 32 (a) (2), involves an income situation slightly different from that considered in the Smith Meal Co. case.

On December 14, 1960, Shops filed its 1960 excise return, and paid the excise thereby shown to be due. In this return, Shops included as required (sch. F-1) a copy of its Federal income tax return for the taxable year ended September 30, 1960. Significant items of income and deductions shown on this schedule are set out in the margin. [Note 4]

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Shops (sch. F of return) allocated the whole of its net income shown by this return (item 24) to Massachusetts. The specific allocation (under Section 37) of interest ($178,042.23) to Massachusetts was in excess of Shops' total net income of $48,169.03. Shops thus had no balance of net income to be allocated under Section 38 (see fn. 3), although it (cf. the Smith Meal Co. case) did have gross income very greatly in excess of the items of gross income specifically allocated to Massachusetts under Section 37.

In 1962, the commissioner assessed an additional 1960 excise of $6,990.46. He in effect treated the whole amount of interest ($178,042.23) received by Shops in its 1960 taxable year as its 1960 net income taxable in Massachusetts. Accordingly, he gave to Shops no benefit of any part of the deductions allowable to it in computing its net income. The additional excise was paid with interest ($517.81) on August 27, 1962.

Cabot (as successor to Shops) thereupon applied for an abatement of the additional excise, and, upon the denial of that application, appealed to the Appellate Tax Board (the board). The facts were agreed. The board rendered a decision for the commission without filing an opinion explaining its action. It denied Cabot's requests for rulings, in effect that, under Section 32 (a) (2) and Section 38A, the amount of Shops' income allocated to Massachusetts could not exceed its net income as defined in Section 30, par. 5. Cabot then appealed to this court.

We need discuss only one difference between this case and the Smith Meal Co. case, viz. that in 1960 Shops (unlike Smith Meal Company, Inc. in 1959) had gross income of a type which would have been subject to allocation under Section 38, if (a) such gross income had exceeded the allowable deductions, and (b) its gross income specifically allocable under Section 37 had not exceeded its total net income. This difference, we think, does not support the additional excise.

The framers of Section 37 and Section 38 may have thought that in the great majority of cases there would be a balance of net income to be allocated by the part of the allocation formula

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found in Section 38. In such cases, the allowable deductions would be substantially reflected in the application of that part of the formula. In other cases, however, where only allocations under the portion of the formula found in Section 37 can be given any effect, the existence of the provisions of Section 38 does not mean that Section 37 is to be applied otherwise than as a part of the method of allocating net income. Section 37 does not provide a gross income measure for the net income portion of the excise. See Section 32 (a) (2). In view of what has been said above and in the Smith Meal Co. case, we hold that the portion of the excise imposed under c. 63, Section 32 (a) (2), as amended, cannot have a measure in excess of total net income as defined in Section 30, par. 5.

Shops (and Cabot) have not asked for more than the abatement of the additional excise. Accordingly, it is not necessary now to consider whether c. 63 may require, in some circumstances differing from those considered in the Smith Meal Co. case, an allocation of allowable deductions to items of gross income specifically assigned under Section 37.

The board's decision is reversed. The additional excise is to be abated with interest. Cabot is to have costs.

So ordered.