WEBVTT

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<v ->SJC-13287 James J. Reagan and another</v>

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v Commissioner of Revenue.

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<v ->Attorney Jones, good morning.</v>

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<v ->Good morning, Your Honors.</v>

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May it please the court, I'm Richard Jones,

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here with Caroline Kupiec for the appellants,

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the Reagans, in this matter.

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There are two issues in this appeal.

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The first issue, the primary issue,

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involves Chapter 121A,

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which is a regime that authorizes private entities

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to invest in and to carry out

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urban redevelopment projects in blighted areas.

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Owners of 121A projects must pay a special excise,

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which is measured by their property value

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and by their gross income.

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But then they are exempt from all other Massachusetts taxes.

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Specifically Section 18C says that project owners

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are exempt from the payment of any tax excise

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or assessment to or for the commonwealth

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on account of a project.

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Despite the clear and broad language,

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the commissioner argues that this statute should mean

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something different than what it says.

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The commissioner says, or argues,

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that the exemption should not apply to capital gains income,

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income tax on capital gains

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from the sale of a 121A property.

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The commissioner is incorrect.

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The statute means exactly what it says,

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but other than the special excise,

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there can be no Massachusetts tax on account of a project.

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The exemption statute-

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<v ->Well, let's just actually look at the words of 18C.</v>

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It says, in consideration of the exemption,

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you will pay the 121A tax.

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So it's a quid pro quo, right?
<v ->That's right.</v>

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<v ->Okay.</v>
<v ->That's correct,</v>

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Your Honor.
<v ->So it's not just</v>

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tax exemption.

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There's a quid pro quo.

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<v ->That's 100% right.</v>

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And that's right.

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So you pay the special excises,

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and then because of that they exempt from all other taxes.

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And there's no dispute here that the special excise taxes

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were paid all along,

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and these were qualified 121A projects and owners.

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<v ->So I understand that you and DOR</v>

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have a difference of opinion on capital gains

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not being included in 18C sub-paragraph F,

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but isn't on account of ambiguous,

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and if it is ambiguous,

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aren't all the tools of interpretation against you,

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whether against the grantee,

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the party with the exemption

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has to show that they're entitled to the exemption?

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This is the entity, the agency

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involved in interpreting the the tax code.

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Why, if on account of, is ambiguous,

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aren't all the tools against you?

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<v ->Your Honor, I think that's the one thing</v>

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that is actually not ambiguous.

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The sale of a 121A project, these project owners,

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they carried on these projects for 30, 35, 38 years,

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and then they sold the projects.

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What was the gain on account of?

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It was on account of the project.

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<v ->Was it?</v>
<v ->I don't even think</v>

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the Appellate Tax Board.
<v ->I guess,</v>

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I wonder if it was on account of the project.

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So the project is defined in the statute.

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And the project consists of any undertaking

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consisting of the construction.

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So this capital gain does not relate to the construction.

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And then it's any undertaking

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consisting of the operation,

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and the capital gain is not consisting of the operation

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or the maintenance.

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<v ->Excuse me.</v>

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Your Honor, yeah, of course capital gains

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or sale of a project is not

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part of the definition of project.

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The definition of project tells you what a project is.

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What is a project?

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It was the undertakings in the projects

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that were carried out in the south end,

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in Kenmore Square, in the west end.

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<v ->Right, and the sale of the urban development</v>

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is not the project.

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<v ->It's the exit plan.</v>

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<v ->I guess what I'm saying is the relevant question here,</v>

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there's no dispute as to what the project is,

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the relevant question isn't what the project.

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The relevant question really may be

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what was done on account of the project.

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Those are the words in the statute so that's what we ask.

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<v ->Right, but it's on account of the project.</v>

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And so while you might not think

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my question is relevant, I do,

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and I guess I wonder whether the project

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defines the scope of the exemption.

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So the project consists of the construction,

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the operation, and the maintenance of the urban development.

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<v ->Correct.</v>
<v ->And you've conceded,</v>

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as I think you must, that the capital gain

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has not to do with the construction,

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the operation, and maintenance.

