(1)
Statement of Purpose; Outline of Topics.
(a)
Purpose. 830 CMR
63.31N.1 implements the rules set forth in M.G.L. c. 63, § 31N, which
requires certain adjustments to the basis of a corporation's property,
including stock owned by the corporation, for purposes of determining gross
income, deductions and other tax items of an entity taxable under M.G.L. c. 63.
830 CMR 63.31N.1 also provides some examples of when these adjustments may be
necessary. 830 CMR 63.31N.1 does not purport to describe all of the situations
where adjustments to the basis of a corporation's property will be necessary
pursuant to M.G.L. c. 63, § 31N for purposes of determining the
corporation's Massachusetts corporate excise. Adjustments to the Massachusetts
basis of a corporation's property may be required in circumstances not
described in 830 CMR 63.31N.1.
(b)
Outline. 830 CMR 63.31N.1 is organized as follows.
1.Statement of Purpose; Outline of
Topics
2.Definitions
3.General Rules
4.Special Rule for Former Corporate
Trusts
5.Intercompany Transactions;
Basis Adjustments Attributable Thereto
6.Combined Reporting; Basis in Subsidiaries;
Earnings and Profits
7.Application
of the Sham Transaction Rule and Related Doctrines
8.Effective Date
(2)
Definitions. For purposes of 830 CMR 63.31N.1, the
following terms have the following meanings.
Code, the federal Internal Revenue
Code, as amended and in effect for the taxable year.
Combined Group, a group of
corporations that is required to file a Massachusetts combined report for a
taxable year beginning on or after January 1, 2009, including a combined group
that results from a Massachusetts affiliated group election. A combined report
is required to be filed pursuant to M.G.L. c. 63, § 32B, as enacted by St.
2008, c. 173. See
830 CMR
63.32B.2. A combined group does not refer to
a combined group allowed to file a combined return within the meaning of former
M.G.L. 63, § 32B (i.e., prior to M.G.L. 63, § 32B's repeal by St.
2008, c. 173, § 48). See
830 CMR
63.32B.1.
Consolidated Federal Income Tax
Return, a return of income filed with the federal government
pursuant to Code § 1501 by an affiliated group as determined under Code
§ 1504.
Corporate Trust, an entity defined in
M.G.L. c. 62, § 1(j), and subject to the provisions of M.G.L. c. 62,
§ 8 prior to the enactment of St. 2008, c. 173, pursuant to which
Massachusetts adopted the federal "check the box" conformity rules and repealed
the Massachusetts personal income tax rules that applied to the taxation of
corporate trusts.
Corporation, a business corporation
within the meaning of M.G.L. c. 63, § 30, whether or not organized in
Massachusetts. For taxable years beginning prior to January 1, 2009, a
"corporation" refers to a foreign or domestic business corporation, a utility
corporation, a financial institution, an insurance company, or other entity
taxable under M.G.L. c. 63, depending upon the context, as determined under the
pertinent provisions of M.G.L. c. 63, in effect for such years.
Federal Consolidated Group, an
affiliated group as defined in Code §1504 that is required to file a
consolidated federal income tax return. The corporations that are includible
corporations for purposes of a consolidated federal income tax return generally
include only corporations that are formed under the laws of the U.S. or a U.S.
state, and generally do not include, for example, non-profit corporations that
are exempt from federal income tax, S corporations, real estate investment
trusts (REITs) as referenced under Code §§ 856 through 859, and
regulated investment companies (RICs) as referenced under Code §§ 851
through 855.
Massachusetts Affiliated Group
Election, an election by the taxable member or members of a
combined group to treat the combined group as consisting of such member or
members and all additional corporations included within the Massachusetts
affiliated group of such member or members as determined under M.G.L. c. 63,
§ 32B and
830 CMR
63.32B.2.
(3)
General Rules.
(a)
Determination of Federal
Gross Income as Determined for Massachusetts Purposes. In
determining a corporation's gross income under M.G.L. c. 63, if the
corporation's federal gross income as determined for Massachusetts purposes
includes any item of gain or has been reduced by an item of loss, with respect
to property, then such federal gross income shall be increased by the amount by
which the federal adjusted basis of the property exceeds the Massachusetts
adjusted basis of the property, and shall be decreased by the amount by which
the Massachusetts adjusted basis of the property exceeds the federal adjusted
basis of the property, such that the gain or loss realized for Massachusetts
purposes takes into account all applicable differences in the Massachusetts and
federal tax rules over the life of an asset that should in principle give rise
to differences in basis.
