Citation Numbers: 436 Mass. 467
Judges: Marshall
Filed Date: 4/8/2002
Status: Precedential
Modified Date: 6/25/2022
General Laws c. 62, § 5A (a), sets forth the statutory scheme for income taxation of nonresidents of Massachusetts. We are asked to determine whether, under that statute, a nonresident must pay Massachusetts income taxes on nonqualified pension payments received from his former Massachusetts employer during those years in which the taxpayer did not carry on any trade or business in Massachusetts. The Appellate Tax Board (board) concluded that the pension payments were not Massachusetts-source income and therefore not
We summarize the findings made by the board, which are based on a statement of agreed facts and attached exhibits. From 1991 through 1995, the years at issue, the taxpayers, R. Bruce Oliver (Oliver) and Sylvia B. Oliver, were domiciled in Florida. Prior to his retirement in 1991, Oliver had been employed in Massachusetts by Hancock Advisers and its parent company, John Hancock Mutual Life Insurance Company (John Hancock), for over twenty-eight years.
The taxpayers filed applications for abatement for each of the years at issue. On September 29, 1997, the commissioner denied the abatement application for 1995. The remaining applications were later deemed denied when the taxpayers withdrew their consent to extend the time for their consideration. The taxpayers filed a petition for review with the board. The commissioner subsequently concluded that Oliver’s severance payments were not taxable as Massachusetts-source income, and agreed to abate $14,233 of tax assessed in connection with those payments only. The nonqualified pension plan tax payments in the amount of $22,453 remain in dispute.
General Laws c. 62, § 5A (a), provides in relevant part that Massachusetts nonresident gross income shall be determined “solely with respect to items of gross income from sources within the commonwealth” (emphasis added). The statute then defines “items of gross income from sources within the commonwealth” as “gross income derived from or effectively connected with (1) any trade or business, including any employ-
General Laws c. 62, § 5A (a) (1), is the only subsection relevant to our inquiry.
We adhere to the familiar principle that tax statutes are to be
By focusing exclusively on whether the income is “derived from” or “effectively connected with” Oliver’s employment in Massachusetts, G. L. c. 62, § 5A (a), regardless of when the income was received, the commissioner ignores the over-all structure of that section. It contains three subsections, each of which defines a taxable “source[] within the commonwealth” from which gross income may be “derived” or with which it may be “effectively connected.” The “derived from or effectively connected with” language becomes operative only after the antecedent determination whether the “source[j” of the income falls within one of the these subsections. Here, the proper inquiry, and the one we pursue, is the meaning of the first subsection, “any trade or business, including any employment carried on by the taxpayer in the commonwealth.” See note 5, supra.
In Commissioner of Revenue v. Dupee, 423 Mass. 617 (1996), we construed this same subsection and considered whether a distribution of assets to a nonresident shareholder arising from the sale of shares in a Massachusetts Subchapter S corporation was taxable Massachusetts-source income under G. L. c. 62,. § 5A (a) (1). The distribution occurred pursuant to a plan of liquidation of the corporation. The issue in that case was not, as here, the timing of the taxpayer’s receipts but a claim by the
Consonantly with Commissioner of Revenue v. Dupee, supra, and the principles of interpretation on which it relied, the board has consistently construed G. L. c. 62, § 5A (a) (1), strictly against the taxing authority. See, e.g., Gersh v. Commissioner of Revenue, 22 Mass. App. Tax Bd. Rep. 49, 62 (1997) (nonresident taxpayer’s income under noncompetition agreement related to sale of Massachusetts corporations not taxable in years when taxpayer no longer acted as officer and director of corporations); Gaston v. Commissioner of Revenue, 21 Mass. App. Tax Bd. Rep. 103, 113-114 (1997) (nonresident shareholder’s sale of shares in Massachusetts Subchapter S corporation not taxable because taxpayer himself did not personally conduct trade or business in Massachusetts); Cohen v. Commissioner of Revenue, 18 Mass. App. Tax Bd. Rep. 28, 36-37 (1995) (gains from nonresidents’ sale of interest in Massachusetts partnerships not taxable because selling interest did not constitute conduct of trade or business in Commonwealth).
