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Letter Ruling

Letter Ruling Letter Ruling 81-18: Liquidation of Corporate Trust

Date: 02/24/1981
Organization: Massachusetts Department of Revenue
Referenced Sources: Massachusetts General Laws

Personal Income Tax


February 24, 1981

You request a ruling concerning the Massachusetts income tax consequences of the liquidation of the *********** Trust, a Massachusetts realty trust.

The Trust was organized on December 27, 1966 as a Massachusetts corporate trust with transferable shares. The principal asset of the Trust is real estate which is leased to other corporations. The Trust used accelerated depreciation with respect to its real estate. The proposed liquidation will occur within one calendar month and will be governed by Section 333 of the Internal Revenue Code ("Code").

A Massachusetts corporate trust is subject to taxation under Chapter 62 of the Massachusetts General Laws and the adjusted gross income of a corporate trust is determined as though it were a resident natural person. (M.G.L. c. 62, s. 8(a)). Under Section 8(c) of Chapter 62, dividends received from a corporate trust, which is, subject to taxation, are not taxable, except to the extent that they were derived from tax free earnings and profits.

For federal tax purposes, the Trust is an association taxable as a corporation. Although ordinarily under the Code no gain or loss will be recognized to the Trust on the distribution of its property in complete or partial liquidation, Section 1250 of the Code provides that upon a sale or other disposition of real estate, including a distribution in liquidation, an amount equal to "additional depreciation" taken on the property, to the extent that the value of the property exceeds its adjusted basis, is taxed as ordinary income. In general, additional depreciation means the amount by which the depreciation taken exceeds straight line depreciation. (I.R.C. s. 1250(b)(1)). The ordinary income is recognized even if the disposition would not otherwise be recognized as a taxable event. (I.R.C. s. 1250(a)(1)(A)).

Section 333 of the Code limits the amount of gain realized by a qualified electing non-corporate shareholder upon the complete liquidation within one calendar month of a domestic corporation. The amount of gain which the shareholder is required to recognize is the greater of (1) his ratable share of the corporations earnings and profits accumulated after February 28, 1913 or (2) the amount of money and the fair market value of stock or securities acquired by the corporation after December 31, 1953 which were distributed to the shareholder. The gain will be treated as a dividend to the shareholder to the extent that it does not exceed his ratable share of the corporation's earnings and profits; to the extent that the sum of money and the fair market value of the stock or securities received by the shareholder exceeds his ratable share of the liquidating corporation's accumulated earnings and profits, it will be taxed as capital gain (I.R.C. s. 333(e)).

Section 334(c) of the Code provides that property received in liquidation under Section 333 and in cancellation or redemption of the stock of a qualified electing shareholder shall have a basis equal to the basis of the stock cancelled or redeemed in the liquidation, decreased in the amount of any money received by the shareholder, and increased in the amount of gain recognized to the shareholder.

Massachusetts gross income is federal gross income with certain modifications (G.L. c. 62, s. 2). Section 2(a)(2)(D) of Chapter 62 excludes from Massachusetts gross income dividends received from a corporate trust subject to taxation under Chapter 62 to the extent that such dividends are exempt from taxation under Section 8.

Chapter 62, Section 1(e) defines "dividend" as "any item of federal gross income which is a dividend under section three hundred and sixteen of the Code or which is treated as a dividend under any other provision of the Code."

Based on the foregoing it is ruled that:

1. The distribution of the assets of the Trust in complete liquidation of the Trust will not result in the recognition of income to the Trust for Massachusetts income tax purposes except to the extent that the Trust realizes ordinary income under Section 1250 of the Code because of recapture of accelerated depreciation.

2. The shareholder will recognize capital gain and dividend income for Massachusetts tax purposes to the extent that capital gain and dividend income is recognized for federal purposes. The dividend income will not be included in the shareholder's Massachusetts gross income except to the extent that the dividends were derived from tax-free earnings and profits as defined in Section 8(c) of Chapter 62.

3. For Massachusetts income tax purposes the shareholder's basis in the property distributed to him will be the same as his federal adjusted basis in such property.

Very truly yours,

/s/L. Joyce Hampers

L. Joyce Hampers

Commissioner of Revenue


LR 81-18

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