(b)
Relationship between Massachusetts and Federal Adjusted Basis of
Property. Except as otherwise provided by Massachusetts law, the
Massachusetts adjusted basis of property shall be the federal adjusted basis of
such property; provided, however, that:
1.any
federal adjustment attributable to provisions of the Code that were not
applicable in determining Massachusetts net or gross income at the time that
such federal adjustment was made shall be disregarded in determining
Massachusetts basis; provided, however, that federal basis adjustments
attributable to federal tax credits claimed by a taxpayer or to federal grants,
subsidies, or similar payments made to a taxpayer shall not be so disregarded
under this clause unless otherwise prescribed by Massachusetts law;
and
2.adjustments shall be made for
any item that was applicable in determining Massachusetts net or gross income
but that was not so applicable in determining federal net or gross income at
the time of such Massachusetts determination, and for which a federal
adjustment would be allowed under the Code if the item had been applicable in
determining federal net or gross income. For example, Massachusetts does not
allow bonus depreciation under Code § 168(k). Therefore, when a
corporation that is subject to the income measure of the Massachusetts
corporate excise takes a bonus depreciation deduction with respect to an item
of property for federal income tax purposes, such depreciation deduction must
be disregarded for Massachusetts purposes, and the corporation's Massachusetts
basis in the property is not reduced on account of the federal adjustment. On
the other hand, there may be basis adjustments that apply for Massachusetts
purposes that do not apply federally.
(c)
Examples. The
following examples illustrate the provisions of 830 CMR 63.31N.1(3)(b).
1.Example 1. On
January 1, 2009, X, a calendar-year corporation engaged in business in
Massachusetts purchases qualified ten-year MACRS property for $100,000 and
places it in service. X's initial basis in the property is $100,000 both for
federal and Massachusetts purposes. On its 2009 federal tax return, X claims
depreciation equal to 50% of the basis of the property, or $50,000, pursuant to
Code § 168(k). Therefore, X's basis in the property is reduced to $50,000
for federal tax purposes. In addition, X takes a regular federal MACRS
depreciation deduction for 2009, applying the 200% Declining Balance method, in
the amount of $5,000 ($50,000 x .20 = $10,000, divided by 2 to account for the
1/2 year convention). Therefore, for federal tax purposes, X's basis in
the property is $45,000. On its 2009 Massachusetts tax return, X must calculate
the federal depreciation deduction for the property as if it did not elect to
utilize the federal bonus depreciation allowance, as Massachusetts does not
allow bonus depreciation. In the absence of the federal bonus depreciation, the
property's first-year federal MACRS depreciation would be $10,000 ($100,000 x
.20 = $20,000, divided by 2 to account for the 1/2 year convention). Thus,
the Massachusetts 2009 depreciation deduction for the property is $10,000, and
X's basis in the property is reduced to $90,000 for Massachusetts tax purposes.
On November 30, 2010, X sells the property to an unrelated party for $75,000. X
has a $30,000 gain for federal tax purposes and a $15,000 loss for
Massachusetts tax purposes.
2.Example 2. On
January 1, 2011, X, a calendar-year corporation engaged in business in
Massachusetts purchases property that includes an abandoned building in an
economic opportunity area of Massachusetts, as determined by the economic
assistance coordinating council established by M.G.L. c. 23A, § 3B. X has
an initial cost basis in the property for both Massachusetts and federal
purposes in the amount of $500,000. X spends $300,000 to renovate the building
in 2011, and thereby increases its basis in the property for both federal and
Massachusetts purposes to $800,000. X also deducts 10% of its costs in
renovating the building pursuant to M.G.L. c. 63, § 38O, thereby further
reducing its basis in the property for Massachusetts purposes to $770,000. No
similar deduction applies for federal income tax purposes, and so X's basis in
the property for federal purposes remains $800,000. Subsequently, in December
of 2011, X sells the renovated property to an unrelated party for $1,000,000,
recognizing a $230,000 gain in Massachusetts and a $200,000 gain
federally.
(d)
Rule of Convenience; Election to Adopt Massachusetts Adjusted Basis
Where Non-taxable Corporation Becomes Taxable Corporation. In
general, when a corporation (other than a corporation that is or becomes a
member of a combined group) first becomes subject to the income measure of the
corporate excise, the initial Massachusetts basis of its various assets will be
the basis of such assets as determined for federal income tax purposes, rather
than the Massachusetts adjusted basis that the property would have had if it
had been acquired and held during a time when the corporation was subject to
the corporate excise under M.G.L. c. 63 with regard to its income.
Notwithstanding the foregoing, a corporation that was not previously subject to
the corporate excise under M.G.L. c. 63 with regard to its income may elect to
determine and adopt the Massachusetts adjusted basis as to all of its assets
acquired prior to becoming a Massachusetts taxpayer by taking this position on
the corporation's initial Massachusetts corporate excise return as filed with
the state, provided that the corporation possesses and maintains adequate
records to demonstrate the appropriate Massachusetts adjusted basis for all
such assets. The election must be made during the period of limitations for
abatement under M.G.L. c. 62C, § 37, without taking into account the
provisions of M.G.L. c. 62C, § 30, for the tax year during which the
corporation first becomes subject to the corporate excise under M.G.L. c. 63
with regard to its income. If the corporation's return is not timely filed
and/or the election is not made within such filing period then the corporation
is precluded from electing to adopt a Massachusetts adjusted basis for its
assets. Once made, this election is irrevocable. Further, 830 CMR 63.31N.1(3)
d) does not apply in the instance of a corporation that is a member of a
combined group, because in the latter such cases an election to adjust the
basis of the corporation's assets must be made pursuant to the rules that apply
to such groups. See 830 CMR 63.31N.1(3)(f)2.
