Top Ten Issues At Massachusetts DOR for 2015
1)
TIR 15-XX Income Tax, Withholding and Reporting Rules for Certain Wagering Income
There is a recent law change in Massachusetts which will allow the deduction of gambling losses against gambling income. The new law will allow those losses which come from Massachusetts Casino’s or race tracks against income from the Massachusetts Casino’s or race tracks. Losses from other non-Massachusetts casino’s are not eligible for deduction. Likewise the income from Non-Massachusetts casino’s and racetracks cannot be offset. There are additional provisions dealing with withholding and the offset of winnings to pay back taxes and child support.
This draft technical information release explains changes to the personal income tax calculation, income tax withholding, and income reporting rules with respect to wagering income contained in Chapter 10 of the Acts of 2015. In general, these changes:
•add c. 62 §3(B)(a)(18), which provides a deduction for losses from wagering transactions incurred at certain establishments, but only to the extent of winnings from such establishments;
•amend c. 62B, § 2, ¶ 7 and add ¶ 8, adopting new income tax withholding and reporting requirements for certain wagering income; and
•increase the dollar threshold at which a gaming establishment governed by c. 23K is required to check winnings against outstanding child support obligations or outstanding tax liabilities.
These changes do not affect income calculation, withholding, or reporting rules for lottery winnings, including winnings from the Massachusetts state lottery.
2)WILLIAM H. PHILLIPS, JR. v.COMMISSIONER OF REVENUE
MICHELE D. PHILLIPS
Docket No. C321613Promulgated: March 20, 2015
There are many interesting issues in this case and in deciding it in the favor of the DOR the ATB has created a number of traps for the unwary. We hope that the taxpayer appeals in order to clear these issues up
On September 2, 2009, the Commissioner issued a Notice of Failure to File a personal income tax return. The appellants did not respond to the notice and on December 28, 2009, the Commissioner issued to them a Notice of Assessment of personal income tax in the amount of $299,081.08. The appellants ultimately filed a 2007 Form 1, Massachusetts Resident Income Tax Return (“Form 1”), with the Commissioner on July 6, 2010, reflecting a loss for the tax year at issue and requesting the resulting overpayment of $3,325 of tax to be refunded.
Treating the Form 1 as an abatement application, the Commissioner sent the appellants a letter on October 27, 2010, acknowledging receipt of their submission, but requesting further information. In response, on December 22, 2010, the appellants submitted a Form CA-6, Application for Abatement/Amended Return (“First CA-6”), The Commissioner issued a Notice of Abatement Determination (“First Determination Letter”) on March 27, 2012, notifying the appellants that their Application for Abatement was denied for failure to respond to a request for documentation.
The appellants did not appeal the Commissioner’s denial to the Board but instead filed a second application for abatement, nearly eight months later, on November 2, 2012 (“Second CA-6”). As part of the Second CA-6 filing, the appellants did not provide the requested information from the letter of December 22, 2010
Because the appellants failed to file a timely appeal from the Commissioner’s denial of their first application for abatement and the appellants’ filing of a second application did not afford them a second opportunity to file an appeal, the Board found and ruled that it has no jurisdiction over this appeal. Accordingly, the Board allowed the Commissioner’s Motion and dismissed this appeal for lack of jurisdiction.
There are a number of interesting issues here. The request for information was issued before an abatement was actually filed. The commissioner has specific rules as to what constitutes an abatement and the Form 1 does not qualify.
The DOR created an assessment of a joint return, an assessment that is invalid. A taxpayer must elect to file a joint return
Another interesting issue is whether or not the ATB would have allowed an appeal where the requested documentation was sent with the second abatement and the Department denied it because they did not agree with the documentation. The language in the opinion seems to suggest they would have.
3)ANTHONY R. & v.COMMISSIONER OF REVENUE
ELIZABETH M. BOTT
Docket No. C302737Promulgated: December 30, 2014
The appellant operated his own law practice, Anthony R. Bott, P.C. (“Bott P.C.”) in East Orleans and was the corporation’s sole officer, director, and shareholder. According to the appellant, he became professionally overburdened in 2002 and, to meet his financial obligations, began appropriating substantial sums from his corporation’s Interest on Lawyers Trust Account (IOLTA), which consisted entirely of client funds. His clients had no knowledge of these transfers.
