830 CMR: DEPARTMENT OF REVENUE
830 CMR 62.00: INCOME TAX
830 CMR 62.00 is amended by adding the following section:
830 CMR 62.17A.1: Massachusetts Taxation of S Corporations and Their Shareholders

(1) General.

(a) Purpose of Regulation. This regulation, 830 CMR 62.17A.1, sets forth rules for the Massachusetts tax treatment for taxable years beginning after December 31, 1985, of domestic S corporations, foreign S corporations, and corporate trusts treated as S corporations for federal tax purposes, and the resident and non‑resident shareholders or beneficiaries of these entities.

(b) Organization. This regulation, 830 CMR 62.17A.1, is organized as follows:

1. General
2. Definitions
3. Tax Treatment of Qualified S Corporations
4. Temporary Election Out of Massachusetts S Corporation Treatment
5. Taxation of Resident Shareholders of Qualified S Corporations
6. Taxation of Non‑Resident Shareholders of Massachusetts S Corporations
7. Part‑Year Residents
8. Basis Changes of S Corporation Stock or Indebtedness
9. Payment of Taxes
10. Actual Distributions
11. Qualification for S Corporation Treatment in Massachusetts and Imposition of the Net Income Measure of the Corporate Excise; Computation of Total Receipts
12. Rules Applied When S Corporations Fail to Qualify for S Corporation Treatment in Massachusetts

(c) Qualification for S Corporation Treatment. An S corporation qualifies for treatment as an S corporation in Massachusetts if it meets the requirements set out below and at 830 CMR 62.17A.1(11).

1. For taxable years beginning after December 31, 1985 and ending before December 31, 1988, an S corporation qualifies for treatment as an S corporation in Massachusetts if it has not made a temporary election out of S corporation treatment in Massachusetts under the rules at 830 CMR 62.17A.1(4).

2. For taxable years ending on or after December 31, 1988 and before December 31, 1989, to qualify for treatment as an S corporation in Massachusetts, an S corporation must have total receipts in the taxable year of less than six million dollars. If an S corporation has total receipts of six million dollars or more, then it does not qualify for treatment as an S corporation in Massachusetts and its shareholders will not be treated as S corporation shareholders for Massachusetts income tax purposes. The regulation provides special rules allowing entities which intermittently have total receipts exceeding the six million dollar limitation to average their total receipts over a longer period in order to qualify for S corporation treatment in Massachusetts, provided that their total receipts for the current taxable year are less than nine million dollars.

3. For taxable years ending on or after December 31, 1989, an S corporation, other than a corporate trust, qualifies for treatment as an S corporation in Massachusetts regardless of its total receipts. Also, such an S corporation is subject to the corporate excise imposed by M.G.L. c. 63, as explained at 830 CMR 62.17A.1(3).

4. For taxable years ending on or after December 31, 1989, a corporate trust that is an S corporation for federal income tax purposes, does not qualify for treatment as an S corporation in Massachusetts. Instead, a corporate trust is subject to tax at the entity level under the provisions of M.G.L. c. 62, § 8.

5. Also, the regulation provides special rules for combining the total receipts of S corporations with more than fifty percent common stock ownership that are engaged in a unitary business in order to determine whether each entity qualifies for treatment as an S corporation in Massachusetts (for taxable years ending on or after December 31, 1988 and before December 31, 1989) and whether each entity is subject to the net income measure of the corporate excise imposed by M.G.L. c. 63 (for taxable years ending on or after December 31, 1989). Two or more such S corporations must combine their total receipts, as explained at 830 CMR 62.17A.1(11)(e). In addition, if the Commissioner finds that an S corporation and another entity or entities, with majority direct or indirect ownership by common owners, are engaged in a unitary business with an intent to reduce the total receipts of the S corporation, the Commissioner may aggregate the total receipts of the S corporation and the other entity or entities, as explained at 830 CMR 62.17A.1(11)(f).

(d) Taxation of Qualified S Corporations and Their Shareholders. Once the entity is treated as a qualified S corporation in Massachusetts, the items of income, loss, deductions, or credits are calculated under M.G.L. c. 62 in the same manner as calculated by a partnership. The regulation includes provisions for Massachusetts S corporations with non‑resident shareholders to apportion income from business activities taxable in other states. It describes the rules for shareholders of a qualified S corporation to adjust the basis in their stock. It also explains the procedure for electing out of S corporation treatment for tax years ending on or before December 31, 1987.

(2) Definitions.

Accumulated adjustments account, an account similar to that described in Code s. 1368(e) (as amended and in effect in M.G.L. c. 62, § 1(c)) which is an account of a qualified S corporation in Massachusetts adjusted for the most recent period during which the entity has been qualified as an S corporation in Massachusetts. The adjustments shall be made in a manner similar to the adjustments described in 830 CMR 62.17A.1(8)(b), below, (except that no adjustment shall be made for income and related expenses exempt from tax under M.G.L. c. 62, and the phrase "but not below zero" in 830 CMR 62.17A.1(8)(b) shall be disregarded).

Average annual total receipts, the aggregate total receipts of an S corporation, annualized if applicable, for the consecutive three taxable years immediately preceding the S corporation's current taxable year, divided by three. For an S corporation with less than three taxable years preceding its current taxable year, the average annual total receipts is the aggregate total receipts, annualized if applicable, for each preceding taxable year, divided by the number of preceding taxable years.

Code, the Internal Revenue Code of the United States. Hereinafter the Code (as amended and in effect for the taxable year) refers to the current Code as applied under M.G.L. c. 63. The Code (as amended and in effect in M.G.L. c. 62, § 1(c)) refers to the Code used in applying the provisions of M.G.L. c. 62 in computing an individual's taxable income.

Commissioner, the Commissioner of Revenue or the Commissioner's representative duly authorized to perform the duties of the Commissioner.

Distributive share, the shareholder's aggregate daily portion of each item of income, loss, deduction, or credit determined by the shareholder's percentage of ownership of shares of stock in an S corporation qualified to be treated as an S corporation in Massachusetts during the taxable year.

DOR, the Massachusetts Department of Revenue.

Massachusetts basis, the shareholder's beginning Massachusetts basis in S corporation stock is the basis for federal income tax purposes on the last day of the last S corporation taxable year beginning before January 1, 1986. The beginning basis is adjusted annually in the manner described in Code § 1367, as amended and in effect in M.G.L. c. 62, § 1(c), using the S corporation's items of income, loss, or deduction computed in accordance with M.G.L. c. 62. If an entity elects to be an S corporation on or after January 1, 1986, then the beginning Massachusetts basis shall be the same as the federal basis at the time of the election, adjusted annually as described in the previous sentence. If the S corporation elects out of Massachusetts S corporation treatment under the temporary election rules of 830 CMR 62.17A.1(4), below, the beginning Massachusetts basis will be computed on the last day of the taxable year preceding the taxable year in which the entity is treated as a qualified S corporation for Massachusetts tax purposes. If in a taxable year an S corporation fails to qualify for treatment as an S corporation in Massachusetts under 830 CMR 62.17A.1(11), below, the Massachusetts basis shall not be adjusted as described in Code § 1367, as amended and in effect in M.G.L. c. 62, § 1(c), except with respect to cash distributions and disallowed losses and deductions as permitted under the post termination transition year rules of 830 CMR 62.17A.1(12)(a).

Massachusetts earnings and profits, the current and accumulated earnings and profits of an S corporation for any taxable year determined under the rules at 830 CMR 62.17A.1(10)(c).

Massachusetts S corporation, for taxable years beginning after December 31, 1985, an S corporation under Code § 1361 (as amended and in effect for the taxable year) which is a domestic business corporation organized under M.G.L. chs. 156, 156A, or 156B, a foreign corporation doing business in Massachusetts which is organized for the purposes described in M.G.L. chs. 156, 156A, or 156B, or a corporate trust doing business in Massachusetts and which qualifies to be treated as an S corporation in Massachusetts under the rules of 830 CMR 62.17A.1(11), below. Domestic and foreign manufacturing corporations and research and development corporations described in M.G.L. c. 63, § 38C and § 42B are eligible for treatment as a Massachusetts S corporation. Corporations which are classified as security corporations under M.G.L. c. 63, § 38B, or as public utility corporations under M.G.L. c. 63, § 52A, are specifically not eligible for treatment as Massachusetts S corporations and their shareholders are not taxable as Massachusetts S corporation shareholders. If a security corporation classification is revoked retroactively, the corporation becomes eligible for Massachusetts S corporation treatment and may file amended returns when qualified as an S corporation for the taxable years for which the statute of limitations for assessment of a tax under M.G.L. c. 62C, § 26 has not run. S corporations which have elected out of Massachusetts S corporation tax treatment are excluded during the period of such election.

Non‑Qualifying S corporation, an S corporation which is not a qualified S corporation, as defined below.

Qualified S corporation, for taxable years beginning after December 31, 1985 and ending before December 31, 1988, an S corporation, as defined below, whether or not subject to tax in Massachusetts, that has not made a temporary election out of S corporation treatment in Massachusetts under the transition rules at 830 CMR 62.17A.1(4). For the taxable year ending on or after December 31, 1988, and before December 31, 1989, an S corporation, as defined below, whether or not subject to tax in Massachusetts, with less than six million dollars in total receipts for the current taxable year, or with average annual total receipts of less than six million dollars and total receipts for the current taxable year of less than nine million dollars. For taxable years ending on or after December 31, 1989, an S corporation, as defined below, whether or not subject to tax in Massachusetts, but not including corporate trusts. See 830 CMR 62.17A.1(1)(c), (11).