(e)
Examples. The
following examples illustrate the provisions of 830 CMR 63.31N.1(3)(d). Assume
for purposes of these examples that Corporation X reports its income on a
calendar year basis for both federal and Massachusetts tax purposes. Assume
also that Corporation X is not a member of a combined group during its 2009 or
2010 taxable years.
Example 1. Corporation X is a
corporation that is not subject to the corporate excise under M.G.L. c. 63 with
regard to its income during its 2008 tax year. X purchases a business asset
that is ten-year property on January 1, 2008 for $10,000. For tax year 2008, X
takes a 50% bonus depreciation deduction of $5,000 as to the purchased asset
for federal income tax purposes pursuant to Code § 168(k). In addition, X
takes a regular MACRS depreciation deduction in the amount of $500 ($5,000 x
.20 = $1,000, divided by 2 to account for the 1/2 year convention).
Therefore, for federal tax purposes, X's basis in the asset as of January 1,
2009, is $4,500 ($10,000 - $5,000 - $500). On January 1, 2009, X expands its
activities into Massachusetts such that it becomes subject to the income
measure of the corporate excise for its 2009 tax year. At this time, the
default Massachusetts basis of X's various assets will be the basis of such
assets as determined for federal income tax purposes. However, X may elect to
determine and adopt a Massachusetts adjusted basis for all of its assets,
provided that it possesses and maintains adequate records to demonstrate the
appropriate Massachusetts adjusted basis for all such assets. Assuming that X
makes this election, its Massachusetts basis in the purchased asset as of
January 1, 2009 will be $10,000 - $1,000 ($10,000 x. 20, divided by 2 to
account for the 1/2 year convention), or $9,000. This basis number is the
same as what the asset's federal basis would have been had the taxpayer not
taken federal bonus depreciation in 2008. On January 2, 2009, X sells the asset
for $8,000. X will recognize a $3,500 federal taxable gain and a $1,000
Massachusetts taxable loss.
Example 2. Assume the same facts as in
Example 1. Assume further that X does not sell the purchased asset on January
2, 2009. Rather, X holds the asset until the end of its 2009 tax year. For
federal tax purposes, X's depreciation deduction for the 2009 tax year will be
$900 ($4,500 x .20), resulting in a federal tax basis of $3,600. For
Massachusetts tax purposes, X's depreciation deduction for the 2009 tax year
will be $1,800 ($9,000 x .20), resulting in a Massachusetts tax basis of
$7,200. Assume that X subsequently sells the asset on January 2, 2010 for
$8,000. For purposes of its 2010 tax year, X will recognize a $4,400 federal
taxable gain and an $800 Massachusetts taxable gain.
Example 3. Assume the same facts as
Example 1, except that upon becoming subject to the Massachusetts corporate
excise in 2009, X does not make the election to determine and adopt a
Massachusetts adjusted basis as to its assets. Therefore, as of January 1,
2009, X's Massachusetts adjusted basis in the purchased asset will be $4,500,
the same as X's federal basis in this asset. If X sells the asset on January 2,
2009 for $8,000, it will have a $3,500 taxable gain for both federal and
Massachusetts tax purposes.
(f)
Massachusetts Basis of
Property Held by Members of a Combined Group.
1.In General. For
purposes of determining a combined group's taxable income pursuant to
830 CMR
63.32B.2(6)(c)2., each
member of the combined group shall determine its separate income by taking into
account the Massachusetts adjusted basis of each asset held by such member;
provided, however, that in the case of a combined group subject to a worldwide
election, any member not incorporated in the United States and not treated as a
U.S. corporation under the Code shall determine its separate income in
accordance with
830 CMR
63.32B.2(6)(c)2.b(i)B and
shall not be subject to the requirement in 830 CMR 63.31N.1(3)(f)1.
2.Non-Massachusetts Taxpayer's
Massachusetts Basis in its Assets at the Time it is First Included in a
Combined Group; Election to Adopt Massachusetts Adjusted Basis for All Assets
of All Members of a Combined Group. In general, when a corporation
that was not previously a Massachusetts taxpayer enters or otherwise is first
included in a combined group, the Massachusetts basis of its various assets at
that time will be the basis of such assets as determined for federal income tax
purposes, rather than the Massachusetts adjusted basis that the property would
have had if it had been acquired and held during a time when the corporation
was subject to Massachusetts tax. Notwithstanding the foregoing, the principal
reporting corporation of a combined group may elect to determine and adopt the
Massachusetts adjusted basis for all previously-acquired assets of every member
of the group that was not previously a Massachusetts taxpayer, including any
non-taxpayer corporation that subsequently enters or otherwise is included in
the group, provided that such corporations 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 M.G.L. c. 62C, § 37, without taking into
account the provisions of M.G.L. c. 62C, § 30, for the tax year that first
includes a previously non-taxable member. If the group's combined return is not
timely filed and/or the election is not made within such filing period then the
group members are precluded from electing to adopt a Massachusetts adjusted
basis for their assets. The election is irrevocable and is to be made in such
form and in such manner as prescribed by the Commissioner. See
830 CMR
63.32B.2(6)(d).
