Technical Information Release  TIR 09-8: Claiming the FAS 109 Deduction for Publicly Traded Companies

Date:	05/28/2009
Organization:	Massachusetts Department of Revenue
Referenced Sources:	Massachusetts General Laws

Corporate

For tax years beginning on or after January 1, 2009, Massachusetts has changed from a separate company reporting state to a combined reporting state for purposes of taxing corporations that are engaged with affiliated corporations in a unitary business. See St. 2008, c. 173, An Act Relative to Tax Fairness and Business Competitiveness (the Act). [1] The purpose of this Technical Information Release (TIR) is to explain a deduction allowed by section 95 of the Act to alleviate, for certain publicly held companies, the potential financial statement impact resulting from these tax law changes.
 

FAS 109. The Statement of Financial Accounting Standards (FAS) No. 109, Accounting for Income Taxes, establishes basic principles that apply when accounting for income taxes for the purpose of preparing a company's financial statements. FAS 109 requires that the effects of income taxes resulting from transactions occurring in the current and preceding years be reported on an entity's financial statements for current and future years. This includes accounting for certain deferred tax liabilities and assets to reflect the future tax consequences of events that have been recognized in a corporation's financial statements or tax returns.
 

Section 95 of the Act; FAS 109 Deduction. If the enactment of combined reporting requirements for unitary businesses under the Act results in an increase to a combined group's net deferred tax liability, the combined group is entitled to a FAS 109 deduction if it meets the requirements of section 95 of the Act. For purposes of the FAS 109 deduction, "net deferred tax liability" means the net increase, if any, in deferred tax liabilities minus the net increase, if any, in deferred tax assets of the combined group, as computed in accordance with generally accepted accounting principles (GAAP), that would otherwise result from the imposition of the provisions of the Act described in the pertinent provisions of section 95(2) of the Act, as referenced below.
 

In general, the total amount of the deduction, to be claimed over a 7-year period described below, is the lesser of (i) the amount necessary to offset the increase in the combined group's net deferred tax liability resulting from the move to combined reporting, and (ii) the "Massachusetts tax basis modification," as defined below, provided that the amount of the deduction shall in no case exceed the amount necessary to offset any increase in net deferred tax liability that would result from the imposition of all of the provisions of the Act. In calculating the FAS 109 deduction, a taxpayer is to consider only changes in deferred tax assets or liabilities attributable to Massachusetts taxes. If applicable, the deduction is prorated over the 7-year period beginning with the combined group's taxable year that begins in 2012.
 

Eligibility for FAS 109 Deduction. Only publicly traded companies, including affiliated corporations participating in the filing of a publicly traded company's financial statements prepared in accordance with GAAP, as of July 3, 2008, are eligible for the FAS 109 deduction. [2] The term "publicly traded company" means a company whose stock is publicly traded; a privately held company that issues publicly traded debt is not eligible for the FAS 109 deduction.
 

July 1, 2009 Electronic Filing Requirement. To state the amount of the FAS 109 deduction to be claimed in future years, the principal reporting corporation must file electronically with the Department on or before July 1, 2009 using the web-based application at www.mass.gov/dor. It is anticipated that the Department's web-based application will be ready to accept FAS 109 electronic filings on June 1, 2009 or soon thereafter.
 

The FAS 109 deduction amount is determined from the information furnished by the principal reporting corporation in its electronic filing, including the following aggregate amounts for the combined group:
 

1. Deferred Massachusetts tax liability of the combined group on July 3, 2008 without application of the provisions of the Act
2. Deferred Massachusetts tax liability on July 3, 2008 after application of combined reporting for Massachusetts
3. Deferred tax assets on July 3, 2008 without application of the provisions of the Act
4. Deferred tax assets on July 3, 2008 after application of combined reporting for Massachusetts
5. Deferred Massachusetts tax liability on July 3, 2008 after application of ALL provisions of the Act
6. Deferred tax assets on July 3, 2008 after application of ALL provisions of the Act
7. Amount of tentative deduction calculated to offset the increase in net deferred tax liability
8. Adjusted book basis of eligible assets of all non-taxable members on July 3, 2008
9. Tax basis of eligible assets of all non-taxable members on July 3, 2008
    

The electronic filing includes an affirmation by the principal reporting corporation that its statement of the FAS 109 deduction amount is submitted under the pains and penalties of perjury.
 

A taxpayer is not permitted to amend the electronic FAS 109 filing after July 1, 2009 in order to state a higher deduction amount. However, if a taxpayer obtains additional information that would lower the FAS 109 deduction amount, the taxpayer is required to amend its FAS 109 filing to state the lower deduction amount.
 

