Directive  Directive 02-11: Corporate Excise Treatment of Construction Work in Progress

Date:	09/17/2002
Organization:	Massachusetts Department of Revenue
Referenced Sources:	Massachusetts General Laws

Sales and Use Tax

Introduction: This Directive sets forth the rules on how construction work in progress ("CWIP") is treated in determining a corporation's excise under chapter 63.

Issue 1: How is Massachusetts real estate CWIP to be treated in determining a tangible property corporation's liability under the non-income or property measure of the corporate excise?

 

Directive 1: In determining a tangible property corporation's liability under the non-income measure of the corporate excise, a corporation must include 15% of its current year's Massachusetts real estate CWIP accumulation in deriving the value of its tangible property situated in the Commonwealth that is not subject to local taxation. Notwithstanding the above rule, effective prospectively from the date of this Directive, if a corporation can substantiate the actual percentage of Massachusetts tangible property not subject to local taxation that is included in such CWIP account, then the corporation may include such actual percentage in lieu of the 15% safe harbor percentage.

 

Discussion of the Law: The non-income measure of the corporate excise is prescribed by § 32(a)(1) of c. 63 for Massachusetts tangible property corporations and by § 39(a)(1) of c. 63 for foreign tangible property corporations. [1] Under both provisions an excise is imposed on the taxable value of such corporations' tangible property situated in Massachusetts and not subject to local taxation at the rate of $2.60 per $1,000 of taxable value, or .26%. G.L. c. 63, §§ 32(a)(1) and 39(a)(1); G.L. c. 63, § 31B.

 

A "tangible property corporation" is defined under c. 63 as:

 

a corporation whose tangible property situated in the commonwealth on the last day of the taxable year and not subject to local taxation is ten per cent or more [2] of such portion of its total assets on the last day of the taxable year less those assets as are situated in the commonwealth on the last day of the taxable year and are subject to local taxation, and, for a foreign corporation, less its investment on said date in foreign corporations not registered to do business nor doing business in the commonwealth, as shall be found by multiplying said amount by such corporation's income apportionment percentage, as determined under the provisions of section thirty-eight, or a corporation which, in the judgment of the commissioner, should be so classified.

 

G.L. c. 63, § 30(10) (footnote added).

 

The non-income measure of the excise is levied on the value of a tangible property corporation's tangible property as determined to be taxable under G.L. c. 63, § 30(7). G.L. c. 63, §§ 32(a)(1) and 39(a)(1). Under paragraph (7) it is stated that the value of a corporation's taxable tangible property "shall be the book value of such of its tangible property situated in the commonwealth on the last day of the taxable year as is not subject to local taxation nor taxable under section sixty-seven." [3]

 

Cognizant that a certain percentage of a tangible property corporation's current year's Massachusetts real estate CWIP accumulation is comprised of Massachusetts tangible property that is not subject to local taxation, but recognizing that it is not always possible to determine that percentage with accuracy, the Department of Revenue ("Department") has required and will continue to require every tangible property corporation to include a safe harbor percentage amount of 15% of its current year's Massachusetts CWIP accumulation in determining its liability under the non-income measure. However, effective prospectively from the date of this Directive, if a corporation can substantiate the actual percentage of Massachusetts tangible property not subject to local taxation that is included in such CWIP account, then the corporation may include such actual percentage in lieu of the 15% safe harbor percentage.

 

Issue 2: How is CWIP to be treated in determining a corporation's liability under the income measure of the corporate excise? More specifically, should CWIP be included in calculating the property factor of the apportionment formula used to determine a corporation's net income derived from business carried on in Massachusetts?

 

Directive 2: For taxable years ending on or after August 11, 1995, real or tangible property, including CWIP, is includible in the property factor equation of a taxpayer that is not a construction contractor [4] if such property is used directly or indirectly for the production of business income. Real or tangible personal property of a type that is depreciable under Internal Revenue Code ("IRC") § 167 is considered to be used by a corporation during the taxable year for the production of business income when it has been placed in service within the meaning of Treas. Reg. § 1.167(a)-10(b), provided that the property has not been retired within the meaning of Treas. Reg. § 1.167(a)-8. Effective prospectively from the date of this directive, however, real or tangible personal property of a type that is not depreciable under § 167, or if depreciable under § 167, not placed in service within the meaning of Treas. Reg. § 1.167(a)-10(b), is presumed not to be used directly or indirectly for the production of business income unless the presumption is rebutted under the facts of a particular case. Accordingly, in the majority of cases, CWIP will not be includible in the property factor equation because such property is not placed in service within the meaning of Treas. Reg. § 1.167(a)-10(b) and, thus, typically, is not used directly or indirectly for the production of business income. [5] Id. However , the facts and circumstances of any given case will determine whether CWIP is includible in the property factor equation.

