July 24, 1980
In 1978, several of your clients formed corporations, each of which contracted with a boat building firm to construct a commercial fishing vessel. Each corporation made a deposit and some additional payments on the purchase price of its boat. The boat building firm subsequently became bankrupt. You have been informed that the corporations, as general creditors of the boat building firm, are unlikely to recover any of their payments. Your clients are contemplating dissolving the corporations. As a result of dissolution, your clients will realize a loss on their capital stock in these corporations, which under Internal Revenue Code Section 1244, will be treated as an ordinary loss up to a specified amount. You inquire as to the treatment of these losses under General Laws Chapter 62.
Code Section 1244 provides an ordinary loss deduction for what is a capital loss on the stock of certain small business corporations. The deduction is limited to $50,000 for taxpayers filing individually and to $100,000 for married taxpayer filing jointly. Any excess of loss over these amounts retains its treatment as a capital loss for federal purposes.
General Laws Chapter 62, Section 2 defines Massachusetts gross income as federal gross income with some modifications and divides it into two classes. Part A gross income, taxable at 10%, consists of dividends, net capital gain and certain interest. Part B gross income, taxable at 5% includes the remainder of Massachusetts gross income. St. 1979, c. 409 eliminated the definition of net capital gain from General Laws Chapter 62. Therefore, Massachusetts now uses the federal definition of net capital gain in determining Part A gross income.
In Turenne v. State Tax Commission (Appellate Tax Board, 1979), (based on General Laws Chapter 62 as in effect in 1971) the Board held that losses which qualify for Code Section 1244 treatment are capital losses in their entirety to be used in determining Part A gross income. This result is unchanged by the adoption of the federal definition of net capital gain since Code Section 1244 alters the treatment of these losses, but does not affect the Code definition of net capital gain.
Article 44 of the Amendments to the Massachusetts Constitution requires that income derived from the same class of property be taxed at the same rate. This article provided the basis for the decision of the Supreme Judicial Court in Daley v. State Tax Commission, (1978 Mass. Adv. Sh. 3149) that the entire amount of a lump-sum distribution from a qualified pension plan was taxable as Part B income although the Internal Revenue Code provided capital gains treatment for a portion of the distribution. Code Section 1244 treats certain losses up to a stated amount as a deduction against ordinary income and the remainder as a capital loss. Such treatment is unconstitutional in Massachusetts.
Therefore, it is ruled that for purposes of Massachusetts General Laws Chapter 62 a loss qualifying under Code Section 1244 will be treated as a capital loss which may be used to offset capital gain and a limited amount ($1000 per year) of dividend and interest income.
Very truly yours,
/s/L. Joyce Hampers
L. Joyce Hampers
Commissioner of Revenue