S corporation, an entity described at Code § 1361, as amended and in effect for the taxable year.

Shareholder, the owner of shares of stock in a foreign or domestic corporation. In applicable provisions the term shareholder includes the beneficiary of a corporate trust.

Total receipts, gross receipts or sales less returns and allowances. Total receipts include service charges, carrying charges, and any other charges included in sales prices. Total receipts also include sales taxes and other excises where the sales tax or excise is imposed on the taxpayer. Total receipts do not include amounts of sales taxes and other excises received by the taxpayer where the sales tax or excise is imposed on the purchase of the good or service and the taxpayer merely collects and remits the tax to the taxing authority. Total receipts also include dividends, interest, all tax‑exempt income, royalties, net capital gains, net short‑term capital gains, gross rental income, reimbursed costs, and all similar items of earnings or revenue, including, but not limited to, items includible in an entity's gross income under Code § 61 under its usual method of accounting for federal income tax purposes. Total receipts include both Massachusetts source income and non‑Massachusetts source income. If an S corporation is a partner in a partnership, then the S corporation must include its distributive share of the partnership's total receipts in the calculation of its total receipts. The cost of goods sold or the cost of operations is not deducted in determining total receipts.

(3) Tax Treatment of Qualified S Corporations.

(a) General Rule. Except as otherwise provided in 830 CMR 62.17A.1(3)(b), below, the income of a qualified S corporation shall not be subject to the net income measure of the corporate excise imposed by M.G.L. c. 63. Each shareholder shall be subject to the personal income tax imposed by M.G.L. c. 62 on the shareholder's distributive share of the qualified S corporation's items of Massachusetts income, loss, or deduction as provided in Code Subchapter S (as amended and in effect in M.G.L. c. 62, § 1(c)) and as such items would be taxed under M.G.L. c. 62 if realized directly by the shareholder. Shareholders shall be subject to the personal income tax under M.G.L. c. 62 regardless of whether the qualified S corporation is subject to the net income measure of the corporate excise under M.G.L. c. 63.

(b) Imposition of Tax Under the Income Measure of the Corporate Excise. A Massachusetts S corporation that is subject to tax under M.G.L. c. 63, § 32 or § 39, is subject to the income measure of the corporate excise under the following rules if in a taxable year beginning after December 31, 1985, it receives income that is taxable to the S corporation for federal purposes, or, if in a taxable year ending on or after December 31, 1989, it has total receipts of six million dollars or more.

1. Income Taxed to the S Corporation for Federal Purposes. For all taxable years beginning after December 31, 1985, when income is taxed to a Massachusetts S corporation at the federal level for the taxable year, it shall be included in the net income measure of the corporate excise of a Massachusetts S corporation subject to tax under M.G.L. c. 63, § 32 or § 39. The S corporation shall be liable for the net income measure of the corporate excise at the rate specified in M.G.L. c. 63, § 32 or § 39. For example, for taxable year 1986, certain capital gains in excess of $25,000 are taxable to a Massachusetts S corporation under Code § 1374 (as amended and in effect for the taxable year). Where such gains are taxable to the Massachusetts S corporation at the federal level, they shall be included in the net income measure of the Massachusetts corporate excise under M.G.L. c. 63, § 32D(a). The S corporation is liable for the net income measure of the corporate excise with respect to that income at the rate of 9.5 percent. Each shareholder shall be taxed on the shareholder's distributive share of the Massachusetts S corporation's gain as taxable under M.G.L. c. 62, reduced as described in Code § 1366(f) for federal and state taxes paid by the Massachusetts S corporation; and

2. Income Received by S Corporations with Total Receipts of Six Million Dollars or More in a Taxable Year. For taxable years ending on or after December 31, 1989, a Massachusetts S corporation that has total receipts of six million dollars or more, computed by taking into account the rules for combining and aggregating total receipts at 830 CMR 62.17A.1(11)(e), (f), must determine its net income under the subchapter C provisions of the Code as though the corporation were a C corporation. The Massachusetts S corporation must include the net income determined in this manner in the net income measure of the corporate excise, and is liable for a tax with respect to that net income at the applicable rate specified in M.G.L. c. 63, § 32D(b). The rate depends on the amount of the Massachusetts S corporation's total receipts. For example, for taxable year 1989 the applicable rate is 3 percent of net income determined under the provisions of M.G.L. c. 63, if the Massachusetts S corporation's total receipts are six million dollars or more but less than nine million dollars. The applicable rate is 4.5 percent of net income determined under the provisions of M.G.L. c. 63, if the Massachusetts S corporation's total receipts are nine million dollars or more.

3. Deduction of Net Operating Losses Sustained in Other Taxable Years.

a. A Massachusetts S corporation with total receipts of six million dollars or more may deduct net operating losses sustained in other taxable years ending on or after December 31, 1989, to the extent the deduction would be allowed to a C corporation under the provisions of the first or second paragraph of M.G.L. c. 63, § 30.5(b)(ii), (applicable to taxable years ending on or after December 31, 1989), for purposes of computing the S corporation's liability under M.G.L. c. 63, § 32D(b) and 830 CMR 62.17A.1(3)(b)2. A Massachusetts S corporation may not deduct any net operating losses sustained in taxable years ending before December 31, 1989.

b. Subject to the provisions of 830 CMR 62.17A.1(3)(b)3.c., d., below, a Massachusetts S corporation with total receipts of less than six million dollars that sustains a deductible net operating loss in a taxable year ending on or after December 31, 1989, may carry the loss forward to taxable years in which the corporation is subject to the net income measure of the corporate excise.

c. A loss sustained in any taxable year may not be carried forward more than five taxable years from the taxable year in which it is sustained, including short taxable years and taxable years in which the S corporation has total receipts of less than six million dollars.

d. A Massachusetts S corporation that receives income taxed to the S corporation for federal purposes may not deduct net operating losses from that income for purposes of computing its tax liability under M.G.L. c. 63, § 32D(a) and 830 CMR 62.17A.1(3)(b)1.

4. Separate Computation Required. A Massachusetts S corporation with total receipts of six million dollars or more that receives income taxed to the S corporation for federal purposes must compute its tax liability under M.G.L. c. 63, § 32D(a) and 830 CMR 62.17A.1(3)(b)1., using a 9.5 percent tax rate, and then separately compute its tax liability under M.G.L. c. 63, § 32D(b) and 830 CMR 62.17A.1(3)(b)2., using a 3 or 4.5 percent tax rate (depending on the amount of the corporation's total receipts). The Massachusetts S corporation must include income taxed to the S corporation for federal purposes in its total receipts to determine whether total receipts are six million dollars or more. However, income taxed to the S corporation for federal purposes is not included in net income and is not subject to tax under M.G.L. c. 63, § 32D(b) and 830 CMR 62.17A.1(3)(b)2.

(c) Non‑income Measure of the Corporate Excise. A Massachusetts S corporation that is subject to tax under M.G.L. c. 63, § 32 or § 39 for the taxable year shall be liable for the non‑income measure of the corporate excise described at M.G.L. c. 63, § 32(a) or § 39(a). The corporation is liable for the minimum excise tax defined at M.G.L. c. 63, § 32(b) or § 39(b), if applicable.

(d) Credits Against the Corporate Excise. Credits allowable against the corporate excise under M.G.L. c. 63 may be applied against either the non‑income or income (if applicable) measure of the excise, to the extent of the limitations in M.G.L. c. 63, § 32C. For example, the investment tax credit in M.G.L. c. 63, § 31A, and business facility credit in M.G.L. c. 63, § 38E, are credits which can be applied against the corporate excise. These credits cannot be passed through to the shareholder to be applied against the shareholder's income tax.

(e) Corporate Trusts. An S corporation that is a corporate trust subject to tax under M.G.L. c. 62, § 8, is taxable as follows:

1. For taxable years beginning after December 31, 1985, and ending before December 31, 1989, when an S corporation that is a corporate trust receives income that is taxed to the S corporation for federal purposes, the income is included in the corporate trust's Massachusetts gross income and is subject to tax under M.G.L. c. 62, § 8.

2. For taxable years ending on or after December 31, 1989, a corporate trust that is an S corporation for federal income tax purposes, does not qualify for S corporation treatment in Massachusetts, regardless of its total receipts. Instead, the corporate trust is subject to tax at the entity level under the provisions of M.G.L. c. 62, § 8.

(f) Return Requirements.

1. Massachusetts S Corporations Subject to Tax Under M.G.L. c. 63, § 32 or § 39. A Massachusetts S corporation subject to tax under M.G.L. c. 63, § 32 or § 39 must file Massachusetts Form 355A or B and Schedule S to provide information on the corporate excise and on the shareholders' distributive shares of items of Massachusetts income, loss, deduction, or credit. It may not file Form SBC with Schedule S. The return shall be due on the fifteenth day of the third month following the close of the corporation's taxable year or on the date determined under a valid extension of time for filing a return.