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So the ambiguity in the statute may perhaps not arise

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on account of,

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but on account of what?

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Is it on account of the project?

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<v ->Well, so the...</v>

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I have to go back to the statute, Your Honor.

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<v ->Yes, of course.</v>

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<v ->And the statute says that the exemption</v>

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applies to tax that arises,

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capital gains tax, what have you,

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that arises on account of a project.

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What was done on account of a project?

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And that would be the gain,

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the tax from selling a project

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is clearly on account of a project.

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What you might look at, Your Honor-

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<v ->But can you explain that?</v>

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Can you explain to me-
<v ->Sure.</v>

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<v ->Why the capital gain is on account of the construction,</v>

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the operation, and maintenance of the urban development?

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<v ->Well, it's...</v>

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I think the way the statute would ask you to phrase it is,

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did the tax that we're looking to exempt

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arise on account of a project?

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So you don't define a thing based on

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what you can do with that thing.

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<v ->But wasn't the project complete when it was built</v>

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and running and they were maintaining it?

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Project over, right?

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<v ->Well, no, the project still existed.</v>

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It still existed-
<v ->But it was over.</v>

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I mean,

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you weren't doing anything.
<v ->It wasn't constructed.</v>

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Is that what you mean?

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<v ->Project is to get rid of blight.</v>

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You've, I mean if you can't, if you tax the end result,

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I mean the whole purpose of this is to build a building

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in a blighted area to fix the blight, right?

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And you're gonna discourage fixing the blight

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if you can't sell the building at the end of the day.

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Right?

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I mean, that's your strongest argument.

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<v ->I mean, yes, Your Honor.</v>

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So these projects.

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I'm sorry.

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<v ->Me again, the purpose of 121A</v>

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is to get a building built that eliminates blight, right?

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<v ->Right.</v>

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<v ->If you can't sell that building,</v>

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I'm not sure how that's gonna work.

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If you can't sell it without converting it

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into a fully taxable entity,

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haven't we defeated the very purpose of the statute?

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<v ->Well, I think that's right, Your Honor.</v>

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I think the legislature, in fact, anticipated,

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acknowledged, and expected that projects

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would be sold even before the end of the project term.

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<v ->What happens when sold, too?</v>

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I'm trying...

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I mean, I understand like a 40B project keeps going,

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but what was this?

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What building, what did this building do?

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<v ->So these, it's a very involved process.</v>

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There's contracts with the city of Boston.

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And so you get these approvals,

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it has to be approved as a blighted area.

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There was construction.

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For example, I think it was

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the Blackstone Construction project was

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in an abandoned building.

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They created a number of units, 130 units,

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and by contract they were provided and maintained

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for affordable housing,

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disability housing.
<v ->What happens...</v>

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<v ->When that building is sold,</v>

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does the new owner...

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What happens to the new owner?

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Does the new owner keep getting a tax benefit from...

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<v ->Yes.</v>
<v ->So does that all keep going?</v>

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It's not like the...

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It's not like the project blows up and disappears.

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<v ->The project could end.</v>

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You get to the end of the 40-year term,

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the project could end, and there's no more restricted use,

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and the owner or the new owner

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could do whatever they want with it.

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Or it could be sold to an no owner with no restrictions,

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and then the project

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and the restricted use ends-
<v ->But are there</v>

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ongoing tax benefits?

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I'm trying to understand.

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I don't fully get this.

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After it's sold, does it continue to be a 121A project

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that someone else is getting tax benefits from

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up to that 40-year period?

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<v ->It can be.</v>

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In this case it was.

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And these sales are subject to the approval,

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in this case, of the city of Boston.

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And exactly what happened here in 2012 is

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the new owners came in-

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<v ->Does that help you answer Justice Wendlandt's question,</v>

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which is, okay, it doesn't say sale,

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but the project is continually, even after it's sale-

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<v ->Right.</v>
<v ->Right?</v>

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Does that address-
<v ->Right, so I understand</v>

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Your Honor is getting at the timing question,

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I think of the project, which is a little bit separate,

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but that goes to,

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if there's a separate issue that came up,

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if we are no longer carrying on the project,

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what the board said below, and this part the board

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I think was correct, it says,

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thereafter, if we're an owner

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and then we sell a project or our term ends,

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stuff we do after the fact is an exempt.

