I. Introduction

General Laws chapter 63, section 38N was amended by chapter 262, section 45 of the Acts of 2004, effective August 9, 2004. This Technical Information Release (TIR) explains the recent amendment and DOR's implementation of the amendment. The Commissioner of Revenue (Commissioner) intends to promulgate a regulation to provide more detailed guidance.

The new legislation provides that the credit allowed under G.L. c. 63, § 38N, the economic opportunity area credit (EOA credit), can be taken only after the taxpayer files an application with the Commissioner and the Commissioner certifies eligibility for the credit. Any corporation filing a return and taking the credit on or after August 9, 2004 is required by statute to file an application with the Commissioner for each year the credit is taken.

II. Overview

General Laws chapter 63, section 38N authorizes a credit against the tax imposed by chapter 63 for corporations that participate in a certified project in an economic opportunity area. The credit allowed is an amount equal to five per cent of the cost of eligible property. [1] The credit is a component of the Economic Development Incentive Program administered by the Economic Assistance Coordinating Council (EACC) within the Massachusetts Office of Business Development pursuant to G.L. c. 23A.

Section 45 of chapter 262 of the Acts of 2004 amended G.L. c. 63, § 38N to require the Commissioner to determine whether designations for economic target areas (ETAs), economic opportunity areas (EOAs), and certified projects are in compliance with the statutory provisions of G.L. c. 23A. Under the amendment, the Commissioner is also responsible for monitoring whether corporations are fulfilling their job creation commitments.

General Laws chapter 63, section 38N, as amended, now provides that the Commissioner must determine that:

  • A corporation taking the EOA credit has completed an application for the credit, signed under the pains and penalties of perjury by an authorized representative of the corporation, and has filed it with the Commissioner.
  • The property eligible for the credit is used in a certified project that is in compliance with the definition of certified project set forth in G.L. c. 23A.
  • The certified project is within an EOA as defined in G.L. c. 23A and wholly within an area designated as an ETA pursuant to G.L. c. 23A.
  • The EOA conformed to the definition of a "blighted open area," "decadent area," or "sub-standard area" as set forth in G.L. c. 121A, § 1 when it was designated.
  • The certified project has a reasonable chance of increasing employment opportunities for the residents of the ETA as advanced in the initial proposal certified by the EACC.

In addition, if the Commissioner determines that the certified project is not in compliance with G.L. c. 23A, then the Commissioner must notify the EACC of the determination, and the EACC must revoke certification of the project.

Finally, the Commissioner must, not less than once every 2 years, review all projects certified by the EACC on or after January 1, 2000 for which corporations have filed EOA credit applications.

If a project is considered decertified for reasons of fraud or material misrepresentation, the Commissioner has a cause of action against the corporation for the value of any economic benefits received, including, but not limited to, the amount of the tax credit allowed under section 38N.

III. Application

A. General Requirement

The amendment to G.L. c. 63, § 38N became effective on August 9, 2004. Any corporation filing a return [2] and expecting to take an EOA credit, including any EOA credit carried over from prior years, on or after that date is required to complete and submit an EOA credit application prior to filing its return. The EOA credit application must be submitted each year the credit is taken. If a corporation files its return taking an EOA credit without completing and submitting the EOA credit application, the Commissioner will make a correction to the corporation's return pursuant to G.L. c. 62C, § 26(c). An S corporation that generates a credit must file an EOA credit application in the tax year it takes the credit or in the tax year that it generates the credit if the credit will flow through to the S corporation's shareholders. Taxpayers subject to tax under G.L. c. 62 are not required to file an EOA credit application prior to taking the credit.

The EOA credit application is available on DOR's web site, www.mass.gov/dor.

Upon receipt of a corporation's EOA credit application, the Commissioner will review the application and any other necessary information to determine whether the certified project is in compliance with G.L. c. 23A and whether the corporation is entitled to take the credit.

