| Date: | 05/09/2014 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Regulatory Authority: | Massachusetts General Laws |
| Official Version: | Published by the Massachusetts Register |
830 CMR: DEPARTMENT OF REVENUE
830 CMR 63:00 Taxation of Corporations
830 CMR 63.31N.1: Massachusetts Property Basis Adjustments
(a) Purpose of Regulation. This regulation implements the rules set forth in M.G.L. c. 63, § 31N, which requires certain adjustments to the basis of a corporation’s property, including stock owned by the corporation, for purposes of determining gross income, deductions and other tax items of an entity taxable under chapter 63. This regulation also provides some examples of when these adjustments may be necessary. This regulation does not purport to describe all of the situations where adjustments to the basis of a corporation’s property will be necessary pursuant to § 31N for purposes of determining the corporation’s Massachusetts corporate excise. Adjustments to the Massachusetts basis of a corporation’s property may be required in circumstances not described in this regulation.
(b) Outline. 830 CMR 63.31N.1 is organized as follows.
(1) Statement of Purpose; Outline of Topics
(2) Definitions
(3) General Rules
(4) Special Rule for Former Corporate Trusts
(5) Intercompany Transactions; Basis Adjustments Attributable Thereto
(6) Combined Reporting; Basis in Subsidiaries; Earnings and Profits
(7) Application of the Sham Transaction Rule and Related Doctrines
(8) Effective Date
For purposes of 830 CMR 63.31N.1, the following terms have the following meanings.
Code, the federal Internal Revenue Code, as amended and in effect for the taxable year.
Combined group, a group of corporations that is required to file a Massachusetts combined report for a taxable year beginning on or after January 1, 2009, including a combined group that results from a Massachusetts affiliated group election. A combined report is required to be filed pursuant to M.G.L. c. 63, § 32B, as enacted by St. 2008, c. 173. See 830 CMR 63.32B.2. A combined group does not refer to a combined group allowed to file a combined return within the meaning of former M.G.L. 63, § 32B (i.e., prior to that section’s repeal by St. 2008, c. 173, § 48). See 830 CMR 63.32B.1.
Consolidated federal income tax return, a return of income filed with the federal government pursuant to Code § 1501 by an affiliated group as determined under Code § 1504.
Corporate trust, an entity defined in M.G.L. c. 62, § 1(j), and subject to the provisions of M.G.L. c. 62, § 8 prior to the enactment of chapter 173 of the Acts of 2008, pursuant to which Massachusetts adopted the federal “check the box” conformity rules and repealed the Massachusetts personal income tax rules that applied to the taxation of corporate trusts.
Corporation, a business corporation within the meaning of M.G.L. c. 63, § 30, whether or not organized in Massachusetts. For taxable years beginning prior to January 1, 2009, a “corporation” refers to a foreign or domestic business corporation, a utility corporation, a financial institution, an insurance company, or other entity taxable under chapter 63, depending upon the context, as determined under the pertinent provisions of M.G.L. c. 63, in effect for such years.
Federal consolidated group, an affiliated group as defined in Code §1504 that is required to file a consolidated federal income tax return. The corporations that are includible corporations for purposes of a consolidated federal income tax return generally include only corporations that are formed under the laws of the U.S. or a U.S. state, and generally do not include, for example, non-profit corporations that are exempt from federal income tax, S corporations, real estate investment trusts (REITs) as referenced under Code §§ 856-859, and regulated investment companies (RICs) as referenced under Code §§ 851-855.
Massachusetts affiliated group election, an election by the taxable member or members of a combined group to treat the combined group as consisting of such member or members and all additional corporations included within the Massachusetts affiliated group of such member or members as determined under M.G.L. c. 63, § 32B and 830 CMR 63.32B.2.
(a) Determination of Federal Gross Income as Determined for Massachusetts Purposes. In determining a corporation’s gross income under chapter 63, if the corporation’s federal gross income as determined for Massachusetts purposes includes any item of gain or has been reduced by an item of loss, with respect to property, then such federal gross income shall be increased by the amount by which the federal adjusted basis of the property exceeds the Massachusetts adjusted basis of the property, and shall be decreased by the amount by which the Massachusetts adjusted basis of the property exceeds the federal adjusted basis of the property, such that the gain or loss realized for Massachusetts purposes takes into account all applicable differences in the Massachusetts and federal tax rules over the life of an asset that should in principle give rise to differences in basis.
