Massachusetts Ussues an FAQ to Explain the New Elective Pass-Through Entity Excise Tax (MGL Chapter 36D)

William Delaney, EA
Westwood, MA

The current MA state budget (enacted 7/16/21) adds new Chapter 63D to the Taxation of Pass-Through Entities (Chapter 63) of MGL.  Preliminary information regarding this new law was posted to our blog a few months ago.  

Under Section 1 (of Chapter 63D),

An “eligible pass-through entity” shall have the following meaning:  “…an S corporation…or a limited liability company that is treated as an S corporation or a partnership…” under the Internal Revenue Code.

According to an updated FAQ (11/19/21) issued by the MA DOR, the state legislature didn’t get it quite right because “In addition, a trust can make the election with respect to income that passes through the trust to beneficiaries that are subject to tax on that income under the Massachusetts personal income tax.”  The FAQ also tells us (correctly) that “Only an eligible pass-through entity can make an election to pay the PTE Excise.”  

The MA DOR has just rewritten the statutory definition of an eligible pass-through entity to include a trust!!!  Where that is coming from (the authority to override state law) we are not told.  Your editor wonders if the MA legislature has gotten the word to clean up its act.

Now for the rest of the story.  Section 1 (see above) also states that a “Qualified member,” means a shareholder of an S corporation or a partner in a partnership, including a member of a limited liability company that is treated as an S corporation or partnership…that is a natural person or trust or estate subject to tax under section 10 of chapter 62;…”  Only a qualified member (as defined) is eligible to claim the refundable credit.  Since this definition does NOT include trust beneficiaries, they are not eligible for a credit based on the payment by the 1041 filer which the MA DOR has just authorized.  Apparently, the DOR missed that little subtlety when they amended the statute???

There, however, is more.  The inspiration for this work-around the SALT limitation is IRS Notice 2020-75.  The notice only allows the deduction for taxes paid by the entity (and this is the key element in the work-around scheme) if the entity is a partnership or an S corporation.  Nowhere does the notice mention a trust (See SECTION 2, .02(2) and (3); also SECTION 1).  

Section 1 of Chapter 63D acknowledges that the “Code” referred to in this newly enacted legislation is the Internal Revenue Code.  Since the IRS Notice is an interpretation of that Code and is provided as guidance, when it excludes trust from what is defined as an eligible pass-through entity, where is the authority for the MA DOR to expand the applicable federal definition to include trusts and trust beneficiaries?  Colleagues, there is no authority.  The Commissioner has overstepped his bounds.  See MA Letter Ruling 08-11 (7/7/2008) which says, in part “The Department of Revenue is an administrative agency charged with carrying out the laws of the Commonwealth…In doing so, the Department may issue rulings, but only such as are not inconsistent with law…”

A final word (what, you thought that your Editor was finished?).  In a recent blog, we published an article entitled WHAT IS AN FAQ AND SHOULD WE CARE?  What the Commissioner has done is an eloquent reason as to why we should care---he has attempted to write law via an FAQ!  Remember what an FAQ is and is not…

An FAQ is not authority.  It cannot be relied upon as an accurate interpretation of state law.  It is not a vehicle for adding to or rewriting state statute (only the legislature may do that).  Unfortunately, it has become more and more the only “resource” available in certain tax situations because the MA DOR is apparently unable to devote the time needed to prepare more formal and authoritative, documented guidance.