830 CMR, § 63.31N.1
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enactment of St. 2008, c. 173, pursuant to which Massachusetts adopted the federal "check the box" conformity rules and repealed the Massachusetts personal income tax rules that applied to the taxation of corporate trusts.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.
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.
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).
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).
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.
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).
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.
830 CMR, § 63.31N.1