Back in the late 1970s, your editor wanted to test the boundaries of his newly minted graduate degree in taxation, so what better way to do so (thought he) than to sign-up for the annual tax seminar offered each year at Boston University. This was strictly a tax lawyer presentation, so could I now follow it and read tax law with them? To my delight, when I attended and started to follow the presentations it appeared that I could, thanks to my Bentley College training!
In the afternoon, there was a
panel discussion of MA state taxation and whether or not the Commonwealth could
reach beyond the water’s edge and tax the overseas income of international
corporations which filed returns in MA.
The speaker was a deputy commissioner whose every word on taxation was
closely followed and even referenced in CCH MA taxation material. Absent a Code or MGL citation, he was cited
as the authority because of a presentation he had made somewhere.
The deputy commissioner
argued, yes we can tax beyond the water’s edge.
He was challenged by another panel member, the tax counsel for a major
CPA firm, and a former MA Commissioner of Revenue. The former Commissioner argued no you cannot,
and provided a cite. Well, thought I,
this will be interesting but my little balloon soon burst when the deputy
commissioner responded by saying…
What difference does it make, we are
doing it!
You could hear a pin drop in
that room, and the attention of the panel swiftly changed to another topic. No one else had a word to say to the guy who
made tax law in MA.
Some of you will remember one
of our annual state tax update seminars when we held them in Sturbridge. Fred Laskey became MA Commissioner of Revenue
in 1991 and he attended one of our seminars and spoke about his plans for the
revenue department. He told us about a
national survey which had been conducted to rank state departments of revenue and
MA ranked dead last. Commissioner Laskey
pledged to reform things and do better.
Both he and his successors did just that, until now.
Are we falling back to the
“old” way of doing things (what difference does it make, we are doing
it)---read on and make up your own mind.
When the Congress first enacted the PPP (paycheck protection program) we were told that most employers would qualify for a $10,000 loan and that part or all of it might later qualify for debt forgiveness. This looked like free money, so folks applied and sought our help with their applications. And, it did prove to be so, the SBA was forgiving the debt and this really looked like free money. Then the IRS stepped in (as they were required to do, so don’t fault them) and reminded us that debt forgiveness income is taxable. IRC §61(a)(11).
Well, everyone was upset---how
can this be, said they. Yes, how can
this be said the Congress??? It’s easy---you
guys didn’t exempt or exclude it when you wrote the law, so the IRS is just
reminding us that you wrote a failed attempt to pass on a free lunch. Later, when the Congress enacted the CARES
Act they decided to fix the problem and declared that their intent was for this
to be tax free. [CARES Act §1106(c) -
Treatment of Amounts Forgiven].
The way that the Congress did
this was simple. They said that the
amount of the forgiven loan shall be
excluded from the gross income of an eligible recipient. The Act carefully explains this---if you are
either an individual or an entity who received the loan proceeds, the funds are
not part of your gross income. Gross
income is what you start with. Example
(for an individual):
Wages…………………………………………………………………..$
50,000
Debt forgiveness
income……………………………………………… 10,000
Gross
Income…………………………………………………………… 60,000
The Congress said that this
eligible recipient (individual) now has:
Wages……………………………………………………………………$
50,000
Gross
Income……………………………………………………………$ 50,000
Now you see it; now you don’t,
said the Congress. The $10,000 has
disappeared---it has been EXCLUDED from the starting point, and this is what we
meant to do the first time, when we got it wrong. Now the Department of Revenue has a
problem---the Congress made this income disappear, so how can they tax something
which isn’t there (in the current federal tax Code). Well, it doesn’t matter reasoned the
Department, because individuals are taxed based on the federal tax Code in
effect on 1/1/2005, and the Congress didn’t change that Code, so we can tax
individuals who are shareholders of S corporations even though they did not
borrow, nor did they receive the funds. We
have all the authority which we need under state statute to include this in S
corporation pass-through income, so they didn’t change their position to
conform with expressed Congressional intent.
What does it
matter, we are doing it.
Can they do that (ignore the
Internal Revenue Code) and pass-through the income to an S corporation
shareholder. Stay tuned because next
week we will give you the answer to that important question.
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