On June 29, 2009, the Legislature enacted "An Act Making Appropriations for the Fiscal Year 2010" (The Act). [1] The Act adopts the new federal exclusion from gross income allowed by the federal American Recovery and Reinvestment Act of 2009 ("ARRA") [2] for the COBRA subsidy for certain involuntarily-terminated employees and their families. In addition, the Act includes provisions decoupling Massachusetts tax law from certain federal tax law changes made by ARRA and, in one instance, from the impact of an IRS Notice that was effectively repealed (but only prospectively) by ARRA.

For certain corporate excise and personal income tax purposes, as specified in particular provisions of G.L. chapters 62 and 63, Massachusetts law generally follows the provisions of the federal Internal Revenue Code (IRC or "Code"). In so doing, the corporate excise provisions generally reference the Code as amended and in effect for the current year. [3] For personal income tax purposes, the pertinent Massachusetts provisions generally adopt the Code as amended and in effect on January 1, 2005; however, the Massachusetts personal income tax adopts the current Code with respect to certain sections. [4] This Technical Information Release (TIR) explains the impact of the Code coupling and decoupling provisions of the Act on the corporate excise and the personal income tax.

Also, the TIR explains that the dairy farmer tax credit is now one hundred percent refundable.

I. Exclusion from Gross Income of Subsidy for COBRA Coverage of Unemployed Workers

ARRA added new IRC § 139C which provides an exclusion from federal gross income for a 65% subsidy for COBRA continuation premiums for up to 9 months for certain workers who have been involuntarily terminated and for their families. To qualify for premium assistance, a worker must be involuntarily terminated between September 1, 2008 and December 31, 2009. This subsidy also applies to health care continuation coverage if required by states for small employers.

As a result of the Act, effective for tax years ending on or after January 1, 2009, Massachusetts conforms to the current Code with regard to the federal exclusion from gross income of the COBRA subsidy under IRC § 139C as added by ARRA. [5]

II. Provisions that Decouple from Federal Tax Law Changes in ARRA

A. Deferral of Cancellation of Debt Income on Repurchase of Debt under Section 108(i) of the Code

Under the Code, gross income includes income realized by a debtor from the cancellation of debt, subject to certain exceptions ( e.g., debtors in Title 11 bankruptcy, insolvent debtors, certain student loans, certain farm debt, and certain real property business debt). [6] The amount of the cancellation of debt (COD) income generally is equal to the difference between the adjusted issue price of the debt being cancelled and the amount used to satisfy the debt. These rules generally apply to the exchange of an old obligation for a new obligation, including a modification of debt that is treated as a debt-for-debt exchange.

ARRA added new IRC § 108(i) under which certain taxpayers can elect to defer recognition of COD income over 10 years (deferring tax on COD income for the first four or five years and then recognizing the income ratably over the following five taxable years). In general, § 108(i) provides that, at the election of a taxpayer, COD income realized in connection with a reacquisition after December 31, 2008, and before January 1, 2011, of an applicable debt instrument is includible in gross income ratably over a 5-taxable-year inclusion period, beginning with the taxpayer's fourth or fifth taxable year following the taxable year of the reacquisition. [7]

ARRA provides that, in the case of COD income realized by a partnership, S corporation, or other pass-through entity from the reacquisition of an applicable debt instrument, the pass-through entity must make the § 108(i) election. [8]

Massachusetts Corporate Excise. Effective for discharges in taxable years ending after December 31, 2008, the Act amends the corporate excise to decouple from IRC § 108(i). [9]

Massachusetts Personal Income Tax. For personal income tax purposes, Massachusetts generally follows the provisions of the Code as of January 1, 2005, with certain exceptions. [10] Since IRC § 108 is not one of the Code sections included as an exception, Massachusetts follows IRC § 108 as amended and in effect on January 1, 2005 and does not adopt the new § 108(i) provision allowing an exclusion from gross income for COD income from reacquisition of business debt at a discount.

For purposes of the corporate excise and the personal income tax, a taxpayer that makes the federal election allowed by IRC § 108(i) is required to add back to gross income any COD income that is deferred under IRC § 108(i). In future years when the deferred COD income is recognized for federal purposes, the taxpayer is allowed to make a corresponding subtraction, since the recognition event will have already taken place for Massachusetts tax purposes.

