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Massachusetts Commissioner of Revenue Issues Guidance Seeking to Limit Taxpayer Win in Apportionment Case

The BR State + Local Tax Spotlight

By Eugene J. Gibilaro

In the wake of the taxpayer win at the Supreme Judicial Court of Massachusetts in VAS Holdings & Investments LLC v. Commissioner of Revenue, 489 Mass. 669 (2022) (“VAS”), the Commissioner of Revenue has issued guidance in the form of a Technical Information Release (“TIR”) purporting to offer the Commissioner’s interpretation of the decision and seeking to limit the application of VAS to other taxpayers’ cases. Massachusetts Commissioner of Revenue, TIR 22-14 (Nov. 30, 2022). While the TIR is useful in understanding the Commissioner’s position, ultimately it is the VAS decision itself, and not the Commissioner’s interpretation of the decision, that will control in future cases. Taxpayers should be prepared to push back against the Commissioner’s attempts to limit the impact of the VAS decision.

In VAS, the Supreme Judicial Court of Massachusetts held that Massachusetts law adheres to the unitary business principle in determining apportionability of income and the Commissioner’s attempt to apportion and tax gain recognized by a non-domiciliary S corporation from the sale of its interest in a pass-through entity operating in Massachusetts, based on the apportionment factors of the pass-through entity, and with which the S corporation was not engaged in a unitary business, violated Massachusetts law. VAS, 489 Mass. at 686.

The TIR explains that the Commissioner will continue to take the position that gain from the sale of an interest in a pass-through entity operating in Massachusetts is taxable by Massachusetts when the gain is recognized by a nonresident individual “actively engaged in the in-state business of the [pass-through entity], in either the year of the sale or in a prior year.” VAS did not specifically address this issue inasmuch as the taxpayer in VAS was an entity and not an individual. The Commissioner’s view is that the gain recognized in this factual scenario is authorized by a state statutory provision permitting the taxation of “gross income derived from or effectively connected with [a] trade or business, including any employment, carried on in the commonwealth.” M.G.L. c. 62, § 5A(a). Whether the statutory provision referenced by the Commissioner actually authorizes taxation of a nonresident individual’s gain from the sale of an intangible interest in an entity operating in Massachusetts remains ripe for challenge.

Moreover, the TIR states that the Commissioner will not apply VAS to gains from sales of pass-through entities when such sales are treated as asset sales under the Internal Revenue Code (for example, a deemed asset sale pursuant to I.R.C. §338(h)(10)). VAS was not limited only to sales of interests in pass-through entities that are treated as sales of interests in pass-through entities for federal income tax purposes and whether the Commissioner is correct to make this distinction also remains ripe for challenge.

Finally, the TIR explains that a claim for abatement based on VAS must be made within the statutory limitations period for the Massachusetts tax return with respect to which the abatement is claimed. A non-domiciliary corporate taxpayer or a nonresident individual taxpayer “must clearly demonstrate that it apportioned the gain from the sale of the [pass-through entity] interest based entirely on the [pass-through entity’s] apportionment attributes” and that “it was proper to apportion the gain from the sale of the [pass-through entity] interest without including in whole or part the apportionment attributes of any other entity.” Abatements will not be granted to non-domiciliary corporate taxpayers “where taxable gain is properly includible in the unitary business income of the taxpayer” and will not be granted to nonresident individuals “actively engaged in the in-state business of the [pass-through] entity, either in the year of the sale or in a prior year.”


This article is one in a series of articles written for the December 2022 edition of The BR State + Local Tax Spotlight.


© 2022 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.