 

Discussion of the Law: Except as noted in footnote 6 below, every corporation, domestic and foreign alike, with income from business activity which is taxable both within and outside of Massachusetts must apportion that part of its net income derived from business carried on in Massachusetts and, thus, taxable by Massachusetts by multiplying all of its taxable net income by a three factor apportionment percentage as provided in G.L. c. 63, § 38 (c)-(g) and 830 CMR 63.38.1. CMR 63.38.1(1)(b). [6] For Massachusetts tax purposes, a corporation's income subject to apportionment is its entire income derived from its related business activities within and outside of Massachusetts plus any other income subject to the tax jurisdiction of Massachusetts. CMR 63.38.1(3)(a).

 

The "three factor apportionment percentage" is a fraction, the numerator of which consists of a property factor, payroll factor, and sales factor, and the denominator of which is the total number of factors utilized in the numerator. G.L. c. 63, § 38(c). The "property factor," itself a fraction, is defined under G.L. c. 63,§ 38(d). There it is provided that the property factor is a fraction, the numerator of which is the average value of the corporation's real and tangible personal property owned or rented and used in Massachusetts during the taxable year and the denominator of which is the average value of all of the corporation's real and tangible personal property owned or rented and used during the taxable year.

 

The above phrase "real and tangible personal property" includes land, buildings, machinery, stock of goods, equipment, and other real and tangible personal property, as well as leaseholds, and leasehold improvements. 830 CMR 63.38.1(7)(a). For taxable years ending on or after August 11, 1995, such property, including CWIP, is includible in the property factor of a taxpayer that is not a construction contractor if it is used directly or indirectly for the production of business income. 830 CMR 63.38.1(7)(b); 830CMR 63.38.1(15)(b); 830 CMR 63.38.1(13)(c) (version promulgated on August 11, 1995); Commissioner of Revenue v. New England Power Company, 411 Mass. 418 (1991).

 

As of August 11, 1995, the date the Department promulgated its apportionment regulation, the Department has considered real or tangible personal property of a type that is depreciable under Internal Revenue Code ("IRC") § 167 to be used by a corporation "during the taxable year for the production of business income" when it has been placed in service within the meaning of Treas. Reg. § 1.167(a)-10(b), provided that the property has not been retired within the meaning of Treas. Reg. § 1.167(a)-8. 830 CMR 63.38.1(7)(b). Additionally, the Department has presumed that real or tangible personal property of a type that is not depreciable under § 167 is used directly or indirectly for the production of business income unless the presumption is rebutted under the facts of a particular case. Id. Effective prospectively from the date of this directive, however, real or tangible personal property of a type that is not depreciable under § 167, or if depreciable under §167 and not placed in service within the meaning of Treas. Reg. § 1.167(a)-10(b), is presumed not to be used directly or indirectly for the production of business income unless the presumption is rebutted under the facts of a particular case. [7]

 

It is well settled that CWIP is not considered "placed in service" within the meaning of Treas. Reg. § 1.167(a)-10(b). Mobile Lights & R. Co. v. C.I.R., 23 B.T.A. 543, 549 (1931); Livingston v. C.I.R., T.C. Memo, 1966-49 (1966); Biggs v. C.I.R., T.C. Memo, 1968-240 (1968), aff'd, 440 F.2d. 1 (1971). Property is considered "placed in service" under Treas. Reg. § 1.167(a)-10(b) only when it is in a condition or state of readiness and available for a specifically assigned function whether in a trade or business, in the production of income, or in a tax exempt activity. (2001) 4 Stand. Fed. Tax Rep. ( CCH) ¶ 11,025.038. Accordingly, in the majority of cases, CWIP will not be includible in the property factor equation because such property is not placed in service within the meaning of Treas. Reg. § 1.167(a)-10(b) and, typically, is not used directly or indirectly for the production of business income. However , the facts and circumstances of any given case will determine whether CWIP is includible in the property factor equation.

 

Issue 3: Does CWIP qualify for the investment tax credit ("ITC")?

 

Directive 3: No. CWIP does not qualify for the ITC because it is neither depreciable property under IRC § 167 nor recovery property under IRC § 168, alternative prerequisites for qualifying for the ITC.

