Commissioner of Revenue v. Oliver
| Decision Date | 08 April 2002 |
| Citation | 436 Mass. 467,765 NE 2d 742 |
| Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
| Parties | COMMISSIONER OF REVENUE v. R. BRUCE OLIVER & another. |
Present: MARSHALL, C.J., GREANEY, IRELAND, SPINA, COWIN, SOSMAN, & CORDY, JJ.
Diane M. McCarron for Commissioner of Revenue.
John S. Brown (Matthew D. Schnall with him) for the taxpayers.
General Laws c. 62, § 5A (a), sets forth the statutory scheme for income taxation of nonresidents of Massachusetts. We are asked to determine whether, under that statute, a nonresident must pay Massachusetts income taxes on nonqualified pension payments received from his former Massachusetts employer during those years in which the taxpayer did not carry on any trade or business in Massachusetts. The Appellate Tax Board (board) concluded that the pension payments were not Massachusetts-source income and therefore not taxable under G. L. c. 62, § 5A, for the applicable tax years. The Commissioner of Revenue (commissioner) appealed from that decision pursuant to G. L. c. 58A, § 13, and we granted his application for direct appellate review. We affirm the board's decision.
We summarize the findings made by the board, which are based on a statement of agreed facts and attached exhibits. From 1991 through 1995, the years at issue, the taxpayers, R. Bruce Oliver (Oliver) and Sylvia B. Oliver, were domiciled in Florida. Prior to his retirement in 1991, Oliver had been employed in Massachusetts by Hancock Advisers and its parent company, John Hancock Mutual Life Insurance Company (John Hancock), for over twenty-eight years.2 On February 10, 1989, Oliver entered into a severance agreement with Hancock Advisers under which he would remain on active employee status through December 31, 1989, subsequent to which he would take nominal employee status for a nineteen-month period ending on August 1, 1991, the effective date of his retirement.3 The severance arrangement provided Oliver with deferred compensation payments to commence on his retirement. During 1991, Oliver received severance payments totaling $227,734. He also began to receive nonqualified pension plan payments that, from 1991 to 1995, totaled $387,641.4 During those years, Oliver did not perform any services for his former employer and was not present in Massachusetts for any business purposes.
On their Massachusetts nonresident income tax return for 1991, the taxpayers did not treat any of the nonqualified pension plan payments received by Oliver as Massachusetts-source income, and claimed a refund of the amounts withheld by Hancock Advisers. In connection with an audit of that return, the commissioner issued a notice of intention to assess and then a notice of assessment, which the taxpayers paid. The taxpayers thereafter filed Massachusetts nonresident income tax returns for the tax years 1992 and 1993, which excluded from their Massachusetts gross income the nonqualified pension plan payments received by Oliver. The commissioner assessed deficiencies as to both years. The taxpayers then filed Massachusetts nonresident income tax returns for tax years 1994 and 1995, which included the pension plan payments as Massachusetts gross income. For the 1991-1995 tax years, the taxpayers paid a total tax of $22,453 on the pension payments.
The taxpayers filed applications for abatement for each of the years at issue. On September 29, 1997, the commissioner denied the abatement application for 1995. The remaining applications were later deemed denied when the taxpayers withdrew their consent to extend the time for their consideration. The taxpayers filed a petition for review with the board. The commissioner subsequently concluded that Oliver's severance payments were not taxable as Massachusetts-source income, and agreed to abate $14,233 of tax assessed in connection with those payments only. The nonqualified pension plan tax payments in the amount of $22,453 remain in dispute.
General Laws c. 62, § 5A (a), provides in relevant part that Massachusetts nonresident gross income shall be determined "solely with respect to items of gross income from sources within the commonwealth" (emphasis added). The statute then defines "items of gross income from sources within the commonwealth" as "gross income derived from or effectively connected with (1) any trade or business, including any employment carried on by the taxpayer in the commonwealth; (2) the participation in any lottery or wagering transaction within the commonwealth; or (3) the ownership of any interest in real or tangible personal property located in the commonwealth" (emphasis added). Nonqualified pension plan income is deferred compensation and is taxable on receipt rather than when it is earned. See G. L. c. 62, § 2 (a); I.R.C. §§ 61 (a) (11), 401, 451 (a) (2000). Because a nonresident may be taxed only on income from a "source" within the Commonwealth, we must determine whether Oliver's nonqualified pension payments received during the years 1991 through 1995 were from such a "source."
