R. Bruce & Sylvia B. Oliver v. Commissioner of Revenue (February 7, 2001)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD



R. BRUCE & SYLVIA B. OLIVER    v.   COMMISSIONER OF REVENUE

Docket No. F245605			      Promulgated:
						      February 7, 2001

	This is an appeal under the formal procedure pursuant to G.L. c. 62C, § 39, from the refusal of the appellee to abate income taxes assessed against the appellants under G.L. c. 62, § 5A. 
Commissioner Scharaffa heard the appeal and was joined in the decision for the appellant by Chairman Burns and Commissioners Gorton, Egan and Rose.
	These findings of fact and report are made at the requests of the appellants and the appellee pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.

	John S. Brown, Esq., George P. Mair, Esq., Donald-Bruce Abrams, Esq., Darcy A. Ryding, Esq. and Matthew D. Schnall, Esq. for the appellants.
	
Diane M. McCarron, Esq. for the appellee.



FINDINGS OF FACT AND REPORT
	On the basis of a Statement of Agreed Facts and exhibits attached thereto, the Appellate Tax Board ("Board") made the following findings of fact.  Throughout the calendar years 1991 through 1995 (the "years at issue"), the appellants, Mr. and Mrs. Oliver, were domiciled in the state of Florida.  Before this time, from 1968 until his retirement in 1989, Mr. Oliver was employed by John Hancock Advisers, Inc. ("Hancock Advisers") in Massachusetts.  In preparation for his impending retirement, Mr. Oliver entered into a severance arrangement with Hancock Advisers in August of 1988, which was subsequently modified in December of 1988 and in February of 1989.  Pursuant to the final severance arrangement,   Mr. Oliver would cease working for Hancock Advisers on February 10, 1989.  The final severance arrangement permitted Hancock Advisers to request Mr. Oliver to perform part-time consulting services for a limited period of time.  However, the parties stipulated, and the Board found, that Hancock Advisers never requested such services, and      Mr. Oliver performed no such services for Hancock Advisers during the years at issue.  Furthermore, Mr. Oliver was never present in Massachusetts for business purposes during the years at issue.
	The severance arrangement between Mr. Oliver and Hancock Advisers provided Mr. Oliver with deferred compensation payments after his retirement.  During 1991, Mr. Oliver received severance payments totaling $227,734.  Mr. Oliver also received non-qualified pension plan payments based on his thirty-one years and five months of employment with Hancock Advisers.  During the years at issue, Mr. Oliver received such non-qualified pension plan payments totaling $387,641.  
On their tax return for 1991, the Olivers did not treat any of the deferred compensation amounts as Massachusetts-source income and thus claimed a refund of the amounts withheld by Hancock Advisers.  Pursuant to an audit of their 1991 tax return, the Commissioner of Revenue ("Commissioner") issued a Notice of Intention to Assess ("NIA") and then a Notice of Assessment ("NOA") with regard to tax year 1991.  The Olivers timely paid the amounts shown as due on the NIA and NOA.  
After the Commissioner issued a Notice of Failure to File with regard to tax year 1992, the Olivers filed nonresident Massachusetts income tax returns for tax years 1992 and 1993, which  excluded from Massachusetts gross income payments received from the non-qualified pension plan.  The Commissioner assessed deficiencies as to both years.  Thereafter, the Olivers timely filed nonresident Massachusetts income tax returns for tax years 1994 and 1995, which included in Massachusetts gross income the payments received from the non-qualified pension plan during those years.  
	The Olivers timely filed abatement applications for each of the years at issue.  The Commissioner denied the Olivers' abatement application for 1995 on         September 29, 1997.  The remaining abatement applications were deemed denied on October 6, 1997 when the Olivers withdrew their consent to extend the time for consideration of the applications.  The Olivers timely filed a petition with the Board on October 7, 1997.  On the basis of the foregoing, the Board found it had jurisdiction over this appeal.
	The Commissioner has conceded that the severance payments were not taxable as Massachusetts-source income, and he has agreed to abate $14,233 of tax that he had assessed in connection with those payments.  Therefore, the remaining amount of tax that is in dispute is $22,453 with respect to the non-qualified pension plan payments.   
	For the reasons stated in the Opinion which follows, the Board found that the severance payments and the non-qualified pension plan payments received by the Olivers during the tax years at issue were not properly included in their Massachusetts taxable income because these amounts were not Massachusetts-source income.  Accordingly, the Board issued a decision for the appellants and granted abatements in the total amount of $14,233 in connection with the inclusion of the severance payments, as agreed to by the parties, and in the further amount of $22,453 in connection with the inclusion of the non-qualified pension plan payments, plus all statutory additions.