The appellant characterized the appropriations as loans from Bott P.C. to its shareholder, himself, on the corporation’s U.S. Corporation Income tax Returns, Forms 1120, for the tax years 2002 and 2003. The returns reflected loans in the amounts of $179,150 and $182,992 for 2002 and 2003, respectively, and “client escrow” liabilities of $309,437 for 2002 and $400,121 for 2003. The appellant did not report income relating to the appropriated sums on his Massachusetts Forms 1 for any of the tax years at issue.
Mr. Bott argued that there was no fraud and that the returns could not be assessed as out of statute. The Board ruled that the appellant acted consistently to deceive and therefore found that he did not intend to return his clients’ funds, which he had taken without their knowledge. Moreover, the Board found and ruled that he did not in fact consider the misappropriations to be loans, nor could they qualify as such, despite having been so represented on the Bott P.C. federal tax returns. The fraud assessment was therefore valid.
4. SARAH P. THAYER v.COMMISSIONER OF REVENUE Docket No. C308533 Promulgated: December 17, 2014 This case addresses the question of whether Ms. Thayer, a cancer surgeon, is in the trade or business of raising horses or whether in fact the activity was a hobby loss. While the taxpayer had little or no income from the operation, she detailed that many of the aspects of a trade or business existed. Additionally she provided a letter of no change from the IRS indicating that the IRS had examined the activity and accepted it as a trade or business. \
Nevertheless the ATB found that Ms. Thayer was not in a trade or business and therefore the losses were not deductible. The most interesting thing in the case is that they gave the IRS determination no weight at all. The ATB ruled that the DOR was not bound to follow it and that “the IRS auditor’s workpapers to be of limited probative value.”
An unusual result given the DOR’s longstanding reliance on Federal audits. Clearly if a taxpayer wants to utilize the IRS findings more work needs to be done to establish the IRS auditor’s expertise.
5. REGENCY TRANSPORTATION, INC. v. COMMISSIONER OF REVENUE Docket No. C310361 Promulgated: December 4, 2014
The key issue in this case is the appellant’s allegation that the Commonwealth’s imposition of use tax on vehicles engaged in interstate commerce violated the Commerce Clause of the U.S. Constitution and Equal Protection Clauses of the U.S. and Massachusetts Constitutions.
The Commerce Clause requires that a tax be imposed only where a four prong test is met: that the taxpayer has substantial nexus with the taxing state; that the tax is fairly apportioned; that the tax does not discriminate against interstate commerce; and that the tax is fairly related to the benefits provided by the taxing state. See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977) (“Complete Auto”). The appellant argued that the imposition of use tax on interstate vehicles fails on all four factors. Regency also argued that its right to equal protection was violated as it alleged that use tax was not enforced against similarly situated taxpayers who used interstate vehicles in Massachusetts and that the appellant was required by the Commissioner to calculate the proper portion of use tax attributable to Massachusetts without proper guidance.
The Board ruled that the assessment meets the four pronged test. Additionally the Board found and ruled that, while the fact that Massachusetts imposes use tax on the use of interstate vehicles in the Commonwealth when many states do not may increase costs for taxpayers who use vehicles here, this difference is not unconstitutional discrimination against interstate commerce because Massachusetts allows a credit for any taxes paid to other jurisdictions.
This is a critical decision for transportation companies driving their fleet of trucks through Massachusetts. The taxpayer has decided to appeal.
6. EXCEL ORTHOPEDIC SPECIALISTS, v. COMMISSIONER OF REVENUE INC. Docket No. C318083 Promulgated: October 24, 2014
Excel argued that the subject dental braces fell under the exemption from sales/use tax under G.L. c. 64H, § 6(l) for sales of artificial devices that are “individually designed, constructed or altered” to be used as a brace for a “particular crippled person and therefore exempt from Sales and Use Tax..
