Massachusetts Decides to Retroactively Tax IRC Section 965 Repatriation Income

For personal income tax purposes, Massachusetts does not automatically update to the current Federal Internal Revenue Code, including some provisions that may have changed under the Tax Cut and Jobs Act of 2017 (TCJA). In fact, under state law, Massachusetts utilizes the provision of the Code, as amended and in effect for January 1, 2005. Under the 2005 Code, IRC section 965 revenue, created as part of the TCJA, did not exist. As such, Massachusetts had previously determined that the deemed income under section 965 was not income for state purposes.

On March 29, 2019, Massachusetts issued House bill 3509, which will result in the inclusion of deemed repatriated income under IRC 965 for state purposes, retroactively to 2017.

The bill treats section 965 income as Part A dividend income, but allows a 60% deduction of the gross amount realized under section 965. If the taxpayer made a valid election under IRC section 965(h) or (i), then Massachusetts will allow the tax to be includable in income over eight years. If a valid election to realize the income over eight years was not made, the entire amount of tax is retroactively due for 2017 income reported for federal tax purposes. It is not currently clear whether the Department of Revenue will require an amended return to be filed, or if the entire 2017 amount will be due on April 19, 2020, as noted below.

The payment on the income arising from the first three installments, for 2017, 2018 and 2019, will be due on April 19, 2020. Each succeeding installment must be paid by April 18 of the taxable year following the recognition of the income. So the fourth installment reportable as income for federal — and now Massachusetts — purposes in 2020 will be due on or before April 18, 2021.

Interest will not accrue on this liability prior to the due date of the tax, so it cannot be considered as part of any underpayment penalty for taxes due. For purposes of reporting the tax, the taxpayer’s status as a resident or non-resident of Massachusetts will be determined by the status in the year in which the income was required to be taken into account for federal income tax purposes. For reporting of such income by non-residents, if so determined, the sourcing to Massachusetts will be consistent with the apportionment or other sourcing method used by the taxpayer in the year the income was taken into account for federal income tax purposes.

The Department of Revenue will be issuing a Technical Information Release (TIR) to address this issue in more detail during the coming year. Marcum’s state and local tax professionals will continue to keep you informed of this change.