TIR 05-4: RCN- BecoCom, LLC v. Commissioner of Revenue; Property Tax; Telephone Company Central Valuation; Entity Classification
This TIR discusses the holding of RCN BecoCom, LLC v. Commissioner of Revenue, 443 Mass. 198 (2005) and the Commissioner’s response to that case. While the case involved the local taxation and personal property exemptions of telephone and telegraph companies, it may have additional impact on local taxation and tax exemptions for unincorporated utilities generally, as well as unincorporated financial institutions and insurance companies.
Under G.L. c. 59, § 39, the Commissioner must determine the value of the machinery, poles, wires and underground conduits, wires and pipes (“statutory property”) of all telephone and telegraph companies in the Commonwealth on an annual basis. The commissioner reports these values to the assessors of the cities and towns in which the property is located, and the assessors must use these centrally determined valuations in assessing the personal property of telephone companies. There is no equivalent central valuation mechanism for property belonging to cable television (alternatively known as community antenna television or CATV) or Internet service providers. Entities that provide some combination of these historically distinct services are known as "bundled service providers."
RCN-BecoCom, LLC (“RCN” or “the Company”), a limited liability company that provides telephone, cable television, and Internet services in the Commonwealth, is considered a bundled service provider. The company requested that the Commissioner centrally value its statutory property pursuant to G.L. c. 59, § 39, but the Commissioner refused because he did not find the company to be a telephone or telegraph company within the meaning of the statute. In the view of the Commissioner, G.L. c. 59, § 39 was limited to companies that engaged solely in telephone and telegraph services to the exclusion of other business activities. As a bundled service provider, RCN did not meet this test. The Company appealed to the Appellate Tax Board (ATB).
RCN’s property was subsequently valued and assessed by the assessors in communities in which its property was located, including the City of Newton. RCN applied for abatements and appealed some of the abatement denials to the ATB, including Newton’s abatement denial. Newton intervened in the central valuation appeal, which was later consolidated with RCN’s abatement appeal. In addition to whether RCN qualified for central valuation as a telephone company, the consolidated cases considered the categories of property (telephone, cable TV, Internet or mixed use) subject to central valuation and the type of property subject to tax and property exempt from tax under applicable provisions of chapter 59. RCN argued that as a telephone company only its machinery used in manufacture (electric generators) was subject to valuation and taxation under GL c. 59, §18, Second. RCN also argued for the same reason that it was entitled to an exemption from local property taxes under G.L. c. 59, § 5 cl. 16(1) on all of its property except “real estate, poles, underground conduits, wires and pipes, and machinery used in manufacture . . ..” Although the exemption was limited on its face to corporations taxable under chapter 63, RCN claimed that as a limited liability company it was also entitled to the exemption because the exemption had been allowed by the Commissioner to telephone companies generally, regardless of how organized or held.
The ATB ruled, among its other holdings, that RCN was taxable on all its machinery and was a telephone company entitled to have its statutory property centrally valued by the commissioner under G. L. c. 59, § 39. It also ruled, however, that RCN was not entitled to the utility exemption under G.L. c. 59, § 5, cl. 16(1), as the exemption is unambiguously limited to corporations. RCN, Newton, and the Commissioner appealed.
II. The SJC Decision
On appeal the Supreme Judicial Court (SJC) affirmed the ATB, holding that:
RCN was a telephone company, despite also being engaged in providing CATV and Internet services. A company need not be involved exclusively in providing telephone services to be a telephone company within the meaning of the statute. Instead, it may qualify so long as it is “substantially” engaged in providing these services under a five factor test involving (1) the financial receipts the services bring to the company; (2) the proportion of the entire income attributable to the services; (3) the percentage of the entire capital invested in providing the services; (4) the number of persons employed in providing the services as compared with the total number of employees of the company; and (5) the ratio of telephone services to the entire business activities of the company.
A company that qualifies as a telephone company is entitled to have its taxable telephone machinery, poles, wires, underground conduits, wires and pipes centrally valued. This includes all property used in providing telephone service, regardless of whether the property is also used to provide other services, such as cable TV. There is no requirement that the property be used exclusively in providing telephone service, i.e., to the exclusion of other business activities. All other taxable personal property of a telephone company is valued locally.
