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Massachusetts 2020 Tax Litigation Summary

Jan. 5, 2021, 9:00 AM

Despite the Covid-19 pandemic, the Massachusetts Appellate Tax Board and the state’s appellate courts managed to carry on in 2020, albeit remotely. The Appellate Tax Board suspended all in-person proceedings but conducted a few evidentiary hearings by video conference. The Supreme Judicial Court and Appeals Court also used video conference technology for tax appeal oral arguments. The Appellate Tax Board issued 36 formal decisions in 2020, while the Supreme Judicial Court and the Appeals Court issued two and three tax opinions, respectively.

It is beyond the scope of this article to address all reported decisions, but several opinions released during the year are worth noting, one of which was the corporate excise appeal of VAS Holdings. Here, the taxpayer argued that a gain on the sale of a 50% interest in a limited liability company operating in Massachusetts was not taxable in Massachusetts. The parties had agreed that the relationship between the taxpayer and the LLC was not unitary, and the LLC did not serve an operational function. In ruling for the Massachusetts Department of Revenue, the Appellate Tax Board distinguished “investee apportionment” from “investor apportionment.”

While investor apportionment is based on the in-state activities of the taxpayer/investor, the investee apportionment methodology focuses on the activities of the second entity (in this case, the LLC). The board held that the increase in value of the LLC and the gain from the sale were inextricably connected to and largely derived from property and business activities of the LLC in Massachusetts. Accordingly, the board concluded that there was no constitutionally impermissible taxation of extraterritorial values. VAS Holdings & Invs. LLC v. Comm’r of Revenue, App. Tax Bd., Nos. C332269 & C332270 (Oct. 23, 2020)

The Massachusetts Appeals Court in Bay State Gas Co. ruled that the taxpayer was entitled to a deduction for amounts remitted to Indiana as payment of the Indiana Utility Receipts Tax (URT). Under Massachusetts law, corporate taxpayers must add back taxes “measured on or by income, franchise taxes measured by net income, franchise taxes for the privilege of doing business, and capital stock taxes imposed by any state.” The court determined that the URT was deductible because it was more like a transaction tax, imposed on the receipts of the retail sales of gas and electricity in Indiana, than a franchise tax for the privilege of doing business in the state. Bay State Gas Co. v. Comm’r of Revenue.

Citrix Systems addressed the application of sales tax to online software offerings. In Massachusetts, custom software is generally exempt from sales tax, while standardized software is generally taxable. The Supreme Judicial Court held that Citrix’s sales of online software offerings represented the taxable sales of prewritten computer software pursuant to Massachusetts General Laws Chapter 64H Section 1. The Court rejected Citrix’s argument that its subscription fees were not taxable transfers of property because customer transactions did not involve the transfer of software title or possession. Citrix Sys. Inc. v. Comm’r of Revenue.

The case of New Cingular Wireless was one of several actions filed in various states, following a class action settlement, seeking refunds of sales tax wrongfully collected on data charges in violation of state tax laws and the Internet Tax Freedom Act (ITFA). The Appellate Tax Board ruled that data charges were charges for internet access and protected from taxation by the ITFA. The Commissioner of Revenue appealed the decision claiming that New Cingular failed to comply with the screening software provision of the ITFA. Internet access providers are required “at the time of entering into an agreement with a customer” to “offer … screening software that is designed to permit the customer to limit access to material on the Internet that is harmful to minors.” Internet access providers who fail to meet this requirement are ineligible to claim the protection of ITFA, subjecting data charges to be taxed. The Appeals Court concluded that the availability and advertising of screening software by New Cingular complied with the screening software requirement of the ITFA despite the fact that New Cingular’s screening software features were not compatible with some devices sold by the appellant. New Cingular Wireless PCS LLC v. Comm’r.

In the personal income tax case of David Pogorelc, the Massachusetts Appeals Court held that the taxpayer was estopped from retroactively challenging a previous tax position because of a principle referred to as the “duty of consistency.” On his 2007 Massachusetts personal income tax return, Pogorelc deducted losses realized upon the disposition of a partial interest in an LLC. In 2011 he reported gain realized upon the sale of the principal asset held by that LLC. The taxpayer argued that he should not have realized a loss in 2007 because the transaction was a merely “fictional” sale under Revenue Ruling 99-5. Although not previously applied in Massachusetts law, the duty of consistency is well established in federal tax law. It prevents a taxpayer who has already benefited from taking a certain position on a tax issue from later taking an inconsistent position on the same issue in order to further his benefit. Pogorelc v. Commissioner of Revenue.

Covid-19 has had a devastating impact on the commercial real estate market. The natural consequence of this will be a dramatic increase in challenges to property tax assessments. Recent studies indicate that local property taxes comprise nearly 40% of state and local taxes paid by businesses. In fact, most tax litigation in Massachusetts involves appeals of property tax assessments, typically addressing overvaluation or exemption issues.

There are many statutory exemptions from local property tax in Massachusetts. Some are based on the taxpayer’s identity or status, while others look to the property’s character or use. Exemption cases decided in 2020 include United Salvage Corp. of America v. Framingham (solar photovoltaic system), Trimont Foundation v. Newton and Roman Catholic Bishop of Springfield v. Easthampton (charitable exemption), and Veolia Energy Boston v. Boston (manufacturing corporation exemption).

While property tax exemption appeals present interesting factual and legal questions, cases alleging overvaluation are far more common. The cases of Western Massachusetts Electric Co. v. Springfield (utility company), Digital 55 Middlesex LLC v. Billerica (data center), Patrick Motor Mart v. Auburn (auto dealership), and HCRI Massachusetts Properties Trust v. Worcester (senior living facility) were decided in 2020 and illustrate the Appellate Tax Board’s analysis of various valuation issues.

It is difficult to predict what impact the Covid-19 pandemic will have on the litigation of state and local tax controversies in 2021. State tax revenue shortfalls may very well result in increased audit activity—and the tax disputes that often follow. New cases and those currently in the pipeline will need to be addressed. In the meantime, we expect that the Massachusetts Appellate Tax Board will keep issuing decisions and rely on remote hearings until the state is back to some level of normalcy.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Philip S. Olsen is a tax attorney at the Boston law firm of Davis Malm,where he focuses on state and local tax consulting and litigation.He has over 25 years’ experience litigating and resolving major tax controversies before courts and administrative boards. He can be contacted at