The Massachusetts Commissioner of Revenue sought to tax the capital gain of an out-of-state S corporation and its nonresident shareholders following the sale of the S corporation’s 50%-member interest in an LLC taxed as a partnership that was doing business in Massachusetts. The S corporation and the LLC were not engaged in a unitary relationship.
The Massachusetts Supreme Judicial Court (SJC) on 16 May concluded that the state could constitutionally impose both its corporate excise tax on the out-of-state S corporation’s capital gain and its nonresident composite tax on the S corporation nonresident shareholders’ share of such gain. However, the SJC abated the tax because Massachusetts lacked the requisite statutory authority to tax the capital gain.
Massachusetts law does not permit including such capital gains in apportionable income without a unitary relationship. Massachusetts allocable income treatment taxes the gain at the place of the taxpayer’s domicile, which was outside of Massachusetts.
Note that on 20 May, the Department filed a motion with the SJC requesting an extension of time to file a Motion for Reconsideration. The rules allow for 14 days. The Department is requesting another 14 days, to 13 June. The SJC will determine whether it wants to grant the motion.