-: SJC-13287 James J. Reagan and another
v Commissioner of Revenue.
-: Attorney Jones, good morning.
-: Good morning, Your Honors.
May it please the court, I'm Richard Jones,
here with Caroline Kupiec for the appellants,
the Reagans, in this matter.
There are two issues in this appeal.
The first issue, the primary issue,
involves Chapter 121A,
which is a regime that authorizes private entities
to invest in and to carry out
urban redevelopment projects in blighted areas.
Owners of 121A projects must pay a special excise,
which is measured by their property value
and by their gross income.
But then they are exempt from all other Massachusetts taxes.
Specifically Section 18C says that project owners
are exempt from the payment of any tax excise
or assessment to or for the commonwealth
on account of a project.
Despite the clear and broad language,
the commissioner argues that this statute should mean
something different than what it says.
The commissioner says, or argues,
that the exemption should not apply to capital gains income,
income tax on capital gains
from the sale of a 121A property.
The commissioner is incorrect.
The statute means exactly what it says,
but other than the special excise,
there can be no Massachusetts tax on account of a project.
The exemption statute-
-: Well, let's just actually look at the words of 18C.
It says, in consideration of the exemption,
you will pay the 121A tax.
So it's a quid pro quo, right? -: That's right.
-: Okay. -: That's correct,
Your Honor. -: So it's not just
tax exemption.
There's a quid pro quo.
-: That's 100% right.
And that's right.
So you pay the special excises,
and then because of that they exempt from all other taxes.
And there's no dispute here that the special excise taxes
were paid all along,
and these were qualified 121A projects and owners.
-: So I understand that you and DOR
have a difference of opinion on capital gains
not being included in 18C sub-paragraph F,
but isn't on account of ambiguous,
and if it is ambiguous,
aren't all the tools of interpretation against you,
whether against the grantee,
the party with the exemption
has to show that they're entitled to the exemption?
This is the entity, the agency
involved in interpreting the the tax code.
Why, if on account of, is ambiguous,
aren't all the tools against you?
-: Your Honor, I think that's the one thing
that is actually not ambiguous.
The sale of a 121A project, these project owners,
they carried on these projects for 30, 35, 38 years,
and then they sold the projects.
What was the gain on account of?
It was on account of the project.
-: Was it? -: I don't even think
the Appellate Tax Board. -: I guess,
I wonder if it was on account of the project.
So the project is defined in the statute.
And the project consists of any undertaking
consisting of the construction.
So this capital gain does not relate to the construction.
And then it's any undertaking
consisting of the operation,
and the capital gain is not consisting of the operation
or the maintenance.
-: Excuse me.
Your Honor, yeah, of course capital gains
or sale of a project is not
part of the definition of project.
The definition of project tells you what a project is.
What is a project?
It was the undertakings in the projects
that were carried out in the south end,
in Kenmore Square, in the west end.
-: Right, and the sale of the urban development
is not the project.
-: It's the exit plan.
-: I guess what I'm saying is the relevant question here,
there's no dispute as to what the project is,
the relevant question isn't what the project.
The relevant question really may be
what was done on account of the project.
Those are the words in the statute so that's what we ask.
-: Right, but it's on account of the project.
And so while you might not think
my question is relevant, I do,
and I guess I wonder whether the project
defines the scope of the exemption.
So the project consists of the construction,
the operation, and the maintenance of the urban development.
-: Correct. -: And you've conceded,
as I think you must, that the capital gain
has not to do with the construction,
the operation, and maintenance.
So the ambiguity in the statute may perhaps not arise
on account of,
but on account of what?
Is it on account of the project?
-: Well, so the...
I have to go back to the statute, Your Honor.
-: Yes, of course.
-: And the statute says that the exemption
applies to tax that arises,
capital gains tax, what have you,
that arises on account of a project.
What was done on account of a project?
And that would be the gain,
the tax from selling a project
is clearly on account of a project.
What you might look at, Your Honor-
-: But can you explain that?
Can you explain to me- -: Sure.
-: Why the capital gain is on account of the construction,
the operation, and maintenance of the urban development?
-: Well, it's...
I think the way the statute would ask you to phrase it is,
did the tax that we're looking to exempt
arise on account of a project?
So you don't define a thing based on
what you can do with that thing.
-: But wasn't the project complete when it was built
and running and they were maintaining it?
Project over, right?
-: Well, no, the project still existed.