OPINION
	The issue raised in the present appeal is whether a nonresident is taxable on proceeds received from a non-qualified pension plan when the recipient is not engaged in a Massachusetts trade or business in the year of receipt.  First, there is no question that receipts from non-qualified pension plans are generally subject to Massachusetts tax.  Massachusetts gross income is the same as the federal gross income defined under the Internal Revenue Code ("Code"), with modifications that are not relevant here.  G.L. c. 62, § 2.  The Code specifically includes income from a pension plan as federal gross income.  Code § 61(a)(11).  The Code defines pension plan income as deferred compensation, meaning that the income is taxed upon receipt rather than when it is earned.        See Code § 401.  Qualified pension plans, as opposed to non-qualified pension plans, are those pension plans that meet specific requirements under the Code and therefore qualify for certain tax benefits.  See Code § 401.  Massachusetts excludes from gross income the income received from certain qualified pension plans, but there is no such exclusion for non-qualified pension plan receipts. G.L. c. 62, § 2(a)(2)(F).  Accordingly, non-qualified pension plan income is generally subject to Massachusetts income tax when received by the participant.             See also 830 CMR § 62.5A.1(3)(b).
However, the income of a non-resident of Massachusetts may be subject to Massachusetts income taxation only if the income is "derived from or effectively connected with" sources within the Commonwealth.  Effectively-connected income will include income from "any trade or business, including any employment carried on by the taxpayer in the commonwealth."  G.L. c. 62, §5A(a).  The issue, therefore, is whether income from a non-qualified pension plan paid to a non-resident during tax years in which the non-resident did not perform any business in the Commonwealth is subject to income tax in the Commonwealth.  The Board found and ruled that, under the controlling Massachusetts authorities interpreting § 5A, as well as under the established interpretation of the analogous federal provision, § 5A includes income from business activities that are actually carried on by a non-resident taxpayer during the tax year in which the income is received.  Accordingly, the non-qualified pension plan payments which the Olivers received in the tax years at issue, during which time Mr. Oliver did not conduct any business activities in Massachusetts, were not properly includable as Massachusetts-source income.
Under controlling Massachusetts case law, a non-resident is not taxable under § 5A on business income if the non-resident was not employed in the Commonwealth during the tax year of receipt.  In Dupee v. Commissioner of Revenue, 16 Mass.App.Tax Bd.Rep. 114 (1994),        aff'd, 423 Mass. 617 (1996), the Board found that income received by a nonresident shareholder and director that was derived from a Massachusetts corporation was not subject to tax as effectively-connected income, when the taxpayer did not actively, regularly or continuously participate in the activities of such corporation.  "The board rules that the only reasonable interpretation of § 5A is that, in order for a nonresident to be taxable on income derived from or effectively connected with a trade or business, the nonresident must conduct that trade or business in Massachusetts."  Id. at 121.  
In Gersh v. Commissioner of Revenue,                 22 Mass.App.Tax Bd.Rep. 49 (1997), the Board addressed a situation substantially identical to the facts of this appeal.  In Gersh, the issue presented to the Board was whether individual income taxes could be assessed on income received by a nonresident pursuant to a covenant not to compete which was entered into in conjunction with the sale of a Massachusetts business.  The nonresident received this income during tax years in which he was a resident of Florida and performed no business activity in Massachusetts.  The Board interpreted the phrase "carried on by the taxpayer" in § 5A to require that the business activity be performed during the tax year of receipt in order for the resulting income to be subject to tax in the Commonwealth.  Id. at 59.  Therefore, the payments which the nonresident taxpayer received from the covenant not to compete were not subject to tax in the Commonwealth, because the taxpayer carried on no trade or business in Massachusetts in the years of receipt.  Accordingly, the relative inquiry is whether the business activity was "carried on during the periods at issue."  Id. 
This rule against taxability holds true even when some or all of the services that gave rise to the compensation were performed in the Commonwealth during prior years.  For example, the Appeals Court in Destito v. Commissioner of Revenue, 23 Mass.App.Ct. 977 (1987) found that a nonresident taxpayer could not be subject to tax on sick and vacation pay received during a year while he was living in New Hampshire, even though the pay was accumulated over thirty-four years of employment carried on in the Commonwealth.  "The board correctly upheld Destito's contention that, because the board found Destito was not required to perform any work whatsoever in Massachusetts in [the year of receipt] (and performed no work there), he was not liable to tax under G.L. c. 62, § 5A . . ."          Id. at 977.  