(b) Relationship between Massachusetts and Federal Adjusted Basis of Property. Except as otherwise provided by Massachusetts law, the Massachusetts adjusted basis of property shall be the federal adjusted basis of such property; provided, however, that (i) any federal adjustment attributable to provisions of the Code that were not applicable in determining Massachusetts net or gross income at the time that such federal adjustment was made shall be disregarded in determining Massachusetts basis; provided, however, that federal basis adjustments attributable to federal tax credits claimed by a taxpayer or to federal grants, subsidies, or similar payments made to a taxpayer shall not be so disregarded under this clause unless otherwise prescribed by Massachusetts law; and (ii) adjustments shall be made for any item that was applicable in determining Massachusetts net or gross income but that was not so applicable in determining federal net or gross income at the time of such Massachusetts determination, and for which a federal adjustment would be allowed under the Code if the item had been applicable in determining federal net or gross income. For example, Massachusetts does not allow bonus depreciation under Code § 168(k). Therefore, when a corporation that is subject to the income measure of the Massachusetts corporate excise takes a bonus depreciation deduction with respect to an item of property for federal income tax purposes, such depreciation deduction must be disregarded for Massachusetts purposes, and the corporation’s Massachusetts basis in the property is not reduced on account of the federal adjustment. On the other hand, there may be basis adjustments that apply for Massachusetts purposes that do not apply federally.
(c) Examples. The following examples illustrate the provisions of 830 CMR 63.31N.1(3)(b).
(d) Rule of Convenience; Election to Adopt Massachusetts Adjusted Basis Where Non-taxable Corporation Becomes Taxable Corporation. In general, when a corporation (other than a corporation that is or becomes a member of a combined group) first becomes subject to the income measure of the corporate excise, the initial Massachusetts basis of its various assets will be the basis of such assets as determined for federal income tax purposes, rather than the Massachusetts adjusted basis that the property would have had if it had been acquired and held during a time when the corporation was subject to the corporate excise under M.G.L. c. 63 with regard to its income. Notwithstanding the foregoing, a corporation that was not previously subject to the corporate excise under M.G.L. c. 63 with regard to its income may elect to determine and adopt the Massachusetts adjusted basis as to all of its assets acquired prior to becoming a Massachusetts taxpayer by taking this position on the corporation’s initial Massachusetts corporate excise return as filed with the state, provided that the corporation possesses and maintains adequate records to demonstrate the appropriate Massachusetts adjusted basis for all such assets. The election must be made during the period of limitations for abatement under M.G.L. c. 62C, § 37, without taking into account the provisions of M.G.L. c. 62C, § 30, for the tax year during which the corporation first becomes subject to the corporate excise under M.G.L. c. 63 with regard to its income. If the corporation’s return is not timely filed and/or the election is not made within such filing period then the corporation is precluded from electing to adopt a Massachusetts adjusted basis for its assets. Once made, this election is irrevocable. Further, this rule does not apply in the instance of a corporation that is a member of a combined group, because in the latter such cases an election to adjust the basis of the corporation’s assets must be made pursuant to the rules that apply to such groups. See 830 CMR 63.31N.1(3)(f)2.
(c) Examples. The following examples illustrate the provisions of 830 CMR 63.31N.1(3)(d). Assume for purposes of these examples that Corporation X reports its income on a calendar year basis for both federal and Massachusetts tax purposes. Assume also that Corporation X is not a member of a combined group during its 2009 or 2010 taxable years.
Example 1. Corporation X is a corporation that is not subject to the corporate excise under M.G.L. c. 63 with regard to its income during its 2008 tax year. X purchases a business asset that is 10-year property on January 1, 2008 for $10,000. For tax year 2008, X takes a 50% bonus depreciation deduction of $5,000 as to the purchased asset for federal income tax purposes pursuant to Code § 168(k). In addition, X takes a regular MACRS depreciation deduction in the amount of $500 ($5,000 x .20 = $1,000, divided by 2 to account for the ½ year convention). Therefore, for federal tax purposes, X’s basis in the asset as of January 1, 2009, is $4,500 ($10,000 - $5,000 - $500). On January 1, 2009, X expands its activities into Massachusetts such that it becomes subject to the income measure of the corporate excise for its 2009 tax year. At this time, the default Massachusetts basis of X’s various assets will be the basis of such assets as determined for federal income tax purposes. However, X may elect to determine and adopt a Massachusetts adjusted basis for all of its assets, provided that it possesses and maintains adequate records to demonstrate the appropriate Massachusetts adjusted basis for all such assets. Assuming that X makes this election, its Massachusetts basis in the purchased asset as of January 1, 2009 will be $10,000 - $1,000 ($10,000 x. 20, divided by 2 to account for the ½ year convention), or $9,000. This basis number is the same as what the asset’s federal basis would have been had the taxpayer not taken federal bonus depreciation in 2008. On January 2, 2009, X sells the asset for $8,000. X will recognize a $3,500 federal taxable gain and a $1,000 Massachusetts taxable loss.
