|Organization:||Massachusetts Department of Revenue|
|Referenced Sources:||Massachusetts General Laws|
Personal Income Tax
FACTS: Taxpayer Baker was employed by the City of Metropolis. While employed, Baker participated in the Deferred Compensation Plan established and maintained by the City of Metropolis pursuant to chapter 44 of the General Laws. In each year, the city deferred a portion of Baker's compensation and invested it in accordance with the plan agreement. When Baker separated from service he began to receive periodic payments of the previously deferred compensation, and the income attributable to such amounts, pursuant to the provisions of the plan.
The Deferred Compensation Plan was established in accordance with section 457 of the Internal Revenue Code and, at all times relevant here, qualified under section 457.
ISSUE 1: When is the compensation deferred included in Baker's Massachusetts gross income?
ISSUE 2: Is the interest earned on the deferred compensation included in Baker's Part A or Part B income?
DISCUSSION: Massachusetts gross income is federal gross income with certain modifications. G.L. c. 62, § 2(a).
The Code provides that compensation deferred pursuant to a city plan that satisfies the requirements of section 457 is not included in the federal gross income of the participant in the year deferred. I.R.C. § 457(a). Consequently, amounts deferred pursuant to a deferred compensation plan that qualifies under section 457 of the Code are not included in Massachusetts gross income in the year deferred. G.L. c. 62, § 2(a).
Compensation deferred pursuant to a plan that qualifies under section 457, and income attributable to such amounts deferred, are included in federal gross income for the taxable year in which paid to the participant. I.R.C. § 457(a). Consequently, compensation deferred pursuant to a plan that qualifies under section 457, and the income attributable to such amounts deferred, are included in Massachusetts gross income for the taxable year in which paid or made available to the participant. The amounts should be included in a taxpayer's Part B income, taxed at 5%.
DIRECTIVE 1: The compensation deferred is included in Taxpayer Baker's Massachusetts gross income in the years in which he receives payments from the plan.
DIRECTIVE 2: Any interest earned on the deferred compensation is included in Baker's Part B income, taxed at 5%.
REFERENCE: G.L. c. 62, § 2(a); I.R.C. § 457.
/s/Ira A. Jackson
Ira A. Jackson
Commissioner of Revenue
12 June 1986
This Directive represents the official position of the Department of Revenue on the application of the law to the facts as stated. The Department and its personnel will follow this Directive, and taxpayers may rely upon it, unless it is revoked or modified pursuant to 830 CMR § 62C.01(5)(e). In applying this Directive, however, the effect of subsequent legislation, regulations, court decisions, Directives, and TIRs must be considered, and Department personnel and taxpayers may rely upon this Directive only if the facts, circumstances and issues presented in other cases are substantially the same as those set forth in this Directive.