United States

Massachusetts: An IRC Section 338(H)(10) Transaction May Trigger Credit Recapture In Massachusetts

Apr 02, 2018
From KPMG TaxWatch

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In a recent Letter Ruling, the Massachusetts Department of Revenue addressed whether the sale of an S-Corporation’s stock in a transaction treated as an asset purchase under IRC section 338(h)(10) constituted a disposition of property under Massachusetts law. Prior to the transaction, the target S Corporation had purchased assets for use in its business and had earned an Investment Tax Credit (ITC) and Economic Opportunity Area Credits (EOAC) as a result. The Investment Tax Credit is generally three-percent of the cost (or other basis for federal income tax purposes) of qualifying tangible property acquired, constructed, reconstructed, or erected during the taxable year. Economic Opportunity Area Credits are available to certain taxpayers in lieu of Investment Tax Credits. The credit-generating assets continued to be used by the target after the transaction.

Under Massachusetts law, a taxpayer is subject to recapture provisions if it disposes of property on which a credit had been taken prior to the end of the property’s useful life. If such a disposition occurs, the difference between the credit taken and the credit allowed must be added back as additional tax due in the year of disposition. The Department ruled that the sale of stock in a IRC section 338(h)(10) transaction is treated as a disposition of the assets held by the target for purposes of these credits. As such, credits (both ITC and EAOC) previously taken by the target corporation with respect to those assets were subject to the recapture provisions. However, the Department also ruled that the transaction will qualify as an acquisition of qualifying property by the target, and therefore the target will be allowed new Investment Tax Credit. The taxpayer did not request a ruling on whether it might qualify for a new EACO, and the Department did not, therefore, address that matter. Please stay tuned to TWIST for future Massachusetts tax updates.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.