July 13, 1983
You inquire about the Massachusetts income tax treatment of a lump-sum distribution from a qualified pension or profit-sharing plan where the taxpayer elects, for federal purposes, ordinary income treatment of that portion of the distribution which would otherwise be taxed as capital gain.
Massachusetts General Laws Chapter 62, Section 2, defines Massachusetts gross income as federal gross income with certain modifications. Section 402(a) of the Code provides that amounts actually distributed or made available from a qualified trust to any distributee are taxable to him in the year of distribution under Section 72 of the Code. Section 402(a)(2) provides that the portion of a lump-sum distribution which is attributable to pre-1974 participation in a qualified plan shall be treated as capital gain. However, an election may be made under Section 402(e)(4)(L) to treat the entire distribution as ordinary income.
Taxation of part of a lump-sum distribution from a pension plan at a 5% rate, while taxing another part of the same distribution at 9%, has been held to violate Article 44 of the Amendments to the Constitution of the Commonwealth. Daley v. State Tax Commission, 376 Mass. 861 (1978). Article 44 provides in part that taxes shall be levied at a uniform rate upon income derived from the same class of property.
A taxpayer may elect to average the portion of a lump-sum distribution attributable to post-1973 plan participation, including the pre-1974 portion if the taxpayer has elected to treat it as attributable to post-1973 plan participation, over a 10 year period and separately calculate the tax on the distribution. (I.R.C. § 402(e)). Amounts so averaged are deductible from federal gross income to the extent included therein. (I.R.C. § 402(e)(3)). General Laws Chapter 62, Section 2(d)(10), includes in Massachusetts adjusted gross income the ordinary income portion of a lump-sum distribution which is deductible from federal gross income under Section 402(e)(3) of the Code.
Based on the foregoing it is ruled that the total amount of a lump-sum distribution from a pension or profit-sharing plan, other than any amount which has previously been subjected to income taxation under General Laws Chapter 62, is includible in Massachusetts Part B gross income in the year in which it is received.
Very truly yours,
/s/Ira A. Jackson
Ira A. Jackson
Commissioner of Revenue