General Laws c. 62, § 5A (a) (1), is the only subsection relevant to our inquiry.5 The board ruled that income "derived from or effectively connected with ... any trade or business, including any employment carried on by the taxpayer in the commonwealth," G. L. c. 62, § 5A (a), can be taxed as Massachusetts-source income only to the extent that it is "income from business activities that are actually carried on by a non-resident taxpayer during the tax year in which the income is received." The taxpayers do not dispute that Oliver's pension payments are "derived from or effectively connected with" his prior employment in Massachusetts. But because Oliver did not himself carry on any business activities in Massachusetts during 1991 to 1995, pension plan payments Oliver received during those years could not be taxed, the board held, and the taxpayers were entitled to the abatement for which they had applied. The commissioner responds that, to constitute taxable gross income, G. L. c. 62, § 5A (a) (1), requires only that the taxpayer's pension payments be "derived from" or "effectively connected with" his employment in Massachusetts, and contains no requirement that the taxpayer himself must have carried on any trade or business in Massachusetts during the taxable years at issue. We agree with the board.
We adhere to the familiar principle that tax statutes are to be strictly construed; we will not read into a statute an authority to tax that it does not plainly confer. See Cabot v. Commissioner of Corps. & Taxation, 267 Mass. 338, 340 (1929); City Nat'l Bank v. Charles Baker Co., 180 Mass. 40, 41 (1901) (). Any ambiguity is resolved in the taxpayer's favor. Cabot v. Commissioner of Corps. & Taxation, supra. See McCarthy v. Commissioner of Revenue, 391 Mass. 630, 633 (1984), quoting Xtra, Inc. v. Commissioner of Revenue, 380 Mass. 277, 281 (1980). General Laws c. 62, § 5A (a) (1), does not state explicitly whether a nonresident taxpayer may be taxed on pension payments received from a prior Massachusetts employer in years in which he has carried on no business in the Commonwealth. In light of the principles just stated, we must consider whether such authority is plainly implied.
By focusing exclusively on whether the income is "derived from" or "effectively connected with" Oliver's employment in Massachusetts, G. L. c. 62, § 5A (a), regardless of when the income was received, the commissioner ignores the over-all structure of that section. It contains three subsections, each of which defines a taxable "source within the commonwealth" from which gross income may be "derived" or with which it may be "effectively connected." The "derived from or effectively connected with" language becomes operative only after the antecedent determination whether the "source" of the income falls within one of the these subsections. Here, the proper inquiry, and the one we pursue, is the meaning of the first subsection, "any trade or business, including any employment carried on by the taxpayer in the commonwealth." See note 5, supra.
In Commissioner of Revenue v. Dupee, 423 Mass. 617 (1996), we construed this same subsection and considered whether a distribution of assets to a nonresident shareholder arising from the sale of shares in a Massachusetts Subchapter S corporation was taxable Massachusetts-source income under G. L. c. 62, § 5A (a) (1). The distribution occurred pursuant to a plan of liquidation of the corporation. The issue in that case was not, as here, the timing of the taxpayer's receipts but a claim by the taxpayer that, because he did not himself participate in the regular operations of the corporation, he did he not "carry on" any trade or business in Massachusetts for purposes of determining his Massachusetts-source gross income. See id. at 618. We rejected the commissioner's argument that the statute required only that the distribution be "derived from" or "effectively connected with" a Massachusetts trade or business, as the distribution plainly was. Rather, we held that, to constitute Massachusetts income taxable to the taxpayer, the statute required that the nonresident taxpayer "personally conduct the Massachusetts business giving rise to the income." Id. at 620.
Consonantly with Commissioner of Revenue v. Dupee, supra, and the principles of interpretation on which it relied, the board has consistently construed G. L. c. 62, § 5A (a) (1), strictly against the taxing authority. See, e.g., Gersh v. Commissioner of Revenue, 22 Mass. App. Tax Bd. Rep. 49, 62 (1997) (); Gaston v. Commissioner of Revenue, 21 Mass. App. T...
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