|Organization:||Massachusetts Department of Revenue|
|Referenced Sources:||Massachusetts General Laws|
Personal Income Tax
FACTS: Taxpayer Davis, who is not in a trade or business, borrows $50,000 at 10% annual interest to purchase an interest in Acme Partnership which is carrying on a business within the meaning of section 62 of the Internal Revenue Code. During the taxable year, Taxpayer Davis incurs interest expense in the amount of $5,000 on this indebtedness.
ISSUE: May Taxpayer Davis deduct the interest expense on indebtedness incurred to acquire the partnership interest on his Massachusetts return?
DISCUSSION: Massachusetts law does not adopt the interest expense deduction permitted under section 163 of the Internal Revenue Code unless it is also allowed under section 62 of the Code. G.L. c. 62, § 2(d). The deductions permitted under section 62 of the Code include the deduction for interest expenses when these expenses are attributable to a trade or business carried on by the taxpayer. I.R.C. §§ 62(1), 163. Under these facts, it is irrelevant that the partnership is carrying on a business because the partnership is not the taxpayer. Here the taxpayer has no trade or business. Consequently, the interest paid on indebtedness incurred by the taxpayer to purchase a partnership interest is not attributable to a trade or business of the taxpayer. Instead, it is a personal expense and thus not deductible under Massachusetts law.
DIRECTIVE: Taxpayer Davis may not deduct the interest expense accrued on the personal indebtedness incurred to purchase the partnership interest on his Massachusetts return.
REFERENCE: G.L. c. 62, § 2(d); I.R.C. §§ 62(1), 163.
/s/Ira A. Jackson
Ira A. Jackson
Commissioner of Revenue
20 August 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.