In addition, a Massachusetts S corporation must notify, no later than the due date of the return (including extensions), each shareholder of the shareholder's distributive share of the qualified S corporation's items of income, loss, or deduction taxable to the shareholder under M.G.L. c. 62, including the shareholder's share of any tax paid by the qualified S corporation which is allowable as a credit under M.G.L. c. 62, § 6(a). The shareholder must attach to the shareholder's Schedule F a copy of the information from the qualified S corporation listing the amount of the shareholder's distributive share of each tax paid by the qualified S corporation for which a credit is allowable under M.G.L. c. 62, § 6(a) as well as the name of the government to which each tax was paid.

2. Massachusetts S Corporations that are Corporate Trusts.

a. For all taxable years ending on or after December 31, 1985 and before December 31, 1989, a corporate trust that is doing business in Massachusetts and that is a qualified S corporation shall file Massachusetts Form 3F and Schedule S to provide information on the beneficiaries' distributive shares of items of Massachusetts income, loss, deduction, or credit. The return shall be due on the fifteenth day of the fourth month following the close of the corporate trust's taxable year or on the date determined under a valid extension for filing of a return.

b. For taxable years ending on or after December 31, 1989, a corporate trust doing business in Massachusetts shall file Massachusetts Form 3F. The return shall be due on the fifteenth day of the fourth month following the close of the corporate trust's taxable year or on the date determined under a valid extension for filing of a return.

3. Massachusetts Shareholders of Qualified S Corporations Not Subject to Tax in Massachusetts. For taxable years ending on or after December 31, 1988, and before December 31, 1989, a Massachusetts shareholder of a qualified S corporation that is not subject to tax in Massachusetts must file a Schedule SQ, signed by a corporate officer, containing the S corporation's name, federal identification number, and address of principal place of business. The Schedule SQ must be filed with the Massachusetts Department of Revenue, P.O. Box 7025, Boston, MA 02204 by the due date of the S corporation's federal income tax return, including extensions. The Schedule SQ must be attached to the shareholder's personal income tax return as evidence that the shareholder is entitled to be treated as an S corporation shareholder in Massachusetts. A Schedule SQ need not be filed for taxable years ending on or after December 31, 1989.

(g) Accounting Method and Taxable Year.

1. Notwithstanding any provisions to the contrary contained in this regulation, 830 CMR 62.17A.1, an S corporation that adopts or elects a method of accounting under the provisions of the Code, as amended and in effect for the taxable year, is deemed to have adopted or elected the same method of accounting for Massachusetts. Neither qualification or disqualification of an entity for S corporation treatment in Massachusetts nor total receipts exceeding six million dollars affects the proper method of accounting for the entity.

2. Notwithstanding any provisions to the contrary contained in this regulation, 830 CMR 62.17A.1, an S corporation that adopts or elects a taxable year under the provisions of the Code, as amended and in effect for the taxable year, is deemed to have adopted or elected the same taxable year for Massachusetts. Neither qualification or disqualification of an entity for S corporation treatment in Massachusetts nor total receipts in excess of six million dollars affects the proper taxable year of the entity.

(4) Temporary Election Out of Massachusetts S Corporation Treatment.

(a) General Rule. For taxable years beginning on or after January 1, 1986 and ending on or before December 31, 1987, a corporation or corporate trust that meets the requirements of this section, 830 CMR 62.17A.1(4), may elect, under St. 1986, c. 488, § 72, on behalf of itself and its shareholders or beneficiaries, to be taxed pursuant to the relevant General Laws in effect prior to the amendments to M.G.L. c. 62, § 2(a)(1), (2), and (d), § 8(b), § 17A and M.G.L. c. 63, § 32D, effective January 23, 1987.

(b) Availability of Election Out. The election out of Massachusetts S corporation treatment is available for each tax year of the S corporation and its shareholders beginning on or after January 1, 1986, and ending on or before December 31, 1987. A separate election must be made for each available tax year for which the S corporation and its shareholders want to elect out of Massachusetts S corporation treatment. Once an entity is treated as a Massachusetts S corporation, it cannot subsequently elect out of Massachusetts S corporation treatment as long as it is an S corporation under Code § 1361 (as amended and in effect for the taxable year). The following examples illustrate the provisions of 830 CMR 62.17A.1(4):

1. Able Corporation is a domestic corporation and an S corporation for federal tax purposes with a calendar year end. For calendar year 1986 it does not elect out of Massachusetts S corporation treatment. It cannot elect out of such treatment for the calendar year 1987.

2. Banner Corporation is a domestic corporation and an S corporation for federal tax purposes with a calendar year end. For the year ending December 31, 1986, it elects out of Massachusetts S corporation treatment. For the year ending December 31, 1987, it may again file its election out of Massachusetts S corporation treatment. If it does not file the election, it will be treated as an S corporation for Massachusetts tax purposes for 1987 and thereafter as long as it is an S corporation for federal income tax purposes and qualifies as an S corporation under the provisions of 830 CMR 62.17A.1(11).

3. Casey Corporation is a domestic corporation and an S corporation for federal tax purposes with a fiscal year end of September 30. For taxable year ending September 30, 1986, the corporation and the shareholders will be taxed under the relevant General Laws in effect prior to the amendments to M.G.L. c. 62, § 2(a)(1), (2), and (d), § 8(b), § 17A and M.G.L. c. 63, § 32D. For the taxable year ending September 30, 1987, it may file an election out of Massachusetts S corporation treatment. If it does not file the election, it will be treated as an S corporation for Massachusetts tax purposes for the fiscal year ending September 30, 1987 and thereafter, as long as it is an S corporation for federal income tax purposes and qualifies under the provisions of 830 CMR 62.17A.1(11).

(c) Requirements. The requirements for electing out of S corporation treatment in Massachusetts are the following:

1. An S corporation must have incorporated or organized before January 23, 1987, and must have filed its S corporation election under Code § 1362 for federal tax purposes before January 23, 1987.

2. An S corporation subject to taxation in Massachusetts shall make the election on Massachusetts Form 1‑SES and attach it to the front of its return. It shall send each shareholder or beneficiary a copy of the election to be attached to the front of the shareholder's return or the beneficiary's return.

3. An S corporation not subject to taxation in Massachusetts but having Massachusetts shareholders shall make the election on Massachusetts Form 1‑SES and send it to the Massachusetts Department of Revenue, P.O. Box 7025, Boston, MA 02204. It shall send each shareholder a copy of the election to be attached to the face of the shareholder's return. The form should be filed by the fifteenth day of the third month following the close of the S corporation's federal taxable year.

4. If an S corporation does not properly file the Form 1‑SES, the election out is void as to the S corporation and its shareholders. If an S corporation shareholder does not properly file the Form 1‑SES, the shareholder's return is incomplete. The S corporation and its shareholders may file amended returns with Form 1‑SES attached within the later of three years after the original return was filed or the date it was required to be filed, without regard to any extension of time for filing.

(5) Taxation of Resident Shareholders of Qualified S Corporations.

(a) Items Taken into Account in Determining a Shareholder's Income. A resident shareholder in any qualified S corporation, whether or not the S corporation is subject to tax in Massachusetts, is taxable on the shareholder's distributive share of the qualified S corporation's items of income, loss, or deduction as would be taxed under M.G.L. c. 62 as if such items were realized directly by the shareholder. In addition to the shareholder's distributive share of non‑separately computed income or loss under M.G.L. c. 62, the shareholder shall include separately in the shareholder's return the information from the qualified S corporation on the shareholder's distributive share of the qualified S corporation's items of income, loss, or deduction computed under M.G.L. c. 62, the separate treatment of which could affect the shareholder's Massachusetts tax liability. For example, since investment interest is not deductible under M.G.L. c. 62, the investment interest expense of the qualified S corporation should be separately stated.

(b) Differences in Treatment. The following provisions illustrate, but are not intended as complete lists of, differences in treatment of certain items by a Massachusetts S corporation and its shareholders:

1. There are differences between an S corporation's computation of a shareholder's distributive share of income, loss, deduction, or credit for federal income tax purposes and for state income tax purposes. Some of these differences are listed in M.G.L. c. 62; and some are the result of Massachusetts following the Code described at M.G.L. c. 62, § 1(c), rather than the Code for the taxable year. For example, interest income that is tax‑exempt at the federal level may be included in Massachusetts income under M.G.L. c. 62, § 2(a)(1)(A). Federal interest income taxable at the federal level may be deducted under M.G.L. c. 62, § 2(a)(2)(A).

2. There are also differences between a corporation's treatment of certain items of income, loss, deduction, or credit under M.G.L. c. 63 and an individual's treatment of such items under M.G.L. c. 62. For example, a corporation can deduct certain charitable contributions, but an individual may not take any such deduction. Also, a corporation can deduct all of its qualified retirement plan contributions under Code § 404; but a sole proprietor cannot deduct under M.G.L. c. 62, § 2(d)(7) contributions to qualified plans made on the proprietor's own behalf. Therefore, contributions to qualified retirement plans under Code § 404 and 405(c) on behalf of Massachusetts S corporation shareholder‑employees are not deductible in computing the shareholders' Massachusetts S corporation income. Further, the deduction under M.G.L. c. 63, § 38K, for qualified contributions of computer equipment, and the deduction under M.G.L. c. 63, § 38F, the job incentive deduction, also are not available to shareholders.

