|COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
JACK T. FREDYMA v. COMMISSIONER OF REVENUE
Docket No. 255947 Promulgated:
August 28, 2001
This is an appeal filed under the formal procedure pursuant to G.L. c. 62C, § 39, from the refusal of the Commissioner of Revenue to abate an amount of personal income tax which the appellant claims to have improperly calculated and paid with his original tax return for the calendar year 1997.
Chairman Burns heard the appeal and was joined in the decision for the appellee by Commissioners Scharaffa, Gorton and Rose.1
These Findings of Fact and Report are made at the request of both parties pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.
Jack T. Fredyma, pro se, for the appellant.
Laura S. Kershner, Esq., for the appellee.
FINDINGS OF FACT AND REPORT
It is uncontested that during calendar year 1997, the tax year at issue, Jack T. Fredyma (“the appellant”) was a resident of New Hampshire. The appellant timely filed his 1997 Massachusetts nonresident personal income tax return, Form 1-NR/PY, dated April 13, 1998, on which he reported Massachusetts source income in the amount of $8,727.65 and non-Massachusetts source income in the amount of $7,396.89. The appellant claimed a personal exemption in the amount of $1,423.62, and also a rental deduction in the amount of $2,025.00. Ultimately, the appellant calculated a refund due him in the amount of $143.21.
For calendar year 1997, the personal exemption for a single individual was $2,630.00. Nonresidents, however, were allowed a partial exemption based on the ratio of their Massachusetts source income to their total income. Pursuant to the Form 1-NR instructions, the appellant calculated his allowable personal exemption amount by multiplying his “exemption ratio” and the standard personal exemption amount. The Board found, based on the appellant’s reported 1997 income, that the appellant correctly calculated his 1997 exemption ratio to be 54.13% ($8,727.65 of Massachusetts source income divided by $16,124.54 of total income), and his allowable personal exemption to be $1,423.62 ($2,630.00 multiplied by 54.13%).
On or about November 15, 1999, the appellant filed an Amended Individual Income Tax Return for 1997 in which he changed his exemption ratio to 100% and claimed a deduction for the full personal exemption of $2,630.00. The appellant reported no change in the amount or the source of his 1997 income, the factors used in determining appellant’s 1997 exemption ratio and his allowable personal exemption.
The Department of Revenue treated the appellant’s amended return as an application for abatement and issued a denial on February 23, 2000. See Petersen v. Commissioner of Revenue, 14 Mass. App. Tax Bd. Rep. 52 (1994), aff’d 39 Mass. App. Ct. 1111 (1995). On April 19, 2000, the appellant timely filed his appeal with the Board. Accordingly, the Board found that it had jurisdiction over the subject appeal.
The appellant’s appeal was based on his claims that the statutory apportionment formula used to calculate a nonresident’s personal exemption and the Commissioner’s disallowing of the rental deduction for some nonresidents, violate (1) the Privileges and Immunities Clause; (2) the Equal Protection clause of the 14th Amendment; and (3) the Commerce Clause, of the U.S. Constitution. The appellant also claimed that the Commissioner’s determination of “taxable income” violates the Massachusetts Constitution.
On February 21, 2001, the Commissioner filed a Motion for Summary Judgment. After hearing the parties’ arguments, the Board found that there existed no material issues of fact but only matters of law to be decided by the Board. For the reasons explained in the following Opinion, the Board allowed the Commissioner’s motion and entered a decision for the appellee.
Pursuant to 831 CMR 1.22, “[i]ssues sufficient in themselves to determine the decision of the Board or to narrow the scope of the hearing may be separately heard and disposed of in the discretion of the Board.” In the present appeal, the Commissioner filed a Motion for Summary Judgment arguing that there was no genuine issue of material fact and that the Commissioner was entitled to judgment in his favor. Although the Rules of Civil Procedure, including Rule 56 dealing with Summary Judgment, are not applicable to Board proceedings (see G.L. c. 58A, § 8A), the Board may use 831 CMR 1.22 to hear and decide cases where there is no genuine issue of material fact and a party is entitled to judgment as a matter of law. See Omer v. Commissioner of Revenue, 1999 ATB Adv. Sh. 586, 591 (November 2, 1999).
