| Date: | 01/19/1990 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Referenced Sources: | Massachusetts General Laws |
Corporate Excise
The Massachusetts Legislature recently enacted Chapter 287 of the Acts of 1989 ("Chapter 287"), which restored Massachusetts S corporation treatment to all federal S corporations (except corporate trusts) for taxable years ending on or after December 31, 1989. St. 1989, c. 287, § 53. Under prior law, which was in effect for taxable years ending on or after December 31, 1988 and before December 31, 1989, federal S corporations with total receipts in excess of six million dollars were disqualified from Massachusetts S corporation treatment. St. 1988, c. 202, § 16 ("Chapter 202").
The purpose of this Technical Information Release (TIR) is to explain the effect of Chapter 287 on re-qualified S corporations. The TIR explains how re-qualified S corporations must calculate their Massachusetts accumulated adjustments accounts (AAA accounts) and their Massachusetts earnings and profits. In addition, the TIR describes the tax consequences of actual distributions by re-qualified S corporations.
For purposes of this TIR, a re-qualified S corporation is any federal S corporation that was a Massachusetts S corporation for its taxable year ending on or after December 31, 1987 and before December 31, 1988, that was disqualified from Massachusetts S corporation treatment because of the total receipts limitation imposed by Chapter 202 for its taxable year ending on or after December 31, 1988 and before December 31, 1989, and that qualifies for Massachusetts S corporation treatment under Chapter 287 for taxable years ending on or after December 31, 1989.
1. Calculation of Massachusetts AAA Accounts:
The Massachusetts AAA account of a re-qualified S corporation is zero at the start of the corporation's first taxable year ending on or after December 31, 1989. A re-qualified S corporation cannot use any undistributed Massachusetts AAA left over from its earlier period as a Massachusetts S corporation when computing Massachusetts AAA for its current period as a Massachusetts S corporation. Undistributed Massachusetts AAA left over from the earlier period as a Massachusetts S corporation is not added to a re-qualified S corporation's Massachusetts earnings and profits. Rather, it becomes part of the corporation's paid in capital at the start of the corporation's first taxable year ending on or after December 31, 1989. Because the amount of undistributed Massachusetts AAA should have been used to increase the Massachusetts adjusted basis of the corporation's stock as it was earned, no additional basis adjustment is required or allowed when undistributed AAA is added to paid in capital.
2. Calculation of Massachusetts Earnings and Profits:
The Massachusetts earnings and profits of a re-qualified S corporation at the start of the corporation's first taxable year ending on or after December 31, 1989 is the amount of Massachusetts earnings and profits on the last day of the corporation's last taxable year ending on or after December 31, 1987 and before December 31, 1988, (the corporation's last taxable year before it was disqualified as a Massachusetts S corporation) plus all undistributed earnings and profits, computed under Subchapter C of the Internal Revenue Code, generated during the taxable year ending on or after December 31, 1988 and before December 31, 1989 (the year of its disqualification as a Massachusetts S corporation).
3. Consequences of Actual Distributions By Re-Qualified S Corporations:
Unless made pursuant to the Massachusetts post-termination transition rules as explained in 830 CMR 62.17A.1(12), an actual distribution by a re-qualified S corporation will have the following effects:
a. Actual Distributions By Re-Qualified S Corporations With No Massachusetts Earnings and Profits.
Distributions of property (including cash) from a re-qualified S corporation with no Massachusetts earnings and profits will have the following tax consequences and will be applied to reduce the Massachusetts accumulated adjustments account and Massachusetts adjusted basis in the following order:
1. The distribution will be tax free to the extent of the Massachusetts adjusted basis of stock. The Massachusetts adjusted basis of the stock and the Massachusetts accumulated adjustments account will be reduced by the amount of the distribution; and
2. The distribution will be treated as a taxable gain on the sale or exchange of stock to the extent that the amount distributed exceeds the shareholder's Massachusetts adjusted basis of the stock.
b. Actual Distributions by Re-Qualified S Corporations With Massachusetts Earnings and Profits.
Distributions of property (including cash) from a re-qualified S corporation with Massachusetts earnings and profits will have the following tax consequences and will be applied to reduce the Massachusetts accumulated adjustments account, Massachusetts earnings and profits, and Massachusetts adjusted basis in the following order:
1. The portion of the distribution that does not exceed the Massachusetts accumulated adjustments account will be tax free to the extent of the Massachusetts adjusted basis of the stock. The Massachusetts adjusted basis of the stock and the Massachusetts accumulated adjustments account will be reduced by the amount of the distribution; and
2. Any amount of the portion of the distribution that does not exceed the Massachusetts accumulated adjustments account remaining after Massachusetts adjusted basis is exhausted will be treated as taxable gain on the sale or exchange of stock; and
3. The portion of the distribution in excess of the Massachusetts accumulated adjustments account will be taxable as a dividend to the extent of Massachusetts earnings and profits. Massachusetts earnings and profits will be reduced by the amount of the distribution; and
4. Further amounts distributed will be tax free to the extent of any remaining Massachusetts adjusted basis of the stock. The Massachusetts adjusted basis of the stock will be reduced by the amount of the distribution; and
5. All additional amounts distributed will be treated as a taxable gain on the sale or exchange of stock.
/s/Stephen W. Kidder
Stephen W. Kidder
Commissioner of Revenue
TIR 90-1
January 19, 1990