Tax Article - Massachusetts Capital Gains Update

As some of you may recall, the Massachusetts Legislature increased the capital gains tax in 2002. The effective date of this increase was May 1, 2002, such that many sales prior to that date were taxed at much lower rates and, in many cases, not taxed at all. However, a lawsuit ensued where a group of investors argued that the effective date of the new law was unconstitutional because it resulted in a change in tax rates during the year. The Supreme Judicial Court recently ruled that the effective date of the statute was unconstitutional leaving a choice to the legislature to make the new law retroactive to January 1, 2002, or delaying its effective date to January 1, 2003. It is estimated that making the change retroactive will increase revenue by $160 million while delaying the effective date will result in tax refunds of approximately $275 million. 

Governor Romney indicated that he would direct the Department of Revenue to issue tax bills to those taxpayers who owe additional tax for 2002 under the retroactive option and to then issue 2005 tax credits to offset the tax. Although this is appealing, there are those who question whether this will pass constitutional muster. In the meantime, the only apparent certainty is that taxpayers who enjoyed relief under the May 1, 2002, effective date will receive tax bills for the untaxed capital gains.

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