(c) Character of Pass‑through Items. The character of any item of income, loss, deduction, or credit of a qualified S corporation included in a shareholder's distributive share shall be determined under the provisions of M.G.L. c. 62 as if realized or incurred directly by the shareholder from the source from which realized or incurred by the qualified S corporation. The shareholders of a qualified S corporation shall be treated in a manner similar to that of a general partner of a partnership. Interest, dividends, and capital gains effectively connected with the active conduct of a trade or business of the qualified S corporation are Part A gross income from which the shareholder's excess deductions under M.G.L. c. 62, § 2(c)(1) may be deducted.

(d) Limitation on Losses. As provided in Code § 1366(d) (as amended and in effect in M.G.L. c. 62, § 1(c)), the amount of losses and deductions computed under M.G.L. c. 62 which can be taken into account by the shareholder of a qualified S corporation shall not exceed the sum of the adjusted Massachusetts basis of the shareholder's stock in the qualified S corporation and the shareholder's adjusted basis in any indebtedness of the qualified S corporation to the shareholder. ( See 830 CMR 62.17A.1(8)(b), Basis Adjustments, below.)

(e) Credits Against Income Tax Liability. A shareholder of a qualified S corporation may be entitled to the Massachusetts personal income tax credit afforded by M.G.L. c. 62, § 6(a) for certain taxes paid by the S corporation, but is not entitled to a distributive share of the credits available to C corporations under M.G.L. c. 63. A shareholder may claim the credit afforded by M.G.L. c. 62, § 6(a) for a taxable year if the S corporation pays or is obligated to pay a tax during the shareholder's taxable year and all of the following additional conditions apply:

1. The tax is imposed by another state, territory, or possession of the United States, or the Dominion of Canada or its provinces; and

2. The tax is measured by income earned by the S corporation, the distributive share of which is required to be included in the shareholders' Massachusetts gross income; and

3. The S corporation does not deduct any portion of the tax from its income in computing net income available for distribution to shareholders; and

4. The tax is otherwise allowable as a credit under the provisions of M.G.L. c. 62, § 6(a).

(f) Tax year. A shareholder of a qualified S corporation shall take into account the shareholder's distributive share of items of income, loss, deductions, or credits for the shareholder's taxable year in which the taxable year of the qualified S corporation ends. A shareholder of a qualified S corporation who dies before the end of the qualifying S corporation's taxable year shall take into account the shareholder's distributive share of the qualified S corporation's items of income, loss, or deductions by multiplying those items by a ratio of the number of days to the date of death to the number of days in the year. Upon the death of a qualified S corporation shareholder, the estate may be a successor shareholder under the provisions of Code § 1361(c). An estate which is a shareholder in a Massachusetts S corporation shall account on Massachusetts Form 2 for the distributive share of income, loss, or deduction of the qualified S corporation from the date of death.

(6) Taxation of Non‑Resident Shareholders of Massachusetts S Corporations.

(a) General Rule. Except as otherwise provided at 830 CMR 62.17A.1(6)(c), a non‑resident shareholder of a Massachusetts S corporation is subject to tax under M.G.L. c. 62, § 5A on the shareholder's distributive share of the Massachusetts S corporation's income, loss, deductions, or credits from sources within Massachusetts. The taxation of non‑resident individuals is described at 830 CMR 62.5A.1.

(b) Character of Items of Income, Loss, Deduction, or Credit. The character of items of income, loss, deduction, or credit of a Massachusetts S corporation is determined as if the items were realized or incurred by the shareholder. These items are included in the shareholder's return as so determined. A Massachusetts S corporation shareholder shall be treated in a manner similar to that of a general partner of a partnership. The trade or business of the Massachusetts S corporation is treated as the trade or business of the shareholder in determining the taxation of interest, dividends, and capital gains as Massachusetts source income.

(c) Apportionment. A Massachusetts S corporation with non‑resident shareholders which does business both within and without Massachusetts and which realizes income from sources within Massachusetts that are derived from or effectively connected with a trade or business, participation in any lottery or wagering transaction, or ownership of any interest in real or tangible personal property located in Massachusetts, must apportion its income as follows:

1. S Corporations Taxable Under M.G.L. c. 63. A Massachusetts S corporation that is described in 830 CMR 62.17A.1(6)(c), above, and that is taxable under M.G.L. c. 63 must apportion its income according to the provisions of M.G.L. c. 63, § 38(c), by which property, payroll, and sales factors are computed and the sales factor is doubled, or M.G.L. c. 63, § 42. The S corporation must inform each non‑resident shareholder at year end of the shareholder's distributive share of income, losses, deductions, or credits apportioned to and taxable in Massachusetts on Form 355A or B, Schedule S.

2. S Corporations that are Corporate Trusts. A Massachusetts S corporation that is described in 830 CMR 62.17A.1(6)(c), above, and that is a corporate trust must apportion the income based upon the provisions of M.G.L. c. 63, § 38(c), by which the property, payroll, and sales factors are computed and the sales factor is doubled, or any other reasonable method subject to review and modification by the Commissioner.

a. For all taxable years ending after December 31, 1985 and before December 31, 1989, each non‑resident beneficiary at year end shall be informed of the beneficiary's distributive share of income, losses, deductions, or credits apportioned to and taxable in Massachusetts on Form 3F, Schedule S.

b. For taxable years ending on or after December 31, 1989, an S corporation that is a corporate trust and that is otherwise described in 830 CMR 62.17A.1(6)(c), shall be subject to tax at the entity level under the provisions of M.G.L. c. 62, § 8.

(7) Part‑Year Residents.

(a) Massachusetts S Corporation. Subject to the applicable rules at 830 CMR 62.17A.1(5)‑(6), if during the taxable year a shareholder of a Massachusetts S corporation changes status from a non‑resident to a resident, or from resident to non‑resident, the shareholder is required to file two tax returns, one for the period of the year in which the shareholder is a resident and one for the period of the year in which the shareholder is a non‑resident. The shareholder shall determine the shareholder's items of income, loss, deduction, or credit as a resident by multiplying the shareholder's distributive share of those items by a ratio of the number of days of residency to the number of days in the shareholder's taxable year. The shareholder shall determine the shareholder's items of income, loss, deduction, or credit as a non‑resident by multiplying the shareholder's distributive share of those items by the Massachusetts S corporation's apportionment ratio and multiplying those results by a ratio of days of non‑residency to days in the shareholder's taxable year. The apportionment ratio shall be determined at the entity level for the entity's taxable year. The shareholder shall obtain the necessary information to determine the shareholder's correct Massachusetts taxable income.

(b) Other S Corporations. Subject to the applicable rules at 830 CMR 62.17A.1(5)‑(6), if during the taxable year a shareholder of a qualified S corporation that is not a Massachusetts S corporation changes status from a non‑resident to a resident, or from resident to non‑resident, then the shareholder is taxable on the shareholder's distributive share of the qualified S corporation's income, loss, deduction, or (if applicable) credits determined by multiplying those items by a ratio of number of days of residency to days in the shareholder's taxable year.

(8) Basis Changes of S Corporation Stock or Indebtedness.

(a) Modification, Upon Sale or Exchange, of the Basis of S Corporation Stock or Indebtedness on January 1, 1986. If a corporation or a corporate trust was an S corporation before January 1, 1986, and if a shareholder's basis for federal tax purposes in the S corporation's stock or indebtedness has been adjusted for federal income tax purposes under Code Subchapter S for the S corporation's taxable years beginning before January 1, 1986, the shareholder's basis in such stock or indebtedness for federal income tax purposes on the last day of the last S corporation taxable year beginning before January 1, 1986, shall be modified as described in 830 CMR 62.17A.1(8)(a)1., below, upon a sale or exchange of the stock or indebtedness recognized under M.G.L. c. 62.

1. The shareholder's basis for federal income tax purposes on the last day of the last S corporation taxable year beginning before January 1, 1986, shall be modified to reflect the federal adjustments to the shareholder's initial S corporation basis. In computing the modification to unadjusted Massachusetts basis,

i. increases in the federal basis will reduce the unadjusted Massachusetts basis, and

ii. decreases in the federal basis will increase the unadjusted Massachusetts basis.

The net modification amount will increase or decrease the Massachusetts gain or loss reported in the year of the sale or exchange.

2. The shareholder shall attach a schedule of the adjustments to the federal basis in the shareholder's S corporation stock as described in M.G.L. c. 62, § 17A(d) to the shareholder's return for the year of the sale or exchange.

3. A shareholder of an S corporation under Code § 1361 (as amended and in effect for the taxable year) which files an election out of Massachusetts S corporation treatment will make the modifications in 830 CMR 62.17A.1(8)(a)1., above, up to the last day of the taxable year preceding the first day of the taxable year in which it is a Massachusetts S corporation.

4. If a shareholder is not required to modify gain or loss under M.G.L. c. 62, § 17A(d), then the Massachusetts basis as adjusted in 830 CMR 62.17A.1(8)(b) shall be used to determine gain or loss upon the sale or exchange of the stock.

(b) Current Basis Adjustments. The Massachusetts basis of the stock of a qualified S corporation is adjusted at least annually to the extent that the qualified S corporation's items of income, loss, or deduction are included in the shareholder's computation of Massachusetts gross income for the taxable years in which the shareholder has S corporation income, loss, deductions, or credits taxable in Massachusetts.

