I. The Federal Election - s. 311(e) of the Act
Under s. 311(e), a taxpayer, other than a corporation, in a marginal federal tax bracket higher than 15%, may elect to treat any readily tradable stock (i.e., stock which, as of January 1, 2001 is readily tradable on an established securities market) which is a capital asset held by the taxpayer on January 1, 2001, and not sold before the next business day after that date, as having been sold on the next business day for an amount equal to its closing market price on that date, and as having been reacquired on that date for the same amount. The beginning holding period of any reacquired stock is January 2, 2001. Additionally, under s. 311(e), such taxpayer may elect to treat any other capital asset or property used in a trade or business as defined in I.R.C. s. 1231(b) (1) held by the taxpayer on January 1, 2001, as having been sold on that date for an amount equal to its fair market value on that date, and as having been reacquired on that date for the same amount. The beginning holding period of any other reacquired asset is January 1, 2001.
The purpose of the election is to make any future gain on the sale of a capital asset by the taxpayer eligible for the 18% capital gains rate allowed by s. 1(h)(2)(B) of the Internal Revenue Code (the "Code"). Otherwise, the maximum federal capital gains rate for sales by such taxpayer of long term capital assets after May 6, 1997 would be 20%. See I.R.C. Â§ 1(h). The 18% tax rate is applicable, however, only to the extent that (a) the holding period of the asset begins after December 31, 2000, and (b) the asset is held for more than 5 years. I.R.C. Â§ 1(h)(2).
Any gain on the deemed sale must be recognized notwithstanding any provision of the Code. Act, Â§ 311(e). A loss resulting from the deemed sale, however, is not allowed for any taxable year; the loss is neither recognized nor preserved through a basis adjustment. Id. The basis of the reacquired asset is its closing market price or fair market value, whichever applies, on the date of the deemed sale, whether the deemed sale results in a gain or a loss. Id.
II. Massachusetts References the Internal Revenue Code
With certain exceptions not here relevant, in determining a taxpayer's Massachusetts taxable personal income, Massachusetts adopts the Internal Revenue Code (the "Code") as of January 1, 1998. Massachusetts residents are subject to tax on their taxable income, computed as federal gross income with certain modifications not relevant here. G.L. c. 62, Â§Â§ 2 through 4. "Federal gross income," as that term is used in c. 62, means federal gross income under the Code as amended and in effect on January 1, 1998. G.L. c. 62, Â§ 1(c). Therefore, any federal provision that has not been incorporated into the Code as of that date is generally not adopted by Massachusetts for personal income tax purposes.
III. Section 311(e) Was Never Incorporated Into the Code
Although Â§ 311(e) was enacted by the United States Congress as part of the Tax Relief Act of 1997 on August 5, 1997 and, thus, would have been in the Code as of January 1, 1998 and adopted by Massachusetts if it had been incorporated into the Code, it was not so incorporated. Section 311(e) neither created a new nor modified an existing Code provision. See Taxpayer Relief Act of 1997: Law and Explanation, Federal Tax Guide Reports (CCH) No. 9, Vol. 80, Issue No. 34 (August 14, 1997). Accordingly, the provisions of Â§ 311(e) are not adopted by Massachusetts.
IV. Massachusetts Treatment of Gain From Federal Deemed Sale
As a result of not adopting Â§ 311(e), any gain from a deemed sale under that provision is not subject to Massachusetts personal income taxation. Although the gain is recognized federally as a result of Â§ 311(e), it is not "federal gross income" under the 1998 Code and, thus, is not included in Massachusetts gross income. Additionally, any loss resulting from the deemed sale is not allowed. Losses are generally taken into account, if at all, only if they are recognized federally under the 1998 Code. See 830 CMR 62.4.1(3)(b); see also G.L. c. 62, Â§ 2.
For Massachusetts personal income tax purposes, the beginning Massachusetts holding period of any stock reacquired pursuant to Â§ 311(e) will continue to be the date the asset was acquired or January 1, 1995, whichever is later, not the date the asset was reacquired for federal tax purposes, e.g., January 2, 2001. Likewise, the beginning Massachusetts holding period of any other capital asset reacquired pursuant to Â§ 311(e) will continue to be the later of the date the asset was acquired or January 1, 1995, not the date the asset was reacquired for federal tax purposes, e.g, January 1, 2001. Finally, the Massachusetts initial basis of any asset reacquired pursuant to Â§ 311(e) will not be its closing market price or fair market value, whichever applies, on the date of the deemed sale, whether the deemed sale results in a gain or a loss, but will continue to be determined as of the date the asset was first acquired.
1. Section 1231(b) property means property used in a trade or business of a character which is subject to the allowance for depreciation provided in Â§ 167 of the Code, held for more than 1 year, and real property used in a trade or business, held for more than 1 year, which is not: (a) property of a kind properly includible in inventory if on hand at the close of the taxable year, (b) property held for sale to customers in the ordinary course of business, (c) a copyright; literary, musical, or artistic composition; or similar property, or (d) a publication of the United States Government which is received from the United States Government, or any agency thereof, other than by purchase at the price at which it is offered for sale to the public, and which is held by the taxpayer described in paragraph (5) of Â§ 1221(a). I.R.C. Â§ 1231(b)(1). Additionally, such term includes timber, coal, or domestic iron ore with respect to which Â§ 621 applies; certain livestock; and certain unharvested crops. Id. at (2) through (4). ( return to text)
/s/Sheila T. LeBlanc
Sheila T. LeBlanc
Senior Deputy Commissioner of Revenue
Febuary 22, 2002