October 24, 1984

In your letter dated June 20, 1984, you inquire about the Massachusetts income tax consequences of payments to a Keogh plan by a self-employed resident of this Commonwealth.

Massachusetts General Laws Chapter 62, Section 2, defines "gross income" as federal gross income with certain modifications. Section 404(a) of the Internal Revenue Code provides for a deduction from federal gross income for certain amounts contributed by an employer, on behalf of an employee, to a qualified pension, profit sharing, or annuity plan, or under other qualified plans deferring the receipt of compensation. Under Code sections 404(a)(8), 401(c)(1), and 401(c)(3), a self-employed individual or owner-employee is treated as both the employer and an employee of his or her business for the purpose of this deduction. Contributions to a Keogh plan by a self-employed individual or owner-employee are governed by Code Section 404.

General Laws Chapter 62, Section 2(d), provides, in part, that "Part B adjusted gross income shall be the Part B gross income less the deductions allowable under Sections 62 and 404 ... of the Code, provided, however, the following deductions shall not be allowed: ... In the case of an individual who is an employee within the meaning of Section 401(c)(1) of the Code, the deductions allowed by Section 404..'. of the Code to the extent attributable to contributions made on behalf of such individual." G.L. c.62, § 2(d)(7). Thus, Section 2(d)(7) specifically disallows any Massachusetts income tax deduction for plan contributions made under Code Section 404.

In view of the fact that a contribution to a Keogh plan is a contribution under Code Section 404, it is hereby ruled that a contribution to a Keogh plan by a self-employed individual or owner-employee is not deductible and must be reported as an item of Massachusetts gross income.

Your letter further requests a statement as to the Massachusetts income tax consequences resulting from a lump sum distribution from a Keogh plan to a non-resident. You state that all contributions to that plan arose out of income resulting from self-employment while you were a resident of Massachusetts, and that all interest on the amounts contributed to that plan accrued in a Massachusetts bank up to the time of distribution. When the lump sum distribution was made you had established residence in another state.

Massachusetts General Laws Chapter 62C, Section 6(a) requires that every non-resident must file a non-resident income tax return if, during the taxable year, he or she received gross income from sources within the Commonwealth in excess of (1) $2,000, or, (2) the personal exemption allowed under Section 3 of Chapter 62, whichever amount is less.

Income received by a non-resident as a lump sum distribution from a qualified employee benefit plan (including a Keogh plan) is an item of Part B gross income from sources within the Commonwealth to the extent that it is effectively connected to past or present employment carried on by the non-resident in the Commonwealth. G.L. c.62, § 5A; Technical Information Release, 79-1. Under G.L. c.62, S 2(a)(2)(F) however, payments from pensions, annuities or deferred payment plans described in Code Section 404 are deductible from gross income up to the aggregate amount of the deductions allowed federally, but only to the extent that such amounts were reported on a Massachusetts tax return and were subjected to tax under Chapter 62. Technical Information Release, 78-1.

The Massachusetts income tax treatment of a lump sum distribution to a non-resident from a qualified Keogh plan funded with income derived from sources within the Commonwealth is as follows:
1. The distribution is subject to taxation in Massachusetts as Part B gross income in the year of receipt; and

2. A deduction from Part B gross income is available for any portion of the distribution which, when contributed to the plan, was deductible from federal gross income and which was reported and taxed under Chapter 62.

We express no opinion as to what amount of the lump sum distribution, if any, is subject to taxation in the state in which you were living when you received the distribution.

Very truly yours,

Commissioner of Revenue

IAJ:HMP:loc

LR 84-97