TIR 05-13 is modified and superseded in part by TIR 05-20

This Technical Information Release ("TIR") provides preliminary guidance on certain provisions contained in "An Act Relative To Tax Laws" ("the Act"). St. 2005, c. 163, enacted on December 8, 2005. The Act delays the effective date of the 2002 capital gains tax rate increase in a manner that complies with the Peterson II decision by the Supreme Judicial Court. [1] Pursuant to the Act, the rate increase will now be effective for tax years beginning on or after January 1, 2003. As a result of the Act, a taxpayer with capital gains transactions in the portion of the 2002 tax year ending April 30, 2002 will not owe tax at the increased rate. Also, under the Act, certain taxpayers with capital gains transactions in the portion of the 2002 tax year after April 30, 2002 may be entitled to refunds. Further details on the special abatement application procedures for taxpayers with refunds attributable to capital gains in 2002 will be provided as soon as possible.

New Capital Gains Tax Rate Effective for Tax Years Beginning on or after January 1, 2003. The Act provides that the capital gains tax rate increase to 5.3%, generally applicable to long-term capital gains (with holding periods exceeding one year), will be effective for tax years beginning on or after January 1, 2003.

Lower Capital Gains Tax Rates for All of Tax Year 2002. The Act reinstitutes the lower capital gains tax rates that initially existed during the portion of the 2002 tax year ending April 30, 2002 (5% ranging down to 0% depending on the holding period) and provides that such rates shall be applicable to the entire 2002 tax year, i.e., a tax year beginning on or after January 1, 2002 and prior to January 1, 2003. With certain exceptions, the capital gains law in effect for tax year 2002 is explained in the Department's regulation at 830 CMR 62.4.1, Capital Gains and Losses. [2]

Disregard Peterson Notices. Taxpayers who recently received a preliminary tax bill ( i.e., Notice of Intent to Assess) attributable to the Peterson case may disregard the notice. The Department will issue an automatic refund to a taxpayer who has paid additional tax and interest as a result of a Peterson Notice of Intent to Assess, to the extent of any overpayment. No action is necessary by the taxpayer. However, if repayment is not received, the taxpayer should contact customer service at 617-887-MDOR or toll-free in Massachusetts at 800-392-6089.

Special Abatement Procedure for Refunds. As a result of the Act, taxpayers with capital gain transactions reported for the portion of their 2002 tax year after April 30, 2002 may have overpaid their Massachusetts personal income tax. [3] The Department is establishing a process for taxpayers affected by the law change who are eligible for refunds for tax paid on gains realized during that portion of the 2002 tax year. Affected taxpayers must follow the special abatement procedure instituted pursuant to the terms of the Act. The Department anticipates offering taxpayers an online special abatement application procedure. Further details on the special abatement application for tax year 2002 capital gains will be provided as soon as possible on the Department's website www.mass.gov/dor.

If it is not possible to utilize the Department's automated online abatement process, a taxpayer may file an abatement application on Form CA-6. A revised 2002 capital gains schedule, instructions and a Form CA-6 will be posted on the Department's website beginning the week of December 12, 2005. However, it should be noted that such applications will be subject to manual processing and review and will, consequently, result in the delayed receipt of any refunds due.

Recalculation of 2002 Tax. Under the Act, all long-term capital gains and losses recognized for tax year 2002 must be netted for the entire year. [4] See 830 CMR 62.4.1. The amount of the overpayment for net capital gains during the portion of the 2002 tax year beginning after April 30, 2002 depends on the rate of tax (ranging from 5% down to 0%) that must be recalculated on such net capital gains (previously taxed at 5.3% on the 2002 return).

Holding Periods for Capital Assets. The Department cannot apply the lower capital gains tax rates for the portion of the 2002 tax year after April 30, 2002 without an application from the taxpayer because information not available to the Department is needed to recalculate the correct tax. The 2002 returns, as filed, do not indicate the holding periods for capital assets sold in the portion of the year after April 30, 2002. Because the lower rates (5% ranging down to 0%) are based on the holding periods, taxpayers must provide the holding period for each capital asset that was sold after April 30, 2002. Mutual fund shareholders must provide the holding periods applicable to any capital gains distributions made by mutual funds. Where a mutual fund does not provide its shareholders with the relevant holding periods for the capital gains that were realized by the fund and reflected in a capital gains distribution, the entire amount of the capital gain distribution is considered 5% gain. See 830 CMR 62.4.1(9)(b).