The appellant’s petition filed with the Board correctly states that this appeal raises “a legal question” regarding the constitutionality of: (1) the statutory formula used to calculate a nonresident’s personal exemption; (2) the Commissioner’s disallowance of the rental deduction for some nonresidents; and (3) the statutory definition of “taxable income.” In his “Motion in Opposition to Summary Judgment,” the appellant again acknowledged that the “appeal states a legal claim.” The taxpayer could point to no genuine issue of material fact and essentially conceded in his oral and written arguments that no disputed issue of material fact existed. After hearing the parties’ oral arguments and reviewing the parties’ submissions, the Board found that there were no material issues of fact at issue in this appeal, and that resolution of the legal issues raised was sufficient to dispose of the appeal. Accordingly, the Board ruled that resolution of the appeal pursuant to 831 CMR 1.22 was appropriate.
For the following reasons, the Board found that the appellant’s constitutional challenges were without merit and entered a decision for the Commissioner.
I. Personal Exemption
Nonresidents of the Commonwealth are subject to the Massachusetts personal income tax on that portion of their income which is derived from sources within the Commonwealth. G.L. c. 52, § 5A(a).
“In computing the taxable income of each Part, the non-resident shall be allowed the [same] deductions and exemptions as provided  in section three” for residents. G.L. c. 62, § 5A(a). For calendar year 1997, G.L. c. 62, § 3 granted a personal exemption for single individuals in the amount of $2,630.00. G.L. c. 62, § 3(B)(b)(1). For nonresident taxpayers, however, “any exemption or deduction under Part B relating or allocable, in whole or part, to any income not included in Massachusetts gross income shall not be allowed to the extent thereof.” G.L. c. 62, § 3(B)(c). Accordingly, nonresident taxpayers are allowed an exemption based on the percentage that the Massachusetts source income bears to the taxpayer’s total income. See 830 CMR 62.5A.1(7)(c).
On his 1997 tax return, the appellant reported Massachusetts source income in the amount of $8,727.65 and non-Massachusetts source income in the amount of $7,396.89, for a total of $16,124.54. The Board found that, in accordance with the statute and the Form 1-NR instructions, the appellant properly calculated his “exemption ratio” to be 54.13% ($8,727.65 divided by $16,124.54). The Board further found that the appellant correctly calculated his 1997 personal exemption amount to be $1,423.62 ($2,630 multiplied by 0.5413). This is the amount the appellant claimed as a personal exemption on his original 1997 tax return.
More than a year and a half after filing his 1997 personal income tax return, the appellant filed an amended return on which he changed his exemption ratio and personal exemption amount. Although the appellant now claimed an exemption ratio of 100%, he reported no changes in either his Massachusetts source income or his non-Massachusetts source income.
On appeal, the appellant claimed that the statutory allocation method violates the Privileges and Immunities Clause, the equal protection clause of the 14th Amendment, and the Commerce Clause, of the U.S. Constitution. The Board ruled that none of the theories advanced renders the statutory allocation method unconstitutional.
A. Privileges and Immunities Clause
The Privileges and Immunities Clause provides that “[t]he Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States.” U.S. Const., Art. IV, § 2. As evidenced by earlier cases, “the Clause prohibits a State from denying nonresidents a general tax exemption provided to residents.” Lunding v. New York Tax Appeals Tribunal, 522 U.S. 287, 288 (1998) citing Travis v. Yale & Towne Mfg. Co., 252 U.S. 60, 80-82 (1920); Austin v. New Hampshire, 420 U.S. 656, 665 (1975). States may, however “limit nonresidents’ . . . nonbusiness deductions based on the relationship between those expenses and in-state property or income.” Id. citing Travis, supra, at 75-76; Shaffer v. Carter, 252 U.S. 37, 57 (1920).