1. For each taxable year, a shareholder of a qualified S corporation shall increase Massachusetts basis by the sum of the shareholder's distributive share of the qualified S corporation's:

i. items of income (including tax‑exempt income) the separate treatment of which could affect the shareholder's liability for Massachusetts income tax; and

ii. non‑separately computed income taxable under M.G.L. c. 62; and

iii. the excess of deductions for depletion over the basis of the property subject to depletion; and

the shareholder shall decrease his Massachusetts basis (but not below zero) by the sum of the shareholder's distributive share of:

iv. distributions by the qualified S corporation which were not included in the shareholder's Massachusetts income under M.G.L. c. 62 by reason of 830 CMR 62.17A.1(10); and

v. items of loss and deduction included in a shareholder's income under M.G.L. c. 62, the separate treatment of which could affect the shareholder's liability for Massachusetts income tax; and

vi. non‑separately computed loss included in computing income under M.G.L. c. 62; and

vii. expenses of the qualified S corporation not deductible in computing Massachusetts income and not properly chargeable to the capital account; and

viii. deductions for depletion for any oil and gas property held by the qualified S corporation to the extent such deduction does not exceed the shareholder's proportionate share of the property's basis.

2. If an S corporation elects out of Massachusetts S corporation treatment pursuant to 830 CMR 62.17A.1(4), the shareholder shall not make the current basis adjustments described in 830 CMR 62.17A.1(8)(b)1., until the taxable year in which the shareholder is treated as having Massachusetts S corporation income.

3. For taxable years ending on or after December 31, 1988 and before December 31, 1989, if an S corporation fails to qualify for S corporation treatment in Massachusetts, the shareholder may not make the current basis adjustments described in 830 CMR 62.17A.1(8)(b)1. until the next taxable year in which the shareholder is treated as having income from a qualified S corporation, except to the extent that basis adjustments are permitted under the post‑termination transition year rules of 830 CMR 62.17A.1(12).

(c) Transfers of Stock. If stock in an S corporation or indebtedness of an S corporation to a shareholder is transferred in a transaction in which the basis of the stock or indebtedness to the transferee carries over from the transferor, the adjustments and modifications to Massachusetts basis described in this section, 830 CMR 62.17A.1(8), continue to apply.

(d) The following example illustrates the provisions of 830 CMR 62.17A.1(8).

Example: On January 1, 1985, Doolittle paid $5000 for the purchase of 50 percent of the shares of stock in Standard, Inc., a Massachusetts corporation which was an S corporation under Code § 1361 with no accumulated earnings and profits.

For taxable year 1985, Standard, Inc. had federal distributive income of $6000. No actual distributions were made. For taxable year 1985 Doolittle had federal taxable income from the S corporation of $3000 and Massachusetts taxable income from the S corporation of $0. As of December 31, 1985, Doolittle's federal and Massachusetts basis in his Standard, Inc. stock was $8000 ($5000 initial basis + $3000 undistributed income).

In taxable year 1986, Standard, Inc. had a distributive loss for federal and Massachusetts tax purposes of $4000. It distributed $1000 to its shareholders.

On December 31, 1986, Doolittle had a federal and Massachusetts basis in his stock of $5500 [$8000 ‑ (.50 x $4000) ‑ (.50 x $1000)]. The actual distribution would not be included in Doolittle's gross income for federal or Massachusetts tax purposes.

If Doolittle sold his stock for $10,000 on January 1, 1987, his gain for federal tax purposes would be calculated as follows: $10,000 ‑ $5500 federal adjusted basis = $4500. His gain for Massachusetts tax purposes would be calculated as follows: $10,000 ‑ $2500 ($5500 Massachusetts adjusted basis ‑ $3000 Massachusetts modification) = $7500.

If, in taxable year 1986, Standard Inc. had a Massachusetts distributive loss of $5000, instead of $4000 as above, then on December 31, 1986, Doolittle's adjusted Massachusetts basis would have been $5000 [$8000 ‑ (.50 x $5000) ‑ (.50 x $1000)]. Upon the sale of stock on January 1, 1987, his gain for Massachusetts tax purposes would then be calculated as follows: $10,000 ‑ $2000 ($5000 Massachusetts adjusted basis ‑ $3000 Massachusetts modification) = $8000 Massachusetts gain.

(9) Payment of Taxes.

(a) Estimated Tax Payment. Shareholders of qualified S corporations shall include their distributive share of the qualified S corporation's income, loss, deduction, or credit in determining their taxable income for the purpose of making estimated tax payments for the shareholder's taxable years beginning on or after January 1, 1986. Payments of estimated taxes by the qualified S corporation cannot be attributed to the shareholders or used to satisfy shareholders' tax liabilities.

(b) Payment of Tax with Extension. Shareholders are responsible for any required tax payment, including the payment of tax on the income from S corporations, for taxable years beginning on or after January 1, 1986, when making a request for an extension of time to file the shareholder's return.

(c) Estimated Tax Payments For Non‑Qualifying S Corporations.

1. Corporations. For taxable years ending on or after December 31, 1988 and before December 31, 1989, if an S corporation taxable under M.G.L. c. 63 fails to qualify for S corporation treatment in Massachusetts, it must determine its estimated taxes for the taxable year as if it were a C corporation, and as if all the relevant provisions of St. 1988, c. 202 were in effect and applicable for the taxable year. For purposes of computing any addition to tax under M.G.L. c. 63B, § 6, the prior year's tax must be redetermined as if the provisions of St. 1988, c. 202 were in effect for the previous taxable year. However, if an S corporation's total receipts for its previous taxable year were less than six million dollars, or if an S corporation's average annual total receipts under the rules of 830 CMR 62.17A.1(11)(d) were less than six million dollars, it may make its estimated tax payments for the first current taxable year ending on or after December 31, 1988 as if it were a Massachusetts S corporation, and it will not be liable for the penalty for underpayment of estimated tax for the current taxable year by reason of its change in status. See 830 CMR 63B.2.1: Declarations and Payments of Estimated Corporate Excise.

2. Corporate Trusts. An S corporation taxable as a corporate trust under M.G.L. c. 62, § 8, and 830 CMR 62.17A.1(3)(e)2.,(11) must determine the amount of its estimated tax payments by recalculating its Massachusetts taxable income under the applicable provisions of M.G.L. c. 62.

(10) Actual Distributions.

(a) General Rule. Actual distributions of cash or property by a qualified S corporation with respect to its stock shall be taxed to the shareholders in a manner similar to that described in Code § 1368 (as amended and in effect under M.G.L. c. 62, § 1(c)) using income, losses and deductions computed according to M.G.L. c. 62 to adjust Massachusetts basis, Massachusetts accumulated adjustments account, and Massachusetts earnings and profits under the rules explained in this section, 830 CMR 62.17A.1(10). The shareholder shall include all taxable actual distributions in Massachusetts gross income for the shareholder's taxable year in which the actual distribution is received or constructively received. In determining the tax consequences of an actual distribution the shareholder shall employ the provisions of M.G.L. c. 62 and this regulation, 830 CMR 62.17A.1, applicable to the shareholder's taxable year during which the actual distribution is received, and the S corporation shall employ the provisions of M.G.L. c. 63 and this regulation, 830 CMR 62.17A.1, applicable to the corporation's taxable year during which the actual distribution is made.

(b) Massachusetts Accumulated Adjustments Accounts. Every S corporation must maintain a Massachusetts accumulated adjustments account for purposes of determining the proper tax treatment of distributions, whether or not it is required to do so under Code § 1368.

1. For taxable years ending before December 31, 1988, the amount in the qualified S corporation's accumulated adjustments account on the first day of the first taxable year of S corporation treatment in Massachusetts shall be the same as the federal accumulated adjustments account. The account shall be adjusted thereafter as described at 830 CMR 62.17A.1(2), Accumulated adjustments account.

2. For taxable years ending on or after December 31, 1988 and before December 31, 1989, the amount in the accumulated adjustments account shall be determined and adjusted as described at 830 CMR 62.17A.1(2), Accumulated adjustments account, for the period during which the S corporation qualifies for S corporation treatment in Massachusetts, and as permitted under the post‑termination transition year rules at 830 CMR 62.17A.1(12)(a)1‑2. Any adjustments to the accumulated adjustments account made solely for federal income tax purposes under the provisions of Code Subchapter S for the years in which the S corporation fails to qualify for S corporation treatment in Massachusetts are disregarded.