Example 2. Assume the same facts as in Example 1. Assume further that X does not sell the purchased asset on January 2, 2009. Rather, X holds the asset until the end of its 2009 tax year. For federal tax purposes, X’s depreciation deduction for the 2009 tax year will be $900 ($4,500 x .20), resulting in a federal tax basis of $3,600. For Massachusetts tax purposes, X’s depreciation deduction for the 2009 tax year will be $1,800 ($9,000 x .20), resulting in a Massachusetts tax basis of $7,200. Assume that X subsequently sells the asset on January 2, 2010 for $8,000. For purposes of its 2010 tax year, X will recognize a $4,400 federal taxable gain and an $800 Massachusetts taxable gain.
Example 3. Assume the same facts as Example 1, except that upon becoming subject to the Massachusetts corporate excise in 2009, X does not make the election to determine and adopt a Massachusetts adjusted basis as to its assets. Therefore, as of January 1, 2009, X’s Massachusetts adjusted basis in the purchased asset will be $4,500, the same as X’s federal basis in this asset. If X sells the asset on January 2, 2009 for $8,000, it will have a $3,500 taxable gain for both federal and Massachusetts tax purposes.
(f) Massachusetts Basis of Property Held by Members of a Combined Group.
1. In general. For purposes of determining a combined group’s taxable income pursuant to 830 CMR 63.32B.2(6)(c)2, each member of the combined group shall determine its separate income by taking into account the Massachusetts adjusted basis of each asset held by such member; provided, however, that in the case of a combined group subject to a worldwide election, any member not incorporated in the United States and not treated as a U.S. corporation under the Code shall determine its separate income in accordance with 830 CMR 63.32B.2(6)(c)2.b(i)(B) and shall not be subject to the requirement in this subsection 830 CMR 63.31N.1(3)(f)1.
2. Non-Massachusetts Taxpayer’s Massachusetts Basis in its Assets at the Time it is First Included in a Combined Group; Election to Adopt Massachusetts Adjusted Basis for All Assets of All Members of a Combined Group. In general, when a corporation that was not previously a Massachusetts taxpayer enters or otherwise is first included in a combined group, the Massachusetts basis of its various assets at that time will be the basis of such assets as determined for federal income tax purposes, rather than the Massachusetts adjusted basis that the property would have had if it had been acquired and held during a time when the corporation was subject to Massachusetts tax. Notwithstanding the foregoing, the principal reporting corporation of a combined group may elect to determine and adopt the Massachusetts adjusted basis for all previously-acquired assets of every member of the group that was not previously a Massachusetts taxpayer, including any non-taxpayer corporation that subsequently enters or otherwise is included in the group, provided that such corporations possess and maintain adequate records to demonstrate the appropriate Massachusetts adjusted basis for all such assets. The election must be made by a combined group during the period of limitations for abatement under M.G.L. c. 62C, § 37, without taking into account the provisions of M.G.L. c. 62C, § 30, for the tax year that first includes a previously non-taxable member. If the group’s combined return is not timely filed and/or the election is not made within such filing period then the group members are precluded from electing to adopt a Massachusetts adjusted basis for their assets. The election is irrevocable and is to be made in such form and in such manner as prescribed by the Commissioner. See 830 CMR 63.32B.2(6)(d).
Notwithstanding the general rules set forth in 830 CMR 63.31N.1(3), the federal basis of shares in a business corporation that was formerly treated as a corporate trust or of shares in a successor of that entity shall be reduced in computing Massachusetts adjusted basis to take into account any tax-free earnings and profits accumulated by the former corporate trust, as adjusted in accordance with the rules set forth in 830 CMR 63.30.3.
(a) General Tax Consequences of Intercompany Transactions.
1. Effect of an Intercompany Transaction with Respect to Property on the Determination of the Property’s Basis. Where a corporation that is a member of an affiliated group engages in a transaction with respect to property with another member of an affiliated group, the gain or loss that derives from that transaction, if any, may require an adjustment to the property’s basis in the hands of its owner. In determining the required basis adjustment in the context of intercompany transactions, Massachusetts law generally looks to federal income tax law, as explained further in the succeeding subsections.