When confronted with a challenge to a law distinguishing between residents and nonresidents, a State may defend its position by demonstrating that “(i) there is a substantial reason for the difference in treatment; and (ii) the discrimination practiced against nonresidents bears a substantial relationship to the State’s objective.” Supreme Court of N.H. v. Piper, 470 U.S. 274, 284 (1985).
In matters of taxation, “[a]bsolute equality is impracticable.” Maxwell v. Bugbee, 250 U.S. 525, 543 (1919). Ultimately, “putting aside ‘theoretical distinctions’ and looking to ‘the practical effect and operation’ of the scheme,” the question to be answered is whether “the nonresident was  treated more onerously than the resident in any particular, and in fact was called upon to make  more than his ratable contribution to the support of the state government.” Austin, 420 U.S. at 664, citing Shaffer, 252 U.S. at 55.
Residents of the Commonwealth are subject to tax on their total income, from whatever source derived. Nonresidents, on the other hand, are subject to tax only on that income derived from activities within the Commonwealth. Correspondingly, residents are afforded the full personal exemption amount whereas nonresidents must apportion their personal exemption in relation to their Massachusetts source income. The legislative scheme, therefore, provides for a full exemption for Massachusetts residents who are taxed on all income, whereas nonresidents who are taxed only on their Massachusetts source income are allowed only that percentage of the personal exemption which corresponds to their Massachusetts source income.
The Board found that the appellant was not treated “‘more onerously than the resident in any particular, and in fact was called upon to make no more than his ratable contribution to the support of the state government.’” Lunding, 522 U.S. at 299. Furthermore, “there is no unconstitutional discrimination against citizens of other States in confining the deduction of expenses, losses, etc., in the case of nonresident taxpayers, to such as are connected with income arising from sources within the taxing State.” Travis, 252 U.S. at 75-76. Accordingly, the Board ruled that allowing nonresidents an apportioned personal exemption, in relation to their Massachusetts source income, does not violate the Privileges and Immunities Clause of the U.S. Constitution.
B. 14th Amendment Equal Protection
No state “shall deny to any person within its jurisdiction the equal protection of the laws.” U.S. Const., 14th Amend., § 1. State legislatures are given great “leeway” in drawing lines of distinction when formulating their taxing schemes. Williams v. Vermont, 472 U.S. 14, 22 (1985).
“As a general rule, ‘legislatures are presumed to have acted within their constitutional power despite the fact that, in practice, their laws result in some inequality.’” Nordlinger v. Hahn, 505 U.S. 1, 10 (1992) quoting McGowan v. Maryland, 366 U.S. 420, 425-426 (1961). Unless there exists a classification which warrants some form of heightened scrutiny, the appropriate standard of review is only whether the disparity in treatment “rationally furthers a legitimate state interest.” Nordlinger at 11.
Residents and nonresidents alike are allowed a personal exemption. The only difference is that nonresidents are entitled to only that percentage of the exemption which corresponds to the ratio of Massachusetts source income to total income. The Board found that it is a legitimate state interest to require nonresidents to contribute to the support of the Commonwealth and that the statutory apportionment formula results in a “reasonable” system of taxation which equates the percentage of personal exemption allowed to the percentage of total income taxed. Accordingly, the Board found that the statutory apportionment formula does not violate the Equal Protection Clause of the 14th Amendment.
C. Commerce Clause
The Commerce Clause grants Congress the power “to regulate commerce with foreign nations, and among the several States.” U.S. Const. Art. 1, § 8, cl. 3. When a state imposes a tax which touches upon interstate commerce, it implicates the “dormant commerce clause.” Aloha Freightways, Inc. v. Commissioner of Revenue, 428 Mass. 418, 421 (1998). A state tax will be upheld against a Commerce Clause challenge “when the tax is  applied to an activity with a substantial nexus with the taxing State,  is fairly apportioned,  does not discriminate against interstate commerce, and  is fairly related to the services provided by the State.” Id. quoting Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977).