Transition Rules Needed to Effectuate the January 1, 2003 Date. The transition rules previously applied under TIR 02-21(II)(E), relating to the previous May 1, 2002 effective date of the capital gains rate change, will apply to the new January 1, 2003 effective date, to the extent pertinent. However, all gains and losses incurred in the 2002 tax year must be netted, as provided in 830 CMR 62.4.1, Capital Gains and Losses. [5]

Period for Filing Special Abatement Applications . The Act provides the following filing period for special abatement applications relating to long term capital gains recognized in taxable years beginning on or after January 1, 2002, and before January 1, 2003:

Such taxpayers may apply for abatement of the overpayment of tax on long-term capital gains for said taxable years pursuant to section 37 of chapter 62C, on or before June 30, 2006, within three years from the due date for such return, determined without regard to extensions, within two years from the date of assessment or deemed assessment of such tax on long-term capital gains, or within one year of the date of payment of such tax on long-term capital gains, whichever is later.

Refunds without Interest; Installment Payments . The Act provides that any overpayments will be refunded, without interest, in four annual installments, substantially equal in amount. The Department currently anticipates grouping refunds as abatement applications are processed in order to establish a quarterly system to issue refunds over the four-year installment period. Every three months, approximately, a group of refunds authorized by the Act will issue. No interest will be paid on refunds whether the taxpayer utilizes the online special abatement application or the manual Form CA-6 abatement application. An amount due to be refunded to a taxpayer is not treated as a tax payment or credit.

Refunds of $1,000 or Less . For administrative convenience, the Department may refund payments to a taxpayer that total $1,000 or less in a single lump sum, without interest.

Taxpayer Verification. As part of the special abatement process, taxpayers should verify the amounts shown on Schedule D (as originally filed) and notify the Department of any errors. For example, in reviewing the 2002 returns filed by affected taxpayers and comparing it to information reported to the Internal Revenue Service, the Department has found that, in some instances, the amount of net gains previously taxed at 0% (Schedule D, Part 3, line 23F) was incorrect.

Offsets. The Department will offset any proposed abatement under the Act by the amount of any additional tax due from the taxpayer under chapter 62 for the taxable year, whether or not the additional tax relates to capital gains, and whether or not such additional tax may otherwise be timely assessed under chapter 62. The provisions of chapters 62C and 62D, including without limitation provisions allowing offsets of refunds for unpaid tax assessments, child support obligations, or other applicable obligations, also apply to refunds under the Act.

/s/Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue


December 8, 2005

TIR 05-20

[1] On April 26, 2005, in Peterson II, the Supreme Judicial Court ruled that the new capital gains tax rate of 5.3% was effective for tax years beginning on or after January 1, 2002. However, in Peterson II, the Court noted that it is "within the Legislature's power to amend the Act yet again, if it wishes, to set the effective date at January 1, 2003." The background to both Peterson cases is detailed in TIR 05-13.

[2]However, in 2002, the regulation was superseded by an amendment to chapter 62 that established a limit of $2,000 for the total amount of deductions for short-term and long-term losses against interest and dividends reported on Schedule B. See TIR 02-21(II)(C). Under the capital gains law prior to 2002, there was no dollar limit on the deduction of capital losses against interest and dividend income reported on Schedule B.

[3] Taxpayers whose returns for the 2002 tax year may be affected because they had net capital gains during the portion of the year after April 30, 2002 include taxpayers who filed a Schedule D with Form 1, Form 1 NR/PY, Form 2, Form 3F or Form 3M.

[4] On the 2002 forms, because the rate structure initially had changed on May 1, 2002, long-term capital gains and losses were netted in two steps. First, long-term capital gains and losses were netted according to the rate classes 5% - 0% for transactions completed during the portion of the 2002 tax year prior to May 1, 2002. As an interim step, any net losses from that portion of the year were considered 5.3% net losses. Then all the 5.3% long-term capital gains and losses were netted for the portion of the tax year after April 30, 2002. These rules have been superseded by the Act.

[5] Taxpayers with installment sales transactions between May 1, 2002 and December 31, 2002 will be required to file abatement applications with regard to subsequent taxable years in which installment payments were received in order to benefit from any lower rate that may apply in those years due to the installment transaction.

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