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We're no longer doing things on account of the project.

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But one of the issues the board...

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So we agree with the board, stuff done afterwards,

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and it uses the word thereafter or a later sale.

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But that wasn't what happened here.

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This was a gain where the tax is at issue,

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that arose at the moment that the sale occurred.

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And at that time-

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<v ->Do you know if this is a new interpretation</v>

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by the commissioner?

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<v ->To my knowledge, yes.</v>

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Since 1965-

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<v ->And I'll ask the other counsel the same question,</v>

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but what's your understanding of the issue?

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<v ->Could you just repeat the question?</v>

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I'm sorry, Your Honor.

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<v ->I'm gonna ask opposing counsel the same question,</v>

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but what's your interpretation,

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or what's your knowledge as far as

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whether this is a new interpretation of 18C?

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<v ->What I can say is,</v>

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and I think opposing counsel would say that,

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since 1965 I've never seen this issue come up.

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I've never seen the department take this position

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where it was litigated-
<v ->What about rule 94-7?</v>

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<v ->94-7 was not about exemptions.</v>

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And that's important.

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So there's a letter ruling that was issued in 1994,

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and the question in that letter ruling

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was whether the gain from a sale,

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or the gross receipts, actually,

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from the sale of a project is subject to the special excise.

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The special excise is under 121A.

258
00:11:25.590 --> 00:11:26.730
Now the answer was no,

259
00:11:26.730 --> 00:11:29.910
because the special excise is defined narrowly,

260
00:11:29.910 --> 00:11:31.620
specifically it's tailored,

261
00:11:31.620 --> 00:11:33.360
and it only includes gross rents,

262
00:11:33.360 --> 00:11:35.130
does not include capital gains.

263
00:11:35.130 --> 00:11:36.360
So you read that decision,

264
00:11:36.360 --> 00:11:38.250
and every single line of the decision

265
00:11:38.250 --> 00:11:40.080
talks about special excise.

266
00:11:40.080 --> 00:11:42.750
Not one mention about the exemptions.

267
00:11:42.750 --> 00:11:45.450
The reason the commissioner has cited that case

268
00:11:45.450 --> 00:11:47.421
is the very last line.

269
00:11:47.421 --> 00:11:50.250
There's two, three sentences in the conclusion.

270
00:11:50.250 --> 00:11:52.980
The two first two sentences are perfectly in line

271
00:11:52.980 --> 00:11:54.360
with what I just said.

272
00:11:54.360 --> 00:11:57.273
The last sentence says, kind of out of nowhere,

273
00:11:58.200 --> 00:12:00.750
and because it's not subject to the special excise,

274
00:12:02.339 --> 00:12:04.737
you'd pay tax under 62 or 63.

275
00:12:04.737 --> 00:12:05.940
And that was an error.

276
00:12:05.940 --> 00:12:06.980
That was just...

277
00:12:08.070 --> 00:12:08.903
It was a mistake.

278
00:12:08.903 --> 00:12:10.200
There was no explanation

279
00:12:10.200 --> 00:12:13.140
and no mention of the exemption statute.

280
00:12:13.140 --> 00:12:15.720
THat had nothing to do with any of the analysis.

281
00:12:15.720 --> 00:12:18.690
To make that statement you'd have to at least acknowledge

282
00:12:18.690 --> 00:12:20.337
that there's this very broad exemption statute.

283
00:12:20.337 --> 00:12:23.310
And it seems as though the author of that opinion

284
00:12:23.310 --> 00:12:25.140
wrote that line without realizing

285
00:12:25.140 --> 00:12:26.490
the exemption statutes were there,

286
00:12:26.490 --> 00:12:29.340
because the ruling wasn't about the exemption statute.

287
00:12:29.340 --> 00:12:30.910
So I don't believe that ruling.