“The first prong is self-explanatory. The tax must be applied to an activity with a substantial nexus with the taxing State.” Aloha Freightways, 428 Mass. at 421. The appellant was subject to the Massachusetts personal income tax by reason of his wages earned from a Massachusetts company while working in the Commonwealth.
The second prong of the test is “designed to ensure that each State taxes only its fair share of an interstate transaction.” Aloha Freightways at 421. Pursuant to G.L. c. 62, § 5A, nonresidents are taxed on only that income which they derive from activities in Massachusetts. The taxpayer is then allowed a reduction in his taxable income, calculated by reference to the Massachusetts source income. G.L. c. 62, § 3.
In Travis, supra, the United States Supreme Court ruled that “there is no unconstitutional discrimination against citizens of other states in confining the deduction of expenses, losses, etc., in the case of nonresident taxpayers, to such as are connected with income arising from sources within the taxing states.” 252 U.S. at 75-76. Accordingly, the Board found that the pro rata allocation of nonresidents’ personal exemption does not discriminate against interstate commerce.
Lastly, there must be a fair relationship between the tax imposed and the services provided by the State. It is a long-standing principle that states may require nonresidents to pay ratable contribution to the support of the state government. Lunding, 522 U.S. at 299; Austin, 420 U.S. at 664.
As detailed in the above subsection A, states may levy a tax on nonresidents as long as the tax is not more onerous than the tax levied on its residents. See Shaffer, 252 U.S. at 52. When faced with a Commerce Clause challenge, ultimately the analysis focuses on the “practical effect on interstate commerce of a challenged tax statute, not the specific language used in the statute.” Id.
The Board found that the tax imposed upon the nonresident appellant, allowing only a proportional personal exemption calculated in relation to his Massachusetts source income, is not more onerous than that imposed upon the residents of the Commonwealth, subject to tax on their total income from whatever source. The Board further found that the “practical effect” of allowing a proportionate personal exemption is to treat nonresidents and residents as similarly as possible.
Accordingly, the Board ruled that the statutory allocation required under G.L. c. 62, § 3(B)(c) satisfied Constitutional requirements and was, therefore, valid.
II. Rental Deduction
Pursuant to G.L. c. 62, § 3(9), “an individual who pays rent for his principal place of residence and such residence is located in the commonwealth, is allowed a rental deduction equal to 50% of the rent paid,” not to exceed $2,500. Generally, “if a non-resident taxpayer has two residences, one located in the state of his legal residence and the other located in Massachusetts, the property located in the state of his legal residence is his principal residence” and the taxpayer is not entitled to the rental deduction for rent paid on the Massachusetts property. 830 CMR 62.3.1(2). Line 18 of the nonresident /part-year taxpayer return requires taxpayers to respond to the question “[during the tax year] did you have a family home or any other dwelling outside Massachusetts to which [the taxpayer] generally or customarily returned or intend to return in the future?” An affirmative response disqualified the nonresident or part-year taxpayer from utilizing the rental deduction.
On his 1997 return, the appellant indicated that he did not have a residence outside of the Commonwealth and claimed a rental deduction in the amount of $2,025.00. The Commissioner allowed the appellant’s claimed rental deduction.2 Although he was allowed a rental deduction, the appellant argued in his appeal to this Board that the Commissioner’s disallowing of a rental deduction to other nonresidents violates the U.S. Constitution – Privileges and Immunities Clause, Equal Protection of the 14th Amendment and the Commerce Clause.