B. Temporary Suspension of Original Issue Discount Rules for Certain High-Yield Obligations

Generally, an issuer of a debt instrument with original issue discount (OID) may deduct OID as it accrues over time. However, under IRC § 163(e)(5), if a debt instrument is an applicable high yield discount obligation (AHYDO) issued by a corporation, no deduction is allowed for the "disqualified portion" of the OID on such debt instrument, and the remainder of the OID is not deductible until paid.

ARRA suspends the special rules for OID in IRC § 163(e)(5) for an AHYDO issued during the period beginning September 1, 2008 and ending on December 31, 2009. This temporary suspension applies only if (1) the obligation is issued in exchange for an obligation that is not an AHYDO and (2) the issuer of the old and new obligations is the same. ARRA also permits the Secretary of the Treasury to temporarily prescribe, in light of distressed conditions in the debt capital markets, a higher interest rate in determining high yield obligations. For federal income tax purposes, certain corporations will now be able to deduct from their gross income more OID than they would have been able to previously.

For purposes of the corporate excise and the personal income tax, Massachusetts decouples from these ARRA modifications of the AHYDO rules pursuant to the amendments included in Section 1232 of the ARRA to IRC § 163(a)(5)(F) suspending the rules for high-yield OID obligations and to IRC § 163(i)(1) regarding the application of a higher rate. [11] These decoupling provisions of the Act are applicable to obligations issued after August 31, 2008 in taxable years ending after that date.

C. Massachusetts Does Not Adopt Partial Gross Income Exclusion of Unemployment Compensation

For federal income tax purposes, pursuant to IRC § 85, individuals must include in gross income any unemployment compensation received under the laws of the U.S. or any state. The ARRA added new IRC § 85(c) whereby up to $2,400 of unemployment compensation benefits received in 2009 are excluded from the gross income of the recipient.

For personal income tax purposes, Massachusetts generally follows the provisions of the Code as of January 1, 2005, with certain exceptions. [12] Since IRC § 85 is not one of the Code sections included as an exception, Massachusetts follows IRC § 85 as amended and in effect on January 1, 2005 and does not adopt the new § 85(c) provision allowing an exclusion from gross income for up to $2,400 of unemployment compensation benefits received in 2009. Thus, for Massachusetts personal income tax purposes, an individual must include in gross income the entire amount of unemployment compensation received in 2009.

D. Effect of Internal Revenue Service Notice 2008-83 and Section 382(n) of the Code; Limitations on Losses Following an Ownership Change

In general, IRC § 382 limits the rate at which certain losses may be used by a corporation to offset income generated after an ownership change. The IRC § 382 loss limitation rules generally apply to net operating losses and net unrealized built-in losses present in the loss corporation at the time of an ownership change.

On October 1, 2008, the IRS issued Notice 2008-83 in which it announced that losses and deductions attributable to loans or bad debts of a bank (including any deduction for a reasonable addition to reserve for bad debts) that were otherwise allowable after the date of an ownership change under § 382 would not be treated as built-in losses or deductions attributable to a pre-change period.

ARRA narrowed (but did not eliminate) the application of IRS Notice 2008-83. ARRA effectively repealed Notice 2008-83 for all ownership changes occurring after January 16, 2009, but indicated that the Notice would be deemed to have the force and effect of law for (1) all ownership changes occurring on or before such date, and (2) all ownership changes occurring after such date if such change occurs with respect to a transaction that (i) is pursuant to a written binding contract entered into on or before such date, or (ii) was described in a public announcement or in a filing with the Securities and Exchange Commission on or before such date.

Also, ARRA adds a new Code § 382(n) which provides that any ownership change that occurs as a result of a restructuring plan required under a loan agreement or a commitment for a line of credit entered into with the Treasury Department under the Emergency Economic Stabilization Act of 2008 is not subject to the limitations on the subsequent use of NOLs and built-in losses that arise prior to the ownership change. [13]

Under the following sections of the Act, for purposes of chapter 62 and chapter 63 of the General Laws, Massachusetts decouples from (i) the federal relief from limitations on the use of losses after a change of ownership under IRS Notice 2008-83 for periods prior to its effective repeal by ARRA, and (ii) the provisions of IRC § 382(n) as added by ARRA:

SECTION 134. Notwithstanding federal income tax treatment to the contrary, for purposes of chapters 62 and 63 of the General Laws, the rules of section 382 of the Internal Revenue Code shall be applied without regard to the treatment of a change in ownership of a bank or other corporation provided in Internal Revenue Service Notice 2008-83 or in any federal statutory or administrative codification, supplement or implementation of such Notice. For purposes of said chapters 62 and 63, Internal Revenue Service Notice 2008-83 and any such codification, supplement or implementation shall have no force or effect in any taxable year.

