The Massachusetts Legislature recently amended the personal income tax installment transactions provision by providing a new $1 million threshold for the separate Massachusetts installment sale election. St. 2004, c. 262, §§ 19, 20, 72; amending G.L. c. 62, § 63.
The purpose of this Technical Information Release is to announce the enactment of the changes
to the Massachusetts installment sale election provision and to provide an interim description of the provision's requirements and effective date prior to the amendment of the accounting methods regulation, 830 CMR 62.63.1.
II. Prior Massachusetts Law
Under federal tax law, taxpayers who sell property in an installment sale, subject to IRC § 453, in general a sale with respect to which payment will be made in multiple years, may elect to defer the tax to the extent that payment of the purchase price is deferred. Under prior Massachusetts personal income tax law, taxpayers who elected installment sale treatment federally were not automatically entitled to equivalent treatment in Massachusetts. In order to qualify for installment sale treatment, taxpayers were required to file a separate Massachusetts installment sale election and to post security with the Commissioner if the tax deferred was at least $1,500. G.L. c. 62, § 63.
Taxpayers electing installment sale treatment federally for tax years prior to January 1, 2005, will be unaffected by the new automatic installment sale provision. Therefore, a taxpayer with a Massachusetts gain for the entire transaction of less than $1 million who, prior to January 1, 2005, did not elect installment gain treatment for Massachusetts purposes, will not have to recognize gain already recognized for Massachusetts purposes. Further, a taxpayer required to post security prior to January 1, 2005, will continue to adhere to the prior security requirements unaffected by the new $1 million Massachusetts gain threshold.
III. New Automatic Installment Sale Treatment
Effective for sales on or after January 1, 2005, taxpayers who are treated as electing installment sale treatment federally will automatically follow Massachusetts installment sale treatment if the Massachusetts gain for the entire transaction is less than $1 million. In the case of flow-through entities, the $1 million threshold applies to the gain recognized by individual shareholders, beneficiaries, etc., taxable under chapter 62. Such qualifying taxpayers may not separately elect out of installment sale treatment for Massachusetts tax purposes and do not have to post security with the Commissioner. The basis adjustment provision under G.L. c. 62, § 6F may apply whether or not the taxpayer automatically qualifies for installment sale treatment.
Taxpayers who are treated as electing installment sale treatment federally will be required to file a separate Massachusetts installment sale election and to post security with the Commissioner if their Massachusetts gain for the entire transaction is equal to or greater than $1 million. G.L. c. 62, § 63(a)(2). In the case of a contingent payment sale, (i.e., where the total gain for the transaction is uncertain by the close of the tax year in which the sale occurs), taxpayers will be required to file a separate Massachusetts installment sale election and to post security with the Commissioner, unless it is unreasonable to expect the total amount of gain, including the contingent payments, to equal or exceed $1 million. Taxpayers are not required to file a separate Massachusetts installment sale election and post security in the case of a contingent payment sale with a stated maximum selling price, including all contingent payments, that would result in Massachusetts gain of less than $1 million.
Commissioner of Revenue
January 25, 2005