1 See Institute Memorandum to Tax Committee No. 7-97, dated February 27, 1997.
March 17, 1997
TO: ACCOUNTING/TREASURERS COMMITTEE No. 9-97
TAX COMMITTEE No. 11-97
RE: INSTITUTE COMMENTS ON MASSACHUSETTS CAPITAL GAINS TAX
REGULATION
______________________________________________________________________________
As we previously informed you, Massachusetts has enacted personal income tax
provisions which generally provide that capital gains are taxed at different rates based on the
holding period of an asset.1 Under this law, in the case of gains from capital assets held for
more than one year, the tax rate starts at five percent (for assets held 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 Massachusetts Department of Revenue issued proposed regulations on the capital
gains provisions, which include special rules for mutual fund investors. The proposed
regulations provide that a mutual fund may determine the amount of a 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. In
addition, the proposed regulations provide that when an investor sells shares in a mutual fund
an accounts for the sale using the average cost basis method for federal tax purposes, then the
Massachusetts adjusted basis shall be determined in the same manner, and the Massachusetts
holding period for each share shall be averaged in the same manner and the resulting average
shall be deemed to be the holding period for all of the shares sold.
In the attached comment letter, the Institute addressed the requirement to use an
average holding period for shareholders using average cost basis, recommending that this
provision be replaced with a provision that permits a mutual fund shareholder to specify which
shares are sold, and, in the absence of such specification, the shareholder would be treated as
selling those shares that were first acquired.
We will keep you informed of further developments.
Anne M. Barr
Associate Counsel - Tax
Attachment (in .pdf format)