It still existed- -: But it was over.
I mean,
you weren't doing anything. -: It wasn't constructed.
Is that what you mean?
-: Project is to get rid of blight.
You've, I mean if you can't, if you tax the end result,
I mean the whole purpose of this is to build a building
in a blighted area to fix the blight, right?
And you're gonna discourage fixing the blight
if you can't sell the building at the end of the day.
Right?
I mean, that's your strongest argument.
-: I mean, yes, Your Honor.
So these projects.
I'm sorry.
-: Me again, the purpose of 121A
is to get a building built that eliminates blight, right?
-: Right.
-: If you can't sell that building,
I'm not sure how that's gonna work.
If you can't sell it without converting it
into a fully taxable entity,
haven't we defeated the very purpose of the statute?
-: Well, I think that's right, Your Honor.
I think the legislature, in fact, anticipated,
acknowledged, and expected that projects
would be sold even before the end of the project term.
-: What happens when sold, too?
I'm trying...
I mean, I understand like a 40B project keeps going,
but what was this?
What building, what did this building do?
-: So these, it's a very involved process.
There's contracts with the city of Boston.
And so you get these approvals,
it has to be approved as a blighted area.
There was construction.
For example, I think it was
the Blackstone Construction project was
in an abandoned building.
They created a number of units, 130 units,
and by contract they were provided and maintained
for affordable housing,
disability housing. -: What happens...
-: When that building is sold,
does the new owner...
What happens to the new owner?
Does the new owner keep getting a tax benefit from...
-: Yes. -: So does that all keep going?
It's not like the...
It's not like the project blows up and disappears.
-: The project could end.
You get to the end of the 40-year term,
the project could end, and there's no more restricted use,
and the owner or the new owner
could do whatever they want with it.
Or it could be sold to an no owner with no restrictions,
and then the project
and the restricted use ends- -: But are there
ongoing tax benefits?
I'm trying to understand.
I don't fully get this.
After it's sold, does it continue to be a 121A project
that someone else is getting tax benefits from
up to that 40-year period?
-: It can be.
In this case it was.
And these sales are subject to the approval,
in this case, of the city of Boston.
And exactly what happened here in 2012 is
the new owners came in-
-: Does that help you answer Justice Wendlandt's question,
which is, okay, it doesn't say sale,
but the project is continually, even after it's sale-
-: Right. -: Right?
Does that address- -: Right, so I understand
Your Honor is getting at the timing question,
I think of the project, which is a little bit separate,
but that goes to,
if there's a separate issue that came up,
if we are no longer carrying on the project,
what the board said below, and this part the board
I think was correct, it says,
thereafter, if we're an owner
and then we sell a project or our term ends,
stuff we do after the fact is an exempt.
We're no longer doing things on account of the project.
But one of the issues the board...
So we agree with the board, stuff done afterwards,
and it uses the word thereafter or a later sale.
But that wasn't what happened here.
This was a gain where the tax is at issue,
that arose at the moment that the sale occurred.
And at that time-
-: Do you know if this is a new interpretation
by the commissioner?
-: To my knowledge, yes.
Since 1965-
-: And I'll ask the other counsel the same question,
but what's your understanding of the issue?
-: Could you just repeat the question?
I'm sorry, Your Honor.
-: I'm gonna ask opposing counsel the same question,
but what's your interpretation,
or what's your knowledge as far as
whether this is a new interpretation of 18C?
-: What I can say is,
and I think opposing counsel would say that,
since 1965 I've never seen this issue come up.
I've never seen the department take this position
where it was litigated- -: What about rule 94-7?
-: 94-7 was not about exemptions.
And that's important.
So there's a letter ruling that was issued in 1994,
and the question in that letter ruling
was whether the gain from a sale,
or the gross receipts, actually,
from the sale of a project is subject to the special excise.
The special excise is under 121A.
Now the answer was no,
because the special excise is defined narrowly,
specifically it's tailored,
and it only includes gross rents,
does not include capital gains.
So you read that decision,
and every single line of the decision
talks about special excise.
Not one mention about the exemptions.
The reason the commissioner has cited that case
is the very last line.
There's two, three sentences in the conclusion.
The two first two sentences are perfectly in line
with what I just said.
The last sentence says, kind of out of nowhere,
and because it's not subject to the special excise,
you'd pay tax under 62 or 63.
And that was an error.
That was just...