B. Transition Period for Returns Filed between August 9, 2004 and 14 Days after the Issuance of this TIR

In any case in which a corporation has taken an EOA credit on a return filed between August 9, 2004 and within 14 days after the issuance of this TIR, the corporation will have to submit an EOA credit application by April 15, 2005. If the taxpayer fails to meet this deadline, the Commissioner will make a correction to the corporation's return pursuant to G.L. c. 62C, § 26(c).

IV. Determination Whether an Economic Target Area is in Compliance with G.L. c. 23A

Absent facts and circumstances indicating a deviation from the statutory provisions of G.L. c. 23A, the Commissioner will defer to the judgment of the EACC in designating an area an ETA.

V. Determination Whether an Economic Opportunity Area is in Compliance with G.L. c. 23A

Absent facts and circumstances indicating a deviation from the statutory provisions of G.L. c. 23A, the Commissioner will defer to the judgment of the EACC in designating an area an EOA.

For purposes of efficiency, the Commissioner will, if a municipality so requests, make a determination whether the EOA designation is in compliance with G.L. c. 23A at the initial stage of the certification process. Municipalities seeking designations of EOAs may submit their proposals to the Commissioner at the same time as they submit them to the EACC. If upon such initial-stage review of a an EOA designation, the Commissioner determines that a designation is in compliance with the provisions of G.L. c. 23A, that determination will not, absent fraud or a material misrepresentation of the facts, be subject to review later when the corporation submits its EOA credit application to take the EOA credit on its tax return.

VI. Determination Whether a Certified Project is in Compliance with G.L. c. 23A

A. In General

The Commissioner will make a determination whether the project meets the criteria contained in G.L. c. 23A. A certified project will be reviewed to determine whether it has met its job creation commitments and whether it is receiving the required local property tax exemption.

B. Job Commitments

The Commissioner is obligated to review certified projects to ensure that they satisfy the employment projections specified in the original project proposal. The Commissioner will make a determination whether the project has a reasonable chance of increasing employment opportunities for residents of the ETA as advanced in the initial proposal certified by the EACC. The Commissioner intends to promulgate a regulation to set out circumstances under which the Commissioner will decertify a project for failing to meet employment projections. An example of an instance where a certified project will not be considered in compliance is where the actual number of permanent full-time employees the certified project employed from among residents of the project's ETA is less than fifty per cent of the number of permanent full-time employees the certified project projected it would employ from among residents of the ETA, as set out in its certified project application for the period in question.

C. Local Property Tax Exemptions

The Commissioner will take into consideration the local property tax exemptions offered to certified projects when making a determination whether a certified project is in compliance with G.L. c. 23A, since such exemptions, specifically tax increment financing (TIF) and special tax assessment (STA) as described in G.L. c. 23A, are a required component of certified projects.

1. Payment in lieu of tax

For projects certified on or after the date this TIR is issued, if a corporation and a municipality enter into an agreement whereby the corporation is obligated to make contributions, in cash or otherwise, to the municipality in an amount approximately equivalent to the amount of the local property tax exemption, the Commissioner will determine that the certified project is not receiving the required local property tax exemption and thus is not in compliance with the provisions of G.L. c. 23A. The Commissioner will not make an adverse determination under this rule solely by virtue of the fact that a taxpayer pursuant to the TIF agreement contributes cash, property or services to a municipality to meet municipal needs, so long as the local property tax exemptions offered to the taxpayer, net of the cost to the taxpayer of the contributions, are not de minimis (see below). Moreover, the Commissioner will not make an adverse determination under this rule because a taxpayer, as a matter unrelated to the TIF agreement, voluntarily contributes cash, property or services to a municipality.

2. De minimis TIFs

For projects certified on or after the date this TIR is issued, the Commissioner will review TIF agreements to make sure that the exemption percentage, i.e., the percentage of the parcel's increased value that is exempt from local property tax, is more than de minimis. In reviewing whether a TIF agreement is de minimis, the Commissioner will take into consideration the incremental benefit to the corporation resulting from the local property tax exemption for personal property provided pursuant to G.L. c. 59, § 5, cl. 51 st.