2. Application of Federal Law in Determining Massachusetts Gain or Loss in the Context of an Intercompany Transaction. In determining whether and when gain or loss is recognized for Massachusetts corporate excise purposes in the case of a transaction between members of a combined group, the federal rules and principles applicable to transactions between members of a federal consolidated group generally shall apply, except where a divergence between Massachusetts law and such federal rules and principles requires a different result. In contrast, in determining whether and when gain or loss is recognized for Massachusetts corporate excise purposes in the case of a transaction between two affiliated corporations that are not members of a combined group, the federal rules and principles applicable to transactions between members of a federal consolidated group generally shall not apply, even if such corporations are members of a federal consolidated group.
(b) Rules Applicable to Transactions Between Corporations That Are Not Members of a Combined Group. In determining whether gain or loss is recognized for Massachusetts corporate excise purposes in connection with a transaction between corporations that are not members of a combined group, and, by extension, the effect that such a transaction will have on basis for Massachusetts purposes, Massachusetts law generally incorporates the analogous federal rules that would apply in the absence of a federal consolidated group. The Massachusetts rules that apply to transactions between affiliated corporations that are not members of a combined group may include those set forth under M.G.L. c. 63, § 39A and M.G.L. c. 62C, § 3A, and the incorporated federal rules may include those set forth under Code §§ 163 and 267, among others. In the case of the disposition of property between corporations that are not members of a combined group, the Massachusetts basis of the property disposed of generally shall be adjusted in the hands of the acquiring corporation when gain or loss is taken into account, consistent with the applicable Massachusetts and federal rules. Special rules that apply in the instance of a combined group are set forth at 830 CMR 63.31N.1(5)(c).
(c) Rules Applicable to Transactions Between Members of a Combined Group.
1. In General. Whether gain or loss is recognized for Massachusetts corporate excise purposes in connection with a transaction between corporations that are members of a combined group, and, by extension, the effect that such a transaction will have on basis for Massachusetts purposes, generally depends upon the state application of the federal rules that apply in the instance of a federal consolidated group, even if such corporations are not members of a federal consolidated group. Where two affiliated corporations are members of a combined group, any item of income, expense, gain or loss that results from a transaction between such corporations in respect of the group’s unitary business (e.g., the disposition of property between such corporations where such property is used in the group's unitary business) will not be taken into account at such time. Rather, any item of income, expense, gain or loss that results from a transaction between the members of a combined group in respect of the group’s unitary business is generally taken into account by applying the federal rules and principles applicable to transactions between members of a federal consolidated group as set forth in Treas. Reg. § 1.1502-13, except where a divergence between Massachusetts law and such federal rules requires a different result, or where no analogous situation exists for purposes of the federal rules. See830 CMR 63.32B.2(6)(c)9. Similar treatment applies when any item of income, expense, gain or loss results from a transaction between members of a combined group in any case in which the group has made and is subject to a Massachusetts affiliated group election without regard to any unitary business determination. See 830 CMR 63.32B.2(10). An item of income, expense, gain or loss described in this subsection (c) is not initially taken into account, but rather accounted for later, consistent with the federal rules as referenced in this subsection. Examples of events upon which the deferred item of income, expense, gain or loss, is taken into account are provided in 830 CMR 63.31N.1(5)(c)2. In the case of the disposition of property between corporations that are members of a combined group, the Massachusetts basis of the property disposed of generally shall be adjusted when gain or loss is taken into account, consistent with the applicable Massachusetts and federal rules. An item of income, expense, gain or loss not described in this subsection (c) shall be accounted for consistent with the rules set forth in 830 CMR 63.31N.1(5)(b).
2. Subsequent Events that Trigger Recognition of a Previously Deferred Item of Income, Expense, Gain or Loss. An item of income, expense, gain or loss, that is not initially taken into account under the rules set forth in 830 CMR 63.31N.1(5)(c)1 shall be subsequently taken into account in a manner similar to, and utilizing the principles referenced in, Treas. Reg. § 1.1502-13. For example, in the case of a sale of property between two members of a combined group, the item of income or gain that was not taken into account upon the initial sale shall be taken into account upon, and apportioned as income earned immediately before, certain recognition events, including but not limited to:
a. the object of the intercompany transaction is sold or otherwise disposed of by the buying member (that is, the combined group member that purchased the object of the intercompany transaction from the selling member) to a person or entity that is not a member of the combined group;
b. where the combined group is based upon the existence of a unitary business (i.e., no Massachusetts affiliated group election has been made), the object of the intercompany transaction is:
i. sold by the buying member to an entity that is a member of the combined group for use outside the unitary business in which the buying member and selling member are engaged; or
ii. converted by the buying member to a use outside the unitary business in which the buying member and selling member are engaged; or
c. the buying member and selling member are no longer members of the same combined group (including where a combined group ceases to be determined pursuant to a pre-existing Massachusetts affiliated group or worldwide election and the buying member and selling member are no longer in a combined group for that reason).