It was a mistake.
There was no explanation
and no mention of the exemption statute.
THat had nothing to do with any of the analysis.
To make that statement you'd have to at least acknowledge
that there's this very broad exemption statute.
And it seems as though the author of that opinion
wrote that line without realizing
the exemption statutes were there,
because the ruling wasn't about the exemption statute.
So I don't believe that ruling.
-: Could I follow up on Justice Gaziano's question, though?
I mean 121A has been in existence how long?
The statutes.
It's a product of the 1960s, right?
So I take it there have been a lot of buildings sold.
We have no tax cases on this issue?
This is the first time this has come up?
-: That's right, Your Honor.
And- -: Is that why you-
-: And now we have two amicus briefs filed by Pioneer Legal
and New England Law that,
who are alarmed by the position.
But you're right, I don't think this has ever come up.
And then we have to ask what was the legislator's intent?
-: Can I just pause you there?
It's never come up in connection with the partnership?
-: I don't think it's come up in connection
with the corporation.
-: That's my next question.
So corporations haven't had this capital gain issue,
to your knowledge, the entire time?
Is that because they usually keep the urban development
for the full 15 slash 40 years?
-: I wish I could say I knew,
but I can say under the corporate statute-
-: Have you looked?
-: To see if there's any controversy?
-: To see if there's a similarly situated...
Like your client where there has been a sale
where the treatment of the capital gain is an issue?
-: So, I can say, based on my knowledge through my client,
I can say that my client has told us
that no capital gain was ever paid
with past projects on sales,
and it got picked up this time.
And so they think that's-
-: You're talking about your client's sales, right?
-: My client's, right.
But it's not evidence that was submitted.
I'm being asked for what I know about.
And so I can just tell you that.
And so- -: Can I ask
one last factual question?
It seems like it's a small number.
What was the tax with...
If it were tax exempt, what was it with the capital gains?
What was the difference?
It was $130,000 difference.
Is that right?
-: Well, yes, Your Honor- -: It just seems like
a small number.
-: This is,
this particular case is one of many.
There were a number of partners.
Of these three partnerships,
this is the one that went forward.
So, we're talking in this case about his
own distributive share. -: Oh it's only his,
it's only his share.
-: This is only his share.
So the numbers are bigger.
-: Do we know what the overall number
for the sale of the building was?
I'm just trying to understand what the tax consequence
of this for that whole building was.
'Cause that may relate to whether you're
gonna discourage fixing blight
if the number differential is big.
-: It's in the briefs, and I cannot recall the numbers.
I mean there were gains on these projects
when they were purchased in 1975 through now.
-: The answer to that question, though,
is going to depend on what the basis is, right?
-: That's right.
And thank you, Your Honor.
There is a second issue in this case,
and it is raised in the alternative,
but although we won't have a lotta time to discuss it,
it's very, very important.
And the reason why is, even though it's in the alternative,
it cries out for this court's attention,
no matter what you rule on the primary issue,
because the decision below
erroneously eviscerates the statute.
What they essentially do below
is they treat the 121A partnerships
as if they were subject to Chapter 62.
The basis gets adjusted like federally,
if you're subject to Chapter 62.
But if you're not because you're a 121A entity,
which they were all these years,
the depreciation deductions could be taken.
They are not allowed to take depreciation deduction
by statute, by clear statute under 62,
by not being subject to tax under 62.
In the DeMarco case, an earlier ATB case,
made that patently clear.
So what happened on the basis issue is the court said,
well, you chose to be a 121A entity.
You didn't have to be that,
so we're gonna tax you as if you were.
Well, that's just simply not permissible.
You have to take the facts as they are
and not alternative facts as what they could be.
And so that's an issue we encourage the court to look at.
And just in terms of the legislation-
-: We don't answer that question, though,
if we decide the first issue in your favor, right?
We don't have to address the second issue
if you win on the first issue.
-: That's right.
That's right.
And we only ask this court
might be interested in looking at it so that
the decision on the basis issue below
isn't left as standing law at the Appellate Tax Board.
That's that question.
-: What were you gonna say about the legislative intent?
-: Thank you, Your Honor.
So with the board's decision
was largely based on this timing question,
and as we said,
we think the timing was that they were exempt
when they sold the property.
But to the extent that is ambiguous.
