September 19, 1984

You became a Massachusetts resident in late 1982 following your retirement after 28 years of employment with the Company in Saudi Arabia. You began receiving social insurance payments from Saudi Arabia in early 1983.

The Saudi Arabian social insurance program ("Program") was begun in 1969. The program provided that you would contribute five percent of your gross wages and that your employer would contribute eight percent of your gross wages each month into the system. You inquire as to the Massachusetts income tax treatment of the social insurance payments you are receiving.

Massachusetts gross income is federal gross income with certain modifications not relevant here (G.L. c. 62, §§ 1, 2). Federal gross income means all income from whatever source derived, including any amount received as an annuity. (I.R.C. §§ 61(a), 72(a)).

For federal income tax purposes, any payment from the Saudi Arabian social insurance program is treated as an amount received as an annuity and is included in federal gross income.

If, under the Program, the total amount you will receive during a three-year period beginning on the date the annuity is first paid is equal to or more than the amount you contributed to the Program, the payments you receive will not be included in your federal gross income until you have recovered your contributions. Thereafter, all amounts received as payments under the program will be included in your gross income. (IRC, § 72(d)(1)).

If you will not recover your contributions within the three year period, then you must include a portion of each Program payment in your federal gross income based upon the amount you invested and the total amount you expect to receive. (I.R.C. § 72(b)).

Accordingly, for Massachusetts income tax purposes, you must include in Massachusetts gross income the same amount of payments from the Program that you included in your federal gross income. This amount will be included in Massachusetts Part B taxable income and taxed at the rate of five percent.

Very truly yours,

Commissioner of Revenue

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LR 84-80