(1)
Statement of Purpose, Outline of Topics, Effective
Date.
(a)
Statement
of Purpose. 830 CMR
62.63.1 explains the scope and effect of the
Massachusetts installment transaction provision, M.G.L. c. 62, § 63, as to
taxpayers who are treated as electing installment sale treatment for federal
income tax purposes under section 453 of the Code.
(b)
Outline of
Topics. 830 CMR
62.63.1 is organized as follows:
1. Statement of Purpose, Outline of Topics,
Effective Date
2.
Definitions
3. Transition
Rules
4. Massachusetts Gain At
Least $1 million
5. Massachusetts
Gain Less Than $1 million
6.
Contingent Payments
7.
Modifications to Federal Gross Income
8. Tax Rate Applicable to Installment
Payments
9. Nonresidents; Interest
on Installment Obligation
10.
Flow-through Entities
11.
Elections; Form of Security
(c)
Effective Date.
830 CMR
62.63.1 takes effect on July 14, 2006 and applies to transactions
occurring during tax years beginning on or after January 1, 2005.
(2)
Definitions. For purposes of 830 CMR
62.63.1, the
following terms shall have the following meanings, unless the context requires
otherwise:
Code, the Internal Revenue Code, as
adopted under M.G.L. c. 62, § 1(c).
Commissioner, the Commissioner of
Revenue.
Flow-through Entity, a trust,
partnership, S corporation, limited liability company or other entity the
income, loss, deductions, credits, and other tax items of which are generally
allocated or otherwise attributed on a current basis to the entity's members,
partners, shareholders, or beneficiaries for Massachusetts income tax purposes,
with such items generally retaining their character and treated as if received,
accrued, paid, or incurred directly by such members, partners, shareholders or
beneficiaries.
Installment Sale Treatment, the
determination of taxable income from a transaction treated as an installment
sale for federal income tax purposes in accordance with the installment method
as described in § 453 of the Code.
Installment Transaction, a transaction
that is treated as an installment sale for federal income tax purposes under
section 453 of the Code and that would, but for such section and M.G.L. c. 62,
§ 63, result in Massachusetts gain for the taxable year of the transaction
that is equal to or greater than $1,000,000.
Massachusetts Gain, the entire gain
that would be recognized from a transaction and included in Massachusetts gross
income as determined under M.G.L. c. 62, § 2 (without regard to the
modifications that apply under M.G.L. c. 62, § 63).
Taxpayer, an individual, partnership,
trust, estate, limited liability company, S corporation or other entity or
their members subject to the income tax imposed by M.G.L. c.
62.
(3)
Transition Rules.
(a)
Installment Sale Treatment
for Tax Years Beginning Prior to January 1, 2005. Under M.G.L. c.
62, § 63, as in effect for installment sales for tax years prior to
January 1, 2005, taxpayers who were treated as electing installment sale
treatment under section 453 of the Code were not automatically entitled to
equivalent treatment under the Massachusetts personal income tax provisions. In
order to qualify for installment sale treatment for Massachusetts income tax
purposes, taxpayers were required to file a separate Massachusetts installment
sale election and were required to post security with the Commissioner if the
Massachusetts personal income tax deferred was at least $1,500. Taxpayers who
were treated as electing installment sale treatment under section 453 of the
Code for tax years beginning prior to January 1, 2005, must continue to apply
M.G.L. c. 62, § 63 as in effect for such years to such transactions and
must apply the Massachusetts personal income tax rate applicable to the year of
the installment sale to all gains attributable to subsequent installment sale
payments subject to M.G.L. c. 62, § 2(b)(3), without regard to subsequent
statutory changes in the personal income tax rate for M.G.L. c. 62, §
2(b)(3).
(b)
Gain
Already Recognized. A taxpayer with a Massachusetts gain from a
transaction treated as an installment sale under section 453 of the Code
occurring in a tax year beginning, prior to January 1, 2005, who did not elect
installment sale treatment for Massachusetts purposes but who did not elect out
of federal installment sale treatment, will not have to recognize gain that has
already been recognized for Massachusetts income tax purposes when such gain is
later recognized federally on a deferred basis under the installment
method.
(c)
Security
Requirements. A taxpayer required to post security with respect to
transactions occurring in a tax year beginning prior to January 1, 2005 must
continue to adhere to the prior security requirements. Such requirements are
unaffected by the new $1 million Massachusetts gain threshold.
(4)
Massachusetts Gain
at Least $1 Million.
(a)
Federal Election In; Massachusetts Election In;
Security. Taxpayers who are treated as electing installment sale
treatment for federal income tax purposes under section 453 of the Code, and
who wish to receive installment sale treatment for Massachusetts income tax
purposes, must file a separate Massachusetts installment sale election if their
Massachusetts gain for the entire transaction is equal to or greater than $1
million. Taxpayers with more than one such installment transaction (each giving
rise to Massachusetts gain equal to or greater than $1 million) in a given tax
year must elect or choose not to elect under this section for all such
transactions as a group. Taxpayers filing such election must post security with
the Commissioner as provided for in 830 CMR
62.63.1(11).
(b)
Federal Election In;
Massachusetts Election Out. Taxpayers who are treated as electing
installment sale treatment for federal income tax purposes under section 453 of
the Code may file an election out of Massachusetts installment sale treatment
if their Massachusetts gain for the entire transaction is equal to or greater
than $1 million. If no election is made under 830 CMR
62.63.1(4)(a) (along with
the requisite posting of security), a taxpayer will be considered to have
elected out of Massachusetts installment sale treatment.