See 830 CMR 63.32B.2(6)(c)5. The rules that explain the apportionment consequences of an intercompany transaction in the context of a combined group are set forth at 830 CMR 63.32B.2(7).
3. Examples. The following examples illustrate the application for Massachusetts corporate excise purposes of some of the general principles set forth in Treas. Reg. § 1.1502-13 as applied in the context of 830 CMR 63.31N.1(5)(c). Assume for purposes of these examples that for tax years 2009-2013 Corporations C and D are affiliated corporations and that for tax years 2010-2013 Corporations C and D are engaged in a unitary business and constitute a combined group that is required to file a combined report. Further, both C and D are taxed on a calendar year basis and are on the accrual method of accounting.
a. Example 1. During tax year 2010, C sells a non-depreciable asset with a basis of $80,000 to D for $100,000. For Massachusetts tax purposes, because C and D file as members of a combined group, the gain from the sale of the asset is not taken into account at this time, and D has a cost basis in the asset of $100,000. In January 2011, D sells the asset previously purchased from C to an unrelated party, X, for $130,000. For Massachusetts tax purposes, C recognizes gain of $20,000 (which is deferred gain that was not taken into account on the prior 2010 sale to D) and D recognizes gain of $30,000. In contrast, if C and D had not been members of a combined group in 2010, C would have recognized gain of $20,000 upon the sale to D in 2010, and D would still have recognized $30,000 of gain upon the sale to X in 2011.
b. Example 2. On January 1, 2009, C buys a depreciable asset with a 10-year useful life for $100,000 and begins to depreciate it under the straight-line method of recovery. C claims $10,000 of depreciation for each of 2009 and 2010, leaving C with an $80,000 basis in the asset on January 1, 2011. On that date, C sells the asset to D for $130,000. For Massachusetts tax purposes, because C and D file as members of a combined group, the gain from the sale of the asset is not taken into account at this time, and D takes a cost basis in the asset of $130,000.
Subsequent to the sale, for purposes of calculating D’s depreciation deductions, D steps into C’s shoes to the extent D’s basis does not exceed C’s adjusted basis at the time of the sale (i.e., $80,000). Any basis on the part of D in excess of C’s adjusted basis at the time of sale (i.e., $130,000 - $80,000, or $50,000) is treated as new 10-year recovery property for which D elects the straight-line method of recovery. Therefore, for 2011 D has $15,000 of depreciation: $10,000 of depreciation with respect to $80,000 of its basis (the portion of its $130,000 basis not exceeding C’s adjusted basis at the time of sale), and $5,000 of depreciation with respect to the $50,000 of its basis that exceeded C’s adjusted basis at the time of sale. C’s $50,000 gain that was not taken into account in connection with the sale to D is taken into account to reflect the difference for each combined reporting year between D’s depreciation ($15,000) and the depreciation D would have been entitled to had C and D been divisions of the same corporation ($10,000). Thus, C is to take into account $5,000 of gain in each remaining year in the original 10-year recovery period, which is offset by the additional $5,000 of depreciation taken each year by D. Consequently, C takes into account $5,000 of gain for each of the tax years 2011 and 2012.
On January 1, 2013, D sells the asset previously purchased from C to an unrelated party, X, for $110,000. As explained above, D has $15,000 of depreciation with respect to the asset in each of 2011 and 2012, leaving D with a basis of $100,000 at the time of the sale. For Massachusetts tax purposes, C recognizes $40,000 of gain upon D’s sale of the asset to X (which is the balance of C’s gain that was not taken into account on the prior 2011 sale to D). D recognizes gain of $10,000 (i.e., the difference between the sale price of $110,000 and its adjusted basis in the property of $100,000).
(d) Intercompany Transactions Where the Composition of the Massachusetts Combined Group Differs from that of the Federal Consolidated Group.