(4)
Special
Rules for Former Corporate Trusts. Notwithstanding the general
rules set forth in 830 CMR 63.31N.1(3), the federal basis of shares in a
business corporation that was formerly treated as a corporate trust or of
shares in a successor of that entity shall be reduced in computing
Massachusetts adjusted basis to take into account any tax-free earnings and
profits accumulated by the former corporate trust, as adjusted in accordance
with 830 CMR 63.30.3.
(5)
Intercompany Transactions; Basis Adjustments Attributable
Thereto.
(a)
General
Tax Consequences of Intercompany Transactions.
1.Effect of an Intercompany
Transaction with Respect to Property on the Determination of the Property's
Basis. Where a corporation that is a member of an affiliated group
engages in a transaction with respect to property with another member of an
affiliated group, the gain or loss that derives from that transaction, if any,
may require an adjustment to the property's basis in the hands of its owner. In
determining the required basis adjustment in the context of intercompany
transactions, Massachusetts law generally looks to federal income tax law, as
explained further in the succeeding subsections.
2.Application of Federal Law in
Determining Massachusetts Gain or Loss in the Context of an Intercompany
Transaction. In determining whether and when gain or loss is
recognized for Massachusetts corporate excise purposes in the case of a
transaction between members of a combined group, the federal rules and
principles applicable to transactions between members of a federal consolidated
group generally shall apply, except where a divergence between Massachusetts
law and such federal rules and principles requires a different result. In
contrast, in determining whether and when gain or loss is recognized for
Massachusetts corporate excise purposes in the case of a transaction between
two affiliated corporations that are not members of a combined group, the
federal rules and principles applicable to transactions between members of a
federal consolidated group generally shall not apply, even if such corporations
are members of a federal consolidated group.
(b)
Rules Applicable to
Transactions Between Corporations That Are Not Members of a Combined
Group. In determining whether gain or loss is recognized for
Massachusetts corporate excise purposes in connection with a transaction
between corporations that are not members of a combined group, and, by
extension, the effect that such a transaction will have on basis for
Massachusetts purposes, Massachusetts law generally incorporates the analogous
federal rules that would apply in the absence of a federal consolidated group.
The Massachusetts rules that apply to transactions between affiliated
corporations that are not members of a combined group may include those set
forth under M.G.L. c. 63, § 39A and M.G.L. c. 62C, § 3A, and the
incorporated federal rules may include those set forth under Code §§
163 and 267, among others. In the case of the disposition of property between
corporations that are not members of a combined group, the Massachusetts basis
of the property disposed of generally shall be adjusted in the hands of the
acquiring corporation when gain or loss is taken into account, consistent with
the applicable Massachusetts and federal rules. Special rules that apply in the
instance of a combined group are set forth at 830 CMR 63.31N.1(5)(c).
(c)
Rules Applicable to
Transactions Between Members of a Combined Group.
1.In General.
Whether gain or loss is recognized for Massachusetts corporate excise purposes
in connection with a transaction between corporations that are members of a
combined group, and, by extension, the effect that such a transaction will have
on basis for Massachusetts purposes, generally depends upon the state
application of the federal rules that apply in the instance of a federal
consolidated group, even if such corporations are not members of a federal
consolidated group. Where two affiliated corporations are members of a combined
group, any item of income, expense, gain or loss that results from a
transaction between such corporations in respect of the group's unitary
business (e.g., the disposition of property between such corporations where
such property is used in the group's unitary business) will not be taken into
account at such time. Rather, any item of income, expense, gain or loss that
results from a transaction between the members of a combined group in respect
of the group's unitary business is generally taken into account by applying the
federal rules and principles applicable to transactions between members of a
federal consolidated group as set forth in Treas. Reg. § 1.1502-13, except
where a divergence between Massachusetts law and such federal rules requires a
different result, or where no analogous situation exists for purposes of the
federal rules. See
830 CMR
63.32B.2(6)(c)9. Similar
treatment applies when any item of income, expense, gain or loss results from a
transaction between members of a combined group in any case in which the group
has made and is subject to a Massachusetts affiliated group election without
regard to any unitary business determination. See
830 CMR
63.32B.2(10). An item of
income, expense, gain or loss described in 830 CMR 63.31N.1(5)(c) is not
initially taken into account, but rather accounted for later, consistent with
the federal rules as referenced in this subsection. Examples of events upon
which the deferred item of income, expense, gain or loss, is taken into account
are provided in 830 CMR 63.31N.1(5)(c)2. In the case of the disposition of
property between corporations that are members of a combined group, the
Massachusetts basis of the property disposed of generally shall be adjusted
when gain or loss is taken into account, consistent with the applicable
Massachusetts and federal rules. An item of income, expense, gain or loss not
described in 830 CMR 63.31N.1(5)(c) shall be accounted for consistent with the
rules set forth in 830 CMR 63.31N.1(5)(b).
