The federal Omnibus Budget Reconciliation Act of 1987 ("OBRA 1987") included a new Section 444 of the Internal Revenue Code, which permits fiscal year partnerships, S corporations, and personal service corporations that were otherwise required to change their taxable years, to retain their fiscal years. The federal due dates for the returns for the entities making Section 444 elections to retain their fiscal year have been extended. The purpose of this Technical Information Release is to explain the due dates of the Massachusetts returns for the entities making Section 444 elections.
FEDERAL RULES ON SECTION 444 ELECTIONS
The federal OBRA 1987 modified the provisions of Section 806 of the Tax Reform Act of 1986 ("TRA"), which required most fiscal year partnerships, S corporations, and personal service corporations ("PSCs") to change to a calendar year. See generally Internal Revenue Code ("I.R.C.") §§ 441(i), 706(b), 1378 (1986). The Massachusetts Commissioner of Revenue promulgated Technical Information Release 87-13 (T.I.R. 87-13) to explain how partnerships, S corporations, and PSCs that file Massachusetts returns would make the change in taxable year for Massachusetts purposes from a fiscal to a calendar year. After T.I.R. 87-13 was issued, OBRA 1987 and Code Section 444 became law. Section 444 provides that fiscal year partnerships, S corporations, and PSCs which would otherwise have been required to change their taxable year may instead agree to make "required payments" and retain their fiscal year.
Section 444 states that the Treasury will issue regulations to clarify how taxpayers will make a Section 444 election, but the Treasury and the Internal Revenue Service have not yet issued a Temporary Regulation to explain the Section 444 election requirements and procedures. The Service issued Notice 88-10, 1988-5 I.R.B. 24, which stated that the due date for all section 444 elections is the later of April 30, 1988, or sixty days after the publication of temporary regulations in the Federal Register. No temporary regulations have yet been published. Notice 88-10 also stated that due dates for returns for entities making a Section 444 election will be extended for the first taxable year beginning after December 31, 1986, to the later of the original due date or the due date of the Section 444 election.
Some partnerships, S corporations, and PSCs will not know whether they wish to file a Section 444 election until the forthcoming temporary regulations are published. If, upon publication of the regulations, an entity decides not to make a Section 444 election, it would then be required to file a short taxable year federal return for the period ending December 31, 1987, under TRA § 806. See also I.R.C. §§ 441(1), 706(b), 1378 (1986). The due date for the short taxable year federal returns will also be extended to the later of the original due date or the due date for Section 444 elections (sixty days after publication of the regulations in the Federal Register).
MASSACHUSETTS RULES ON SECTION 444 ELECTIONS
Massachusetts due dates for returns of partnerships, S corporations, corporate trusts that are also S corporations ("corporate trusts") , and PSCs, are set by chapter 62C of the General Laws. See G.L. c. 62C, §§ 6, 7, 11, 12. Partnerships and corporate trusts are required to file their Massachusetts returns on the fifteenth day of the fourth month after the end of the taxable year; S corporations and PSCs are required to file Massachusetts returns on the fifteenth day of the third month after the end of the taxable year.
The Commissioner of Revenue is authorized to grant reasonable extensions of time for filing the returns required under chapter 62C, provided that the taxpayer file a tentative return and pay the amount of tax reasonably estimated to be due on or before the due date. See G.L. c. 62C, § 19. All returns must be filed on a extensions filed under G.L. c. 62C, § 19. The following procedures govern the Massachusetts treatment of entities affected by either TRA § 806 or Section 444.
1. Due dates for returns for Massachusetts entities on the short taxable year required by Tax Reform Act § 806.
All entities required to change their taxable year under TRA § 806 and which know they will not make a Section 444 election should file their Massachusetts returns as provided in TIR 87-13, for the period ending December 31, 1987. The S corporations' and PSCs' returns will be due March 15, 1988; the partnerships' and corporate trusts' returns will be due April 15, 1988.
2. Due dates of Massachusetts returns for entities which will make the Section 444 election or which will otherwise retain their fiscal year.
Entities that are certain that they will make the Section 444 election upon publication of the temporary regulations or entities that are eligible to retain their fiscal year under some other provision are not required to file Massachusetts extensions of time to file. These entities should file their returns for their first fiscal year ending after December 31, 1987, on the fifteenth day of the third month following the close of their fiscal year or the fifteenth day of the fourth month following the close of their fiscal year, whichever is applicable. But if an entity decides after March 15, 1988, or April 15, 1988, whichever is applicable, that it will not retian its fiscal year, the entity will be subject to eighteen percent interest on the tax due and all applicable penalties, including the late return penalty, for the short taxable year ending December 31, 1987.
3. Due dates for Massachusetts returns for entities awaiting temporary regulations to make Section 444 elections.
All entities currently awaiting the publication of the temporary regulations on Section 444 to decide whether they will change to a fiscal year or will remain on a calendar year should file for extensions of their Massachusetts due dates on their return due dates, March 15, 1988, or April 15, 1988, whichever is applicable. Massachusetts extensions will not be granted without the filing of an application for extension to file.
The partnerships and corporate trusts should file Form M-4868 and should add at the top of the form, "Filed in compliance with TIR 88-3." The partnership's or corporate trust's filing of a Massachusetts extension extends the due date of the complete return to the later of August 15, 1988, or the due date of the Section 444 election.
The S corporations and PSCs should file Form 355-7004 and should add at the top of the form, "Filed in compliance with TIR 88-3." The S corporation's or PSC's filing of the extension extends the due date of the complete return to the later of the six-month automatic extension date or the due date of the section 444 election.
Any tax due as of March 15, 1988, for S corporations and PSCs, and as of April 15, 1988, for corporate trusts, should be paid upon the filing of the Massachusetts extension. The extension of time to file does not extend the due date for payment, and interest at the rate of eighteen percent will be charged on any tax not paid on or before the original due date.
4. Effect of filing a Massachusetts extension to file.
A Massachusetts extension to file, for the short taxable year ending December 31, 1987, filed in compliance with this TIR, does not prevent any entity from subsequently retaining its Massachusetts fiscal year, if it decides to do so upon the publication of the federal temporary regulations. Any payment made upon the filing of a Massachusetts extension may be applied as an estimated payment upon the entity's tax due for its fiscal year ending after December 31, 1987, and before December 31, 1988.
5. Massachusetts returns of partners and shareholders of entities awaiting temporary regulations.
Partners and shareholders, whose returns are due April 15, 1988, of entities still considering a Section 444 election as of April 15, 1988, may also wish to file for Massachusetts extensions of time to file. They should calculate their tax due carefully, because partners and shareholders who do not report all their income deemed to have been received from the entities during the partner's or shareholder's calendar year ending December 31, 1987, will be required to file amended returns and pay all applicable interest and penalties.
Stephen W. Kidder
Commissioner of Revenue
March 14, 1988