In the electronic FAS 109 filing, the principal reporting corporation must indicate whether the increase in net deferred tax liability and the aggregate tax basis of eligible assets have been calculated using a Massachusetts-adjusted tax basis for assets of non-taxable members as allowed under 830 CMR 63.32B.2(6)(d). [3] Consistency in basis calculations is required between the electronic FAS 109 filing and the subsequent filing of a combined report under G.L. c. 63, § 32B. If the principal reporting corporation makes the 830 CMR 63.32B.2(6)(d) election, it must use Massachusetts-adjusted basis for assets of non-taxable members in calculating the FAS 109 deduction amount. If the principal reporting corporation calculates its FAS 109 deduction amount on its initial or an amended electronic FAS 109 filing using federal basis for assets of non-taxable members, but subsequently makes the 830 CMR 63.32B.2(6)(d) election to use Massachusetts-adjusted basis on its combined report, the taxpayer is required to amend its FAS 109 filing if using Massachusetts-adjusted basis would have the effect of lowering the FAS 109 deduction amount.
 

While the electronic filing requires aggregate amounts for the combined group, all contemporaneous calculations and other information used to arrive at the amount of its FAS 109 deduction must be kept in taxpayer records, including the following:
 

1. The taxpayer name and federal employer identification number (FEIN) of each entity taken into consideration in arriving at the FAS 109 deduction, indicating which member or members in the combined group is a publicly traded company and whether each entity in the group is a taxable member or a non-taxable member.
2. The amount of deferred tax liability for each entity as of July 3, 2008 before the change to combined reporting and the amount of increase in net deferred tax liabilities as of July 3, 2008 that would result from Massachusetts taxes attributable to the imposition of combined reporting requirements.
3. The amount of deferred Massachusetts tax assets for each entity as of July 3, 2008 before the change to combined reporting, and the amount of any net increase in deferred tax assets. [4]
4. The amount necessary to offset the increase in net deferred tax liabilities, minus any increase in net deferred tax assets, that would result from the imposition of the combined reporting requirements under c. 63, § 32B (in the absence of the FAS 109 deduction), but limited to the amount necessary to offset any increase in net deferred tax liabilities minus any increase in net deferred tax assets that would result from the imposition of all the provisions of the Act (in the absence of the FAS 109 deduction). [5]In addition, the taxpayer is required to provide an analysis of how the provisions of the Act result in the increase in net deferred tax liability.
5. The calculation of the Massachusetts tax basis modification as of July 3, 2008, including for each non-taxable member of the combined group, the adjusted book basis and the adjusted tax basis of the eligible assets, as described below, placed in service before July 3, 2008.
6. Any other information necessary to demonstrate the amount of the FAS 109 deduction.
    

No FAS 109 deduction is allowed for any taxable year except to the extent claimed in the manner prescribed in this TIR and based on the amount stated and filed electronically with the Department on or before July 1, 2009 (or as reduced in a later amended filing as required).
 

The Commissioner retains the authority under G.L. c. 62C to review or redetermine the proper amount of any FAS 109 deduction, whether on the electronic filing required by this TIR or on a tax return for any taxable year. As part of this process the Commissioner may require the taxpayer to provide its contemporaneous calculations and other information used to determine the FAS 109 deduction, related tax accrual workpapers and any other pertinent information. If the taxpayer fails to timely provide such records (workpapers or other information) after request, the Commissioner will deny any FAS 109 deduction.
 

Net Deferred Tax Liability. For purposes of section 95 of the Act, "net deferred tax liability" is defined as the net increase, if any, in deferred tax liabilities minus the net increase, if any, in deferred tax assets of the combined group, as computed in accordance with GAAP that would otherwise result from the imposition of the provisions of section 95(2) which states:
 

For the 7-year period beginning with the combined group's taxable year that begins in 2012, a combined group shall be entitled to a deduction equal to one-seventh of the lesser of: (i) the Massachusetts tax basis modification, as determined in paragraph (3) of this section, and (ii) the amount necessary to offset the increase in net deferred tax liability, as computed in accordance with generally accepted accounting principles, that would result from the imposition of the combined reporting requirements under section 32B of chapter 63 of the General Laws but for the deduction provided under this section; provided, however, that notwithstanding the foregoing, the amount of the deduction shall in no case exceed the amount necessary to offset any increase in net deferred tax liability, as computed in accordance with generally accepted accounting principles, that would result from the imposition of all of the provisions of this act but for the deduction provided under this section.
 