288
00:12:30.910 --> 00:12:34.170
<v ->Could I follow up on Justice Gaziano's question, though?</v>

289
00:12:34.170 --> 00:12:37.560
I mean 121A has been in existence how long?

290
00:12:37.560 --> 00:12:39.390
The statutes.

291
00:12:39.390 --> 00:12:42.060
It's a product of the 1960s, right?

292
00:12:42.060 --> 00:12:45.540
So I take it there have been a lot of buildings sold.

293
00:12:45.540 --> 00:12:47.790
We have no tax cases on this issue?

294
00:12:47.790 --> 00:12:50.490
This is the first time this has come up?

295
00:12:50.490 --> 00:12:52.650
<v ->That's right, Your Honor.</v>

296
00:12:52.650 --> 00:12:53.918
And-
<v ->Is that why you-</v>

297
00:12:53.918 --> 00:12:58.080
<v ->And now we have two amicus briefs filed by Pioneer Legal</v>

298
00:12:58.080 --> 00:13:00.213
and New England Law that,

299
00:13:01.260 --> 00:13:04.320
who are alarmed by the position.

300
00:13:04.320 --> 00:13:07.830
But you're right, I don't think this has ever come up.

301
00:13:07.830 --> 00:13:10.140
And then we have to ask what was the legislator's intent?

302
00:13:10.140 --> 00:13:11.820
<v ->Can I just pause you there?</v>

303
00:13:11.820 --> 00:13:14.523
It's never come up in connection with the partnership?

304
00:13:16.620 --> 00:13:18.090
<v ->I don't think it's come up in connection</v>

305
00:13:18.090 --> 00:13:19.140
with the corporation.

306
00:13:19.140 --> 00:13:20.460
<v ->That's my next question.</v>

307
00:13:20.460 --> 00:13:24.393
So corporations haven't had this capital gain issue,

308
00:13:25.800 --> 00:13:28.170
to your knowledge, the entire time?

309
00:13:28.170 --> 00:13:31.110
Is that because they usually keep the urban development

310
00:13:31.110 --> 00:13:35.472
for the full 15 slash 40 years?

311
00:13:35.472 --> 00:13:37.110
<v ->I wish I could say I knew,</v>

312
00:13:37.110 --> 00:13:38.730
but I can say under the corporate statute-

313
00:13:38.730 --> 00:13:39.753
<v ->Have you looked?</v>

314
00:13:40.650 --> 00:13:43.290
<v ->To see if there's any controversy?</v>

315
00:13:43.290 --> 00:13:46.770
<v ->To see if there's a similarly situated...</v>

316
00:13:46.770 --> 00:13:50.340
Like your client where there has been a sale

317
00:13:50.340 --> 00:13:54.060
where the treatment of the capital gain is an issue?

318
00:13:54.060 --> 00:13:57.930
<v ->So, I can say, based on my knowledge through my client,</v>

319
00:13:57.930 --> 00:14:00.300
I can say that my client has told us

320
00:14:00.300 --> 00:14:03.330
that no capital gain was ever paid

321
00:14:03.330 --> 00:14:05.730
with past projects on sales,

322
00:14:05.730 --> 00:14:07.860
and it got picked up this time.

323
00:14:07.860 --> 00:14:09.089
And so they think that's-

324
00:14:09.089 --> 00:14:10.680
<v ->You're talking about your client's sales, right?</v>

325
00:14:10.680 --> 00:14:11.550
<v ->My client's, right.</v>

326
00:14:11.550 --> 00:14:14.880
But it's not evidence that was submitted.

327
00:14:14.880 --> 00:14:16.980
I'm being asked for what I know about.

328
00:14:16.980 --> 00:14:18.580
And so I can just tell you that.

329
00:14:19.800 --> 00:14:20.633
And so-
<v ->Can I ask</v>

330
00:14:20.633 --> 00:14:21.570
one last factual question?

331
00:14:21.570 --> 00:14:24.070
It seems like it's a small number.

332
00:14:24.070 --> 00:14:26.960
What was the tax with...

333
00:14:27.840 --> 00:14:30.540
If it were tax exempt, what was it with the capital gains?