2.
Subsequent Events that Trigger
Recognition of a Previously Deferred Item of Income, Expense, Gain or
Loss. An item of income, expense, gain or loss, that is not
initially taken into account under the rules set forth in 830 CMR
63.31N.1(5)(c)1. shall be subsequently taken into account in a manner similar
to, and utilizing the principles referenced in, Treas. Reg. § 1.1502-13.
For example, in the case of a sale of property between two members of a
combined group, the item of income or gain that was not taken into account upon
the initial sale shall be taken into account upon, and apportioned as income
earned immediately before, certain recognition events, including but not
limited to:
a.the object of the intercompany
transaction is sold or otherwise disposed of by the buying member (that is, the
combined group member that purchased the object of the intercompany transaction
from the selling member) to a person or entity that is not a member of the
combined group;
b.where the
combined group is based upon the existence of a unitary business (i.e., no
Massachusetts affiliated group election has been made), the object of the
intercompany transaction is:
i.sold by the
buying member to an entity that is a member of the combined group for use
outside the unitary business in which the buying member and selling member are
engaged; or
ii.converted by the
buying member to a use outside the unitary business in which the buying member
and selling member are engaged; or
c.the buying member and selling member are no
longer members of the same combined group (including where a combined group
ceases to be determined pursuant to a pre-existing Massachusetts affiliated
group or worldwide election and the buying member and selling member are no
longer in a combined group for that reason).
See
830 CMR
63.32B.2(6)(c)5. The rules
that explain the apportionment consequences of an intercompany transaction in
the context of a combined group are set forth at
830 CMR
63.32B.2(7).
3.
Examples. The
following examples illustrate the application for Massachusetts corporate
excise purposes of some of the general principles set forth in Treas. Reg.
§ 1.1502-13 as applied in the context of 830 CMR 63.31N.1(5)(c). Assume
for purposes of these examples that for tax years 2009-2013 Corporations C and
D are affiliated corporations and that for tax years 2010-2013 Corporations C
and D are engaged in a unitary business and constitute a combined group that is
required to file a combined report. Further, both C and D are taxed on a
calendar year basis and are on the accrual method of accounting.
a.Example 1. During
tax year 2010, C sells a non-depreciable asset with a basis of $80,000 to D for
$100,000. For Massachusetts tax purposes, because C and D file as members of a
combined group, the gain from the sale of the asset is not taken into account
at this time, and D has a cost basis in the asset of $100,000. In January 2011,
D sells the asset previously purchased from C to an unrelated party, X, for
$130,000. For Massachusetts tax purposes, C recognizes gain of $20,000 (which
is deferred gain that was not taken into account on the prior 2010 sale to D)
and D recognizes gain of $30,000. In contrast, if C and D had not been members
of a combined group in 2010, C would have recognized gain of $20,000 upon the
sale to D in 2010, and D would still have recognized $30,000 of gain upon the
sale to X in 2011.
b.
Example 2. On
January 1, 2009, C buys a depreciable asset with a ten-year useful life for
$100,000 and begins to depreciate it under the straight-line method of
recovery. C claims $10,000 of depreciation for each of 2009 and 2010, leaving C
with an $80,000 basis in the asset on January 1, 2011. On that date, C sells
the asset to D for $130,000. For Massachusetts tax purposes, because C and D
file as members of a combined group, the gain from the sale of the asset is not
taken into account at this time, and D takes a cost basis in the asset of
$130,000.
Subsequent to the sale, for purposes of calculating D's
depreciation deductions, D steps into C's shoes to the extent D's basis does
not exceed C's adjusted basis at the time of the sale (i.e., $80,000). Any
basis on the part of D in excess of C's adjusted basis at the time of sale
(i.e., $130,000 - $80,000, or $50,000) is treated as new ten-year recovery
property for which D elects the straight-line method of recovery. Therefore,
for 2011 D has $15,000 of depreciation: $10,000 of depreciation with respect to
$80,000 of its basis (the portion of its $130,000 basis not exceeding C's
adjusted basis at the time of sale), and $5,000 of depreciation with respect to
the $50,000 of its basis that exceeded C's adjusted basis at the time of sale.
C's $50,000 gain that was not taken into account in connection with the sale to
D is taken into account to reflect the difference for each combined reporting
year between D's depreciation ($15,000) and the depreciation D would have been
entitled to had C and D been divisions of the same corporation ($10,000). Thus,
C is to take into account $5,000 of gain in each remaining year in the original
ten-year recovery period, which is offset by the additional $5,000 of
depreciation taken each year by D. Consequently, C takes into account $5,000 of
gain for each of the tax years 2011 and 2012.