SECTION 135. Notwithstanding federal income tax treatment to the contrary, for purposes of chapters 62 and 63 of the General Laws, section 382(n) of the Internal Revenue Code, inserted by the American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, shall have no force or effect in any taxable year.

Thus, for purposes of chapter 62 and chapter 63, these sections of the Act restore IRC § 382's limitation (as it existed before the special treatment for banks in IRS Notice 2008-83) on the use of built-in losses following the change in ownership of a bank or other corporation. For Massachusetts corporate and personal income tax purposes, IRC § 382(n) inserted by the ARRA has no force or effect in any taxable year. Also, for Massachusetts corporate and personal income tax purposes in any taxable year, IRC § 382 must be applied without regard to the treatment of a change in ownership of a bank or other corporation provided in IRS Notice 2008-83 or in any federal statutory or administrative codification, supplement or implementation of such Notice.

III. Change to the Dairy Farmer Tax Credit

The Massachusetts dairy farmer tax credit was established to offset the cyclical downturns in milk prices paid to dairy farmers and is based on the U.S. Federal Milk Marketing Order for the applicable market, such that when the U.S. Federal Milk Marketing Order price drops below a trigger price anytime during the taxable year the taxpayer will be entitled to the tax credit. The total amount of credits granted cannot exceed $4 million in any year.

A taxpayer who holds a certificate of registration as a dairy farmer pursuant to G.L. c. 94, § 16A is allowed a refundable tax credit based on the amount of milk produced and sold. The credit may be claimed against the taxes due under G.L. c. 63 or G.L. c. 62. [14] The dairy farmer tax credit as originally enacted pursuant to St. 2008, c. 310 was ninety percent refundable.

Pursuant to the Act, the dairy farmer tax credit is now one hundred percent refundable. [15] The Commissioner will apply the credit against the taxpayer's liability as reported on its tax return, first reduced by any other available credits, and then refund the balance of the credit to the taxpayer. The credit remains non-transferable. The effective date of this provision is July 1, 2009.

/s/Navjeet K. Bal
Navjeet K. Bal
Commissioner of Revenue

NKB:MTF:adh

December 11, 2009

TIR 09-21



[1] St. 2009, c. 27.

[2] Public Law No. 111-5. ARRA was signed into law by the President on February 17, 2009.

[3] G.L. c. 63, §§ 1, 30, 52A.

[4] G.L. c. 62, § 1(c).

[5] St. 2009, c. 27, § 26, amending G.L. c. 62, § 1(c).

[6] Generally, IRC § 61(a)(12) requires debtors to include COD income in the calculation of gross income. Among other exceptions, however, a debtor that realizes COD income in a Title 11 bankruptcy proceeding or when the debtor is insolvent may exclude some or all of this COD income from its gross income under IRC § 108(a) and must reduce, on a corresponding basis, valuable federal tax attributes such as net operating losses, capital losses, various credits, and basis in assets.

[7] See Revenue Procedure 2009-37.

[8] IRC § 108(i) (5)(B)(iii).

[9] St. 2009, c. 27, § 41 amending G.L. c. 63, § 1; § 43 amending G.L. c. 63, § 30(3); and § 48 amending G.L. c. 63, § 52A.

[10] G.L. c. 62, § 1(c).

[11] St. 2009, c. 27, § 27 amending G.L. c. 62, § 2(d)(1) by adding new paragraph (P); § 42 amending the definition of "net income" in G.L. c. 63, § (1); § 44 amending G.L. c. 63, § 30(4) by adding new clause (vii); and § 49 amending G.L. c. 63, § 52A.

[12] G.L. c. 62, § 1(c).

[13] See § 1261 of the ARRA (uncodified) and § 1262 of the ARRA adding new IRC § 382(n.).

[14] G.L. c. 63, § 38Z; c. 62, § 6(o).

[15] St. 2009, c. 27, § 29 amending G.L. c. 62, § 6(o), and § 47 amending G.L. c. 63, § 38Z.