| Date: | 07/05/1988 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Referenced Sources: | Massachusetts General Laws |
Personal Income Tax
INTRODUCTION
Massachusetts tax legislation enacted in October 1986 included a provision setting out new rules for determining the basis of property for Massachusetts income tax purposes. St. 1986, c. 488, § 34. These rules, codified as G.L. c. 62, § 6F, are effective for tax years beginning on or after January 1, 1987.
The new provision is designed to reflect differences between federal and state basis rules over the course of the period during which the taxpayer holds property. Section 6F sets out a step-by-step procedure for adjusting federal gross income to account for historical differences since 1970 between federal and Massachusetts basis provisions. For the seven years before the enactment of § 6F, Massachusetts used the federal basis rules for determining gain or loss on the sales of property. See e.g., Letter Ruling 80-84. This Technical Information Release (TIR) sets out the basic steps required under G.L. c. 62, § 6F, for determining a taxpayer's Massachusetts basis in property. This TIR is narrow in scope: a more detailed explanation of the provisions of § 6F will follow in a regulation.
THE BASIC § 6F CALCULATIONS
Section 6F requires a taxpayer determining Massachusetts gross income to adjust federal gross income by any differences between the federal basis and the Massachusetts basis of property the taxpayer has disposed of during the tax year:
Rule 1: Massachusetts gross income = federal gross income + (federal adjusted basis - Massachusetts adjusted basis) or - (Massachusetts adjusted basis - federal adjusted basis).
This calculation increases the taxpayer's Massachusetts gross income to the extent that the taxpayer's federal basis is higher than Massachusetts basis (which means that the taxpayer has more gain for Massachusetts purposes than for federal purposes) and decreases a taxpayer's Massachusetts basis exceeds federal basis (which means that the taxpayer has less gain for Massachusetts tax purposes than for federal).
The taxpayer already has federal adjusted basis from the federal tax calculation to use in the calculation set out above in Rule 1. The taxpayer determines "Massachusetts adjusted basis" using the following calculation:
Rule 2: Massachusetts adjusted basis = Massachusetts initial basis + certain federal and Massachusetts basis adjustments.
How to determine the "Massachusetts initial basis" and what federal and state adjustments to apply to it to determine the "Massachusetts adjusted basis" are discussed in the next two sections.
MASSACHUSETTS INITIAL BASIS
For taxable year beginning on or after January 1, 1987, the first step in calculating the amount to be added to or subtracted from the federal gross income figure is to determine the Massachusetts initial basis of the property. There are rules for determining the Massachusetts initial basis of property owned on and before December 31, 1970 and other rules for determining the Massachusetts initial basis of property acquired after that date. This date is significant because before January 1, 1971, Massachusetts did not depreciation on real property. For property owned on and before December 31, 1970, there are three rules; for property acquired since that date, there are five rules.
MASSACHUSETTS INITIAL BASIS OF PROPERTY OWNED ON AND BEFORE DECEMBER 31, 1970
The rule the taxpayer uses to determine the initial basis of property held on December 31, 1970 depends upon whether any gain realized would have been taxable in Massachusetts if the taxpayer has sold the property on December 31, 1970, and whether the taxpayer is reporting a gain for Massachusetts purposes in the actual year of sale. Rules 3 and 4 apply to any property the gain from which would have been taxable in Massachusetts if the taxpayer had sold it in the course of business (i.e., the ordinary course) on December 31, 1970. Rule 3 governs the situation in which the taxpayer is now selling such property at a gain. Rule 4 governs the situation in which the taxpayer is now selling such property at a loss. Rule 5 applies to property any gain from which would not have been taxable in Massachusetts if the taxpayer had sold it on December 31, 1970.
Rule 3: If the taxpayer is disposing of property
(a) that the taxpayer owned on and before December 31, 1970
(b) any gain from which would have been taxable in Massachusetts if the taxpayer had sold it in the ordinary course on December 31, 1970, and
(c) that the taxpayer is now selling at a gain for Massachusetts tax purposes.
then the Massachusetts initial basis is the adjusted basis of the property under the Massachusetts basis rules in effect on December 31, 1970.
Rule 4: If the taxpayer is disposing of property
(a) that the taxpayer owned on and before December 31, 1970,
(b) any gain from which would have been taxable in Massachusetts if the taxpayer had sold it in the ordinary course on December 31, 1970, but
(c) that the taxpayer is now selling at a loss for Massachusetts tax purposes then the Massachusetts initial basis is the lower of
(i) the December 31, 1970 adjusted basis under December 31, 1970 Massachusetts basis rules, or
(ii) the federal adjusted basis on December 31, 1970.
