and the
Citizens Economic Research Foundation

Thursday, June 9, 2005


To:  CLT activists who could be impacted by the SJC's recent Peterson decision on the capital gains tax hike of 2002.


(1) you sold an asset in the beginning of 2002 (before May 1, 2002) but you didn't pay a capital gains tax (or you paid a very small amount) for tax year 2002 because your capital gains rate was zero or close to it. Under the recent Peterson II decision, you now will be retroactively assessed a capital gains tax on the sale of that asset at 5.3%, because the lower capital gains tax rate for the first half of 2002 has now been eliminated; or

(2) you sold an asset in the second half of 2002 (after May 1, 2002) and you paid a hefty capital gains tax for tax year 2002. If favorable tax legislation is introduced and enacted, you may be entitled to a refund of that 2002 capital gains tax, particularly if you held the asset for several years. In fact, under the legislation (and under the old cap gains law), if you held that asset for more than six years, you would be entitled to a full refund of your capital gains tax for that asset.

Background:  You remember the biggest tax increase in state history, in June 2002, which froze our income tax rollback at 5.3%. That same tax hike also changed the capital gains rate (for the history on this, see my column on the CLT website for May 14, 2005).

Until that hike, the capital gains tax dropped 1% each year that an asset was held, so after six years there was no tax. Effective in mid-2002, the Legislature made the capital gains rate the same rate as the frozen income tax rate, 5.3%, for the rest of the year. So people who sold an asset and had a capital gain in the beginning of 2002 paid a much lower tax than those who had a capital gain in the second half of the year.

In Peterson I, the SJC ruled that the state can't charge different rates in the same year. So the Legislature had the choice either to return money to the second-half-of-2002 investors, or go back retroactively and raise taxes on the first-half-of-2002 investors. The Legislature chose to make the new cap gains tax rate effective January 1, 2002, which would have raised the taxes on the first-half-of-2002 investors. However, the Legislature attempted to include a safe-harbor provision to prevent the commissioner of revenue from adjusting the tax liability for any taxpayer who sold an asset before May 1, 2002.

But in Peterson II, the SJC ruled that the safe harbor provision was invalid and that the new 5.3% capital gains tax rate retroactively applies to any asset sold after January 1, 2002. This decision has the effect of raising the capital gains tax for any taxpayer who sold assets and realized gains between January 1, 2002 and May 1, 2002. The commissioner of revenue has no choice but to send out tax assessments to these tax payers (and assess interest). Those who sold assets after May 1, 2002, are unaffected by the SJC decision because they paid at the 5.3% rate.

Legislation may be soon introduced to change the unfair result to those who sold assets at the lower rate in the beginning of 2002. The legislation would move the effective date of the tax hike to January 1, 2003. This would not only eliminate the need for tax assessments for the first-half-of-2002 investors, but also eliminate the 5.3% tax hike for the second-half-of-2002 investors.

CLT is looking for people who fall into either category:  (1) taxpayers who will have to pay more taxes because the rate hike has now been made retroactive for all of 2002 or (2) taxpayers who paid a 5.3% rate for 2002 and now might be entitled to a refund if the tax hike is pushed until January 1, 2003.

CLT of course wants the legislative rate hike to be carried forward to 2003, with no 2002 tax hike for anyone.

If this effects you, please contact us RIGHT NOW at (508) 384-0100 or by e-mail.

Barbara Anderson

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