The Board found and ruled that the subject braces were individually designed and constructed, in addition to certain of the braces being altered for the use of a particular patient, as a brace, support and correction for a body part of the patient. Accordingly, the Board issued a decision for the appellant, finding and ruling that the subject braces were exempt from use tax under § 6(l), and granted an abatement of $23,878.39, together with all statutory additions.
7. Directive 14-XX Recordkeeping Requirements for Sales and Use Tax Vendors Utilizing Point of Sale (POS) Systems
This Directive is being issued to provide additional guidance with respect to the recordkeeping and record retention requirements applicable to sales/use tax vendors, particularly in connection with the use of Point of Sale (POS) systems.
In particular, every vendor, retailer and contractor must maintain the following records:
1. a journal or its equivalent, which records daily all non-cash transactions affecting accounts payable;
2. a cash journal or its equivalent, which records daily all cash receipts and cash disbursements, including any check transactions;
3. a sales slip, invoice, cash register tape, or other document evidencing the original transaction, which substantiates each entry in the journal or cash journal;
4. memorandum accounts, records or lists concerning inventories, fixed assets or prepaid items, except in cases where the accounting system clearly records such information;
5. a ledger to which totals from the journal, cash journal and other records have been periodically posted. The ledger must clearly classify the individual accounts receivable and payable and the capital account.
830 CMR 62C.25.1(12)(f)
For the first time the Department has made the maintenance of Z-tapes or their POS equivalent mandatory. This is of critical importance to restaurateurs.
8. Directive 14-4: Massachusetts Income Tax and Corporate Excise Deductions Where Federal Law Allows a Credit in Lieu of Deduction
Massachusetts and federal tax statutes sometimes differ in their treatment of deductions and credits. With respect to both corporate entity-level taxation under the corporate excise under G.L. c. 63, and personal income taxation under G.L. c. 62, Massachusetts law generally bases the business expense deduction on the federal business expense deduction that is allowable under Internal Revenue Code (IRC or Code) §§ 62(a), 162.[1] extent the deduction is actually taken at the federal level. If a taxpayer takes a federal credit in lieu of a federal deduction, the amount that would otherwise have been allowed as a federal deduction is no longer allowable and may not be deducted as a business expense for Massachusetts taxation purposes.
In calculating its corporate excise under G.L. c. 63, or the personal income tax liability under G.L. c. 62, Massachusetts law generally permits a taxpayer to deduct a business expense only when that expense is actually deducted for federal purposes. In circumstances where a taxpayer does not take part or all of a federal business expense deduction, taking instead a federal credit, Massachusetts law allows a business expense deduction, under G.L. c. 62 or c. 63, only in an amount equal to that part of the expense that the taxpayer actually deducts as a business expense for federal purposes. Exceptions to this general rule exist only where a Massachusetts statute specifically allows a taxpayer both a credit and a deduction related to the same expense.
9. Letter Ruling 15-1: Sales/Use Tax on Sale and Installation of a Ski Lift
This letter ruling deals with the question of whether a contract for the installation of a ski lift under the facts set forth below is a construction contract subject to the Massachusetts sales tax rules governing construction contractors, or alternatively, whether the contract is a contract for the sale of tangible personal property.
A "construction contract" has been defined as "a contract for the construction, reconstruction, alternation, improvement, remodeling or repair of real property. In Massachusetts, it is well-settled that "construction contracts. . . are not contracts for the sale of goods. . . . [Such] contracts . . . [are] not contracts for the sale of bricks or window frames or caulking material but contracts for the construction and sale of building." Classic Kitchens, Inc., v. Commissioner of Revenue, A.T.B. Docket No. C262393 (2004), citing White v. Peabody Construction Co., Inc., 386 Mass. 121, 132-133 (1982).
The general rule for contractors and subcontractors who construct, reconstruct, alter, improve and remodel and repair real property is that the contractor is the consumer of tangible personal property purchased by them for the performance of their contracts ("the contactor rule"). The sales contractor rules were originally published in Emergency Regulation No. 12 in 1966.