Rule 5: If the taxpayer is disposing of property
(a) that the taxpayer owned on and before December 31, 1970
(b) gain from which would not have been taxable in Massachusetts if the taxpayer had sold the property on December 31, 1970, then the Massachusetts initial basis is the federal adjusted basis on December 31, 1970, less any Code § 1015(d) adjustment for gift tax paid.
MASSACHUSETTTS INITIAL BASIS OF PROPERTY ACQUIRED AFTER DECEMBER 31, 1970
There are five rules for determining the initial basis of property acquired after December 31, 1970. Which rule applies depends upon several variables, but the principal inquiry is whether the property's basis is "dependent" upon another basis. A dependent basis is one that, for federal tax purposes, is determined at least in part by referring either to basis of the property in the hands of the person from whom the taxpayer acquired it or to the basis of other property in the taxpayer's hands (such as a substituted or a carryover basis). Dependent basis is determined by the "basis of prior property," in the language of Section 6F. Rule 6 applies to property that does not have a dependent basis; Rules 7 and 8 apply to dependent-basis property; and Rules 9 and 10 apply to dependent-basis property acquired from a decedent.
Rule 6: If the taxpayer is disposing of property that the taxpayer acquired
(a) after December 31, 1970,
(b) other than from a decedent under Code § 1014(b), and
(c) with an initial federal basis at acquisition that was not dependent upon the basis of prior property, then the Massachusetts initial basis is the federal basis at the time of acquisition without any Code § 1015 (gift tax paid) adjustment.
Rule 7: If the taxpayer is disposing of property that the taxpayer acquired
(a) after December 31, 1970,
(b) other than from a decedent under Code § 1014(b),
(c) with an initial federal basis at acquisition that was dependent upon the basis of prior property, and if the taxpayer has a taxable gain or loss for federal purposes on the sale of the property, then the Massachusetts initial basis is the taxpayer's federal basis at the time he acquired the property.
Rule 8: If the taxpayer is disposing of property that the taxpayer acquired
(a) after December 31, 1970,
(b) other than from a decedent under Code § 1014(b),
(c) with an initial federal basis at acquisition that was dependent upon the basis of prior property, and if the taxpayer has no taxable gain or loss for federal tax purposes from the sale of the property, then the Massachusetts initial basis of the property is its initial federal basis at acquisition, either increased by the excess of the prior property's Massachusetts adjusted basis over its federal adjusted basis, or decreased by the excess of the prior property's federal adjusted basis over its Massachusetts adjusted basis.
Under Rules 7 and 8, the first step for a taxpayer selling dependent-basis property not acquired from a decedent is to determine whether the sale produces a gain or loss that the taxpayer includes in the calculation of federal gross income for the tax year. If federal gross income for the year includes either a gain or a loss from the sale, then Rule 7 applies and the taxpayer's Massachusetts initial basis is the same as federal initial basis. If there was no federal gain or loss, then Rule 8 applies. Under Rule 8 the taxpayer must first determine the Massachusetts adjusted basis and the federal adjusted basis of the prior property. The taxpayer then increases (or decreases) federal initial basis in the dependent-basis property according to whether (or lower) than the federal adjusted basis in that prior property. This rule requires the taxpayer to go through the § 6F procedure twice: once, for the prior property and then again for the property the taxpayer is selling. As the last step in the § 6F procedure for the prior property, however, the taxpayer does not adjust federal gross income for the differences between Massachusetts basis and federal basis of the prior property. Rather, the taxpayer increases (or reduces) federal initial basis in the dependent-basis property to the extent that Massachusetts adjusted basis in the prior property is greater than (or less than) federal adjusted basis in that prior property.
Rule 9: If the taxpayer is disposing of property that the taxpayer acquired
(a) after December 31, 1970,
(b) from a decedent under Code § 1014(b), where the date of death is the valuation date for estate tax purposes then the Massachusetts initial basis is the basis determined under Code § 1014, without any § 1014(d) adjustment (for DISC stock).
Rule 10: If the taxpayer is disposing of property that the taxpayer acquired
(a) after December 31, 1970,
(b) from a decedent under Code § 1014(b), and
(c) where the executor elected an alternate valuation date under G.L. c. 65C, §5, then the Massachusetts initial basis is the initial value under G.L. c. 65C, § 5, on the alternate valuation date.
