July 21, 1980

You request a ruling as to the taxability of contributions by ********** (the "Corporation") to the individual retirement accounts of its employees under a Simplified Employee Pension Plan (SEP-IRA).

Simplified employee pensions, such as those available to the Corporation's employees, were created by Section 152 of Public Law 95-600, the Revenue Act of 1978 ("the Act"). Section 152(c) of the Act amended the Internal Revenue Code by adding such pensions to the Code's Section 219, which describes the deductions allowable for retirement savings. Although the Act was approved on November 6, 1978, the amendments to the Code made by Section 152 were not effective until after December 31, 1978.

Section 1(c) of Massachusetts General Laws Chapter 62, as amended by Chapter 408 of the Statutes of 1979, states that the Internal Revenue Code in effect on November 6, 1978 provides the basis for Massachusetts income tax determinations which are dependent on the Code.

General Laws Chapter 62, Section 2(a) defines Massachusetts gross income as federal gross income with certain modifications. Massachusetts gross income is divided into Part A taxable income, which is taxed at the rate of 10%, and Part B taxable income, which is taxed at the rate of 5%. Part A income is composed of dividends, net capital gain and interest other than interest on savings deposits in banking institutions in Massachusetts. Part B income is all other income subject to taxation. Under Section 219 of the Code, employer contributions to IRAs are considered to be payments of compensation and part of such employees federal gross income. Such contributions are therefore also Massachusetts Part B income.

Although Section 219(b), as amended by Public Law 95-600, allows a deduction for employer contributions to simplified employee pensions in arriving at the federal adjusted gross income figure of such employees, no similar deduction is allowed by Massachusetts. Section 2(d)(9) of Chapter 62 expressly prohibits the deduction by employees of contributions to IRAs. Even if no such prohibition existed, deduction by employees of employer contributions to simplified employee pensions would not be possible since Section 1(c) of Chapter 62 precludes consideration of any amendment to the Code which became effective after November 6, 1978, as did Section 152 of the Act.

Based on the foregoing, it is ruled that employer contributions to simplified employee pensions under an SEP-IRA are Part B income of such employees and taxable at the rate of 5% for the year in which the contributions are made.

Very truly yours,

/s/L. Joyce Hampers

L. Joyce Hampers
Commissioner of Revenue

LJH/JKH/jmcd

LR 80-53