July 11, 1980

You ask whether a net loss on a taxpayer's Massachusetts Part B adjusted gross income may be added to his total personal and other exemptions allowable under Chapter 62, Section 3(B), in determining the amount of the taxpayer's exemption which may be used against Part A income under Massachusetts General Laws, Chapter 62, Section 3(A)(b).

The taxpayer's 1977 Massachusetts income tax return offset his losses from his sole proprietorship against his Part B income. He also offset his losses on "Section 1244 stock" against his Part B income.

Section 1244 of the Internal Revenue Code deals with losses on small business stock. Under Chapter 62, Section 2(b)(1), in effect for 1977, and the case law interpreting Chapter 62, a loss on Section 1244 stock is considered a capital loss to be offset against capital gains. Turenne v. State Tax Commission (Docket No. 82024, May 16, 1979). The taxpayer may only offset his 1244 losses against his capital gain income, except one thousand dollars of his net capital loss may be applied against interest and dividends. Excess net capital loss may be applied to reduce the net capital gain and one thousand dollars of interest and dividends in each of the five succeeding taxable years (Chapter 62, Section 2(c)(2)).

Massachusetts General Laws Chapter 62, Section 3(A)(b) allows an exemption against Massachusetts Part A adjusted gross income equal to the amount by which the total personal and other exemptions allowable under Section 3(B) of Chapter 62 exceed the Massachusetts Part B adjusted gross income.

The taxpayer's Part B income transactions result in a net loss. Since Massachusetts tax laws do not recognize negative income the taxpayer's Part B adjusted gross income is zero. ( See Wolcott v. State Tax Commission, 341 Mass. 409 (1960) in which the taxpayer reported that she had negative business income. The Supreme Judicial Court sustained the Appellate Tax Board which ruled that the taxpayer's business income was zero.)

If a taxpayer has no Part B adjusted gross income, the amount by which his Section 3(B) exemptions exceed his Part B income, which is available for use against his Part A income, is simply the amount of his Section 3(B) exemptions.

Very truly yours,

/s/L. Joyce Hampers

L. Joyce Hampers
Commissioner of Revenue

LJH/RSF/jmcd

LR 80-50