Massachusetts tax basis modification. The Massachusetts tax basis modification is determined in section 95(3) of the Act which states:
 

For purposes of this section, Massachusetts tax basis modification shall mean the aggregate adjusted book basis of the combined group's non-taxable members' eligible assets less the aggregate adjusted tax basis of the combined group's non-taxable members' eligible assets. Eligible assets shall mean, and be limited to, those tangible or intangible assets that are subject to depreciation, amortization, or other cost recovery allowable under chapter 63 of the General Laws and placed in service before the enactment date of this act [July 3, 2008]. Aggregate adjusted book basis shall mean the total of carrying amounts for eligible assets as reported on the combined group's books of accounts, as determined in accordance with generally accepted accounting principles. Aggregate adjusted tax basis shall mean the total of remaining amounts, not yet depreciated, amortized or recovered, attributable to eligible assets that would have been available to deduct from future taxable income under chapter 63 of the General Laws, determined in accordance with the Internal Revenue Code, as modified by the General Laws, before the effective date of this act [July 3, 2008].
 

For purposes of section 95, a "non-taxable member" is a member of the combined group that is not subject to tax on income under G.L. c. 63, sections 2, 2B, 32D, 39 or 52A. See G.L. c. 32B(d)(1). Under section 95(4) of the Act, gain or loss on the disposition or abandonment of any eligible asset shall be computed using the adjusted tax basis of such asset, as determined under the Internal Revenue Code as modified by the General Laws before July 3, 2008, and the deduction provided by section 95 shall continue thereafter without adjustment.
 

Increase in net deferred tax liabilities . The FAS 109 deduction is calculated only with respect to an increase in net deferred tax liabilities, as defined in section 95, minus any increase in net deferred assets, that would otherwise result from imposition of combined reporting in Massachusetts, and is further limited to any such net increase in net deferred tax liabilities minus increase in net deferred tax assets that would otherwise result from imposition of all of the provisions of the Act. [6] No deduction is available for a decrease in net deferred tax assets due to combined reporting or otherwise. For purposes of the netting process, net deferred tax liabilities and net deferred tax assets are viewed as separate accounts. Therefore, a taxpayer whose net deferred tax asset account exceeds its net deferred tax liability account may be eligible for the deduction, subject to other limitations specified in section 95, if its net deferred tax liability account would increase due to combined reporting in Massachusetts, to the extent that this increase in deferred liabilities exceeds any increase in deferred tax assets.
 

Recordkeeping Requirements. To facilitate review and potential audit of the taxpayer's statement and any claimed FAS 109 deduction during the 7 years provided in section 95 of the Act, a taxpayer must maintain records and workpapers necessary to support the calculation and journal entries identified for the full length of taxable years in which the deduction may be claimed, and all additional periods of time for which such taxable years may be subject to audit or adjustment.
 

/s/Navjeet K. Bal
Navjeet K. Bal
Commissioner of Revenue
 

NKB:MTF:adh
 

May 28, 2009
 

TIR 09-8

[1] Also, see Regulation 830 CMR 63.32B.2: Combined Reporting.
 

[2]To be eligible for the FAS 109 deduction, it is not required that the shares of a "publicly traded company" were publicly traded in the United States as of July 3, 2008, provided that those shares were publicly traded in one or more foreign countries as of that date. However, in the case of companies that were publicly traded in a foreign country, only publicly traded companies that prepare their financial statements in accordance with GAAP qualify for the FAS 109 deduction.

[3]830 CMR 63.32B.2(6)(d) provides:
 

Federal basis of non-Massachusetts taxpayer included in a combined group; election to use Massachusetts basis for all assets of all combined group members. In general, when a corporation that was not previously a Massachusetts taxpayer enters or otherwise is first included in a combined group the basis of the various assets of such member will be the basis of such assets for federal income tax purposes. However, the principal reporting corporation of a combined group may elect to determine and apply a Massachusetts-adjusted basis for all assets of every member of the combined group that was not previously a Massachusetts taxpayer, including any non-taxpayer corporation that subsequently enters or otherwise is included in the combined group, provided that the corporation must 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 G.L. c. 62C, § 37, without taking into account the provisions of G.L. c. 62C, § 30, for the tax year that first includes a previously non-taxable member. The election is irrevocable and is to be made in such form and in such manner as prescribed by the Commissioner. If a taxpayer is unable to reasonably document basis adjustments pursuant to this election for any member of the group, the election will be treated as void with respect to all group members and taxable periods that are within the statute of limitations for assessment.
 

[4]It should be noted that while the calculation of an increase in net deferred tax liabilities must be reduced for any net increase in deferred tax assets, any net decrease in deferred tax assets is not taken into account in calculating the deduction under section 95 of the Act.
 

[5]The offsets described in text contemplate a gross-up to the extent necessary to offset an increase in net deferred liability that would otherwise result from imposition of combined reporting in Massachusetts. Taxpayers must explain the calculation of any gross-up.
 

[6]Thus, for example, any increase in net deferred tax liability due to combined reporting must be reduced by any increase in deferred tax assets or reduction in deferred tax liabilities resulting from the other provisions or effects of the Act as a whole, including tax rate changes, entity classification changes, and other changes unrelated to combined reporting.