And as I said, I don't think the on account of is ambiguous,
because there was no other activities
conducted by these partnerships,
it could only be on one account,
but with regard to the timing question,
the legislative intent is where you would look,
and this court says you have to consider
interpreting the statute
in connection with the intent
and the cause of the enactment
and the main object to be accomplished.
Well, the intent for 121A is uniquely clear.
Section two is very long declaration
of its intent and purpose.
A public exigency exists, a menace to blighted areas,
and urban blight cannot be dealt with effectively
by regulatory process or ordinary operations
of private enterprise without the aids provided here.
And so the legislature intended, and did intend
to provide extraordinary incentives
to bring private capital into blighted areas.
So that was by clear design
when they made the statute very broad.
That statute that has no carve out
for a capital gains when you sell a project.
-: But it does...
I guess here's my problem with the broad statutory language
and how that favors or disfavors your client.
If I sell your 39, 11 months, and 28 days,
I, under your theory,
have the exemption after the capital gain.
If I sell at year 40 and one day I don't.
Richard: That's right.
I think that's, I think it's-
-: And so I guess what is your best argument
that this additional incentive for private investment
in urban development is required if one day difference
gives you a tax on the capital gain or not?
-: It's very interesting.
I actually wanna backtrack slightly.
If you sell it one day after,
I'm not exactly sure that's not exempt.
I kind of set it up because it's not our facts,
but because it's on account of a project.
And so it still might be exempt.
But even if there were that kind of cliff,
the legislature considered that people would,
the 40-year term, which was at issue here,
that is the maximum.
You're not allowed to do that.
But the towns may want you to do that.
So they may encourage you to sell to someone
and they can renew their term, which is what happened here.
One was about to expire, got renewed by the city of Boston
with the new owner for 38 years.
But the legislature has provisioned section 11.
It contemplates exactly this.
It says you may sell during the project term,
and when you do that,
the city of Boston or the city involved
has the right to approval,
and this is how the transfers of restrictions
and rights would go.
So they understood that that would happen.
And it turns out to be quite beneficial here
for the city of Boston.
So wouldn't have been any intent to discourage these sales
and with 40 being the maximum period,
it might have been well understood that they wanted
or expected turnover to happen before the end of the term.
-: But only if they restricted the turnover
to somebody who was going to continue the urban development.
-: Well that- -: Did they do that?
-: So there could be sales to someone
who is not continuing the development.
And that might be in the city's interest, too,
again, subject to the city approval.
So it wasn't that the legislature
had any intent to discourage these sales.
They seemed like they contemplated 'em,
and then they left it to the city to
make those discretionary decisions as to what's good.
Maybe they didn't want the project to continue
in the city or what's not.
But I think that's where the intention was.
The other thing, the last thing I'd say is,
if you look at what the incentive,
the extraordinary incentive the commissioner was trying,
the legislature was trying to give here,
we have to remember that there is a special excise already,
and the special excise is,
in this case it was 10 or 15% of gross revenue.
That was the rents.
Compare that to the personal income tax rate,
which is now 5%.
And for all these years between five and six.
This special excise was a lot higher on the income tax side.
They pay 1% of the value on property.
Where is this extraordinary incentive
if not for the gain for all of
the revitalization of a blighted area
that gets sold at the end of the project?
Where is that extraordinary incentive?
And I refer to the amicus briefs that were filed
that touch on that as well.
-: Okay, thank you very much. -: Thank you.
-: Okay, Attorney de la Foscade-Condon.
-: Good morning, Celine de la Foscade-Condon
for the Massachusetts Department of Revenue,
may it please the court.
So actually I would like to start
by answering the question of Justice Kafker.
-: Can I interrupt you and ask you
to answer counsel's last question,
where was the incentive?
-: So that's going to
also Justice Kaskar- -: Excellent.
So let's do it. (laughing)
-: So here we were talking about three buildings,
residential apartment buildings,
that were pretty large,
and the incentive was tax-free rental income,
almost, for 40 years.
So when you think of like 121A projects-
-: Are these- -: The rental income
was what was taxed.
-: It's based...
That's what is used to calculate the excise tax.
But when you think about it, there's no income tax
on the revenues that the partners are receiving.
That's the exemption.
So for 40 years-
-: But, I'm sorry, was this like a 40B project?
Is this a low income housing building?
-: It is a low income housing project.
-: So, again, so we've got,
we've got someone building a low income housing project
in a blighted area, just what
we want the statute to do, right?
