June 21, 1983
You inquire about the Massachusetts income tax treatment of interest received on an installment obligation where the taxpayer elects, for federal income tax purposes, to report the gain on a sale in full in the year of sale.
Massachusetts General Laws Chapter 62, Section 2, define s Massachusetts gross income as federal gross income with certain modifications. Interest on installment obligations is included in federal gross income. (I.R.C. § 61(a)(4)). A non-resident who elects for federal and state income tax purposes to pay tax on an installment basis on a gain from the sale of Massachusetts real estate is subject to Massachusetts income tax on the interest earned on the installment obligation note. Horst v. Commissioner of Revenue, 389 Mass. 177 (1983).
Section 5A of Chapter 62, dealing with the Massachusetts income taxation of non-residents, provides that Massachusetts gross income shall be determined solely with respect to items of gross income from sources within the Commonwealth. Items of gross income from sources within the Commonwealth are items of gross income derived from or effectively connected with any trade or business in, or derived from the ownership of any interest in real or tangible personal property located in, the Commonwealth.
Based on the foregoing it is ruled that:
1. All interest received by a resident on an installment obligation is includible in his Massachusetts gross income in the year of receipt.
2. Interest received by a non-resident on an installment obligation is includible in his Massachusetts gross income in the year of receipt if it is directly traceable to the sale of real or tangible personal property located in Massachusetts.
Very truly yours,
/s/Ira A. Jackson
Ira A. Jackson
Commissioner of Revenue