April 14, 1978
You inquire as to the Massachusetts tax consequence with respect to amounts of compensation deferred by state, county and municipal employees.
The deferment of compensation was first authorized by St. 1972, c. 808, which amended Chapters 29, 35 and 44 of the General Laws. This act contained no exemption from state income tax for amounts so deferred. The Internal Revenue Service refused to recognize the deferment as the employee did not relinquish sufficient control over the amounts deferred.
St. 1976, c. 422 further amended said Chapters 29, 35 and 44 to make the deferred compensation program for public employees conform to the requirements of federal law. This act, bearing an emergency preamble, was approved on October 18, 1976.
On January 28, 1977, the Internal Revenue Service in a letter ruling to Mr. Patrick D. Sullivan, Deputy State Treasurer, ruled that, if amended to conform to the amended provisions of the General Laws, a participant using the cash receipts and disbursements method of accounting would not currently include amounts deferred in federal gross income. Amounts payable under the Plan will be includible in gross income during the taxable year in which such amounts are paid or otherwise made available, whichever is earlier, to the participant, his beneficiary, or his estate. The deferment is affected pursuant to Section 451 of the Internal Revenue Code.
M.G.L. Chapter 62, Section 2(a) defines Massachusetts gross income as federal gross income with modifications not here relevant. To the extent amounts deferred are not includible in federal gross income for a taxable year, they are not includible in Massachusetts gross income for that taxable year.
Amounts payable under such plans will constitute wages subject to withholding in the taxable year in which such amounts are paid or otherwise made available to the participant, his beneficiary, or his estate. Such amounts will also constitute items of gross income from sources within the Commonwealth and be subject to taxation when received by a non-resident of the Commonwealth.
Thus to the extent that the income of the public employee is deferred for federal income tax purposes it is also deferred for Massachusetts income tax purposes.
Very truly yours,
/s/Laurence D. Fitzmaurice
Laurence D. Fitzmaurice
Commissioner of Corporations