So they're getting those tax benefits, which are limited.
This is not...
they're not making a killing on this kind of
building a low income housing project in a blighted area.
Again, that's what the legislature wanted to encourage.
So the one thing that,
where there's potentially,
then we're gonna convert it into a for-profit building
at the end for the sale.
Just...
I don't know, just seems completely counterintuitive
to the whole purpose of the statute to me.
-: Well, I would disagree with you, Justice Kafker,
as I said, having income for 40 years,
that is almost tax-free, it is a huge incentive.
Also, you have to think of what 121A projects you have.
I mean, the Prudential Center, it's a 121A project.
So when you think about the rental income
on the Prudential Center,
which is tax free for 40 years, it's a huge benefit.
And here-
-: Just, again, I thought that that,
that the taxes were on the rental income.
-: So the exemption that's provided under 121A
is like no personal or real property tax
on account of the project.
So during the time that they have the project,
and partners being,
here since we're talking about partnership,
it's a flow through.
So partners are not being taxed on the revenues
that are being received from the-
-: Did you say, though, property tax?
-: No property tax. -: No property tax.
-: Correct.
There's no property tax,
and there's no- -: Property tax.
-: And there's no,
here since we're talking about partners,
there's no income tax under 62.
-: Could you help us out with regard to
whether or not this is a new interpretation?
-: So it is not a new interpretation.
I mean the commissioner has been following
the same interpretation since the beginning.
That's what letter ruling 94-7 states, that the tax-
-: That's just the last sentence.
That's not really what that letter ruling is about.
Are there corporations that have turned over
before the 40-year expiration
as to which the commissioner has taken
this position that the capital gain is taxable?
-: So I'm not aware of any cases.
So that would suggest that they reported the capital gain,
and therefore, that's the reason why it wasn't audited,
that the capital again was reported
when they sold the property.
-: I'm confused. -: I'm not aware of any case.
-: File taxes every year, right?
-: I'm sorry?
-: These corporations file taxes every year that you review.
-: Mm-hmm, that's correct.
-: So did they or didn't they?
-: I'm not aware of any case where a corporation
or a partnership sold a property
prior to the expiration of the 40 years
and did not report the capital gain on it.
-: Are you aware of any that did?
If you phrase it in the negative.
Do you just have no clue whatsoever
how this has been done before?
Or do you have a, I mean...
I mean we can send you back,
and if you have records to this effect.
-: We have no cases where this issue came up.
So that would mean that it was reported correctly.
I mean, is it possible that if something
was not reported correctly, it wasn't picked up?
-: Of course. -: Meaning that they all
converted their properties into private, or I mean-
-: Well, they might have kept the project for the 40 years.
Justice: It could be that they paid the tax.
-: Exactly that they reported it correctly,
and therefore it was not audited,
or they had kept the property for the 40 years,
and therefore afterwards it would be also reported
on their return because it's not exempt anymore.
Justice: We don't know either way.
Justice: We don't know either way, yeah.
-: Correct.
-: And you looked? -: Have I looked?
No, I have not looked.
-: Okay. -: Me personally
as to whether- -: Or not, yeah, okay.
-: So the board's decision here
is consistent with the statutory scheme.
I mean as Justice Wendlandt was saying,
project is defined as including construction
and any activities that are related
to maintenance and operations of the project.
It does not include sale of the project
within the definition. -: Why not?
Why isn't a sale of a 121A project,
on account of it being a 121A project?
I build a blighted building for the commonwealth.
That's a good thing.
I did it to correct the blight and build a 40B project.
Why isn't the sale of that
and the profits that they make from that
on account of it being a 121A project?
-: So first it would be in contradiction
with another provision of the statute, which is 18D.
So 18D is a statutory provision that deals with condominium.
Project owners can develop condominiums
in order to develop 121A projects.
18D states that if you sell a condominium,
this is subject to federal and state tax,
and of course here, state tax would be Massachusetts.
-: But you're talking about the,
when they have a dual project, right?
When they have something that's a 121A,
and they also have a separate private sector activity.
-: Well, I mean that wouldn't...
No, because I mean, if you have a,
if you develop condominium within the 121A project,
if you sell those property,
then those are subject to taxation.
So you can't reconcile the claim
that a portion of the project would be subject to tax,
but then that the whole project is exempt from taxation.
-: [Justice Wendlandt] Why not?