3. Except as provided in 830 CMR 62.17A.1(10)(b)3.a.,b., below, for taxable years ending on or after December 31, 1989, the amount in the S corporation's accumulated adjustments account on the first day of the first taxable year under the provisions of St. 1989, c. 287, shall be the same as the Massachusetts accumulated adjustments account at the close of the preceding taxable year, as determined and adjusted after applying the applicable rules of 830 CMR 62.17A.1(10)(b)1.,2., above. Thereafter, the account shall be adjusted as described at 830 CMR 62.17A.1(2), Accumulated adjustments account.

a. In the case of an S corporation that failed to qualify for S corporation treatment in Massachusetts under the rules at 830 CMR 62.17A.1(11) for any taxable years ending on or after December 31, 1988 and before December 31, 1989, the amount of the Massachusetts accumulated adjustments account on the first day of the first taxable year beginning on or after January 1, 1989 shall be zero. Any amount in the Massachusetts accumulated adjustments account at the close of the S corporation's taxable year ending before December 31, 1988 that is not distributed during the S corporation's post‑termination transition year, as defined at 830 CMR 62.17A.1(12), is not carried forward to the Massachusetts accumulated adjustments account on the first day of the first taxable year beginning on or after January 1, 1989.

b. At the end of a post‑termination transition year, as defined at 830 CMR 62.17A.1(12), if an S corporation has an undistributed Massachusetts accumulated adjustments account balance with respect to its shareholder's stock, the undistributed Massachusetts accumulated adjustments account balance becomes part of the corporation's Massachusetts paid in capital account on the first day after the last day of the post‑termination transition year. No additional basis adjustment is required or allowed when the undistributed Massachusetts accumulated adjustments account balance is added to paid in capital.

(c) Massachusetts Earnings and Profits. Every S corporation must maintain a Massachusetts earnings and profits account for purposes of determining the proper tax treatment of distributions during qualifying and nonqualifying S corporation years. Massachusetts earnings and profits are earnings and profits of any S corporation for any taxable year under one or more of the following rules:

1. Determination of Massachusetts Earnings and Profits. For taxable years ending before December 31, 1988 and for taxable years ending on or after December 31, 1989, the Massachusetts earnings and profits of an S corporation for the taxable year are determined under Code Subchapter S. For taxable years ending on or after December 31, 1988 and before December 31, 1989, the Massachusetts earnings and profits of a qualified S corporation for the taxable year are determined under Code Subchapter S. However, for taxable years ending on or after December 31, 1988 and before December 31, 1989, if an S corporation fails to qualify for S corporation treatment in Massachusetts, earnings and profits for the taxable year are determined under Code Subchapter C, as if the corporation or corporate trust had not elected S corporation status under Subchapter S of the Code.

2. Computation of Massachusetts Earnings and Profits. The Massachusetts earnings and profits of an S corporation include the following items:

a. Earnings and profits generated in taxable years before S corporation status is elected for federal purposes under Code section 1362; and

b. Earnings and profits generated in taxable years beginning before January 1,1988, in which the S corporation election was in effect for federal purposes, but in which the S corporation had elected out of Massachusetts S corporation treatment as described at 830 CMR 62.17A.1(4); and

c. Earnings and profits that are required to be recognized by the S corporation, or that are otherwise attributed to the S corporation, under applicable Code sections, such as in a corporate acquisition under Code § 381; and

d. Earnings and profits generated in the taxable year ending on or after December 31, 1988 and before December 31, 1989, if the S corporation fails to qualify for S corporation treatment in Massachusetts for that taxable year.

(d) Tax Consequences of Distributions and the Application of Distributions Against Qualified S Corporation Massachusetts Accounts and Stock Basis. Unless a distribution occurs in a post‑termination transition year as defined at 830 CMR 62.17A.1(12) and the post‑termination transition rules require otherwise, each distribution of property (including cash) from a qualified S corporation will taxed to shareholders and will be applied to reduce the Massachusetts accumulated adjustments account, the Massachusetts earnings and profits account, and Massachusetts adjusted basis according to the following rules:

1. Qualified S Corporations with No Earnings and Profits. Each distribution of property (including cash) from a qualified S corporation with no Massachusetts earnings and profits will have the following tax consequences and will be applied to reduce the Massachusetts accumulated adjustments account and Massachusetts adjusted basis in the following order:

a. The distribution will be tax free to the extent of the shareholder's Massachusetts adjusted basis of stock. The Massachusetts adjusted basis of the stock and the Massachusetts accumulated adjustments account will be reduced by the amount of the distribution; and

b. The distribution will be treated as a taxable gain on the sale or exchange of stock to the extent that the amount distributed exceeds the shareholder's Massachusetts adjusted basis of the stock.

2. Qualified S Corporations With Massachusetts Earnings and Profits. Each distribution of property (including cash) from a qualified S corporation with Massachusetts accumulated earnings and profits will have the following tax consequences and will be applied to reduce the Massachusetts accumulated adjustments account, the Massachusetts earnings and profits account, and Massachusetts adjusted basis in the following order:

a. The portion of the distribution that does not exceed the Massachusetts accumulated adjustments account will be tax free to the extent of the Massachusetts adjusted basis of the stock. The Massachusetts adjusted basis of the stock and the Massachusetts accumulated adjustments account will be reduced by the amount of the distribution; and

b. Any amount of the portion of the distribution that does not exceed the Massachusetts accumulated adjustments account remaining after Massachusetts adjusted basis is exhausted will be treated as taxable gain on the sale or exchange of stock; and

c. The portion of the distribution in excess of the Massachusetts accumulated adjustments account will be taxable as a dividend to the extent of current and accumulated Massachusetts earnings and profits. The Massachusetts earnings and profits account will be reduced by the amount of the distribution; and

d. Further amounts distributed are tax free to the extent of any remaining Massachusetts adjusted basis of the stock. The Massachusetts adjusted basis of the stock will be reduced by the amount of the distribution; and

e. All additional amounts distributed will be treated as gain from the sale or exchange of the stock.

(e) The following examples illustrate the provisions of 830 CMR 62.17A.1(8)(b), (10), and (12).

Example 1: Scorpion, Inc. is an S corporation that reports on a calendar year basis. All stock is owned by Alice (a calendar year taxpayer). On December 31, 1984, the federal accumulated adjustments account of the corporation is $250,000, it has no accumulated earnings and profits, and Alice's basis in her stock is $250,000.

In taxable year 1985, the corporation had total receipts of $4 million and distributive loss of $50,000 for federal purposes. No distributions were made. For Massachusetts purposes, the corporation was treated as a C corporation since Massachusetts did not recognize S corporation status in 1985.

On January 1, 1986 the corporation qualifies as an S corporation for Massachusetts purposes. Alice's unadjusted Massachusetts stock basis as of January 1, 1986 equals her federal stock basis as of December 31, 1985, or $200,000.

In taxable year 1986, the corporation had total receipts of $4 million and distributive income of $200,000. No actual distributions were made.

In taxable year 1987, the corporation had total receipts of $7 million and distributive income of $400,000. The corporation distributed $200,000 to its shareholder. As of December 31, 1987, Alice had Federal and Massachusetts basis in her stock of $600,000 ($250,000 ‑ $50,000 + $200,000 + $400,000 ‑ $200,000.) The actual distribution is a nondividend distribution and is not taxable for Federal or Massachusetts purposes.

In taxable year 1988, the corporation had total receipts of $9 million or more, and is therefore not treated as an S corporation for Massachusetts purposes. Instead, the corporation is taxed as a C corporation for Massachusetts purposes. Because the corporation is treated as a C corporation, no adjustments can be made to the Massachusetts accumulated adjustments account after the beginning of taxable year 1988, except as permitted under post‑termination transition year rules at 830 CMR 62.17A.1(12). Thus, assuming the corporation has no current earnings and profits, if it distributes $600,000 under the post‑termination transition rules at 830 CMR 62.17A.1(12) during 1988, the following tax consequences result for Federal and Massachusetts purposes: The $600,000 is applied to the basis of Alice's stock, reducing her basis to $0. The distribution is treated as a nondividend distribution and is not taxable. Following the distribution, the accumulated adjustments account of the corporation is zero.

Example 2: Assuming the same facts as Example 1, except that in taxable year 1988 Scorpion, Inc. had total receipts of $9 million or more and had current Massachusetts earnings and profits of $300,000, which is treated as distributive income for federal purposes. As of December 31, 1988 (before taking into account distributions) the corporation's accumulated adjustments account for federal purposes is $900,000 and for Massachusetts purposes is $600,000. Assuming no adjustments are necessary, as of December 31, 1988 (before taking into account distributions) the corporation's earnings and profits account is $0 for federal purposes and $300,000 for Massachusetts purposes. If during 1988, Scorpion Inc. distributes $900,000 in cash to Alice, for federal tax purposes the distribution is not taxable because it is a nondividend distribution. For Massachusetts purposes, the first $600,000 of the distribution is not taxable because it is a nondividend distribution. Alice's stock basis is reduced to $0 and the corporation's Massachusetts accumulated adjustments account is reduced to $0 under the post‑termination transition rules of 830 CMR 62.17A.1(12). The remaining $300,000 is a taxable dividend and reduces the corporation's Massachusetts earnings and profits to zero.

Despite Code Subchapter S rules, any distribution of money or property will be treated as a dividend for Massachusetts purposes to the extent that it consists of Massachusetts earnings and profits. The corporation must maintain a Massachusetts earnings and profits account for purposes of determining the proper tax treatment of distributions during nonqualifying S corporation years.