 

Discussion of the Law: Under G.L. c. 63, § 31A, manufacturing corporations, research and development corporations, and corporations engaged primarily in agriculture or commercial fishing are allowed an ITC against their corporate excise liabilities imposed by c. 63 for acquiring, constructing, reconstructing, or erecting qualified tangible property. To be eligible for the credit, the qualifying property must be: (1) tangible property acquired by purchase, as defined under IRC § 179(d); (2) depreciable property under IRC § 167, with a useful life of four years or more or considered recovery property under IRC § 168; (3) used by the corporation in Massachusetts, and (4) situated in Massachusetts on the last day of the corporation's taxable year. G.L. c. 63, § 31A(a).

 

Tangible property is depreciable under IRC § 167, beginning in the taxable year that the property is placed in service and ending in the taxable year that the property is retired from service or fully depreciated. Treas. Reg. § 1.167(a)-10(b). As stated in the Discussion of the Law in Directive 2 above, it is well settled that CWIP is not considered "placed in service" within the meaning of Treas. Reg. § 1.167(a)-10(b). Accordingly, CWIP is not depreciable property under IRC § 167.

 

Nor is CWIP recovery property under IRC § 168. "Recovery property" is a term used in connection with the accelerated cost recovery system ("ACRS") applicable under a prior version of IRC § 168. The term has had no meaning under IRC § 168 since 1987. Under ACRS, "recovery property" was defined as tangible personal property placed in service after 1980 and before 1987 of a character subject to depreciation and used in a trade or business or held for the production of income. [2001] 4 Stand. Fed Tax Rep. (CCH) ¶ 11,258.01. However, for property placed into service after 1986, IRC § 168 provides for a modified accelerated cost recovery system ("MACRS"), a system which does not employ the term "recovery property."

 

Property is subject to IRC § 168 and to MACRS rules beginning in the taxable year that the property is placed in service. This was also true of recovery property under ACRS rules. Accordingly, CWIP would not have been considered recovery property were ACRS rules still applicable as CWIP is not considered "placed in service." Nor, for this reason, is CWIP any other type of property that is subject to IRC § 168.

 

In summation, CWIP is neither depreciable property under IRC § 167 nor recovery property under IRC § 168 or any other type of property subject to IRC § 168. Accordingly, CWIP is not eligible for the ITC.

 

/s/Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue

 

AL:DMS:pls

 

September 17, 2002

 

DD 02-11

[1] The term "foreign corporations" means every corporation , association, or organization established, organized, or chartered under laws other than those of Massachusetts, i.e., laws of other states or of any foreign nation. G.L. c. 63, § 30(2).

[2] The rule in Directive 1 also applies in determining whether a corporation's tangible property situated in Massachusetts on the last day of the taxable year and not subject to local taxation is less than, exactly, or more than ten percent, for purposes of determining the corporation's classification status.

[3] G.L. c. 63, § 67 imposes an excise on certain ships or vessels.

[4] Property or equipment under construction must be included in the property factor of a construction contractor to the extent that the work completed exceeds progress payments received by the contractor. 830 CMR 63.38.1(7)(b).

[5] The Department will follow the analysis in Commissioner of Revenue v. New England Power Company, 411 Mass. 418 (1991) as to all factual scenarios that substantially resemble the facts in that case. In New England Power, the Supreme Judicial Court held that a public utility corporation's CWIP account was includible in calculating its property factor because the CWIP in issue in that case contributed indirectly to the production of the taxpayer's business income. New England Power at 423. The Federal Energy Regulatory Commission required the taxpayer to include a percentage of its CWIP costs in the report of its rate base, thus allowing the taxpayer to derive revenues based on its CWIP expenses.

[6] Exempted from the general rule are: (1) defense corporations described in subsection (k) of G.L. c. 63, § 38; (2) manufacturing corporations described in subsection (l) of § 38; and (3) mutual fund service corporations to the extent of their mutual fund sales as described in subsection (m) of §38. G.L. c. 63, § 38 (c). Generally, these corporations are subject to an apportionment percentage 100% based on sales. (Defense corporations described in subsection (k) of G.L. c. 63 are subject to the apportionment rules set forth in G.L. c. 63, § 38(k) and 830 CMR 63.38.1(11). Manufacturing corporations described in subsection (l) of § 38 are subject to the apportionment rules set forth in G.L. c. 63, § 38(l) and 830 CMR 63.38.1(10). Finally, mutual fund service corporations are subject to the apportionment rules under G.L. c. 63, § 38(m); 830 CMR 63.38.1(1)(c)(3).)

[7] Subsequent to the issuance of this directive, the Department will amend 830 CMR 63.38.1(7)(b) to comport with the analysis stated herein. From the date of the issuance of this directive, the position stated herein shall govern and taxpayers may no longer rely on the provisions of that regulation that reflect a different position.