334
00:14:30.540 --> 00:14:31.440
What was the difference?

335
00:14:31.440 --> 00:14:33.300
It was $130,000 difference.

336
00:14:33.300 --> 00:14:34.697
Is that right?

337
00:14:34.697 --> 00:14:35.530
<v ->Well, yes, Your Honor-</v>
<v ->It just seems like</v>

338
00:14:35.530 --> 00:14:36.363
a small number.

339
00:14:36.363 --> 00:14:37.196
<v ->This is,</v>

340
00:14:37.196 --> 00:14:39.120
this particular case is one of many.

341
00:14:39.120 --> 00:14:40.740
There were a number of partners.

342
00:14:40.740 --> 00:14:42.330
Of these three partnerships,

343
00:14:42.330 --> 00:14:44.010
this is the one that went forward.

344
00:14:44.010 --> 00:14:46.500
So, we're talking in this case about his

345
00:14:46.500 --> 00:14:47.333
own distributive share.
<v ->Oh it's only his,</v>

346
00:14:47.333 --> 00:14:48.870
it's only his share.

347
00:14:48.870 --> 00:14:49.920
<v ->This is only his share.</v>

348
00:14:49.920 --> 00:14:50.880
So the numbers are bigger.

349
00:14:50.880 --> 00:14:52.650
<v ->Do we know what the overall number</v>

350
00:14:52.650 --> 00:14:54.630
for the sale of the building was?

351
00:14:54.630 --> 00:14:58.740
I'm just trying to understand what the tax consequence

352
00:14:58.740 --> 00:15:02.460
of this for that whole building was.

353
00:15:02.460 --> 00:15:04.200
'Cause that may relate to whether you're

354
00:15:04.200 --> 00:15:07.410
gonna discourage fixing blight

355
00:15:07.410 --> 00:15:10.293
if the number differential is big.

356
00:15:11.568 --> 00:15:14.730
<v ->It's in the briefs, and I cannot recall the numbers.</v>

357
00:15:14.730 --> 00:15:17.010
I mean there were gains on these projects

358
00:15:17.010 --> 00:15:20.700
when they were purchased in 1975 through now.

359
00:15:20.700 --> 00:15:21.960
<v ->The answer to that question, though,</v>

360
00:15:21.960 --> 00:15:24.210
is going to depend on what the basis is, right?

361
00:15:24.210 --> 00:15:25.260
<v ->That's right.</v>

362
00:15:25.260 --> 00:15:26.400
And thank you, Your Honor.

363
00:15:26.400 --> 00:15:28.407
There is a second issue in this case,

364
00:15:28.407 --> 00:15:30.540
and it is raised in the alternative,

365
00:15:30.540 --> 00:15:33.480
but although we won't have a lotta time to discuss it,

366
00:15:33.480 --> 00:15:35.550
it's very, very important.

367
00:15:35.550 --> 00:15:39.720
And the reason why is, even though it's in the alternative,

368
00:15:39.720 --> 00:15:41.520
it cries out for this court's attention,

369
00:15:41.520 --> 00:15:43.920
no matter what you rule on the primary issue,

370
00:15:43.920 --> 00:15:45.724
because the decision below

371
00:15:45.724 --> 00:15:48.390
erroneously eviscerates the statute.

372
00:15:48.390 --> 00:15:51.090
What they essentially do below

373
00:15:51.090 --> 00:15:54.840
is they treat the 121A partnerships

374
00:15:54.840 --> 00:15:57.810
as if they were subject to Chapter 62.

375
00:15:57.810 --> 00:16:00.300
The basis gets adjusted like federally,

376
00:16:00.300 --> 00:16:02.580
if you're subject to Chapter 62.

377
00:16:02.580 --> 00:16:05.220
But if you're not because you're a 121A entity,

378
00:16:05.220 --> 00:16:07.140
which they were all these years,

379
00:16:07.140 --> 00:16:09.540
the depreciation deductions could be taken.

380
00:16:09.540 --> 00:16:12.480
They are not allowed to take depreciation deduction

381
00:16:12.480 --> 00:16:15.540
by statute, by clear statute under 62,

382
00:16:15.540 --> 00:16:17.990
by not being subject to tax under 62.

