Income/Franchise:
Massachusetts: State High Court Says S Corp’s Gain from Selling LLC Interest Not Taxable in this Case

Case No. SJC-13139, Mass. (5/16/22). The Massachusetts Supreme Judicial Court (Court) reversed a Massachusetts Appellate Tax Board ruling from 2020 – which had held that a nondomiciliary S corporation owed Massachusetts corporate excise (income) tax on capital gains from the sale of its ownership interest in a Massachusetts limited liability company (MA LLC) [see Docket Nos. C332269 & C332270, Mass. App. Tax Bd. (10/23/20) for details on this earlier ruling] – to hold that while Due Process and Commerce Clause limitations on Massachusetts’ authority to tax the S corporation may be satisfied through its 50% ownership interest in MA LLC, Massachusetts lacked the statutory authority in this case to tax the capital gain realized by the S corporation based on MA LLC’s connection to Massachusetts as “there is no unitary business” between the S corporation and MA LLC. While holding for the taxpayer under the facts in this case, the Court noted that the constitutional limitations on Massachusetts’ authority to tax a nondomiciliary corporation feasibly could be satisfied where, as here, the nondomiciliary corporation has “reaped the financial benefits (in the form of a capital gain) from its fifty percent ownership interest in an in-State entity whose growth is tied inextricably to the protections, opportunities, and benefits afforded to it” by Massachusetts.

See forthcoming Multistate Tax Alert for more details on this recent decision, including some related taxpayer considerations, and please contact us with any questions in the meantime.