Example 3: Assume the same facts as in Example 2 except that the corporation makes no distribution during 1988. As of January 1, 1989 the corporation's accumulated adjustment account is $900,000 for federal purposes, and $0 for Massachusetts purposes. Assuming no adjustments are necessary, as of January 1, 1989, the corporation's earnings and profits account is $0 for federal purposes, and $300,000 for Massachusetts purposes. In 1989, Scorpion, Inc. once again qualifies for S corporation treatment in Massachusetts and has $100,000 in distributive income for the year. During 1989 Scorpion, Inc. makes an actual distribution of $700,000 to Alice. For federal tax purposes the distribution is not taxable because it is a nondividend distribution out of the corporation's federal accumulated adjustments account. For Massachusetts tax purposes, the first $100,000 is not taxable because it is a nondividend distribution, which reduces the corporation's Massachusetts accumulated adjustments account to $0. The next $300,000 is a dividend, which reduces the corporation's Massachusetts earnings and profits account to $0. The remaining $300,000 is treated as a nontaxable return of shareholder stock basis for Massachusetts purposes.

As the above example illustrates, the corporation's undistributed Massachusetts accumulated adjustments account left over from taxable year 1988 disappears and does not carry over to the 1989 taxable year. The amount of the Massachusetts accumulated adjustments account left over is already reflected in the basis of the shareholder's stock, so failure to completely distribute the accumulated adjustments account during the post‑termination transition period, in effect, moves the amount of undistributed accumulated adjustments below Massachusetts earnings and profits under the rules at 830 CMR 62.17A.1(10)(d), which govern priorities for the application of distributions to the various accounts of the corporation.

Despite Code Subchapter S rules, any distribution of money or property will be treated as a dividend in Massachusetts to the extent that it consists of Massachusetts earnings and profits. The corporation must maintain a Massachusetts earnings and profits account for purposes of determining the proper tax treatment of distributions during nonqualifying S corporation years.

(11) Qualification for S Corporation Treatment in Massachusetts and Imposition of the Income Measure of the Corporate Excise; Computation of Total Receipts.

(a) General Rule.

1. For taxable years beginning after December 31, 1985 and ending before December 31, 1988, an S corporation qualifies for treatment as an S corporation in Massachusetts, whether or not it is subject to tax in Massachusetts, if it has not made a temporary election out of S corporation treatment in Massachusetts under the rules at 830 CMR 62.17A.1(4).

2. For the taxable year ending on or after December 31, 1988 and before December 31, 1989, an S corporation qualifies for treatment as an S corporation in Massachusetts, whether or not it is subject to tax in Massachusetts, if it has total receipts for the taxable year of less than six million dollars as determined under the rules at 830 CMR 62.17A.1(11)(d), (e) and (f).

3. For taxable years ending on or after December 31, 1989, an S corporation, other than a corporate trust, qualifies for treatment as an S corporation in Massachusetts regardless of its total receipts. However, if an S corporation has total receipts of six million dollars or more it is subject to the net income measure of the corporate excise under M.G.L. c. 63, § 32D(b) and 830 CMR 62.17A.1(3)(b).

4. A shareholder of a qualified S corporation is subject to tax on the shareholder's distributive share of the qualified S corporation income, loss, deduction and credit under 830 CMR 62.17A.1(5) for resident shareholders, under 830 CMR 62.17A.1(6) for non‑resident shareholders, and under 830 CMR 62.17A.1(7) for part‑year resident shareholders.

(b) Taxation of Shareholders of Non‑Qualifying S Corporations. Shareholders of S corporations that do not qualify for treatment as S corporations in Massachusetts are not taxed as S corporation shareholders under M.G.L. c. 62, § 17A. Massachusetts resident shareholders of non‑qualifying S corporations that are domestic or foreign corporations are taxed as shareholders of Code Subchapter C corporations. Massachusetts resident shareholders of non‑qualifying S corporations that are corporate trusts are taxed as beneficiaries of corporate trusts subject to M.G.L. c. 62, § 8. Non‑resident shareholders of non‑qualifying S corporations are subject to tax if they receive Massachusetts source income. See 830 CMR 62.5A.1: Non‑Resident Income Tax. Generally, distributions to shareholders of non‑qualifying S corporations are treated as distributions of dividends under the provisions of the Code (without regard to Subchapter S of the Code) from a corporation or from a corporate trust, as the case may be.

(c) Short Taxable Year. To compute total receipts for a taxable year consisting of fewer than twelve months, an S corporation must annualize its total receipts for the taxable year by multiplying the S corporation's total receipts for the short taxable year by twelve, and then dividing the resulting amount by the number of months in the short taxable year.

(d) Exception to Six Million Dollar Limitation. For the taxable year ending on or after December 31, 1988 and before December 31, 1989, an S corporation with total receipts for the current taxable year of six million dollars or more but less than nine million dollars may nonetheless qualify for treatment as an S corporation in Massachusetts if, while an S corporation, its average annual total receipts is less than six million dollars. In determining the application of this exception under 830 CMR 62.17A.1(11), the following rules apply:

1. The period for computing the average annual total receipts is the consecutive three taxable year period immediately preceding the S corporation's current taxable year. However, an S corporation with only two consecutive taxable years immediately preceding its current taxable year should compute its average annual total receipts by aggregating the total receipts in each such year and dividing that sum by two. For an S corporation with only one taxable year immediately preceding its current taxable year, the average annual total receipts is the total receipts in such immediately preceding taxable year; and

2. If any taxable year for computing the average annual total receipts of an S corporation is comprised of less than twelve months, total receipts for such year must be annualized by multiplying the total receipts for the short taxable year by twelve, and then dividing the resulting amount by the number of months in the short taxable year; and

3. An S corporation with total receipts for the current taxable year of nine million dollars or more may not employ the averaging provisions of 830 CMR 62.17A.1(11)(d), and does not qualify for S corporation treatment in Massachusetts.

The following examples illustrate the provisions of 830 CMR 62.17A.1(11)(d):

Example 1: Corporation X is a C corporation for its taxable year ending December 31,1987. On January 1,1988, Corporation X elects S corporation status under § 1361 of the Code. X corporation has total receipts of $ 7 million for its taxable year ending on December 31, 1988. Corporation X does not qualify for treatment as an S corporation in Massachusetts and Corporation X's shareholders are not taxed as S corporation shareholders under the general rule of 830 CMR 62.17A.1(11)(a). Also, Corporation X cannot use the average annual total receipts method of 830 CMR 62.17A.1(11)(d) to qualify for treatment as an S corporation in Massachusetts because Corporation X was not an S corporation during the immediately preceding taxable year ending December 31, 1987.

Example 2: For taxable years ending December 31, 1985, 1986 and 1987 Corporation Y, an S corporation, had total receipts of $4 million, $5 million, and $7 million respectively. For its taxable year ending on December 31, 1988, Corporation Y has total receipts of $8 million. Since Corporation Y's total receipts are $6 million or more, Corporation Y does not qualify for treatment as an S corporation in Massachusetts under the general rule of 830 CMR 62.17A.1(11)(a). However, since Corporation Y's total receipts do not equal or exceed $9 million, and since Corporation Y was an S corporation for federal purposes for the immediately preceding three taxable years, Corporation Y may use the averaging method under 830 CMR 62.17A.1(11)(d) to determine whether it qualifies for treatment as an S corporation in Massachusetts. Under the averaging method of 830 CMR 62.17A.1(11)(d), Corporation Y qualifies for S Corporation treatment in Massachusetts because its average annual total receipts is less than $6 million (i.e. $5.33 million, rounded down, determined by adding $4 million, $5 million, and $7 million, and dividing by 3).

Example 3: Assume the same facts as in Example 2, above, except that Corporation Y was not an S corporation for federal purposes for the taxable year ending December 31, 1985. Corporation Y elected S corporation status for federal purposes commencing with taxable year beginning January 1, 1986. Corporation Y does not qualify for treatment as an S corporation in Massachusetts because its current year total receipts of $8 million exceeds $6 million and its average annual total receipts are $6 million (determined by adding $5 million and $7 million, and dividing by 2).

(e) Constructive Ownership of Unitary S Corporations. For taxable years ending on or after December 31, 1988, if there is common stock ownership of two or more S corporations and the S corporations are engaged in a unitary business, the S corporations must combine the total receipts of each such S corporation and apply the six million dollar limitation rules of 830 CMR 62.17A.1(11) to the aggregate total receipts of all such S corporations in the current taxable year. The aggregate total receipts of two or more S corporations that are required to aggregate their total receipts under this provision, 830 CMR 62.17A.1(11)(e), shall not include receipts derived from intercompany transactions between those S corporations.

1. Common Stock Ownership. Common stock ownership exists between two or more S corporations when one or more shareholders own, in the aggregate, directly or indirectly, more than fifty percent of the total combined voting power or more than fifty percent of the total value of shares of each S corporation. Stock is owned by a person under 830 CMR 62.17A.1(11)(e), above, if the person owns the stock directly or if ownership may be attributed to the person under the constructive ownership rules of Code § 318. The following examples illustrate the provisions of 830 CMR 62.17A.1(11)(e)1.:

Example 1: A and B, each own one‑third of the total value of the shares of X Corporation. Also, A owns 15 percent and B owns 40 percent of the total value of the shares of Y Corporation. X Corporation has $4.5 million of total receipts and Y Corporation has $2 million of total receipts. Because A and B together own more than 50 percent (i.e. 66.7 percent) of the total value of shares in X Corporation and more than 50 percent (i.e. 55 percent) of the total value of shares in Y Corporation, X Corporation and Y Corporation have common stock ownership.

