Johnson v. Department of Revenue

• Decision Date: 04 August 1982
• Parties: Carl C. JOHNSON et al. 1 v. DEPARTMENT OF REVENUE.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 1059

438 N.E.2d 1059

387 Mass. 59

Carl C. JOHNSON et al. ¹ v. DEPARTMENT OF REVENUE.

Supreme Judicial Court of Massachusetts,

Suffolk.

Argued April 6, 1982.

Decided Aug. 4, 1982.

Edward F. Hines, Jr., Boston (Michael D. Bliss, Boston, with him), for the taxpayers.

Stephen S. Ostrach, Asst. Atty. Gen., for Department of Revenue.

Before WILKINS, LIACOS, ABRAMS, NOLAN and LYNCH, JJ.

ABRAMS, Justice.

The taxpayers appeal from a decision of the Appellate Tax Board (board) which denied their request for an abatement of income tax paid on income received in 1973. The board held that gain included within an installment payment received in 1973, on a sale of real estate in 1970, was income taxable under the Massachusetts income tax law even though gains from the sale of the real estate were not subject to the Massachusetts income tax in the year of the sale. See Flower, State Taxation, 1957 Ann. Survey of Mass. Law, 186-187. See also Dogon v. State Tax Comm'n, 370 Mass. 699, 700 n.2, 351 N.E.2d 854 (1976). The board also determined that such an application of the tax was constitutional. We agree with the board that the money received in 1973 is subject to the Massachusetts income tax, and that application of the tax is not unconstitutional. We affirm the decision of the board.

We summarize the facts. In July, 1970, the taxpayers sold a parcel of vacant real estate. The sale price was $180,000, consisting of $45,000 cash and a promissory note payable in three equal installments of $45,000 in 1971, 1972, and 1973. The taxpayers reported the gain on the installment method for Federal income tax purposes. See § 453(b) of the Internal Revenue Code (I.R.C.) (26 U.S.C. § 453[b] [1976] ). The taxpayers did not report the gain as income on their 1970 Massachusetts return because the gain was not taxable under the Massachusetts income tax in effect in 1970. See Flower, State Taxation, 1957 Ann. Survey of Mass. Law, 186-187.

In 1973, the taxpayers received the final installment under the promissory note. The taxpayers reported the gain as income on their joint Federal income tax return, but did not report it on their joint State tax return. The Commissioner of Corporations and Taxation, now the Department of Revenue (hereinafter department), assessed an additional tax which the taxpayers paid. The taxpayers then filed an application for an abatement which the department denied. Before the board the taxpayers argued that the installment amount received in 1973 was excluded from the State income tax by G.L. c. 62, § 63, as amended through St.1973, c. 723, § 11. The taxpayers also claimed that the Commonwealth could not constitutionally tax the amounts received. The board denied the taxpayers' request for an abatement. The taxpayers appealed.

1. Taxability of installment amount. The taxpayers reported the gain in the installment payment as income on their Federal income tax return. See I.R.C. § 453(b). "Because the gain which was received in [1973] was part of the taxpayers' 'federal gross income' (G.L. c. 62, § 1[d ] ), part of their gross income and adjusted gross income for State income tax purposes (G.L. c. 62, § 2), and not excluded from their 'income subject to taxation' by any modification of their adjusted gross income (see G.L. c. 62, § 3), the gain was 'income subject to taxation' as defined in G.L. c. 62, § 3. Consequently, the gain is taxable under the literal wording of G.L. c. 62, §§ 2 and 3, unless a particular provision of the tax statute exempts it from taxation." Dogon v. State Tax Comm'n, 370 Mass. 699, 701, 351 N.E.2d 854 (1976).

The taxpayers argued before the board that such an exclusion is found in G.L. c. 62, § 63, as amended through St. 1973, c. 723, § 11. The board held that the taxpayers did not qualify for the exemption provided by that section because the installment sale in 1970 was not an "installment transaction," as defined by G.L. c. 62, § 63(a ). See Dogon v. State Tax Comm'n, supra at 702 n.6, 351 N.E.2d 854. We agree with the board.

General Laws c. 62, § 63(a ), defines "installment transaction" as "any transaction which: (1) is treated for federal tax purposes under sections four hundred and fifty-three (a ) or (b ) of the Code, and (2) would, but for the application of section four hundred and fifty-three of the Code, result in an item of Massachusetts gross income for the taxable year of the transaction." The transaction in question qualifies as an "installment transaction" under subsection (1), but fails under subsection (2). For the taxable year of the transaction (1970), the transaction would not have resulted in an item of Massachusetts gross income, and therefore, the exemption provisions applicable to "installment transactions" (G.L. c. 62, § 63) do not apply to the 1970 sale. ²