-: Well that would make no sense,
because one portion of the project would be taxable.
But then they're saying that the whole,
the sale of the whole project is exempt.
So you can't reconcile the two.
If one is taxable, then the entire thing is taxable.
-: Well, I mean, wouldn't just the part
that's subject to 121A be non-taxable?
-: Well, there's no splitting of the part of the project.
It's like when they sell the whole project,
according to the appellant, it's completely exempt.
Here we're saying since here, the statute 18D is clear
that the sale of a condominium is subject to tax,
then it wouldn't make any sense that a portion
of the project is taxable,
but that the rest of the project is not.
-: Well, I understand that
if it's an all or nothing proposition,
that that may be true.
But does it have to be?
And there are ways to figure out
what the capital gain attributable
to the low income housing would be.
-: Well, so I disagree with you.
I generally, when it's sold it's as a whole.
-: Yes, but there are economic tools
that could be used to figure out
which portion was low income.
-: So even if true,
it would still disagree that the sale of a,
that the capital gain from the sale of a project
is on account of a project.
Because first of all, on account,
as the Supreme Court defined in the Ogilvy matter,
is very narrowly construed.
-: It means because, right?
-: It it means because, right?
And here there is no reason to, and 18,
the language of on account of,
which is found in 18CF is,
in that section it says that
in exchange of the 121A exemption, there will no,
there won't be any property or-
-: But why?
What the United States Supreme Court said
on account of means
in dealing with the relationship between punitive damages,
what does that tell us about this circumstance
that we should look to that case
to help in the statutory interpretation?
-: So here is to look at what means on account of.
-: But why?
Why in that circumstance, so divorced from this,
does that interpretation matter?
-: I mean, it is the Supreme Court's decision,
I think it makes sense to look at that decision
to figure out what on account of.
I think here it doesn't mean
that the capital gain derive from the sale
of the project is on account of the project.
Because what that definition,
what that section meant was that on account of
the income derived from the maintenance
and the operation of the project, you have an exemption.
-: Because we get into the whole dizzying world
of approximate causation
and but for causation that this court struggled with,
with Justice Law and Justice Kafker recently,
if we start doing the because of, right?
-: Right, that's correct.
But here it should not be...
I mean the on account of in that section
should not be read to include the income
upon the sale of the project,
which is not at all referenced in section one,
which defines project.
Also the tax exemptions are directly related
to the owner's obligation to comply
with the statutory provision of 121A.
So the 121A partnerships transferred the property
to unrelated buyer,
they were released from the statutory
and the contractual limitation,
limiting their return on investment
and the other obligation.
-: Can I ask you a question about the words of F?
It says in consideration of this tax exemption,
the taxpayer will pay the excises, the 121A excises.
Did the taxpayer pay the 121A excises
for this particular year?
-: For the year of the sale? -: Yes.
-: I do not know.
I do not know. -: Well, isn't that important?
Because it says in consideration of the exemption,
which you dispute here, they pay the excise taxes.
Did they pay the excise taxes?
-: But did pay the excise tax on the-
-: So they've paid the consideration,
and you're not giving them what they're entitled to.
-: Well, so the excise tax is based on
the gross income coming from the rental income, right?
The capital gain would not be included
into that calculation of the excise.
-: But that's neither here nor there.
They've paid their consideration part of section F.
-: That's correct.
-: And in exchange for that, they get the tax exemption.
-: They get the tax exemptions.
Once they transfer the property,
the tax exemptions are over.
-: Yeah, but then we get into the sort of metaphysical,
like when does the sale occur and...
I mean, to me, you lose that argument,
because the capital gain doesn't happen until the sale.
So let's just say there was an accident on the project
at the urban development, who would be liable for that?
Until the moment of sale the liability would go to whom?
-: Well, until the moment of sale,
the liability would go to the owners.
-: Okay, so up until the sale, the very sale,
when they get the check, that's, they're liable,
they're on the hook for anything that happens
on that project, right?
So why does it make sense to say that the gain
somehow happens after the sale?
-: Well, I think it's actually simultaneous,
right? -: Yes.
Right, isn't that- -: To whom does that-
-: A problem for you? (indistinct)
-: I'm sorry? -: Why isn't that
helpful to the taxpayer?
-: Because once- -: If it's simultaneous.
Once this, when they sold the property,
they were no longer under the provision of 121A.
