The purpose of this statement is to provide a preliminary response with regard to several issues on which the Department has, to date, received repeated inquiries. The statement describes regulatory positions that the Department anticipates proposing in the course of the regulation drafting and promulgation process. This statement is not a binding policy document, and the anticipated positions stated herein are subject to change in the drafting and promulgation process. However, the Department is aware that numerous taxpayers must make book accounting adjustments in the current quarter to reflect the effects of the law changes for financial accounting purposes. Therefore, this statement is an effort to provide a timely indication of regulatory intent with regard to the particular matters specified.
Net Operating Loss and Credit Carry Forwards from Periods Before Law Change
G.L. c. 63, § 32B(f), as adopted by Acts 2008, Chapter 173, Section 48, directs the Commissioner to issue implementing regulations with regard to various matters, including:
"(iii) the application of any carry forwards, including the sharing of any net operating loss or tax credit carry forwards that are attributable to the activities of the combined group's unitary business, but the carry forward of losses, credits or other tax benefits that arise before the effective date of this section shall be available only to the extent permitted by law as in effect before the effective date…."
Accordingly, the Department anticipates that regulations proposed with regard to NOL or credit carry forwards will limit the use of such carry forwards of losses or credits originating in years beginning before January 1, 2009, in the manner provided immediately before the law change. In particular, such NOL carry forwards and investment tax credit carry forwards will be available to offset the future year income or tax, respectively, of only the individual corporations that generated the loss or credit. The Department anticipates, however, that the income or tax liability of that individual corporation in years beginning on or after January 1, 2009, against which the carry forward may be applied, will be determined under the combined reporting regime adopted by Chapter 173. The Department does not anticipate that a corporation with pre-2009 loss or credit carry forward will need to re-calculate its post-2009 income or tax on a pro forma basis, applying pre-2009 rules, in order to calculate limitations on use of such pre-2009 carry forwards in later years.
Affiliated Group Elections
G.L. c. 63, § 32B(g), as adopted by Acts 2008, Chapter 173, Section 48, allows a group of corporations to elect to file a return combining all members of the "affiliated group," as defined. The Department has received various inquiries relating to the composition of an "affiliated group" for purposes of the election.
G.L. c. 63, § 32B(g)(i) defines an affiliated group as "an affiliated group as defined in section 1504 of the Code except that it shall include all corporations incorporated in the United States or formed under the laws of the United States, any state, the District of Columbia or any territory or possession of the United States that are commonly owned, directly or indirectly, by any member of such affiliated group and other commonly owned corporations as described in paragraph (3) of subsection (c)."
G.L. c. 63, § 32B(g)(i) further defines "commonly owned" as "more than 50 per cent of the voting control of such member is directly or indirectly owned by a common owner or owners, either corporate or non-corporate."
G.L. c. 63, § 32B(c)(3)(ii) and (iii) include in a water's edge group "any member, regardless of the place incorporated or formed, if the average of its property, payroll, and sales factors within the United States is 20 per cent or more"; and "any member [of a combined group] that earns more than 20 per cent of its income, directly or indirectly, from intangible property or service-related activities the costs of which generally are deductible for federal income tax purposes, whether currently or over a period of time, against the business income of other members of the group, but only to the extent of that income and the apportionment factors related thereto."
Pursuant to the above provisions, the Department anticipates proposing regulations to the following effect:
(1) The membership of a group pursuant to an affiliated group election is not limited to those corporations that are members of an affiliated group under IRC 1504 (i.e. generally those corporations participating in the filing of a federal consolidated return). The election will include any corporation participating in the filing of a federal consolidated return, but the group is expanded in several respects. First, the Massachusetts affiliated group will include corporations more than 50% of whose voting interests are commonly controlled, rather than the 80% control by vote and value applicable for consolidated return purposes. Second, control of members of the Massachusetts affiliated group may be direct or indirect, and the common owner or owners may be corporate or non-corporate. Thus, for example, two or more federal consolidated groups would be combined in one Massachusetts affiliated group filing if both consolidated groups were commonly owned by a non-US corporation. Third, corporations described in G.L. c. 63, § 32B(c)(ii) are included in the Massachusetts affiliated group; and corporations described in G.L. c. 63, § 32B(c)(iii) are included in the Massachusetts affiliated group to the extent of the income and apportionment factors indicated in such § 32B(c)(iii), even though such corporations generally would not be included in a federal consolidated return.
(2) A taxpayer may not simultaneously file pursuant to a worldwide combined filing election and an affiliated group election. The two elections are mutually exclusive. Either of such elections, if made, will be binding for a 10-year period as provided in the statute, and will preclude the making of the other of such elections during such period.
FAS 109 Deduction
Acts 2008, chapter 173, section 95, provides a tax deduction to publicly traded corporations in certain situations where the corporation is required to increase its deferred tax liabilities due to adoption of the combined reporting rules of the Act. The deduction is spread over seven years commencing in the corporation's taxable year beginning in 2012. Several different and specific limitations pertinent to calculating the amount of the deduction are provided in paragraphs (1) through (3) of section 95.
The Department anticipates proposing regulations or issuing other guidance to the following effect:
(1) Calculations under this section are made as of the July 3, 2008 effective date of section 95 of the Act. They are to consider only changes in deferred tax assets or liabilities attributable to Massachusetts taxes.
(2) Under section 95(2), the annual deduction available for the 7-year period shall be equal to one-seventh of the lesser of two calculations, (i) the "Massachusetts tax basis modification," as defined, or (ii) "the amount necessary to offset the increase in net deferred tax liability [as defined], . . . that would result from the imposition of the combined reporting requirements under [G. L. c. 63, § 32B] but for the deduction provided under this section . . . ." The Department interprets this clause (ii) as contemplating a gross-up of the amount of deduction to the extent necessary to offset an increase in net deferred liability that would otherwise result from imposition of combined reporting in Massachusetts.
(3) The deduction is calculated only with respect to an increase in net deferred tax liabilities, as defined in section 95(1), that would otherwise result from imposition of combined reporting in Massachusetts. No deduction is available for a decrease in net deferred tax assets due to combination or otherwise. However, for purposes of the netting process, net deferred tax liabilities and net deferred tax assets are viewed as separate accounts. Therefore, a taxpayer whose net deferred tax asset account exceeds its net deferred tax liability account may be eligible for deduction, subject to other limitations specified in section 95, if its net deferred tax liability account would increase due to combined reporting in Massachusetts, to the extent that this increase in deferred liabilities exceeds any increase in deferred tax assets.
(4) A net increase in deferred tax liabilities due to combination, for purposes of calculating the allowable deduction, must be reduced by any increase in deferred tax assets resulting from the Act as a whole (including tax rate changes, entity classification changes, and other changes unrelated to combined reporting) and cannot exceed the net increase in deferred tax liabilities, if any, resulting from the Act as a whol e.