D. Opportunity for DOR Prescreening of Certified Projects

For purposes of efficiency, the Commissioner will, if a municipality or a corporation so requests, make a determination whether the certified project designation is in compliance with G.L. c. 23A at the initial stage of the certification process. Municipalities or corporations seeking designations of certified projects may submit their proposals to the Commissioner at the same time as they submit them to the EACC. If upon such initial-stage review of a certified project designation, the Commissioner determines that a designation is in compliance with the provisions of G.L. c. 23A, that determination will not, absent change of facts or circumstances or fraud or a material misrepresentation of the facts, be subject to review later when the corporation submits its EOA credit application to take the EOA credit on its tax return. However, a certified project will still be reviewed with respect to job commitments.

VII. Two-year Review

Every two years, the Commissioner will review projects certified on or after January 1, 2000 if corporations have filed EOA credit applications with respect to the projects and the projects have not been reviewed during the previous two years.

VIII. Decertification

If the Commissioner determines that a certified project is no longer in compliance, he will provide notice to the corporation and the EACC of his intention to have the project decertified. A corporation that has been notified of the Commissioner's intent to have its project decertified may request a hearing before the Department on the proposed decertification and all interested parties will be given an opportunity to be heard. The notice provided to the corporation will explain that the corporation may request a hearing and the time within which the corporation must request a hearing.

If after the hearing, or thirty days from the date of the notice if no hearing is requested, the Commissioner still finds that the certified project is not in compliance with G.L. c. 23A, he will notify the EACC of the determination, and EACC will revoke certification of the project. The Commissioner will consider the date a project is decertified to be the date of the Commissioner's notice of his intention to have the project decertified.

Absent fraud or material misrepresentation, any EOA credits taken prior to the date the project is decertified will be allowed, subject to recapture. If a project is decertified, the EOA credits previously taken are subject to recapture. G.L. c. 63, § 38N(a); 830 CMR 63.38N.1(11). Under G.L. c. 63, § 38N, if property for which an EOA credit was taken ceases to be used exclusively in a certified project within an EOA before the end of its useful life, the credit claimed is subject to recapture. Upon de-certification of a corporation's certified project, the property generating the credit is no longer being used in a certified project. After the application of the recapture rules, the amount of credit remaining will be available to the corporation to take or carryover as allowed under the applicable carryover provisions. G.L. c. 63, § 38N; 830 CMR 63.38N.1(10).

Example: On April 1, 2005, Abel Corp files an EOA application. After a review, the Commissioner provides Abel Corp with a notice of his intention to have the its project decertified. The notice is dated May 1, 2005. In a letter dated May 15, 2005, Abel Corp requests a hearing on the proposed decertification. The hearing is held on May 29, 2005. After the hearing the Commissioner still finds that the certified project is not in compliance and notifies EACC of its determination. The EACC is required by statute to revoke certification of Abel Corp's project. For purposes of determining the amount of credit subject to recapture, the Commissioner will consider the date of decertification to be May 1, 2005, the date of the Commissioner's notice of his intention to have the project decertified.

If the project is considered decertified for reasons of fraud or material misrepresentation, the Commissioner will have a cause of action against the controlling business of the project for the value of any economic benefits received, including, but not limited to, the amount of the tax credit allowed under this section. That cause of action does not preclude the Commissioner from making assessments for open tax periods to recover the credits.

The Commissioner's responsibility to review certified projects does not affect his authority to make adjustments to a corporation's tax liability upon audit.

/s/Alan LeBovidge

Alan LeBovidge

Commissioner of Revenue

AL:LEM:lbr

March 18, 2005

TIR 04-24


[1] A description of "eligible property" is set out in DOR regulation 830 CMR 63.38N.1(4).

[2] For purposes of this TIR, "return" means an original return or an amended return.