(LR 84-100 is modified by TIR 99-19) October 31, 1984
Your letter of August 25, 1983, requests interpretations of several provisions of the Revenue Enforcement and Protection Program ("REAP") (St. 1983, c. 233).
I. You request a ruling with respect to the Massachusetts income tax treatment of property subject to the federal Accelerated Cost Recovery System ("ACRS"). Specifically, you inquire whether Massachusetts individual taxpayers will be entitled to the federal ACRS deduction on their 1983 returns for assets placed in service after December 31, 1980, but before January 1, 1983.
The federal Economic Recovery Tax Act of 1981 introduced ACRS for recovering the cost of property placed in service on or after January 1, 1981.
Massachusetts gross income is federal gross income with certain modifications. (G.L. c. 62, §§ 1, 2). With certain exceptions, Massachusetts allows the deductions taken from federal gross income in determining federal adjusted gross income. (G.L. c. 62, § 2(d)). Federal gross income is gross income as defined under the "Code". (G.L. C. 62, § l(d)). For taxable years 1979 through 1982 inclusive, Chapter 62 references to the "Code" applied to the Internal Revenue Code as amended on November 6, 1978. (G.L. c. 62, § l(c) as amended by St. 1979, c. 408, § 1) Thus, for taxable years 1981 and 1982, the federal ACRS deduction did not apply for Massachusetts income tax purposes. Effective for taxable years commencing on or after January 1, 1983, the word "Code" in Section l(c) of Chapter 62 is redefined to refer to the Internal Revenue Code as amended on February 1, 1983 (St. 1983, c. 233, § 11). As a result of the 1983 amendment, the Massachusetts personal income tax statute incorporated the cost recovery method rules of ACRS. Under current Massachusetts income tax law, there are no provisions which modify the federal ACRS or other depreciation deductions.
Based on the foregoing, it is ruled that for Massachusetts personal income tax purposes, for taxable years beginning on or after January 1, 1983, the Massachusetts deduction for depreciation or cost recovery for property placed in service on or after January 1, 1981, is the federal deduction for such property.
II. You request a ruling regarding the Massachusetts income tax treatment of employee stock options which for federal purposes qualify as Incentive Stock Options ("ISO's Specifically, you inquire whether Massachusetts will adopt the federal tax treatment for ISO's granted prior to 1983 which are exercised in 1983 or thereafter. Also, you inquire as to the Massachusetts tax treatment of a post-1982 disposition of ISO stock where the option was exercised in 1982 and ordinary income was recognized for Massachusetts purposes in 1982.
Section 422A, which was added to the Internal Revenue Code ("Code") by the Economic Recovery Tax Act of 1981, defines an ISO as an option granted to an individual for any reason connected with his employment by a corporation, providing the requirements of Section 422A are met. Generally, no federal tax consequences result to an employee upon the grant or exercise of an ISO. An employee will be taxed at capital gain rates when he sells ISO stock providing the holding period and other definitional requirements of Section 422A are met.
Pursuant to Section 422A(a)(1), the stock must be held for at least two years from the date the option was granted and at least one year after exercise of the option. If an employee does not meet the holding period requirements, then any gain resulting from disposition of ISO stock is treated as ordinary income. Gain for this purpose is equal to the lesser of (1) the fair market value of the stock on the date of exercise over the adjusted basis of the stock or (2) the amount realized on disposition over the adjusted basis of the stock.
With certain modifications, Massachusetts gross income is federal gross income as defined in the Code. (G. L. c.62, § 2). For taxable years 1981 and 1982, Massachusetts determined federal gross income according to the Code as amended on November 6, 1978. (G.L. c. 62, § l(c) as amended by St. 1979, c. 408, §1). Thus, the federal tax treatment of ISO's did not apply for Massachusetts income tax-purposes for those years (see Letter Ruling 82-110). Effective for taxable years commencing on or after January 1, 1983, the word "Code" in Section l(c) of Chapter 62 is redefined to refer to the Code as amended on February 1, 1983. (St.1983, c. 233, § 11). As a result of this amendment, the Massachusetts income tax statute now incorporates the provisions of the current Code pertaining to ISOs.
Massachusetts gross income is divided into Part A taxable income, which is taxed at the rate of ten percent and Part B taxable income, which is taxed at the rate five percent. 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.
Massachusetts adopts federal characterization of gain as either capital gain or ordinary income.
Under current Massachusetts income tax law, there are no provisions which. modify the federal rules for determining basis for purposes of computing gain or loss.
Based on the foregoing, it is ruled that:
1. Effective for taxable years beginning on or after January 1, 1983, where an employee exercises a stock option in 1983 or thereafter which was originally granted prior to 1983, the Massachusetts income tax treatment of the exercise of the option and the sale of the stock in 1983 and later will be the same as the federal tax treatment.
2. Upon the sale of an employee's ISO stock oft or after January 1, 1983, for purposes of determining gain for Massachusetts income tax purposes, the basis of the ISO stock will be the same as the federal adjusted basis.
3. Upon the sale of an employee' s ISO stock on or after January 1, 1983, the employee will recognize capital gain or loss for Massachusetts income tax purposes (includible in Part A. gross income) to the, extent that capital gain or loss is recognized for federal purposes, and he will recognize Part B gross income to the extent that ordinary income is recognized for federal purposes. With respect to the basis problems which can be anticipated upon the subsequent disposition of ACRS property or sale of ISO stock, there is now pending in the legislature a bill (House No. 242) which would provide for adjustments it computing Massachusetts basis. In the absence of such remedial legislation however, the federal basis must be used.