On January 1, 2013, D sells the asset previously purchased from
C to an unrelated party, X, for $110,000. As explained above, D has $15,000 of
depreciation with respect to the asset in each of 2011 and 2012, leaving D with
a basis of $100,000 at the time of the sale. For Massachusetts tax purposes, C
recognizes $40,000 of gain upon D's sale of the asset to X (which is the
balance of C's gain that was not taken into account on the prior 2011 sale to
D). D recognizes gain of $10,000 (i.e., the difference between the sale price
of $110,000 and its adjusted basis in the property of $100,000).
(d)
Intercompany Transactions Where the Composition of the
Massachusetts Combined Group Differs from that of the Federal Consolidated
Group.
1.In
General. Although the Massachusetts rules for accounting for an
item of income that results from a transaction between members of a combined
group are similar to the federal rules that apply to intercompany transactions
in the context of a federal consolidated group, the composition of such groups
can differ. For example, the common ownership requirement used to determine a
Massachusetts combined group, i.e., more than 50% voting control, is different
than the 80% control "vote and value" standard that applies for purposes of
determining a federal consolidated group. Also, in contrast to the federal
rules, the Massachusetts ownership standard is met when the voting control
standard is satisfied through either direct or indirect ownership and a common
owner may be either corporate or non-corporate. Further, there are certain
types of corporations that are not included in a federal consolidated group
that may be included in a Massachusetts combined group, for example,
corporations that are not incorporated under the laws of the United States or a
U.S. state, S corporations, REITs, RICs and certain insurance companies.
Conversely, there are certain corporations that are not included in a
Massachusetts combined group that may be included in a federal consolidated
group, for example, a corporation that is incorporated under the laws of the
United States or a U.S. state but that is not engaged in a unitary business
with the corporations that are included in the combined group (provided that
the combined group has not made a Massachusetts affiliated group election).
Consequently, because there can be differences between the composition of a
Massachusetts combined group and that of a federal consolidated group, there
may be differences as to the treatment of an intercompany transaction that
takes place between the members of such groups. Such differences in treatment
are illustrated in the examples in 830 CMR 63.31N.1(5)(d)2. In any instance in
which a member of a Massachusetts combined group enters into a transaction with
a corporation that is not a member of the combined group, any item of income,
expense, gain or loss that results from such transaction shall be determined
consistent with the general rules set forth in 830 CMR
63.31N.1(5)(a).
2.
a.
Examples. The
examples in this section illustrate the provisions of 830 CMR 63.31N.1(5).
Assume for purposes of these examples that Corporation P owns 100% of
Corporations A, B, C and D and that these five corporations file a consolidated
federal income tax return for the 2010 and 2011 tax years. All of the
corporations are taxed on a calendar year basis and are on the accrual method
of accounting. Assume that Corporations P, C and D, (but not A and B) are
engaged in a unitary business during tax years 2010 and 2011, and therefore
constitute a combined group (the PCD combined group) that is required to file a
combined report under M.G.L. c. 63, § 32B as applicable for such
years.
b.Example
1. During tax year 2010, C sells a non-depreciable asset used in
the PCD unitary business with a basis of $80,000 to D for $100,000. For both
federal and Massachusetts tax purposes, the gain from the sale between C and D
is not taken into account at this time, and D has a cost basis in the asset of
$100,000. In January 2011, D sells the asset purchased from C in tax year 2010
to an unrelated party, X, for $130,000. For federal and Massachusetts tax
purposes, C recognizes $20,000 of gain upon D's sale in 2011 (which is deferred
gain that was not taken into account in connection with the prior 2010 sale to
D) and D recognizes gain of $30,000. For Massachusetts tax purposes the gain of
C and D is included in the taxable income of the PCD combined group for tax
year 2011.
c.Example
2. During tax year 2010 C sells a non-depreciable asset used in
the PCD unitary business with a basis of $120,000 to B for $100,000. For
federal tax purposes, the loss from the asset sale between C and B is not taken
into account at this time, and B has a cost basis in the asset of $100,000. For
Massachusetts tax purposes, C realizes a $20,000 loss on the transaction
because B is not a member of the combined group. Whether such gain or loss is
recognized depends on the application of the relevant state and federal rules
as provided in 830 CMR 63.31N.1(5)(a). Consequently, under the Code § 267
rules as applied in Massachusetts, the loss must be deferred until there is a
later triggering event, such as B's later sale of the asset to an unrelated
party. For Massachusetts tax purposes, B has a basis in the asset of $100,000.
In January 2011, B sells the asset purchased from C to an unrelated party for
$130,000. For both federal and Massachusetts tax purposes, B recognizes a gain
of $30,000 on the sale and C recognizes a $20,000 loss (which for Massachusetts
tax purposes is the loss that was previously deferred under the Code § 267
rules as applied in Massachusetts in connection with C's prior asset sale to
B). For Massachusetts tax purposes, the loss of C is included in the taxable
income computation of the PCD combined group for tax year
2011.
(6)
Combined Reporting; Basis in
Subsidiaries; Earnings and Profits.
(a)
General;
Purpose. 830 CMR 63.31N.1(6) applies the provisions of M.G.L. c.
