Technical Information Release  TIR 23-9: Reagan v. Commissioner of Revenue – Taxability of Capital Gain on the Sale of a Chapter 121A Urban Redevelopment Project

Date:	08/11/2023
Referenced Sources:	Massachusetts General Laws

I. Introduction

On March 10, 2023, the Supreme Judicial Court (“SJC”) reversed the decision of the Appellate Tax Board in favor of the Commissioner in Reagan v. Commissioner of Revenue, 491 Mass. 446 (2023) (“Reagan”). At issue was whether the capital gain from the sale of an urban redevelopment project, undertaken pursuant to G.L. c. 121A, § 18C, was exempt from taxation. The SJC held that the gain was exempt from tax under the statute. This Technical Information Release (“TIR”) explains the position of the Department of Revenue (“Department”) regarding the SJC’s decision.

II. Discussion

A.  Urban Redevelopment Projects Under Chapter 121A

The Massachusetts Legislature (“Legislature”) enacted G.L. c. 121A to “stimulate the investment of private capital in blighted open, decadent or sub-standard areas,” by encouraging “the construction, maintenance and operation in such areas of needed decent, safe and sanitary residential, commercial, industrial, institutional, and recreational buildings . . .”  G.L. c. 121A, § 2. To achieve this goal, the statute provides for the creation of corporate entities (“Section 3 Corporations”), pursuant to G.L. c. 121A, § 3, for the purpose of “undertaking and carrying out . . . a project.”

The statute defines a “project” as:

[A]ny undertaking consisting of the construction in a blighted open, decadent or sub-standard area of decent, safe and sanitary residential, commercial, industrial, institutional, recreational or governmental buildings and such appurtenant or incidental facilities as shall be in the public interest, and the operation and maintenance of such buildings and facilities after construction. G.L. c. 121A, § 1.

The statute also states that a “project may include as incidental thereto” a number of related activities, including the “acquisition and assembly of the land (and buildings and structures and other improvements thereon, if any) within a blighted open, decadent or sub-standard area.” Id.

To encourage individuals to form Section 3 Corporations and undertake projects, the statute provides that Section 3 Corporations are exempt from taxation for a period of up to forty years. G.L. c. 121A, § 10. However, such entities are also subject to certain statutory restrictions. Section 3 Corporations cannot undertake more than one project or engage in any other type of activity. G.L. c. 121A, § 3. They are required to pay a special annual urban redevelopment excise (the “121A Excise”) consisting of an income tax component and a property tax component. G.L. c. 121A, § 10. Section 3 Corporations are also subject to several reporting and regulatory requirements with the city or town in which the project is located. G.L. c. 121A, §§ 4, 6A, 8, 9, 15.

The Legislature subsequently amended G.L. c. 121A to allow “individuals, and associations of persons organized in the commonwealth in the form of joint ventures, partnerships, limited partnerships or trusts” (“Section 18C Entities”) to undertake projects. G.L. c. 121A, § 18C. Unlike with Section 3 Corporations, the statute did not limit the business activities of the Section 18C Entities. As a result, the Legislature did not exempt these entities from taxation entirely; instead, it provided that they would be exempt from tax “on account of a project.” Id. Section 18C Entities are also required to pay the 121A Excise and enter into a regulatory agreement with the city or town. Id.[1]

At issue in Reagan were projects undertaken by three Section 18C Entities: St. James Company, Blackstone Company, and Kenmore Abbey Limited Partnership (together, the “121A Partnerships”). Each 121A Partnership undertook a project in Boston for a forty-year tax exempt term. Near the end of the forty-year term, the 121A Partnerships sold their projects to unrelated buyers. The partners of the 121A Partnerships did not report the capital gains from the sale of the projects as taxable on their Massachusetts tax returns. The Commissioner assessed tax on these capital gains, contending that the gains were not earned “on account of” the projects.

B.  The Supreme Judicial Court’s Decision

The SJC determined that the 121A Partnerships’ capital gains from the sale of their projects were exempt under G.L. c. 121A, § 18C(f). The statute exempts Section 18C Entities from taxation “on account of a project.”  G.L. c. 121A, § 18C(f). The SJC found that the term “on account of a project” does not limit the exemption solely to activities enumerated in the definition of a “project,” such as the construction, operation, and maintenance of a building. Instead, the 121A Partnerships were entitled to an exemption “for any taxes causally connected to the project.” Reagan, 491 Mass. at 452. Capital gain on the sale of a project falls within this exemption because the value of the capital gain results from the 121A Partnerships undertaking and carrying out the projects. The partnerships acquired the properties, invested in the construction of buildings on the properties, and operated and maintained the buildings. Id. at 452-53. These endeavors, all part of the definition of a “project,” caused the projects’ increase in value and thus the capital gain. Id.

The SJC also noted that G.L. c. 121A itself suggests that the exemption should be read broadly. Id. at 454-456. It also found further support for a broad reading of the G.L. c. 121A exemption from the fact that the Legislature broadened the exemption several times, expanding it to include other tax types and entities. Id. at 457-58.

III. Application of Reagan Decision

Pursuant to chapter 121A, when a taxpayer’s capital gain on the sale of a project is causally connected to the project, that gain is exempt from tax if the sale is within the statutory exemption period. Taxpayers that own projects remain liable for the 121A Excise as well as any other applicable taxes under G.L. c. 121A.

 

                                                                   /s/Geoffrey E. Snyder
                                                                   Geoffrey E. Snyder
                                                                   Commissioner of Revenue

GES:RHF:mc

August 11, 2023

TIR 23-9

[1] The Commissioner issued a letter ruling pertaining to the sale of a project in 1994. Letter Ruling 94-7 stated that proceeds received from the sale of a project were not includable in the income tax component of the 121A Excise and also concluded the proceeds were instead subject to tax under either G.L. c. 62 or 63. In its decision, the SJC found that the taxability of the proceeds under G.L. c. 62 or 63 was not relevant to the question presented in Letter Ruling 94-7 and that this conclusion was incorrect under the statute.