III. You inquire as to the application of the investment credit carryforward provisions to credits against corporate excise which arose prior to 1983 but are not fully allowable in 1983. You request a ruling as to the treatment of unused credit in years after 1983 where a corporation has a 1983 excise of $2,000 and investment credits, all carried forward from prior years, of $5,000.
An investment credit can be taken against the corporate excise liability of corporations classified as manufacturing, research and development, agricultural or commercial fishing corporations. (G.L. c. 63, § 31A). For taxable years ending before December 31, 1985, the credit is three percent of the cost or other basis for federal income tax purposes of qualifying tangible property, after the deduction of any federally authorized credit taken with respect to the property. (St. 1982, c. 658, § 7). For taxable years ending on or after December 31, 1985, the credit is one percent. (G.L. c. 63, § 31A(a)).
The credit for investments allowed by Section 31A cannot reduce the corporate excise to less than the minimum tax. (G.L. c. 63, § 31A(c)).
Any corporation entitled to the investment credit under Section 31A may carry over that portion of its credit which exceeds the excise to apply against its excise for the next three taxable years. (G.L. c. 63, § 31A(g)).
A corporation is entitled to a credit against the excise for operating an eligible business facility in a poverty area. (G.L. c. 63, § 38E). The amount of this credit is based on the assessed valuation of the poverty area real estate.
Effective July 1, 1983, and applicable to taxable- years beginning on or after January 1,. 1983, the maximum amount of credits under Sections 31A and 38E, otherwise allowable to a corporation, shall not exceed fifty percent of its excise tax liability. (G.L. c. 63, S 32C). A corporation may carry over and apply to its excise for any subsequent taxable year the portion of those credits which were disallowed by Section 32C.
Based on the foregoing, it is ruled that where a corporation has a 1983 excise of $2,000 and investment credits, all carried forward from prior years of $5,000, (a) the use of investment credits against corporate excise is limited to $1,000 for 1983, (b) the $1,000 credit disallowed by Section 32C may be carried forward and applied against the corporate, excise in any subsequent taxable year, and (c) the carryforward of the remaining credits of $3,000 is limited to the three taxable years subsequent to the year in which the credit was generated, except that any portion of the $3,000 denied by the fifty percent limitation in General Laws Chapter 63, Section 32C, in a subsequent taxable year may be carried forward indefinitely.
IV. You inquire whether General Laws Chapter 62B, Section 12A which requires any agency or subdivision of the Commonwealth to withhold a tax of three and one-half percent from any payment made to a person for personal services, is applicable to payments made to a partnership. Because certain administrative difficulties are now under consideration, the Department of Revenue has not implemented withholding on personal services contracts at this time.
V. You inquire whether a corporation is subject to penalties for underpayment of quarterly estimated excise where the underpayment is due to changes in Massachusetts tax law limiting the use of investment credits.
All corporations which reasonably estimate their corporate excise to be in excess of $1,000 are required to file a declaration of estimated tax on or before the fifteenth day of the third month of the taxable year. (G.L. c.63B, §§ 2, 3). The estimated tax is required to be paid in quarterly installments of thirty percent, twenty-five percent, twenty-five percent and twenty percent respectively. (G.L. c. 63B, § 4).
However, if the requirements of Chapter 63B (that is, expected tax liability exceeds $1,000) are first met after the last day of the second month and before the first day of the twelfth month, the declaration must be filed by the fifteenth day of the twelfth month. (G.L. c. 63B, § 3). For failure to file a declaration of corporate estimated tax, a penalty of five percent of the tax due for the taxable year will be assessed. (G.L. c. 63B, § 8). The Commissioner may waive such penalty, if it is shown -to his satisfaction that failure to file was due to reasonable cause and not .to willful neglect. (G.L. c. 63B, § 8).
Any portion of the underpayment of an installment of the estimated tax by a corporation is subject to an addition to the tax of eighteen percent per annum for the period of underpayment. (G.L. c. 63B, § 6).
The addition to the tax with respect to underpayment of any installment is not imposed if the total amount of all payments of estimated tax made on or before the last date prescribed for payment of such installment equals or exceeds the amount which would have been required to be paid on or before such date if the estimated tax equaled the lesser of:
(1) the -tax shown on the return for the preceding taxable year if a full 12-month year, or
(2) -the tax computed on the rates applicable to the taxable year but based on the facts shown on the return for, and the law applicable to, the preceding taxable year. (G.L. c. 63B, § 6(b)).
Effective July 1, 1933, the law relating to investment credits was changed to limit a corporation to a maximum amount of credit in any one taxable year of fifty percent of its corporate excise liability. (G.L. c. 63, § 32C, as added by St. 1983, c. 233, § 43). Section 32C is applicable to taxable years beginning on or after January 1, 1983. You inquire whether penalties will be assessed in the situation where a corporation made no first or second quarter estimated tax payments for 1983 because its investment credit exceeded the tax. The following rulings are based on the assumption that the corporation operates on a calendar year basis. For corporations operating on a fiscal year basis, consideration must be given to the fact that the first and/or second quarter estimated tax payments may have become due after July 1, 1983, the effective date of the change in the law.
Based on the foregoing it is ruled that:
1. If the limitation of Section 32C results in an expected tax liability exceeding $1,000 before the first day of the twelfth month of the taxable year, the declaration of estimated tax must be filed by the fifteenth day of the twelfth month.
2. A corporation which made no first or second quarter estimated tax payments for 1983 because its investment credit exceeded its corporate excise will not be assessed a penalty for underpayment of installments if the estimated tax paid equaled the tax computed on the rates applicable to the taxable year but based on the facts shown on the return for, and the law applicable to, the preceding tax year.
Very truly yours,
Commissioner of Revenue