May 30, 1979

You request a ruling with respect to the income tax status of interest paid to borrowers who deposit advance payments of real estate taxes with the ********** Credit Union.

General Laws, Chapter 171, Section 24(B)(a)(3) provides that on certain mortgage loans the note or mortgage shall contain a provision requiring the payment each month to the mortgage of a proportionate part of the estimated real estate taxes and betterment assessments.

Under General Laws, Chapter 183, Section 61 mortgagees holding first mortgages on certain dwelling houses who require advance payments, deposits or other security from the mortgagor for payment of real estate taxes on mortgaged property must pay interest to the mortgagor on the amounts paid or deposited in advance.

Your institution is a credit union incorporated in Massachusetts. It requires monthly advance deposits of taxes from its real estate borrowers and pays interest to these borrowers on these deposits. You inquire as to rate of tax applicable to this interest income under General Laws, Chapter 62 and whether the interest exclusion in Section 3 of Chapter 62 is applicable.

Chapter 62 of the General Laws divides Massachusetts gross income into Part A gross income and Part B gross income. Part B income includes:

"Interest and dividends from savings deposits, including term and time deposits having a principal amount of less than one hundred thousand dollars, savings accounts, share or share savings accounts in any savings or cooperative bank, trust company or credit union incorporated in or chartered by the commonwealth; in any national bank, federal savings and loan association or federal credit union located in the commonwealth; in any banking company or Morris Plan company subject to chapter one hundred and seventy-two A; in any savings or loan association under the supervision of the commissioner of banks." (G.L. c. 62, s. 2(b)(1)(A)).

In determining Part B taxable income there is excluded from Part B adjusted gross income "interest and dividends in the amount of one hundred dollars for a single person or a married person filing a separate return or two hundred dollars for a husband and wife filing a joint return from savings deposits, savings accounts, shares or share savings accounts included in Part B gross income." (G.L. c. 62, s. 3(B)(a)(6)). Part B taxable income is taxed at the rate of 5%.

Based on the foregoing it is ruled:

1. The interest paid by a Massachusetts credit union on advance deposits of real estate taxes by borrowers is taxable as interest on savings deposits within the meaning of Chapter 62.

2. The interest paid on such deposits is Part B income taxable at the rate 5% plus surtax.

3. The interest paid on such deposits is eligible for inclusion in the exclusion from Part B adjusted gross income of one hundred dollars of interest on savings deposits in the case of a single person or a married person filing separately or two hundred dollars for a married couple filing a joint return.

Very truly yours,

/s/L. Joyce Hampers

L. Joyce Hampers
Commissioner of Revenue

LJH:JJW:FC

LR 79-10