1. In General. Although the Massachusetts rules for accounting for an item of income that results from a transaction between members of a combined group are similar to the federal rules that apply to intercompany transactions in the context of a federal consolidated group, the composition of such groups can differ. For example, the common ownership requirement used to determine a Massachusetts combined group, i.e., more than 50% voting control, is different than the 80% control "vote and value" standard that applies for purposes of determining a federal consolidated group. Also, in contrast to the federal rules, the Massachusetts ownership standard is met when the voting control standard is satisfied through either direct or indirect ownership and a common owner may be either corporate or non-corporate. Further, there are certain types of corporations that are not included in a federal consolidated group that may be included in a Massachusetts combined group, for example, corporations that are not incorporated under the laws of the United States or a U.S. state, S corporations, REITs, RICs and certain insurance companies. Conversely, there are certain corporations that are not included in a Massachusetts combined group that may be included in a federal consolidated group, for example, a corporation that is incorporated under the laws of the United States or a U.S. state but that is not engaged in a unitary business with the corporations that are included in the combined group (provided that the combined group has not made a Massachusetts affiliated group election). Consequently, because there can be differences between the composition of a Massachusetts combined group and that of a federal consolidated group, there may be differences as to the treatment of an intercompany transaction that takes place between the members of such groups. Such differences in treatment are illustrated in the examples in 830 CMR 63.31N.1(5)(d)2. In any instance in which a member of a Massachusetts combined group enters into a transaction with a corporation that is not a member of the combined group, any item of income, expense, gain or loss that results from such transaction shall be determined consistent with the general rules set forth in 830 CMR 63.31N.1(5)(a).
2. a. Examples. The examples in this section illustrate the provisions of 830 CMR 63.31N.1(5). Assume for purposes of these examples that Corporation P owns 100% of Corporations A, B, C and D and that these five corporations file a consolidated federal income tax return for the 2010 and 2011 tax years. All of the corporations are taxed on a calendar year basis and are on the accrual method of accounting. Assume that Corporations P, C and D, (but not A and B) are engaged in a unitary business during tax years 2010 and 2011, and therefore constitute a combined group (the PCD combined group) that is required to file a combined report under M.G.L. c. 63, § 32B as applicable for such years.
b. Example 1. During tax year 2010, C sells a non-depreciable asset used in the PCD unitary business with a basis of $80,000 to D for $100,000. For both federal and Massachusetts tax purposes, the gain from the sale between C and D is not taken into account at this time, and D has a cost basis in the asset of $100,000. In January 2011, D sells the asset purchased from C in tax year 2010 to an unrelated party, X, for $130,000. For federal and Massachusetts tax purposes, C recognizes $20,000 of gain upon D’s sale in 2011 (which is deferred gain that was not taken into account in connection with the prior 2010 sale to D) and D recognizes gain of $30,000. For Massachusetts tax purposes the gain of C and D is included in the taxable income of the PCD combined group for tax year 2011.
c. Example 2. During tax year 2010 C sells a non-depreciable asset used in the PCD unitary business with a basis of $120,000 to B for $100,000. For federal tax purposes, the loss from the asset sale between C and B is not taken into account at this time, and B has a cost basis in the asset of $100,000. For Massachusetts tax purposes, C realizes a $20,000 loss on the transaction because B is not a member of the combined group. Whether such gain or loss is recognized depends on the application of the relevant state and federal rules as provided in 830 CMR 63.31N.1(5)(a). Consequently, under the Code § 267 rules as applied in Massachusetts, the loss must be deferred until there is a later triggering event, such as B’s later sale of the asset to an unrelated party. For Massachusetts tax purposes, B has a basis in the asset of $100,000. In January 2011, B sells the asset purchased from C to an unrelated party for $130,000. For both federal and Massachusetts tax purposes, B recognizes a gain of $30,000 on the sale and C recognizes a $20,000 loss (which for Massachusetts tax purposes is the loss that was previously deferred under the Code § 267 rules as applied in Massachusetts in connection with C's prior asset sale to B). For Massachusetts tax purposes, the loss of C is included in the taxable income computation of the PCD combined group for tax year 2011.
(a) General; Purpose. The rules set forth in this section apply the provisions of M.G.L. c. 63, § 31N and M.G.L. c. 63, § 32B to determine, in the context of a combined group, the basis of stock owned by a shareholder corporation in a subsidiary and the impact of a subsidiary’s earnings and profits on the earnings and profits of the shareholder corporation. In addition to providing general guidance on the mechanics of the adjustments to basis and earnings and profits that may be required in the context of a combined group, a significant purpose of this section, 830 CMR 63.31N.1(6) is to promote the clear reflection of a combined group’s income by preventing a subsidiary’s items of income, gain, deduction and loss from giving rise to duplicative gain or loss with respect to the subsidiary’s stock. In the case of a shareholder corporation and its subsidiary that are not members of a combined group, the determination of Massachusetts basis in the shareholder’s stock in the subsidiary, and of the earnings and profits of the subsidiary and the shareholder, shall generally follow the analogous federal rules that would apply in the absence of a federal consolidated group, except where a divergence between Massachusetts law and such federal rules requires a different result.
