| Date: | 02/16/2006 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Referenced Sources: | Massachusetts General Laws |
Personal Income Tax
This Directive is applicable to Peterson abatement applications and supplements Technical Information Release 05-20, Lower Capital Gains Tax Rates for All of Tax Year 2002; New Capital Gains Tax Rate Beginning on January 1, 2003. TIR 05-20 explains the procedure whereby certain taxpayers with capital gains transactions in the portion of the 2002 tax year after April 30, 2002 may be entitled to Peterson refunds under the provisions of St. 2005, c. 163.
Issue: Is a pass-through entity ( e.g., partnership, S-Corporation, or certain trusts) required to file an amended return in order for its partner, shareholder, or other applicable member or beneficiary to apply for a Peterson abatement under the provisions of St. 2005, c. 163 and TIR 05-20?
Directive: Amended 2002 returns for pass-through entities (Form 3, Form 355S, etc.) are not required in order for a partner, shareholder, or other applicable member or beneficiary to apply for a Peterson abatement. A partnership or other pass-through entity is required to provide a statement to its partners, shareholders, or other applicable members or beneficiaries to supplement the existing K-1s giving the holding period information for long-term capital gains and losses (5%, 4%, 3%, 2%, 1% or 0%) recognized during the portion of the 2002 tax year after April 30, 2002. However, any net long-term gain is taxed at 5% if specific holding period information needed to substantiate a lower rate is unavailable to the partner, shareholder, or other applicable member or beneficiary.
When applying for a Peterson abatement under TIR 05-20, partners, shareholders, or other applicable members or beneficiaries should make the corresponding adjustments directly on their own Schedule D. Also, if requested to provide substantiation for the abatement claim, the partner, shareholder, or other applicable member or beneficiary reporting such capital gains derived from a pass-through entity must submit the statement from the pass-through entity.
Issue: The taxable year for a partnership is different from the taxable year for certain of its partners who are individuals subject to the personal income tax. [1] Where a partnership has sold a capital asset in calendar 2002, what is the effect of different taxable years on the eligibility of a partner of the partnership to apply for a Peterson abatement?
Directive: Where there is a sale of a capital asset by a partnership, the date of gain or loss realization by the partnership determines the holding period for the capital asset. The computation of the taxable income of a partner includes the income, gain, loss, deduction, or credit derived by the partner from the partnership for the taxable year of the partnership ending within or with the taxable year of the partner. Thus, the date of a partnership's tax year-end determines the taxable year in which an individual partner reports gain from a partnership transaction. A partner is eligible to apply for a Peterson abatement only with respect to gains that are reportable by the partner for the partner's taxable year beginning on or after January 1, 2002 and before January 1, 2003.
Discussion: Partnerships themselves are not subject to the personal income tax, but a partner is required to include separately in his return his distributive share of the partnership's income or loss and any item of deduction or credit. G.L. c. 62, § 17(a), (b).
Under General Laws chapter 62, § 17(c), the character of any item of income, loss, deduction or credit included in a partner's distributive share shall be determined as if such item were realized directly by the partner from the source from which realized by the partnership or incurred in the same manner as incurred by the partnership.
General Laws chapter 62, § 17(d) specifies the taxable year in which the income is to be reported by the partner: the partner's distributive share of the various classes of income, loss, deduction and credit shall be included by such partner in his return for his taxable year during which or with which the taxable year of the partnership ends.
Example 1: Partner eligible for a Peterson abatement.
Partnership ABC, whose taxable year ends September 30, has partners A, B, and C. Partner A is a corporation (with a 50% partnership interest) whose taxable year ends September 30. Partners B and C are Massachusetts resident individuals (each with a 25% partnership interest) who use the calendar year as their taxable year.
On August 9, 2002, Partnership ABC sold a capital asset (Massachusetts real estate) with a holding period of seven years. Partnership ABC realized a long-term capital gain from the transaction within the partnership's taxable year ending on September 30, 2002. For Massachusetts personal income tax purposes, the partnership passes through the item of gain to its partners. The gain from the sale by the partnership retains its character (as capital gain income from the sale of a capital asset held for seven years) on each partner's tax return.
Partners B and C each report their distributive share (items of income, gain, loss, deduction, and credit) from partnership ABC's taxable year ending on September 30, 2002 on their 2002 Massachusetts personal income tax returns (partner A reports its distributive share on its corporate excise return).
As a result of the Peterson case and St. 2005, c. 163, for taxpayers subject to the personal income tax, the lower capital gains tax rates (5% ranging down to 0% depending on the holding period) are now applicable for the entire tax year beginning on or after January 1, 2002 and prior to January 1, 2003. Thus, individual partners B and C are eligible to apply for Peterson abatements on account of the sale of Massachusetts real estate by partnership ABC on August 9, 2002. In reference to partner A, the Peterson case has no application to a partner subject to the corporate excise.
Example 2: Partner not eligible for a Peterson abatement.
Partnership XYZ, whose taxable year ends June 30, has partners X, Y and Z. Partner X is a corporation (with a 50% partnership interest) whose taxable year ends June 30. Partners Y and Z are Massachusetts resident individuals (each with a 25% partnership interest) who use the calendar year as their taxable year.
On December 9, 2002, partnership XYZ sold a capital asset (Massachusetts real estate) with a holding period of seven years. Partnership XYZ realized a long-term capital gain from the transaction within the partnership's taxable year ending on June 30, 2003. For Massachusetts personal income tax purposes, the partnership passes through the item of gain to its partners. The gain from the sale by the partnership retains its character (as capital gain income from the sale of a capital asset held for seven years) on each partner's tax return.
Partners Y and Z each report their distributive share (items of income, gain, loss, deduction, and credit) from Partnership XYZ's taxable year ending on June 30, 2003 on their 2003 Massachusetts personal income tax returns (partner X reports its distributive share on its corporate excise return). For taxpayers subject to the personal income tax, for a taxable year beginning on or after January 1, 2003, the tax rate on capital gain income from the sale or exchange of a capital asset held for more than one year is 5.3%.
Thus, individual partners Y and Z are not eligible to apply for Peterson abatements on account of the sale of Massachusetts real estate by Partnership XYZ on December 9, 2002.
/s/Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue
AL:MTF:adh
February 16, 2006
DD 06-2