The letter ruling concludes that the contract to furnish and install the ski lift is a construction contract. The DOR ruled that the corporation is acting as a construction contractor with respect to its agreement to furnish and install the ski lift.[1] As such, Corporation must pay tax on the sales price of all tangible personal property it purchases in fulfillment of its contract. Finally they conclude that the ski lift as described is not "a complete unit of standard equipment requiring no further fabrication but simply installation, assembling, applying, or connecting services", and therefore the contract is not transformed into one for the sale of tangible personal property on that basis.
10.. Directive 15-XX Determining Basis for Purposes of Calculating the Massachusetts Investment Tax Credit and Certain Economic Development Incentive Credits – Impact of Depreciation and Expensing Deductions
This Directive explains that the basis to be used for computing these credits is the taxpayer’s initial adjusted basis used for computing federal depreciation deductions upon the acquisition, construction, reconstruction, or erection of the property (herein the “federal depreciable basis”).
IRC § 179 and the regulations thereunder require that such federal depreciable basis reflect a reduction on account of any properly-elected IRC § 179 deduction to expense the cost of the property[1]. Accordingly, such reduction is similarly required for Massachusetts tax purposes, as described below, and the Massachusetts investment credits may only be claimed with respect to any remaining basis of the property.
The Massachusetts ITC allowed pursuant to G.L. c. 63, § 31A, and the amount of Massachusetts economic development incentive credits allowed when granted under G. L. c. 62, § 6(g) and G.L. c. 63, § 38N, the basis of qualifying property upon which these Massachusetts investment credits are calculated does not require a reduction on account of the first-year federal or Massachusetts “regular” depreciation deductions or the bonus depreciation deduction allowed for federal income tax purposes pursuant to IRC § 168(k).
Thus you would reduce the amount eligible for the ITC by any section 179 expense but not by reductions for regular depreciation or bonus depreciation..
Additional Issue
Recent Case of Note
The Massachusetts Supreme Judicial Court on Wednesday, June 3, 2015 upheld a decision by the Suffolk County Superior Court that classified a group of real estate agents as independent contractors, not employees, but held off on clarifying how the state’s conflicting independent contracting and real estate licensing statutes can be applied to the real estate industry.
The case at hand was Monell v. Boston Pads LLC, a 2011 case in which a group of real estate agents sued their employers, saying they had been misclassified as independent contractors when really they were employees — and thus entitled to pay, benefits and protection that come from the commonwealth’s wage and hour laws. The Suffolk Superior Court held that those agents should be classified as independent contractors, not employees, which the SJC upheld.
However, the SJC also said it agrees with the superior court that the commonwealth’s independent contractor statute does not apply to real estate agents. While its decision deals specifically with the agents in the Monell v. Boston Pads LLC case, the SJC left the issue whether real estate agents should be classified as independent contractors or employees open to further discussion.
“We take no position on whether the plaintiffs in fact are employees or independent contractors, or on how, in the absence of the framework established by the independent contractor statute, it may be determined whether a real estate salesperson is properly classified as an independent contractor or employee,” the SJC wrote. “In light of the potential impact of that issue on the real estate industry as a whole and its significant ramifications for real estate salespersons’ access to the rights and benefits of employment, we think it prudent to leave that issue’s resolution to another day, when it has been fully briefed and argued,” the SJC wrote in its decision.
The SJC suggested that legislation might be necessary to clarify how a real estate agent can gain employee status under the commonwealth’s real estate licensing statute.
Real estate attorney Neil Markson, a managing partner at Bernkopf Goodman, has followed the case, and said the SJC “kicked the can down the road.”
“There’s no finality,” he said. “No one is breathing a sigh of relief here or saying, ‘oh my god, there’s going to be disaster in the industry.’”
The judge determined that there is a conflict between the independent contractor and real estate licensing statutes insofar as a real estate salesperson would not be able to satisfy all three
indicia of an independent contractor relationship while simultaneously complying with the real estate licensing statute.
Based on his determination that the real estate licensing statute was more recently amended and
Is more specific than the independent contractor statute, the judge concluded that, pursuant to statutory construction principles, the independent contractor statute did not control, meaning that the defendants did not fail properly to classify the plaintiffs as employees and therefore could
not be liable for a violation of G.L.c.149,
§ 148B.