63, § 31N and M.G.L. c. 63, § 32B to determine, in the context of a
combined group, the basis of stock owned by a shareholder corporation in a
subsidiary and the impact of a subsidiary's earnings and profits on the
earnings and profits of the shareholder corporation. In addition to providing
general guidance on the mechanics of the adjustments to basis and earnings and
profits that may be required in the context of a combined group, a significant
purpose of this section, 830 CMR 63.31N.1(6) is to promote the clear reflection
of a combined group's income by preventing a subsidiary's items of income,
gain, deduction and loss from giving rise to duplicative gain or loss with
respect to the subsidiary's stock. In the case of a shareholder corporation and
its subsidiary that are not members of a combined group, the determination of
Massachusetts basis in the shareholder's stock in the subsidiary, and of the
earnings and profits of the subsidiary and the shareholder, shall generally
follow the analogous federal rules that would apply in the absence of a federal
consolidated group, except where a divergence between Massachusetts law and
such federal rules requires a different result.
(b)
Basis in
Subsidiaries. Combined reporting is required of certain
corporations engaged in a unitary business where more than 50% of the voting
control of such corporations is directly or indirectly owned by one or more
common owners. See
830 CMR 63.32B.2(2) and
(4)(a). Where a member of a combined group
holds shares directly or indirectly in another member of the combined group,
such shareholder corporation's basis in the subsidiary's stock shall be
adjusted for Massachusetts purposes to reflect certain distributions from the
subsidiary and the subsidiary's items of income, gain, deduction and loss taken
into account for the period that the subsidiary is a member of the combined
group by applying the federal rules and principles set forth in Treas. Reg.
§ 1.1502-32, except where a divergence between Massachusetts law and such
federal rules requires a different result, or where no analogous situation
exists for purposes of the federal rules. In determining such adjustments, the
following general rules, inter alia, shall apply:
1.An adjustment to a shareholder
corporation's Massachusetts basis in a subsidiary's stock shall not be made for
the subsidiary's distributions or items of income, gain, deduction, or loss
taken into account for the subsidiary's taxable years beginning prior to
January 1, 2009, except as required in connection with the election described
in 830 CMR 63.31N.1(3)(f);
2.An
adjustment to a shareholder corporation's Massachusetts basis in a subsidiary's
stock shall not be made for the subsidiary's items of income, gain, deduction,
or loss to the extent those items were not included in the combined group's
taxable income (except in the case of tax exempt income that would have been
included in the combined group's taxable income had it not been exempt from
tax);
3.An adjustment to reduce the
Massachusetts basis of a shareholder corporation's basis in a subsidiary's
stock shall be made for the subsidiary's distributions to the extent those
distributions are from earnings and profits attributable to items that were
included in the combined group's taxable income (for purposes of determining
the amount of the basis reduction under this subsection, the LIFO and pro rata
rules set forth in
830 CMR 63.32B.2(6)(c)(4)
shall apply);
4.Negative adjustments may exceed the
shareholder corporation's Massachusetts basis in the subsidiary's stock,
resulting in the shareholder corporation having an "excess loss account" in the
subsidiary's stock, the consequences of which shall be determined in a manner
similar to, and by applying the rules and principles referenced in, Treas. Reg.
§§ 1.1502-19 and -32(a)(3)(ii);
5.Basis adjustments shall be attributed to a
subsidiary that holds stock in a lower tier subsidiary from such lower tier
subsidiary using the same general rules set forth above, with the adjustments
applied in the order of the tiers, from the lowest to the highest;
6.A basis adjustment is not to be made under
this section or any other applicable rule of law in a manner that has the
effect of duplicating a Massachusetts adjustment; and
7.The adjustments to basis required by this
subsection shall be allocated among the shares of a subsidiary's stock in a
manner similar to, and by applying the rules and principles referenced in,
Treas. Reg. § 1.1502-32(c).
No such adjustments shall be made pursuant to this section 830
CMR 63.31N.1(6)(b) in the case of a shareholder corporation and its subsidiary
when such entities are not members of a Massachusetts combined group,
irrespective as to whether such entities are members of a federal consolidated
group.
(c)
Examples. The following examples illustrate the
provisions of 830 CMR 63.31.N.1(6).
Example 1.
Corporations X and Y are members of a combined group that file a combined
report for the 2010 tax year on a calendar year basis. Y is a wholly owned
subsidiary of X. At the beginning of the group's 2010 tax year, X's basis in
the stock of Y is $1,000,000. During the group's 2010 tax year, Y has $100,000
of net income, all of which is included in the combined group's taxable income
for 2010. During 2010, Y also pays a dividend of $80,000 to X, all of which is
attributable to earnings and profits of the combined group. Assume that the
entire dividend from Y to X is eliminated from the XY group's taxable income in
2010 pursuant to
830 CMR
63.32B.2(6)(c)(4).
Consistent with the rules set forth in 830 CMR 63.31.N.1(6)(b), Y's $100,000 of
net income results in a positive adjustment of $100,000 to X's basis in the
stock of Y, and Y's $80,000 distribution to X results in a negative basis
adjustment of $80,000 to X's basis in the stock of Y. Therefore, X's basis in
the stock of Y as of the beginning of the group's 2011 tax year is $1,020,000
(i.e., $1,000,000 + $100,000 - $80,000).