A telephone company that is organized as a limited liability company (“LLC”) is taxable on all its property under GL c. 59, §18, First and is not restricted to taxation on machinery used in manufacture under GL c. 59, §18, Second.
A telephone company is not automatically entitled to an exemption from taxation for its personal property under G.L. c. 59, §5, cl. 16(1). That exemption is available only to corporations, not business entities otherwise organized, such as LLCs. RCN, as an LLC, could not qualify for the exemption.
The Commissioner is not authorized to extend the operation of an unambiguous statute beyond its clear scope. The Commissioner is thus not bound by a prior practice of allowing the G.L. c, 59, § 5, clause 16(1) utility corporation exemption to all telephone companies, irrespective of how the business entity was organized or held. Integral to this result is that the central valuation statute allows third parties (local assessors), who were (or would be) harmed by the practice, a right of appeal.
Neither the Supremacy Clause of the United States Constitution nor the 1996 federal Telecommunications Act required the Commissioner to exempt RCN’s machinery or other property from the personal property tax since RCN could have operated as a corporation but chose to operate as a limited liability company.
As a result of the RCN decision:
The Commissioner will not require that a company engage solely in providing telephone services in order to be classified as a telephone company, but will instead use a substantiality test in making this determination.
The Commissioner will centrally value the statutory property of telephone companies used in providing telephone services, including statutory property used in providing telephone services of a bundled service provider otherwise qualifying as a telephone company. Any taxable property that is used to provide telephone service will be centrally valued, without regard to whether the property is also used to provide other services, e.g., CATV. Taxable property not used to provide telephone service will not be centrally valued.
The Commissioner will not centrally value the taxable statutory property of cable TV or Internet companies that do not provide sufficient telephone or telegraph services to be considered telephone companies.
The Commissioner will adhere to any statutory requirement that an entity conduct business in a particular form of organization, such as a corporation, in order to receive an exemption or other benefit.
Telephone companies organized as corporations subject to the public utility excise under G.L. c. 63, § 52A are entitled to the exemptions provided by G.L. c. 59, § 5., cl. 16(1) and the exclusion provided by GL c. 59, §18, Fifth; they are thus taxable only on real estate, underground conduits, wires and pipes, poles and wires over private property (but not public ways) and machinery used in manufacture (electric generators, for example). See Assessors of Springfield v. Commissioner of Corps. & Taxation, 321 Mass. 186 (1947); Warner Amex Cable Communications, Inc. v. Assessors of Everett, 396 Mass. 239 (1985). This includes qualified bundled service providers organized as corporations; the exemption is unavailable to companies otherwise organized, e.g., as LLCs or as partnerships.
Telephone companies organized as LLCs that elect to be treated as corporations for federal income tax purposes, and companies organized as single member LLCs that elect to be treated as disregarded entities for federal income tax purposes whose single members are S corporations are considered business corporations under G.L. c. 63, §30(1) and (2), and are therefore entitled to the property tax exemptions provided by GL c. 59, §5, cl. 16(2).2 In the case of such LLCs, poles and wires over public ways are subject to tax under GL c. 59, §18, First. Such LLCs are required to file corporate excise returns (Form 355), and may not file public utility returns (Form PS-1), as only actually incorporated utilities are subject to the utility excise. GL c. 63, § 52A.
Telephone companies organized as LLCs that do not elect to be treated as corporations for federal income tax purposes, including LLCs filing as disregarded entities (except any LLC with an S corporation as its single member), and telephone companies organized as partnerships, corporate trusts, or other unincorporated legal entities are not entitled to any of the corporate exemptions of GL c. 59, § 5, cl. 16.
Dedicated cable TV and Internet companies that provide no telephone or telegraph service are not entitled to the c. 59, § 5, cl. 16(1) utility exemptions regardless of their form of organization.
The Commissioner will apply the reasoning of the RCN case to other utilities, financial institutions and insurance companies where appropriate.
Commissioner of Revenue
April 29, 2005
 See the “Conclusions” section of this TIR for treatment of LLCs filing federally as corporations after the RCN decision.
2 Application of the exemptions contained in GL c. 59, § 5, cl. 16(2) result in taxation of a business corporation’s machinery used in the conduct of business.