June 3, 1981

You represent a Massachusetts resident, who is a shareholder in an Indiana corporation. Stockholders of the corporation have elected to be taxed federally under Subchapter S of the Internal Revenue Code. The corporation is not making any distributions from earnings to its stockholders. You inquire whether your client is entitled to a credit against his Massachusetts income taxes for taxes paid to Indiana on his share of the corporation's undistributed earnings.

A corporation whose stockholders have elected Subchapter S treatment is, for the most part, exempt from federal income taxes; but, its stockholders are subject to federal income taxation on their share of corporate earnings, whether or not distributed, and may deduct their share of any corporate net operating loss. Indiana adopts the federal treatment of Subchapter S corporations and their shareholders; Massachusetts does not. Nonresident shareholders of Indiana corporations electing Subchapter S treatment are subject to the Indiana income tax on their share of undistributed earnings which are attributable to the corporation's activities in Indiana.

Massachusetts gross income, for personal income tax purposes, is federal gross income increased in part by "amounts excluded under Subchapter S of the Code" and decreased in part by "amounts included in federal gross income under Subchapter S of the Code." (G.L. c. 62, ss. 2(a)(1)(E) and 2(a)(2)(B).) Thus undistributed earnings of the Indiana corporation are not subject to the Massachusetts personal income tax. If the corporation were to make distributions from earnings, the distributions to the Massachusetts stockholder would be taxable to him in Massachusetts, although excluded from federal gross income under Subchapter S of the Code.

General Laws Chapter 62, Section 6(a) provides a credit against income taxes of a resident for "...taxes due any other state...on account of any item of Massachusetts gross income..." with certain limitations not here relevant.

Based on the foregoing, it is ruled that a Massachusetts resident may not take a credit for income taxes due to Indiana oh his share of the corporation's undistributed earnings which is not included in his Massachusetts gross income.

Very truly yours,

/s/L. Joyce Hampers

L. Joyce Hampers

Commissioner of Revenue

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LR 81-42