They will no longer have to comply
with the regulation of 18CA through 18CF,
which is a requirement if you have a 121-
-: Yeah, but up until the moment of sale, they do.
And that's the moment of sale
is when they earn the capital gain.
-: Right, so I'm saying that
once they sold the property-
-: Yeah, but you're talking about afterwards.
I wanna...
That admission you just made about the simultaneous nature
of the sale and the liabilities, and I would say the gain,
I don't, I guess I don't understand
the commissioner's position on that.
-: The thing, once it was sold, everything terminate.
-: Yes. -: Right.
It terminates, the obligation terminates,
and the benefits terminates at the same time.
-: Agreed, agreed. -: That is our position.
-: What happens until that very moment?
-: Well, before they sold, of course,
I mean they were still
under the obligation of 18C, under 6A,
and they were also benefiting from those.
But like when they sold it, at that moment,
it was transferred,
and they no longer were under subject of 121A.
They- -: What's your
reasoning for that?
That at the moment of sale, they don't get,
they lose the exemption.
-: So it would go with the same as section 16,
or I believe it's section 18C,
relating to the partnership at the moment of
when the project is terminated.
When that is over, then you no longer benefit
from the exemption under the 121A
and you are no longer under the restriction.
And it would make no sense for the legislature
to give benefit, to give more benefit
to taxpayer who sell their project before-
-: It doesn't- -: The 40 years.
-: It doesn't...
What happens to the person who purchases it?
Do they have 121A status, too?
If they keep running this?
Because then everything continues.
Then there's sort of,
if the person who buys it remains in this 121A status
and in that for up to 40-year period,
then the project, there's a consistency to it.
It's non-taxable or limited taxation
for who owns it and who buys it.
-: So in this circumstance, in this case,
they sold the property at year 39.
-: Say they sold it at year 10,
and the person who bought it,
would they keep for,
would they have 30 years of 121A status?
-: That's correct.
It would not be extended for- -: So doesn't that,
isn't there some level of consistency to saying,
okay, the person who sold it,
it was a nonprofit when it was,
it was a 121A when it was sold,
so we're gonna treat them under this tax regime,
and the people who bought it
are gonna continue that 121A tax status.
But what you're doing is you're converting them
into a private, outside of 121A on a sale.
It just...
-: So I mean the incentive here it is to get people
to invest in those property
and to maintain them and to operate them.
It's not to sell them.
-: No, it's to build them.
That's a big risk for someone to take and to build it.
It's not just that they're doing this for income.
There are lots of ways of making more income.
You're doing a,
you're serving a public purpose by building it, right?
-: But building it and operating it and maintaining it.
I mean that is what the definition of project
in section one.
-: We don't like to have people build buildings
they can't sell, right?
-: Right, and that's correct.
But here we want, I mean, as I said,
they do have this benefit of income that is
subject to a much lower tax rate for 40 years.
I mean that's a long time
and it's a really big benefit.
-: How is it an incentive, though,
to have the buildings built if you are going to impose
the depreciation that nonetheless isn't available
under the Massachusetts tax?
-: Well, it is, it is under 62.
And that is, that's a key point here.
If we are saying there's a capital gain is taxable,
then automatically you're under 62.
You're no longer under 121A.
And then because you are under 62
then depreciation, where allowable under 62,
and whether or not you took them,
you still have to,
you have to include it in the computation.
-: That's a double whammy is what it is.
-: It seems the opposite of an incentive.
Justice: Right.
-: It's a complete disincentive.
-: Well, I would disagree with you Judge Wenlandt.
I mean depreciation deductions...
I mean, first of all, this court has always,
in all the cases that I could find,
this court has always stated that
if the deduction is allowable,
it has to be included in the computation of the basis.
And the reason for that, I think, is depreciation,
(indistinct) deduction (indistinct)
as the Supreme Court stated in the Virgin Hotel,
and then you have to consider
the wear and tear of the building,
whether or not the taxpayer was able to benefit it,
and they couldn't benefit it in this case,
because yes, 121A doesn't provide
for depreciation deduction,
because there's no taxable income
to offset those deduction during those 40 years.
So that is a reason why 121A
doesn't provide the deduction.
But here if you're saying the capital gain is taxable,
it's under 62, and 62 provide depreciation deduction,
and therefore you have to include it
in the calculation of the basis.
-: Okay. -: If you-
If you have no further question,
I will rest on the brief,
and I will ask the court to affirm the decision.