Example 2: Assume the same facts as in Example 1, above, except that B owns only 25 percent (instead of 40 percent) of the total value of the shares of Y Corporation and C, an unrelated party, owns the remaining 60 percent of Y Corporation. A and B together own more than 50 percent (66.7 percent) of the total value of the shares of X Corporation, but only 40 percent (15 percent + 25 percent) of the total value of the shares in Y Corporation. Thus, X Corporation and Y Corporation do not have common ownership.

2. Unitary Business. Whether two or more S corporations are engaged in a unitary business depends upon the particular facts and circumstances of each case. In general, however, the Commissioner will determine that a unitary business exists if he finds that there is a sharing or exchange of value between two or more S corporations beyond the mere flow of funds arising out of a passive investment or a distinct business operation.

3. Groups of S Corporations. When an S corporation is included in a group of commonly owned S corporations engaged in a unitary business, the total receipts for that S corporation included in the aggregate total receipts of the group is the total receipts for the taxable year which ends within or with the taxable year of the S corporation at issue. The following example illustrates the provisions of 830 CMR 62.17A.1(11)(e)3.

Example: Corporations A, B, and C have common stock ownership and are engaged in a unitary business. Corporation A, an S corporation, has a taxable year ending December 31. During the taxable year ending December 31, 1988, Corporation A had total receipts of $3 million. Corporation B, an S corporation, has a fiscal year ending November 30. During the fiscal year ending November 30, 1988, Corporation B had total receipts of $2 million. Corporation C has a taxable year ending December 31 and is not an S corporation for federal purposes. During the taxable year ending December 31, 1988, Corporation C had total receipts of $4 million. In determining Corporation A's total receipts for the taxable year ending December 31, 1988, Corporation B's total receipts of $2 million for the fiscal year ending November 30, 1988 must be included with Corporation A's total receipts of $3 million. Corporation A should not include Corporation C's total receipts of $4 million since Corporation C is not an S corporation for federal purposes for the taxable year ending December 31, 1988. Accordingly, Corporation A's total receipts, on an aggregate basis, are $5 million for taxable year ending December 31, 1988, and Corporation A qualifies for S corporation treatment in Massachusetts under the general rules of 830 CMR 62.17A.1(11).

(f) Aggregation of Total Receipts of S Corporations and Other Entities. To prevent the circumvention of the six million dollar limitation and the imposition of the net income measure of the Massachusetts corporate excise under M.G.L. c. 63, § 32D(b), the Commissioner will aggregate the total receipts of one or more S corporations and one or more other entities, if they have common ownership, and are engaged in a unitary business under the rules at 830 CMR 62.17A.1(11)(e)2. The aggregate total receipts of two or more entities that are required to aggregate their total receipts under this provision, 830 CMR 62.17A.1(11)(f), shall not include receipts derived from intercompany transactions between those entities.

1. Common Ownership. Common ownership exists between an S corporation and another entity when one or more shareholders of the S corporation own, in the aggregate, directly or indirectly, more than fifty percent of the combined voting power or more than fifty percent of the total value of the shares in the S corporation and hold, in the aggregate, directly or indirectly, more than fifty percent of the combined voting power or more than fifty percent of the total value of the ownership interest of the other entity, whether represented by stock shares, partnership interests, or otherwise. The Commissioner will apply the constructive ownership rules of Code § 318 for purposes of determining ownership under 830 CMR 62.17A.1(11)(f), regardless of whether the ownership is represented by stock shares, partnership interests, or any other indication of ownership.

2. Application of Aggregation Rules. The total receipts of an S corporation and another entity must be aggregated if the S corporation and the other entity have common ownership under the rules at 830 CMR 62.17A.1(11)(e)1., are engaged in a unitary business under the rules at 830 CMR 62.17A.1(11)(e)2., and the Commissioner determines that the other entity was organized to reduce the total receipts of the S corporation. The Commissioner will presume that any entity organized after the enactment of St. 1988, c. 202, was organized to reduce the total receipts of an S corporation with which it has common ownership and with which it engages in a unitary business. This presumption can be rebutted by establishing, to the Commissioner's satisfaction, that the entity was organized for valid business purposes and not for the purpose of reducing the total receipts of the S corporation.

The following example illustrates the provisions of 830 CMR 62.17A.1(11)(f):

Example: A, B, and C each own one‑third of the total value of the shares of Q Corporation. In addition, A and B each own 50 percent of the total value of the ownership interest of P Partnership, which was formed in order to reduce Q Corporation's total receipts. Q Corporation and P Partnership are engaged in a unitary business. Q Corporation has total receipts of $1 million and P Partnership has total receipts of $8.5 million. Because A and B together own more than 50 percent (i.e. 66.7 percent) of the total value of the shares of Q Corporation and together own more than 50 percent (i.e. 100 percent) of the total value of the ownership interest in P Partnership, Q Corporation must aggregate its total receipts with those of P Partnership for purposes of determining the corporation's total receipts. Thus, Q Corporation's total receipts are $9.5 million.

(12) Rules Applied When S Corporations Fail to Qualify for S Corporation Treatment in Massachusetts.

(a) Post‑Termination Transition Year. For the taxable year ending on or after December 31, 1988 and before December 31, 1989, if a qualified S corporation ceases to qualify for S corporation treatment in Massachusetts under the provisions of 830 CMR 62.17A.1(11), or ceases to be an S corporation under Code § 1362, as amended and in effect for the taxable year, the post‑termination transition period in Massachusetts is defined under the rules of Code § 1377(b), as amended and in effect for the taxable year. Disqualification under the provisions of 830 CMR 62.17A.1(11) is not treated as a determination for purposes of Code § 1377(b)(1)(B) and (b)(2), as amended and in effect for the taxable year.

1. Timing of Pass‑Through Items in Post‑Termination Transition Year. The shareholder of a qualified S corporation which ceases to qualify for S corporation treatment under Code § 1362, as amended and in effect for the taxable year, is subject to tax under M.G.L. c. 62 on S corporation items of income, loss, or deduction as provided under the rules of Code § 1366(a) in the shareholder's taxable year in which the taxable year of the qualified S corporation ends. For the taxable year, ending on or after December 31, 1988 and before December 31, 1989, if a qualified S corporation ceases to qualify for S corporation treatment in Massachusetts under the provisions of 830 CMR 62.17A.1(11), or ceases to qualify for S corporation treatment under Code § 1362, as amended and in effect for taxable years, if a loss or deduction was disallowed to a shareholder of the qualified S corporation under Code § 1366(a)(1), such loss or deduction is carried over and treated as incurred on the last day of the post‑termination transition year under the rules of Code § 1366(d).

2. Cash Distribution in Post‑Termination Transition Year. Under the rules of Code § 1371(e), any distribution of cash by an S corporation with respect to its stock during the post‑termination transition year shall reduce the shareholder's Massachusetts adjusted basis to the extent of the Massachusetts accumulated adjustments account, as defined at 830 CMR 62.17A.1(2), above. An S corporation which is not required to maintain an accumulated adjustments account under Code § 1368 for federal income tax purposes must nonetheless maintain such an account for Massachusetts income tax purposes in order to determine the tax treatment in Massachusetts of its distributions. An S corporation may not make the election to treat distributions as dividends, as provided in Code § 1368(e)(3), solely for Massachusetts income tax purposes.

3. Carryovers Between Massachusetts S Corporation Years and Other Years. No carryforward is permitted at the entity level for a taxable year in which an entity qualifies to be treated as an S corporation in Massachusetts. No carryforward arising in a taxable year in which an entity does not qualify for S corporation treatment in Massachusetts may be carried to a taxable year in which the entity does qualify for Massachusetts S corporation treatment. To the extent that net operating losses in Massachusetts are recognized, such losses may be utilized in applying Code § 1374 to determine the S corporation's Massachusetts corporate excise. A taxable year in which an entity qualifies for S corporation treatment in Massachusetts is an elapsed year for purposes of determining the number of years in which an item may be carried forward.

(b) Basis Rules. For the taxable year ending on or after December 31, 1988 and before December 31, 1989, the provisions of M.G.L. c. 62, § 6F apply to determine the gain or loss on the sale of stock in an S corporation which fails to qualify for S corporation treatment in Massachusetts. The Massachusetts basis is adjusted under 830 CMR 62.17A.1(8) for the period during which the S corporation is a Massachusetts S corporation, and under 830 CMR 62.17A.1(12)(a)1. and 2. for the post‑termination transition year. Any adjustments solely for federal income tax purposes under provisions of Code Subchapter S after the S corporation fails to qualify for S corporation treatment in Massachusetts are disregarded.

(c) Credits Against Income Tax Liability. In determining a resident shareholder's tax liability resulting from a non‑qualifying S corporation's post‑termination transition year, the shareholder may use the credit for taxes due to other states, territories or possessions of the United States or to the Dominion of Canada or its provinces to the same extent the credit would be available to a shareholder of a qualified S corporation under 830 CMR 62.17A.1(5)(e).

REGULATORY HISTORY
Emergency Regulation: 2/26/87, 5/29/87, 8/27/87
Date of Promulgation: 10/16/87
New Emergency Regulation: 12/3/88, 3/389
Promulgated: 5/26/89
New Emergency Regulation: 1/19/90, 4/19/90
New Regulation Promulgated: 7/6/90