|Organization:||Massachusetts Department of Revenue|
|Referenced Sources:||Massachusetts General Laws|
Personal Income Tax
Facts: Taxpayer Cooper has Part B (5%) net income of $10,000 from his business which he reports on a Schedule C. For the current taxable year, Cooper has a deduction for alimony paid in the amount of $12,000. In addition, Cooper has Part A (10%) net gain of $1,000 from the sale of a capital asset used in his business. For purposes of this Directive, it is assumed that the gain from this sale is effectively connected with the active conduct of Cooper's business.
Issue: May Taxpayer Cooper use the $2,000 excess of his deduction for alimony paid over his Part B income to offset his Part A income?
Discussion: Generally, taxpayers may not use excess Part B deductions to offset their Part A income. However, Massachusetts law provides that a taxpayer may use the excess of Part B deductions over Part B income to offset Part A income in the limited situation where two requirements are met. G.L. c. 62, § 2(c)(1).
The first requirement relates to the Part B deductions. The deductions must be those taken against Part B gross income to compute Part B adjusted gross income. (AGI deductions). G.L. c. 62, § 2(c)(1). These deductions are those allowed under section 62 of the Internal Revenue Code, with certain modifications. G.L. c. 62, § 2(d). These deductions include the deductions for trade or business expenses, as well as deductions for certain other payments, such as alimony. I.R.C. § 62(13). Thus, on the facts presented, Cooper's $2,000 excess of his alimony deduction over his Part B income satisfies the first requirement.
The second requirement relates to the nature of the Part A income. To qualify for the offset, the Part A income must be effectively connected with the active conduct of the taxpayer's trade or business. Part A income that is unrelated to a trade or business of the taxpayer may not be reduced by the excess adjusted gross income deductions. G.L. c. 62, § 2(c)(1).
Directive: Taxpayer Cooper may use the $2,000 excess deduction for alimony paid to offset his Part A income since this deduction is an AGI deduction and his Part A income is effectively connected with the active conduct of his business.
Reference: G.L. c. 62, § 2(c)(1), (d); I.R.C. § 62(13).
/s/Ira A. Jackson
Ira A. Jackson
Commissioner of Revenue
31 December 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.