(c)
Federal Election Out;
Automatic Massachusetts Election Out. Taxpayers who elect out of
installment sale treatment for federal income tax purposes under section 453 of
the Code are automatically treated as electing out of Massachusetts installment
sales treatment. Such taxpayers are not allowed to elect Massachusetts
installment sales treatment.
(5)
Massachusetts Gain less than
$1 Million.
(a)
Federal Election In; Automatic Massachusetts Election
In. Taxpayers who are treated as electing installment sale
treatment for federal income tax purposes under section 453 of the Code are
automatically treated as electing Massachusetts installment sales treatment if
their Massachusetts gain for the entire transaction is less than $1 million.
Such taxpayers are not allowed to elect out of Massachusetts installment sales
treatment.
(b)
Federal
Election Out; Automatic Massachusetts Out. Taxpayers who elect out
of installment sale treatment for federal income tax purposes under § 453
of the Code are automatically treated as electing out of Massachusetts
installment sales treatment. Such taxpayers are not allowed to elect
Massachusetts installment sales treatment.
(6)
Contingent
Payments. In determining the amount of Massachusetts gain for the
entire transaction for purposes of 830 CMR
62.63.1(4) and (5), contingent
payments shall be presumed to be valued at their stated maximum selling price
for the transaction, and contingent payment transactions that do not state a
maximum selling price shall be presumed to give rise to a Massachusetts gain
for the entire transaction of at least $1 million, unless a separate
Massachusetts determination of the value of contingent payments or of the
maximum selling price is made by the taxpayer and such determination is
submitted to and approved by the Commissioner for purposes of determining the
amount of Massachusetts gain for the entire transaction under 830 CMR
62.63.1(4) and (5).
(7)
Modifications to Federal Gross Income. In each taxable
year that the taxpayer has gain subject to Massachusetts income tax from an
installment transaction under M.G.L. c. 62, § 63, the federal gross income
of such taxable year shall be modified for the purpose of applying M.G.L. c.
62, § 2 as follows:
(a) the federal gross
income shall be increased by the excess of the federal adjusted basis of the
property disposed of in the transaction over the Massachusetts adjusted basis
of such property; and
(b) the
federal gross income shall be decreased by the excess of the Massachusetts
adjusted basis of the property disposed of in the transaction over the federal
adjusted basis of such property; and
(c) similar modifications under M.G.L. c. 62,
§ 6F apply generally to modifying federal gross income under M.G.L. c. 62,
§ 2, regardless of qualification as an installment transaction under
M.G.L. c. 62, § 63, however, no modification shall be made under 830 CMR
62.63.1(7) to the extent that such modification would duplicate a modification
required under M.G.L. c. 62, § 6F.
(8)
Tax Rate Applicable to
Installment Sale Gain. Massachusetts gain included in income
pursuant to an installment sale under 830 CMR
62.63.1(4)(a) and (5)(a) is
subject to the Massachusetts personal income tax rate applicable to the
particular tax year in which such gain is included in income, except as may
otherwise be expressly provided by statute. Thus, the rate applicable to income
included in the year of the sale may differ from the rate applicable to income
attributable to installments received in subsequent years in the event of a
statutory change to the personal income tax rates.
(9)
Nonresidents; Interest on
Installment Obligation.
(a) A
nonresident taxpayer who receives installment sale treatment for Massachusetts
income tax purposes under 830 CMR
62.63.1(4)(a) and (5)(a) with respect to gain
recognized on the sale of Massachusetts real estate or other property subject
to tax in accordance with M.G.L. c. 62, § 5A shall be subject to
Massachusetts tax with respect to all gain and other income, including interest
and original issue discount, recognized on account of such transaction in all
applicable tax years.
(b) A
resident taxpayer who receives installment sale treatment for Massachusetts
income tax purposes with respect to gain recognized on any installment sale,
and who becomes a nonresident in a tax year subsequent to the tax year of the
transaction, shall be subject to Massachusetts tax with respect to all gain and
other income, including interest and original issue discount recognized on
account of such transactions in all applicable tax years.
(10)
Flow-through
Entities. In the case of a flow-through entity disposing of
property in a transaction receiving installment sale treatment for
Massachusetts income tax purposes under 830 CMR
62.63.1(4)(a) and (5)(a), it is
the flow-through gain recognized by each partner, shareholder, member or
beneficiary of an entity that applies in determining the amount and timing of
Massachusetts gain for the entire transaction under 830 CMR
62.63.1(4) and (5).
Each individual partner, shareholder, member or beneficiary is separately
subject to the election and security requirements under 830 CMR
62.63.1(4), (5)
and (11). The Massachusetts apportionment percentage, if any, applicable to the
year of an installment sale subject to 830 CMR
62.63.1(4)(a) and (5)(a) applies
to all gains recognized by non-residents that are attributable to subsequent
installment sale payments.
See
830 CMR
62.5A.1(6):
Non-resident Income Tax.
Example: A partnership consisting of
three partners having identical a interests sells Massachusetts real estate and
the sale results in $2.1 million of recognized Massachusetts gain in the
aggregate. Each partner recognizes $700,000 of Massachusetts gain for purposes
of determining the amount and timing of Massachusetts gain for the entire
transaction under 830 CMR 62.63.1(4) and (5). Therefore, each partner is
separately subject to 830 CMR 62.63.1(5) and the security requirements under
830 CMR 62.63.1(11) do not apply.
(11)
Elections; Form of
Security. Any taxpayer making an election pursuant to 830 CMR
62.63.1 must do so in the form and manner prescribed by the Commissioner. Any
taxpayer filing an election for Massachusetts installment sale treatment under
830 CMR
62.63.1(4)(a) must post security with the Commissioner of such kind and
in such amount as the Commissioner may determine necessary to secure payment of
the total tax.