In this case, the board adopted, and the taxpayers urge us to adopt, a correspondingly narrow view of G. L. c. 62, § 5A (a) (1), with regard to the timing of pension plan payments to a nonresident taxpayer. In addition to their reliance on Commissioner of Revenue v. Dupee, supra, Gersh v. Commissioner of Revenue, supra, Gaston v. Commissioner of Revenue, supra, and Cohen v. Commissioner of Revenue, supra,
The commissioner urges us either to limit Commissioner of Revenue v. Destito, supra, to its particular facts, or to overrule it entirely. He points out that in that case the board could not determine whether the deferred compensation at issue (sick and vacation time that had accrued to the taxpayer) was for services that had actually been performed in Massachusetts. But the record in that case did establish that the taxpayer had in fact accrued sick and vacation time by working in the Commonwealth for at least part of the time. At least some of his income, therefore, resulted from prior employment within the Commonwealth for which the Appeals Court concluded no tax was due. Here, like the taxpayer in Destito, Oliver received income from his prior Massachusetts employment, but received the income only when he was no longer carrying on any business in the Commonwealth. The board was correct to apply Commissioner of Revenue v. Destito, supra, to this case.
The commissioner asserts that such a conclusion “negates” his regulatory provision addressing deferred compensation, 830 Code Mass. Regs. § 62.5A.1 (3) (b) (2000). We disagree. In pertinent part, that regulation provides:
“Deferred Compensation. Massachusetts gross income in the nature of deferred compensation and derived from or effectively connected with a trade or business including employment carried on in Massachusetts is Massachusetts source income. Deferred Compensation, for purposes of [830 Code Mass. Regs. § 62.5A.1,] means all compensation for services which is paid or made available to the taxpayer in any taxable year following the taxable year in which the services were performed . . . .”
830 Code Mass. Regs. § 62.5A.1 (3) (b). Title 830 Code Mass. Regs. § 62.5A.1 cannot be read more expansively than G. L. c. 62, § 5A (a) (1): a regulation that purports to tax an item that the statute itself does not tax is invalid. See, e.g., Lowell Sun Publ. Co. v. Commissioner of Revenue, 397 Mass. 650, 652,
Stare decisis considerations also inform our decision not to overrule Commissioner of Revenue v. Destito, supra. Taxpayers must be able to rely on established rules in order to comply with their reporting and filing obligations.
Decision of the Appellate Tax Board affirmed.
Oliver was employed by John Hancock for eight and one-half years and by Hancock Advisers for twenty years.
For the purposes of calculating payments due to Oliver under the pension plan, the nineteen-month period was included in the determination that Oliver completed thirty-one years and five months of employment. Under the terms of the severance agreement, Oliver agreed not to undertake full-time employment, and to make himself available, as required, to perform services as a consultant for the chairman of the board or the chief executive officer during this period. He was never asked to perform any such services.
Qualified pension income meets certain requirements under the Internal Revenue Code (I.R.C.) with regard to contribution limits, participation requirements and funding requirements that qualify the plan for preferential tax treatment such as a tax exemption for the fund, deductions for the employer, and a tax deferral to the employee for the employer’s contributions and earnings thereon. 2001 United States Master Tax Guide, Chapter 21 Retirement Plans, par. 2101 (CCH). Nonqualified plans do not meet these limitations and do not
The commissioner notes that the taxpayer’s nonqualified pension income is not taxable in Massachusetts after 1995 due to the enactment of Federal legislation prohibiting nondomiciliary States from taxing qualified and certain nonqualified pension income received by nonresidents. 4 U.S.C. § 114 (State Taxation of Pension Income Act of 1995) (2000).
The commissioner does not argue that the taxpayer’s pension is taxable either as resulting from “participation in any lottery or wagering transaction within the commonwealth,” or from “the ownership of any interest in real or tangible personal property located in the commonwealth.” G. L. c. 62, §§ 5A (a) (2), (3).
The taxpayers also rely on a decision of the board in which no written report was issued, Mills vs. Commissioner of Revenue, A.T.B. Docket No. F223949 (Oct. 21, 1997). The commissioner contends that the board’s
A rescript opinion is “a form generally reserved for settled doctrine.” Til-con Mass., Inc. v. Commissioner of Revenue, 30 Mass. App. Ct. 264, 266 (1991).
Our ruling is not, as the commissioner suggests, inconsistent with our decisions in Commissioner of Revenue v. Chinchillo, 417 Mass. 219 (1994), and Horst v. Commissioner of Revenue, 389 Mass. 177 (1983), which concerned the application of a statute governing the income from instalment sales, G. L. c. 62, § 63.
The commissioner also points to various provisions of the I.R.C. that, he argues, support his position. The Federal provisions relied on are not analogous to G. L. c. 62, § 5A (a), and do not influence our reading of the statute.
“When a principle of taxation requires reexamination, Congress is better equipped than a court to define precisely the type of conduct which results in tax consequences. When courts readily undertake such tasks, taxpayers may not rely with assurance on what appear to be established rules lest they be subsequently overturned. Legislative enactments, on the other hand, although not always free from ambiguity, at least afford the taxpayers advance warning.” United States v. Byrum, 408 U.S. 125, 135 (1972).