ACTION REQUESTED
February 27, 1997
VIA FAX
TO: TAX COMMITTEE No. 7-97
RE: MASSACHUSETTS TAXATION OF CAPITAL GAINS
______________________________________________________________________________
At the last Tax Committee meeting, we briefly discussed that Massachusetts has enacted
rules that substantially change the taxation of capital gains for purposes of the Massachusetts
personal income tax. Under the new rules, capital gains are taxed at rates that differ based on
the holding period of an asset. For gains from capital assets held for more than one year, the
tax rate starts at 5% (for capital assets held for more than one year but not more than two
years), and decreases by one percentage point for each additional year that the asset is held.
Thus, for assets held for more than six years, the tax rate is zero percent. The new rules are
effective for the 1996 calendar year, although holding periods are deemed not to begin prior to
January 1, 1995.
The Massachusetts Department of Revenue issued the attached proposed regulations
that explain the application of the new rules. The proposed regulations include, among other
things, a special rule for capital gain dividends received from mutual funds (see page seven of
the regulations). Under the special rule, a mutual fund may determine the amount of the
capital gain dividend that is attributable to each "class" of capital gains under the Massachusetts
law, and report such amounts to the taxpayer and Massachusetts by March 1 of the calendar
year following the calendar year of the distribution. In this case, Massachusetts shareholders
will be able to apply the graduated tax rates applicable to capital gains. If the mutual fund does
not provide the additional information, then the capital gain dividend will be subject to the 5%
tax rate.
Written comments on the proposed regulations are due by March 12, 1997, and a public
hearing on the regulations is scheduled for that day. Accordingly, any suggestions for issues
that should be addressed in any Institute comment letter regarding the proposed regulations
should be sent to the undersigned by Tuesday, March 4.
We will keep you informed of developments.
Anne M. Barr
Associate Counsel - Tax
Attachment (in .pdf format)