You have requested a ruling on behalf of ("Bank"), concerning questions you say are raised by Technical Information Release 87-15, ("TIR 87-15"), issued by the Department on December 17, 1987, entitled "Accounting Method Changes by Banks and Utilities Required Under the Tax Reform Act of 1986".
You ask whether the Bank may use for Massachusetts bank excise a method of accounting different from the one it uses for federal tax purposes. You also ask whether the Bank must apply the same provisions of the Internal Revenue Code ("Code") for determining its Massachusetts bank excise that it uses for federal tax purposes when it changes from cash to the accrual method of accounting under Code § 448. In particular, your question concerns whether the Bank must make the same adjustments to income under Code § 481(a) and report those adjustments using the same timing under Code § 448(d)(7) for Massachusetts bank excise as is required of the Bank for federal tax purposes.
For the reasons stated below, we rule that:
- The Bank must use the same method of accounting for Massachusetts purposes as it uses for federal purposes; and
- A Bank that changes from cash to the accrual method of accounting as required under Code § 448 must apply the same Code provisions it uses for federal tax purposes to determine its Massachusetts bank excise, including those adjustments mandated by Code §§ 481(a), (c), 448(d)(7), and Rev. Proc. 84-74, as discussed in TIR 87-15.
As indicated in your letter, the Bank must change from cash to the accrual method of accounting under Code § 448 for federal purposes. However, the Bank contends that for Massachusetts purposes, it is not required to change its method of accounting. We disagree.
The Tax Reform Act of 1986 (P.L. 99-514) amended the Code by adding new Code § 448, which requires certain taxpayers with average annual gross receipts (calculated as set out in Code § 448(c)) of more than $5 million to change from the cash to the accrual method of accounting in their first tax year beginning after 1986. Banks are among the taxpayers covered by this new Code requirement. Banks making the Code § 448 change must adjust their federal income for the year of the change to prevent amounts from being duplicated or omitted as a result of the change in accounting method. See I.R.C. §§ 448 (d)(7), 481(a). Code § 448(d)(7)(C)(i) limits the period for spreading out Code § 481 adjustments to a maximum of four years.
Under Massachusetts law, "Banks," as defined in G.L. c. 63, § 1, are subject to the bank excise imposed by G.L. c. 63, §§ 1, 2. Those provisions require banks to pay an excise of 12.54% measured by the bank's net income. G.L. c. 63, § 2. "Net income" is defined as "gross income from all sources, without exclusion, for the taxable year, with deductions, but not credits, allowable under the provisions of the Federal Internal Revenue Code, as amended and in effect for the taxable year." G.L. c. 63, § 1. (The definition continues by disallowing particular deductions otherwise permitted under the Code).
The language of G.L. c. 63, § 1 is quite clear. The reference to the Code within the definition indicates the legislative intent to incorporate Internal Revenue Code provisions and principles, with certain modifications, into the bank excise.
Code §446 requires a taxpayer to use the method of accounting that most clearly reflects its income. Ordinarily, this means the consistent application of generally accepted accounting principles in a trade or business. Accordingly, a taxpayer that uses the cash method of accounting in computing gross income from its trade or business must use the cash method of accounting in computing expenses of such trade or business. Similarly, a taxpayer that uses the accrual method of accounting in computing business deductions must use the accrual method of accounting in computing items affecting gross income. To allow a different combination of methodologies for the computation of income and deductions would improperly match the income and related expenses under accepted trade and business standards.
Since the statutory language of G.L. c. 63, § 1 references the Code, as amended and in effect for the taxable year, the statute incorporates the most current provisions of the Code, including accounting rules, with respect to the determination of that income. Therefore, the change in accounting method under Code § 448, and the applicable adjustments under Code § 481(a), are automatically adopted by Massachusetts for bank excise purposes.
Very truly yours,
Stephen W. Kidder
Commissioner of Revenue
May 19, 1989