ISSUE: When is the LIFO recapture adjustment included in federal gross income under I.R.C. § 1363(d), reported and taxed for Massachusetts purposes?

DIRECTIVE: LIFO method C-corporations converting to S-corporation status must make a LIFO recapture adjustment in accordance with I.R.C. § 1363(d). The adjustment to income is made in the last taxable C-corporation year before the first taxable year in which an S-election is effective. I.R.C. § 1363(d)(1). Any resulting Massachusetts tax liability must be paid on or before the due date for filing the last taxable C-corporation year return, without regard to any extensions of time for filing. The Massachusetts tax payments may not be spread over a four year period as provided for federal purposes under I.R.C. § 1363(d)(2).

DISCUSSION OF LAW:

Massachusetts C-corporations and S-corporations determine taxable income for Massachusetts tax purposes by referring to their federal gross income for the taxable year. G.L. c. 63, §§ 30 (C-corporations) & 32D (S-corporations). Federal gross income includes income recognized under I.R.C. § 1363(d) as a LIFO recapture adjustment. This adjustment is required for LIFO method C-corporations that convert to S-corporation status to reflect a change in the way inventory is valued. The adjustment to income is made in the last taxable C-corporation year before the first taxable year in which an S-election is effective. Accordingly, Massachusetts gross income will reflect the same adjustment.

I.R.C. § 1363(d)(2) provides relief from the resulting federal tax liability by spreading the tax payments attributable to the LIFO recapture adjustment, over a four year period. Massachusetts has no corresponding provision for spreading the state tax liability. Thus, although there is federal tax payment relief under I.R.C. § 1363(d)(2), the taxpayer must pay the entire amount of Massachusetts tax attributable to the LIFO recapture adjustment, with the filing of the last C-corporation return.

/s/Mitchell Adams
Mitchell Adams
Commissioner of Revenue

MA:HMP:dmm

September 27, 1995

DD-95-10