The Commissioner argued that Destito should be distinguished on its facts because the case specifically addressed a taxpayer who apportioned his income.  His argument was that for a taxpayer who apportions his income, sick and vacation pay are excludable as days not worked in Massachusetts, because a taxpayer could be sick or on vacation in another state, and therefore the taxpayer should not be subject to taxation for pay attributed to those days.  However, the Board found no meaningful distinction between the Commissioner's argument based on sick and vacation pay, and the taxpayer's argument based on deferred compensation pay.  In both instances, the income is accumulated from a trade or business performed in the Commonwealth.  Also, whether a taxpayer apportions his regular employment income should not affect the taxability of other income accumulated from that employment.  The Commissioner has cited no law, regulation or rule for his arguments, and the Board finds no basis for these distinctions.  Therefore, the result in Destito should apply to the facts of this appeal to exclude the income received by the Olivers while they were residents of Florida and carried on no Massachusetts trade or business.
In the present appeal, the Olivers have received deferred compensation payments during a time when        Mr. Oliver was not required to, nor did he, perform any employment services in the Commonwealth in connection with his receipt of the payments from Hancock Advisers.  The Board thus found that, consistent with the cases cited above, the Olivers are entitled to an abatement of taxes assessed against them on this deferred compensation.  This result is also consistent with the Board's ruling in the appeal of Mills v. Commissioner of Revenue         (F223949, October 21, 1997), the facts of which are substantially identical to this appeal.  In Mills, the Board granted an abatement of tax on deferred compensation received while the nonresident taxpayer resided in Florida and performed no business services in the Commonwealth during the year of receipt.  While the Commissioner argues that Mills is not controlling because the Board did not promulgate findings of fact and report, the Board's decision in Mills is nonetheless highly persuasive of the Board's view of deferred compensation payments received by a nonresident during a tax year in which the nonresident performs no services in the Commonwealth.  The Commissioner has offered nothing in the present appeal to persuade the Board to abandon the ruling, implicit in the Mills decision, that deferred compensation payments received by a non-resident are not subject to tax in Massachusetts if the recipient performed no business activity in Massachusetts during the year of receipt.
	The established interpretation of the analogous federal tax provisions also supports the conclusion that a nonresident must carry on a trade or business in the taxing jurisdiction during the tax year of receipt in order to be subject to source-based taxation.  Under the Code, nonresident aliens and foreign corporations are generally subject to federal income tax on income that is "effectively connected with the conduct of a trade or business within the United States."  Code § 871(b)(2);    Code § 882(b)(2).  Treasury regulations promulgated under these Code sections provided unambiguously that pension plan income attributable to the personal services performed in the United States would constitute income effectively connected with a United States trade or business only if the nonresident alien was "engaged in a trade or business in the United States at some time during the taxable year in which such income [was] received."                     26 C.F.R. § 1.864-4(c)(6)(ii)(1985). See also,           Rev. Rul. 79-388, 1979-1 C.B. 270 ("Because A is a nonresident alien who is not engaged in a trade or business in the United States in 1979, the year A received the pension payments under consideration, the portion of the payments that is from United States sources is not effectively connected with the conduct of a trade or business within the United States . . .").
	Section 5A uses nearly identical language to that used in § 871(b)(2) and § 882(b)(2), in effect before the Code was amended in 1986.  While the Code was amended in 1986 to provide specific rules relating to deferred compensation,  § 5A was not so amended.  Where a Massachusetts provision is analogous to a federal counterpart, Massachusetts courts and this Board look to harmonize the interpretation of the state law with interpretations of the analogous federal provision.  "If the State income tax law has incorporated Federal income tax provisions, those provisions should be interpreted as they are interpreted for Federal income tax purposes. . . . We should be reluctant to infer the existence of a State legislative intent which would require us to disregard the meaning established under Federal tax law of unambiguous, common statutory language."         B.W. Co. v. State Tax Comm'n, 370 Mass. 18, 22-23 (1976).  See also Commissioner of Revenue v. Franchi,             423 Mass. 817, 823 (1996).  Accordingly, the Board found highly persuasive the Federal authorities interpreting    §§ 871(b)(2) and 882(b)(2), the Federal counterparts to     § 5A, finding that pension plan income received by a nonresident during a tax year when he performed no services in the taxing jurisdiction was not income effectively connected to that taxing jurisdiction.