“It is a general rule of law that one cannot attack the validity of a tax that affects only others and not himself.” Amory v. Assessors of Boston, 210 Mass. 199, 203 (1941). A taxpayer may not invoke the public right doctrine, “which allows a citizen to bring an action for relief in the nature of mandamus to ‘procure the enforcement of a public duty’”, to challenge the constitutionality of a statute. Tax Equity Alliance for
Massachusetts v. Commissioner of Revenue, 423 Mass. 708, 714 (1996). “A court can inquire into the general constitutionality of a statute only at the instance of a plaintiff whose ‘liberty, rights, or property was invaded through its operation.’” Id. quoting Kaplan v. Bowker, 333 Mass. 455, 461 (1956).
The appellant in the present appeal has presented no evidence to demonstrate that he has been negatively affected in any manner by G.L. c. 62, § 3(9) nor has he offered any evidence to demonstrate that he has a “special relationship with those whose right [he] seeks to assert, such that we might overlook this prudential limitation.” Nordlinger, 505 U.S. at 11.
Accordingly, the Board found that the appellant lacked standing to challenge the constitutionality of the rental deduction statute.3
III. Definition of Income
Lastly, the appellant argues that “taxable income” exists only when there is a “net profit or gain” and, therefore, the Commissioner’s imposition of an income tax on the appellants’ gross wages, with no reductions for the costs associated with generating that income, violates the Massachusetts Constitution. Thus, he argues, there is an unauthorized tax imposed on wage earners.
G.L. c. 62, § 5A(a) defines a nonresident’s taxable income as:
income from sources within the commonwealth of such person. . . . Items of gross income from sources within the commonwealth are items of gross income derived from or effectively connected with (1) any trade or business, including any employment carried on by the taxpayer in the commonwealth . . . (emphasis added).
Similarly, federal gross income, the starting point for determining Massachusetts taxable income, is defined “to mean all income from whatever source derived, including . . . compensation for services.” I.R.C. § 61(a). It is uncontested that appellant earned wages during 1997 from his employment in the Commonwealth.
In accordance with G.L. c. 62, § 5A(a), the appellant reported his 1997 Massachusetts wages earned while employed in the Commonwealth, and calculated his taxable income and tax due the Commonwealth. In his appeal to this Board, the appellant argues that the Commissioner’s definition of “taxable income,” including his gross wages with no allowances for the costs associated with earning that income, violates Part 1, Article 23 of the Massachusetts Constitution and Article 44 of the Amendments to the Massachusetts Constitution.
Article 23 provides that “[n]o . . . tax . . . ought to be established, fixed, laid, or levied, under any pretext whatsoever, without the consent of the people or their representatives in the legislature.” Article 44 of the Amendments to the Massachusetts Constitution further provides that the general court may “impose and levy a tax on income . . . at a uniform rate . . . and may grant reasonable exemptions and abatements. This article shall not be construed to limit the power of the general court to impose and levy reasonable duties and excises.”
Recently, in Joseph R. Olson v. Commissioner of Revenue, 2001 ATB Adv. Sh. 437 (June 5, 2001) the taxpayer argued that his wages were not within the scope of “gross income.” The Board, however, found:
the phrase ‘gross income’ is intended to be comprehensive: it encompasses all income from whatever source. The wages reflected on the Forms W-2 are definitionally ‘compensation for services’, and well within the statutory ambit of ‘income’ and ‘gross income’. There is no ambiguity and no room for semantic maneuver: the duty of the Board is to give effect to the plain meaning of the words chosen by the legislature.
Olsen, 2001 ATB Adv. Sh. at 440-441.
Accordingly, in the present appeal, the Board found that the appellant properly included in his original return the wages earned while working in the Commonwealth of Massachusetts. The Board further found that the inclusion of this income does not violate the Massachusetts Constitution.
On the basis of the foregoing, the Board found that the appellant’s constitutional challenges failed. Accordingly, the Board allowed the appellee’s motion for summary judgment and entered a decision for the appellee.
APPELLATE TAX BOARD
Abigail A. Burns, Chairman
A true copy,
Clerk of the Board
ATB 2001 -