830 CMR, § 62.63.1

Current through Register 1533, October 25, 2024

Section 62.63.1 - Installment Transactions

(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. See830 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.

830 CMR, § 62.63.1