(b) Basis in Subsidiaries. Combined reporting is required of certain corporations engaged in a unitary business where more than 50% of the voting control of such corporations is directly or indirectly owned by one or more common owners. See 830 CMR 63.32B.2(2) and (4)(a). Where a member of a combined group holds shares directly or indirectly in another member of the combined group, such shareholder corporation’s basis in the subsidiary's stock shall be adjusted for Massachusetts purposes to reflect certain distributions from the subsidiary and the subsidiary's items of income, gain, deduction and loss taken into account for the period that the subsidiary is a member of the combined group by applying the federal rules and principles set forth in Treas. Reg. § 1.1502-32, except where a divergence between Massachusetts law and such federal rules requires a different result, or where no analogous situation exists for purposes of the federal rules. In determining such adjustments, the following general rules, inter alia, shall apply:
1. An adjustment to a shareholder corporation’s Massachusetts basis in a subsidiary’s stock shall not be made for the subsidiary’s distributions or items of income, gain, deduction, or loss taken into account for the subsidiary’s taxable years beginning prior to January 1, 2009, except as required in connection with the election described in 830 CMR 63.31N.1(3)(f);
2. An adjustment to a shareholder corporation’s Massachusetts basis in a subsidiary’s stock shall not be made for the subsidiary’s items of income, gain, deduction, or loss to the extent those items were not included in the combined group’s taxable income (except in the case of tax exempt income that would have been included in the combined group’s taxable income had it not been exempt from tax);
3. An adjustment to reduce the Massachusetts basis of a shareholder corporation’s basis in a subsidiary’s stock shall be made for the subsidiary’s distributions to the extent those distributions are from earnings and profits attributable to items that were included in the combined group’s taxable income (for purposes of determining the amount of the basis reduction under this subsection, the LIFO and pro rata rules set forth in 830 CMR 63.32B.2(6)(c)(4) shall apply);
4. Negative adjustments may exceed the shareholder corporation’s Massachusetts basis in the subsidiary’s stock, resulting in the shareholder corporation having an “excess loss account” in the subsidiary’s stock, the consequences of which shall be determined in a manner similar to, and by applying the rules and principles referenced in, Treas. Reg. §§ 1.1502-19 and -32(a)(3)(ii);
5. Basis adjustments shall be attributed to a subsidiary that holds stock in a lower tier subsidiary from such lower tier subsidiary using the same general rules set forth above, with the adjustments applied in the order of the tiers, from the lowest to the highest;
6. A basis adjustment is not to be made under this section or any other applicable rule of law in a manner that has the effect of duplicating a Massachusetts adjustment; and
7. The adjustments to basis required by this subsection shall be allocated among the shares of a subsidiary’s stock in a manner similar to, and by applying the rules and principles referenced in, Treas. Reg. § 1.1502-32(c).
No such adjustments shall be made pursuant to this section 830 CMR 63.31N.1(6)(b) in the case of a shareholder corporation and its subsidiary when such entities are not members of a Massachusetts combined group, irrespective as to whether such entities are members of a federal consolidated group.
(c) Examples. The following examples illustrate the provisions of 830 CMR 63.31.N.1(6).
Example 1. Corporations X and Y are members of a combined group that file a combined report for the 2010 tax year on a calendar year basis. Y is a wholly owned subsidiary of X. At the beginning of the group’s 2010 tax year, X's basis in the stock of Y is $1,000,000. During the group's 2010 tax year, Y has $100,000 of net income, all of which is included in the combined group’s taxable income for 2010. During 2010, Y also pays a dividend of $80,000 to X, all of which is attributable to earnings and profits of the combined group. Assume that the entire dividend from Y to X is eliminated from the XY group’s taxable income in 2010 pursuant to 830 CMR 63.32B.2(6)(c)(4). Consistent with the rules set forth in 830 CMR 63.31.N.1(6)(b), Y’s $100,000 of net income results in a positive adjustment of $100,000 to X’s basis in the stock of Y, and Y’s $80,000 distribution to X results in a negative basis adjustment of $80,000 to X’s basis in the stock of Y. Therefore, X's basis in the stock of Y as of the beginning of the group’s 2011 tax year is $1,020,000 (i.e., $1,000,000 + $100,000 - $80,000).