MASSACHUSETTS ADJUSTED BASIS
Once the taxpayer has determined Massachusetts initial basis under the preceding rules, the taxpayer must determine Massachusetts adjusted basis using a tax-year -by-tax-year analysis. Under this analysis, the taxpayer must look at each tax year since the taxpayer acquired the property and for each year add to and subtract from the Massachusetts initial basis certain basis-related adjustments.
Rule 11: If a provision requiring an adjustment to basis applied for Massachusetts tax purposes in a tax year in which the taxpayer held the property (either under the then-current Internal Revenue Code or under the provisions then in effect under G.L. c. 62), then the taxpayer must adjust Massachusetts initial basis for that provision in that year (increased or decreased, according to the particular provision) to determine Massachusetts adjusted basis.
Rule 12: If a federal provision requiring an adjustment to basis did not apply for Massachusetts tax purposes in the same tax year in which the provision applied federally, then the taxpayer may not adjust Massachusetts initial basis for that provision in that year to determine Massachusetts adjusted basis.
Since 1970 Massachusetts basis adjustments have often differed from federal basis adjustments for the tax year. Under G.L. c. 62, Massachusetts gross income is (with certain modifications) federal gross income under the Internal Revenue Code as amended as of a specified date and in effect for the taxable year. G.L. c. 62, §§ 1, 2. Only when the Code reference in G.L. c. 62 is to the Code in effect for the current tax year can a taxpayer conclude that federal basis adjustments also applied in Massachusetts that year. The Code reference in G.L. c. 62 and the Code in effect for the year have coincided three times since 1970 -- in 1971, 1977 and 1983. In all other years during this period, the Massachusetts income tax was linked to an earlier year's Code, so that a change or addition to a basis-adjustment provision may have been incorporated for federal tax purposes, but not for Massachusetts tax purposes. For those years in which the Code and the G.L. c. 62 Code reference did not coincide while the taxpayer owned the property, the taxpayer must determine when a particular adjustment was first introduced for federal tax purposes and when G.L. c. 62 would have first picked it up.
The taxpayer may not adjust Massachusetts initial basis in accordance with an adjustment provided by the Code until the year in which that Code adjustment first applied to Massachusetts income tax law. For example, the Economic Recovery Act of 1981 introduced the Accelerated Cost Recovery Systems (ACRS) for tax years beginning in 1981 and after. Massachusetts did not pick up ACRS until July 1983, when the legislature changed the Code reference in G.L. c. 62 to February 1, 1983. As a result, a taxpayer would make ACRS adjustments to his federal basis for 1981 and 1982, but would not make any ACRS adjustments to his Massachusetts basis until 1983.
Rule 13: Even though the taxpayer adjusted basis in the property for federal tax purposes under Code § 1015(d) (for gift tax paid), the taxpayer may not adjust Massachusetts initial basis under Code § 1015(d) in determining his Massachusetts adjusted basis.
APPLICATION TO NON-RESIDENTS
Section 6F applies to non-residents as well as residents (§ 6F(d)). It contains a special provision for property sold by non-residents that is now taxable in Massachusetts but was not always subject to tax under G.L. c. 62. If the period during which the non-resident has owned the property includes a time when Massachusetts would not have taxed any gain on its sale under G.L. c. 62, then the adjustments the taxpayer makes to Massachusetts initial basis to determine Massachusetts adjusted basis are different from the adjustments that have been outlined above in section C. For the period during which Massachusetts would not have taxed a sale of the property, the taxpayer makes all federal adjustments to basis for that period. The taxpayer is not required to figure out which federal adjustments were also allowed in Massachusetts for a particular tax year for this period; the taxpayer is not required to adjust for Massachusetts-only adjustments for this period; and the taxpayer may take any Code § 1015(d) adjustment to which the taxpayer was entitled during this period.
ADJUSTING GROSS INCOME
Once the taxpayer has made the adjustments to initial basis to produce Massachusetts adjusted basis, the taxpayer must adjust federal gross income to reflect the difference between federal adjusted basis and Massachusetts adjusted basis. If federal adjusted basis is greater than Massachusetts adjusted basis, then in determining Massachusetts gross income, the taxpayer must increase federal gross income by the excess. If, in contrast, Massachusetts adjusted basis is greater than federal adjusted basis, then the tax payer must reduce federal gross income by the excess.
Stephen W. Kidder
Commissioner of Revenue
July 5, 1988
TIR 88-7