Example 2. Corporations X, Y and Z are
members of a combined group that file a combined report for the 2010 tax year
on a calendar year basis. X owns all the stock of Y, and Y owns all the stock
of Z. At the beginning of the group's 2010 tax year, X has an unadjusted basis
of $500,000 in Y's stock, which includes Y's unadjusted basis of $200,000 in Z
stock. In the group's 2010 taxable year, Y has a total of $80,000 of net
income, all of which is included in the XYZ group's taxable income, and Z has a
total of $150,000 of net income. Z's net income includes $20,000 that was
attributable to income earned outside the United States that is not included in
the XYZ group's taxable income for 2010 pursuant to
830 CMR
63.32B.2(6)(c)(2). Neither Y
nor Z makes any distributions in 2010. Consistent with the rules set forth in
830 CMR 63.31N.1(6)(b), Y's basis in the stock of Z is increased by $130,000 to
reflect the $130,000 of Z's income that is included in the XYZ group's 2010
taxable income. Also, X's basis in the stock of Y is increased by the $130,000
adjustment to Y's basis in Z, and by Y's $80,000 of net income. No adjustment
is made for the $20,000 of Z's net income that is not attributable to the XYZ
group. Therefore, at the end of the group's 2010 tax year, Y's basis in the
stock of Z is $330,000 (i.e., $200,000 + $130,000) and X's basis in Y's stock
is $710,000 (i.e., $500,000 + $80,000+ $130,000).
(d)
Earnings and
Profits. Where a shareholder corporation and its subsidiary
corporation are members of a combined group, the shareholder corporation's
earnings and profits shall be adjusted to reflect the undistributed earnings
and profits of the subsidiary by applying the federal rules and principles set
forth in Treas. Reg. § 1.1502-33, except where a divergence between
Massachusetts law and such federal rules requires a different result, or where
no analogous situation exists for purposes of the federal rules. In determining
such adjustments, the following general rules, inter alia, shall apply:
1.Intercompany transactions as between
members of the combined group are not reflected in earnings and profits before
they are taken into account pursuant to 830 CMR 63.31N.1(5)(b); and
2.In any instance in which the combined group
consists of tiers, the adjustments are applied in the order of the tiers, from
the lowest to the highest.
No such adjustments shall be made pursuant to 830 CMR
63.31N.1(6)(d) in the case of a shareholder corporation and its subsidiary when
such entities are not members of a Massachusetts combined group, irrespective
as to whether such entities are members of a federal consolidated group.
(e)
Example. The following example illustrates the
provisions of 830 CMR 63.31N.1(6)(d). Corporations X, Y and Z are members of a
combined group that file a combined report for the 2010 tax year on a calendar
year basis. X owns all the stock of Y and Y owns all the stock of Z. During the
XYZ group's 2010 tax year, X has earnings of $300,000 and Y has earnings of
$500,000. Assume these amounts are attributable entirely to items included in
the XYZ group's taxable income for its 2010 taxable year. Z has $400,000 of
earnings for the 2010 tax year. However, $50,000 of this amount is attributable
to income earned outside the United States that is not included in the XYZ
group's taxable income for 2010 pursuant to
830 CMR
63.32B.2(6)(c)(2). Assume
neither Y nor Z made any distributions in 2010. At the end of 2010, Y's total
current year earnings and profits are $850,000 (i.e., $500,000 + the $350,000
of Z's earnings attributable to income included in the XYZ group's taxable
income), and X's current year earnings and profits are $1,150,000 (i.e.,
$300,000 + $850,000 attributed from Y).
(f)
Effective Date.
See 830 CMR 63.31N.1(8)(b) for specific rules regarding the effective date of
830 CMR 63.31N.1(6).
(7)
Application of the Sham Transaction Rule and Related
Doctrines. All transactions and other activities that increase or
decrease basis, or otherwise affect basis, in a corporation's property,
including stock owned by such corporation, are potentially subject to
additional adjustment as permitted under Massachusetts law, including pursuant
to the sham transaction doctrine and other related tax doctrines as referenced
in M.G.L. c. 62C, § 3A.
(8)
Effective Date.
(a)
General. Except as specifically provided in 830 CMR
63.31N.1(8)(b) or to the extent that a provision reflects prior law, the
provisions in 830 CMR 63.31N.1, generally shall apply to tax years beginning on
or after January 1, 2009.
(b)
Application of 830 CMR 63.31N.1(6). Notwithstanding
the general rule set forth in 830 CMR 63.31N.1(8)(a), the provisions of 830 CMR
63.31N.1(6) generally shall apply to tax years beginning on or after January 1,
2014. However, for tax years beginning on or after January 1, 2009, the
Commissioner may apply the provisions of 830 CMR 63.31N.1(6) or make other
appropriate adjustments in order to properly reflect gain and to avoid the
duplication of gain or loss.