Example 2. Corporations X, Y and Z are members of a combined group that file a combined report for the 2010 tax year on a calendar year basis. X owns all the stock of Y, and Y owns all the stock of Z. At the beginning of the group’s 2010 tax year, X has an unadjusted basis of $500,000 in Y’s stock, which includes Y's unadjusted basis of $200,000 in Z stock. In the group's 2010 taxable year, Y has a total of $80,000 of net income, all of which is included in the XYZ group’s taxable income, and Z has a total of $150,000 of net income. Z’s net income includes $20,000 that was attributable to income earned outside the United States that is not included in the XYZ group’s taxable income for 2010 pursuant to the rules of 830 CMR 63.32B.2(6)(c)(2). Neither Y nor Z makes any distributions in 2010. Consistent with the rules set forth in 830 CMR 63.31N.1(6)(b), Y’s basis in the stock of Z is increased by $130,000 to reflect the $130,000 of Z’s income that is included in the XYZ group’s 2010 taxable income. Also, X’s basis in the stock of Y is increased by the $130,000 adjustment to Y’s basis in Z, and by Y’s $80,000 of net income. No adjustment is made for the $20,000 of Z’s net income that is not attributable to the XYZ group. Therefore, at the end of the group’s 2010 tax year, Y’s basis in the stock of Z is $330,000 (i.e., $200,000 + $130,000) and X’s basis in Y’s stock is $710,000 (i.e., $500,000 + $80,000+ $130,000).
(d) Earnings and Profits. Where a shareholder corporation and its subsidiary corporation are members of a combined group, the shareholder corporation’s earnings and profits shall be adjusted to reflect the undistributed earnings and profits of the subsidiary by applying the federal rules and principles set forth in Treas. Reg. § 1.1502-33, except where a divergence between Massachusetts law and such federal rules requires a different result, or where no analogous situation exists for purposes of the federal rules. In determining such adjustments, the following general rules, inter alia, shall apply:
1. Intercompany transactions as between members of the combined group are not reflected in earnings and profits before they are taken into account pursuant to 830 CMR 63.31N.1(5)(b); and
2. In any instance in which the combined group consists of tiers, the adjustments are applied in the order of the tiers, from the lowest to the highest.
No such adjustments shall be made pursuant to this section 830 CMR 63.31N.1(6)(d) in the case of a shareholder corporation and its subsidiary when such entities are not members of a Massachusetts combined group, irrespective as to whether such entities are members of a federal consolidated group.
(e) Example. The following example illustrates the provisions of 830 CMR 63.31N.1(6)(d). Corporations X, Y and Z are members of a combined group that file a combined report for the 2010 tax year on a calendar year basis. X owns all the stock of Y and Y owns all the stock of Z. During the XYZ group’s 2010 tax year, X has earnings of $300,000 and Y has earnings of $500,000. Assume these amounts are attributable entirely to items included in the XYZ group’s taxable income for its 2010 taxable year. Z has $400,000 of earnings for the 2010 tax year. However, $50,000 of this amount is attributable to income earned outside the United States that is not included in the XYZ group’s taxable income for 2010 pursuant to the rules of 830 CMR 63.32B.2(6)(c)(2). Assume neither Y nor Z made any distributions in 2010. At the end of 2010, Y's total current year earnings and profits are $850,000 (i.e., $500,000 + the $350,000 of Z’s earnings attributable to income included in the XYZ group’s taxable income), and X's current year earnings and profits are $1,150,000 (i.e., $300,000 + $850,000 attributed from Y).
(f) Effective Date. See 830 CMR 63.31N.1(8)(b) for specific rules regarding the effective date of this section, 830 CMR 63.31N.1(6).
All transactions and other activities that increase or decrease basis, or otherwise affect basis, in a corporation's property, including stock owned by such corporation, are potentially subject to additional adjustment as permitted under Massachusetts law, including pursuant to the sham transaction doctrine and other related tax doctrines as referenced in M.G.L. c. 62C, § 3A.
(a) General. Except as specifically provided in 830 CMR 63.31N.1(8)(b) or to the extent that a provision reflects prior law, the provisions in this regulation, 830 CMR 63.31N.1, generally shall apply to tax years beginning on or after January 1, 2009.
(b) Application of 830 CMR 63.31N.1(6). Notwithstanding the general rule set forth in 830 CMR 63.31N.1(8)(a), the provisions of 830 CMR 63.31N.1(6) generally shall apply to tax years beginning on or after January 1, 2014. However, for tax years beginning on or after January 1, 2009, the Commissioner may apply the provisions of 830 CMR 63.31N.1(6) or make other appropriate adjustments in order to properly reflect gain and to avoid the duplication of gain or loss.
REGULATORY AUTHORITY
830 CMR 63.31N.1: M.G.L. c. 14, § 6(l); M.G.L. c. 62C, §3
Date of Promulgation: May 9, 2014