On appeal, the taxpayers argue that G.L. c. 62, § 63, as amended through St. 1973, c. 723, § 11, was not intended to apply to pre-1973 sales. The taxpayers assert that former G.L. c. 62, § 63(d ), as inserted by St. 1971, c. 555, § 18, "should be construed as remaining in effect in the case of sales ... occurring prior to January 1, 1973." See Dogon v. State Tax Comm'n, supra (taxpayers entitled to adjust Federal gross income for State tax purposes to reflect use of installment method for Federal, but not State, income tax purposes). The taxpayers also argue that they are entitled to an exemption by the revised basis rules of former G.L. c. 62, § 7, as appearing in St. 1973, c. 723, § 2. ³ The taxpayers contend that they held a promissory note on December 31, 1970, and that if there had been a sale of the note, any gain would have been taxable, and therefore they are entitled to an adjustment of basis. "The taxpayers' requests for rulings of law filed with the board do not focus on the statutory exclusion[s] on which they rely here, ... [nor does the board's opinion address them], therefore, the question[s] cannot be considered by us. See G.L. c. 58A, § 13." Dogon v. State Tax Comm'n, supra at 701 n.3, 351 N.E.2d 854. ⁴ See Commissioner of Revenue v. McGraw-Hill, Inc., --- Mass. ---, ---, Mass.Adv.Sh. (1981) 957, 965, 420 N.E.2d 293. ⁵ Finally, neither before the board nor before this court do the taxpayers raise any claim that there was no taxable gain recognized in 1973 because the basis of the note was determined by the sale price in 1970. Compare Rohrbough, Inc. v. Commissioner of Revenue, 385 Mass. 830, 434 N.E.2d 211 (1982). Therefore, we do not reach or discuss that issue. See G.L. c. 58A, § 13.

2. Constitutionality. The taxpayers argue that G.L. c. 62, § 2, if applied to them, would (a) be retroactive in effect and, therefore, violate the due process clause of the Federal Constitution and comparable provisions of the Massachusetts Constitution; (b) be an arbitrary distinction between taxpayers in violation of the equal protection clause of the Fourteenth Amendment to the United States Constitution and art. 10 of the Massachusetts Declaration of Rights; and (c) be a tax on capital appreciation occurring before the effective date of the tax in violation of art. 44 of the Massachusetts Constitution. We conclude that the Massachusetts income tax, as applied in this case, is constitutional.

a. Due process. The taxpayers argue that since the installment payments received in 1973 were actually proceeds from the sale of property in 1970 (when such a gain was not taxable), the taxation of these proceeds in 1973 was, in effect, a tax upon the gain from such prior sale. They argue that this gain was fully realized in 1970, so that any tax upon the gain at a later date amounts to a retroactive application of the Massachusetts income tax in violation of the due process clause. The application of the statute is not retroactive in these circumstances.

The taxpayers elected to report the gain on the sale of their property on the installment method under I.R.C. § 453, thereby requiring them to "return as income therefrom in [1973] ... that proportion of the installment payments actually received in [1973]," in accordance with the provisions of I.R.C. § 453(a). Having made such an election, that portion of the gain received by them in 1973 constituted gross income as defined by "federal gross income" in accordance with G.L. c. 62, § 2(a). Since "the receipt of the installment payment in [1973] was a part of [the taxpayers'] ... gross income for federal tax purposes in [1973], ... [it] is thus the taxable event upon which [G.L. c. 62, § 2(a) ] ... levied a tax." Dery v. Lindley, 57 Ohio St.2d 5, 6, 385 N.E.2d 291 (1979). See Marco Assocs. v. Comptroller of the Treasury of Md., 265 Md. 669, 672-673, 291 A.2d 489 (1972); Katzenberg v. Comptroller of the Treasury of Md., 263 Md. 189, 199, 282 A.2d 465 (1971); Roger Dean Enterprises v. State, 387 So.2d 358, 364 (Fla.1980); Tiedemann v. Johnson, 316 A.2d 359, 366 (Me.1974); DuBois v. Director, Div. of Taxation, 4 N.J.Tax 11, 28 (N.J.Tax Ct. Dec. 18, 1981); Rosenblatt v. New York State Tax Comm'n, 106 Misc.2d 490, 433 N.Y.S.2d 987 (N.Y.Sup.Ct.1980). See also Picchione v. Commissioner of Internal Revenue, 440 F.2d 170, 173 (1st Cir.), cert. denied, 404 U.S. 828, 92 S.Ct. 66, 30 L.Ed.2d 57 (1971). "The taxable event is receipt of the installments. Since this is a current event, there is no retroactivity." DuBois v. Director, Div. of Taxation, supra.

Further, the taxpayers' claim, that since the gain from the sale was fully realized in 1970, ⁶ gain in the installment payment cannot be subject to tax by virtue of a 1973 statute, is unpersuasive. The parties concede that the gain, although realized, was not recognized for tax purposes. "Various sections of the Code imply that unrecognized gains are not part of gross income." B. W. Co. v. State Tax Comm'n, 370 Mass. 18, 20, 345 N.E.2d 884 (1976). As required by I.R.C. § 453(a), the installment payments were not "return[ed] as income" until "actually received" in 1973. See DuBois v. Director, Div. of...