June 10, 1977

You inquire as to the Massachusetts tax treatment accorded lump-sum distributions of a qualified profit sharing plan.

It is noted that the Internal Revenue Code (Code) was amended by the Employee Income Security Act of 1974 to provide that the portion of a lump-sum distribution by a qualified plan, attributable to post 1973 participation, would constitute ordinary income and be subject to ten year averaging where elected. The Tax Reform Act of 1976 further amended the Code by permitting the recipient an election to treat the entire taxable portion of the distribution as ordinary income thereby making the ten year averaging rule available for the entire taxable portion of a distribution.

Massachusetts General Laws, c. 62, s. 1(c), defines the word "Code" as meaning "the Internal Revenue Code of the United States, as amended on January first, nineteen hundred and seventy-one." Massachusetts gross income is federal gross income as defined in the Code as amended on January 1, 1971, with modifications not here relevant. (M.G.L. c. 62, ss. 1(d) and 2(a)).

The Code as amended on January 1, 1971, provided that if the total distribution payable with respect to any employee is paid to the distributee within one taxable year of the distributee on account of the employee's death or other separation from the service, or on account of the death of the employee after his separation from the service, the amount, with the exception of employer contributions in plan years beginning after December 31, 1969, is considered a gain from the sale or exchange of a capital asset.

The full amount of such capital gain is includible in Massachusetts Part A income and subject to tax at the rate of ten percent.

The employer contributions for post 1969 years of the plan constitutes ordinary income for federal tax purposes and is includible in Massachusetts Part B income, subject to tax at the rate of five percent. Employer contributions for post 1969 years would include employer contributions forfeited by other employees and reallocated after 1969 under the plan to the employee involved.

Where the lump-sum distribution is made due to the termination of the plan and the employee remains in the service of the employer, the entire distribution, exclusive of the employee's contribution, is includible in Massachusetts Part B income. This applies irrespective of the age of the employee.

There is no provision in Massachusetts law permitting income averaging.

Very truly yours,

/s/Owen L. Clarke

Owen L. Clarke
Commissioner of Corporations
and Taxation

LR 77-11