	Finally, under the Commissioner's own regulations governing the taxation of non-residents, the non-qualified pension plan payments at issue were not Massachusetts-source income.  The language of the regulations promulgated under § 5A tracks the statutory language of the statute.  See 830 CMR 62.5A.1(3)(b).  Therefore, Massachusetts cases, such as Destito and Dupee, apply to interpret that same language to mean that the trade or business must be conducted during the tax year of receipt in order for the income to be effectively connected to a Massachusetts source.  Furthermore, the Board in Gersh found that the language in the regulation requires that the nonresident taxpayer must have conducted the trade or business in the Commonwealth during the year of receipt:  "It is clear from the use of the present tense in the regulations interpreting the phrase 'has a trade or business, including any employment carried on in Massachusetts,' that the commissioner's interpretation is that the trade or business or employment must be carried on during the period at issue."  22 Mass.App.Tax Bd.Rep. at 57.  
The Board also found that the casual, isolated and inconsequential presence exception at 830 CMR 62.5A.1(4)(b) exempts Mr. Oliver's pension income.  During the tax years at issue, Mr. Oliver performed no business activities in the Commonwealth.  Therefore, his presence in the Commonwealth for business purposes was less than ten days, and thus within the regulatory safe harbor for exemption of his deferred compensation income.  This ten-day test does not apply if the nonresident taxpayer has earned more than $6,000 from employment or business activities             in Massachusetts during the taxable year.                   See 830 CMR 62.5A.1(4)(b)(1).  However, the Board found that Mr. Oliver did not earn any income from employment or business activities in Massachusetts during the tax years at issue, because Mr. Oliver was not ever present in Massachusetts for business activities during that time.  As noted in Gersh, the regulation provides examples to illustrate the application of the casual and isolated exception, and "[i]n each of the thirteen examples there is a presence in Massachusetts by the taxpayer for some period of time during the taxable period."  Id.  Consistent with its position in Gersh, the Board thus ruled that a business presence in a prior year "does not provide a sufficient nexus" for taxing income received in a subsequent tax year, and that unless the taxpayer has a business presence in the Commonwealth that is beyond casual, isolated and inconsequential, then the taxpayer is not subject to the Commonwealth's taxing jurisdiction for income received in subsequent tax years. 
The Commissioner contended that Gersh did not apply to the Olivers' situation, based on a footnote distinguishing the income from a covenant not to compete at issue in that case, with the income from a deferred compensation plan at issue in this appeal.  However, the footnote in question is limited to distinguishing deferred compensation from noncompetition payments, such that noncompetiton payments would not fall within the rubric of the        Commissioner's deferred compensation regulation.         See Gersh, 22 Mass.App.Tax Bd.Rep. at 57, n.15.  The Board did not at that time address the taxability of deferred compensation, nor interpret the Commissioner's regulation on that matter.  Upon consideration of the issue in Mills and in this appeal, however, the Board found that deferred compensati on is not taxable under § 5A to a nonresident who performs no business activities in the Commonwealth during the year of receipt.  The Commissioner's regulation, employing the same language as the statute itself,       must be interpreted to yield this same                result. See Hampers v. Commissioner of Revenue,                    6 Mass.App.Tax Bd.Rep. 31 (1985)(Commissioner can make regulations interpreting statutes, provided that the regulations are a reasonable construction of the statute and are consistent with the law).





Based on the foregoing, the Board found that Mr. Oliver's deferred compensation was properly excluded from the Olivers' Massachusetts gross income.  Accordingly, the Board issued a decision for the appellants and granted abatements in the total amount of $14,233, in accordance with the agreement of the parties, and in the further amount of $22,453.  The total amount of the abatements, therefore, was $36,686, plus all statutory additions.

					       APPELLATE TAX BOARD	
							
  By:______________________________
					     Frank J. Scharaffa, Member

A true copy:



Attest: _____________________
	    Clerk of the Board

   The Board does not here address the taxability of severance payments, because the Commissioner conceded to their exclusion from taxation pursuant to an agreement with the appellants.

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