383
00:16:17.990 --> 00:16:20.550
In the DeMarco case, an earlier ATB case,

384
00:16:20.550 --> 00:16:22.170
made that patently clear.

385
00:16:22.170 --> 00:16:25.080
So what happened on the basis issue is the court said,

386
00:16:25.080 --> 00:16:27.990
well, you chose to be a 121A entity.

387
00:16:27.990 --> 00:16:29.490
You didn't have to be that,

388
00:16:29.490 --> 00:16:32.640
so we're gonna tax you as if you were.

389
00:16:32.640 --> 00:16:34.500
Well, that's just simply not permissible.

390
00:16:34.500 --> 00:16:37.050
You have to take the facts as they are

391
00:16:37.050 --> 00:16:40.380
and not alternative facts as what they could be.

392
00:16:40.380 --> 00:16:45.380
And so that's an issue we encourage the court to look at.

393
00:16:46.410 --> 00:16:49.020
And just in terms of the legislation-

394
00:16:49.020 --> 00:16:50.400
<v ->We don't answer that question, though,</v>

395
00:16:50.400 --> 00:16:53.250
if we decide the first issue in your favor, right?

396
00:16:53.250 --> 00:16:54.960
We don't have to address the second issue

397
00:16:54.960 --> 00:16:56.880
if you win on the first issue.

398
00:16:56.880 --> 00:16:57.870
<v ->That's right.</v>

399
00:16:57.870 --> 00:16:58.703
That's right.

400
00:16:58.703 --> 00:17:00.810
And we only ask this court

401
00:17:00.810 --> 00:17:02.847
might be interested in looking at it so that

402
00:17:02.847 --> 00:17:05.340
the decision on the basis issue below

403
00:17:05.340 --> 00:17:09.368
isn't left as standing law at the Appellate Tax Board.

404
00:17:09.368 --> 00:17:11.040
That's that question.

405
00:17:11.040 --> 00:17:13.830
<v ->What were you gonna say about the legislative intent?</v>

406
00:17:13.830 --> 00:17:14.975
<v ->Thank you, Your Honor.</v>

407
00:17:14.975 --> 00:17:17.160
So with the board's decision

408
00:17:17.160 --> 00:17:19.290
was largely based on this timing question,

409
00:17:19.290 --> 00:17:20.340
and as we said,

410
00:17:20.340 --> 00:17:22.560
we think the timing was that they were exempt

411
00:17:22.560 --> 00:17:24.480
when they sold the property.

412
00:17:24.480 --> 00:17:27.270
But to the extent that is ambiguous.

413
00:17:27.270 --> 00:17:29.869
And as I said, I don't think the on account of is ambiguous,

414
00:17:29.869 --> 00:17:32.160
because there was no other activities

415
00:17:32.160 --> 00:17:34.050
conducted by these partnerships,

416
00:17:34.050 --> 00:17:35.550
it could only be on one account,

417
00:17:35.550 --> 00:17:38.493
but with regard to the timing question,

418
00:17:39.930 --> 00:17:42.690
the legislative intent is where you would look,

419
00:17:42.690 --> 00:17:47.340
and this court says you have to consider

420
00:17:47.340 --> 00:17:48.880
interpreting the statute

421
00:17:49.740 --> 00:17:50.700
in connection with the intent

422
00:17:50.700 --> 00:17:51.870
and the cause of the enactment

423
00:17:51.870 --> 00:17:53.940
and the main object to be accomplished.

424
00:17:53.940 --> 00:17:58.260
Well, the intent for 121A is uniquely clear.

425
00:17:58.260 --> 00:18:00.570
Section two is very long declaration

426
00:18:00.570 --> 00:18:02.163
of its intent and purpose.

427
00:18:03.120 --> 00:18:07.470
A public exigency exists, a menace to blighted areas,

428
00:18:07.470 --> 00:18:10.500
and urban blight cannot be dealt with effectively

429
00:18:10.500 --> 00:18:13.650
by regulatory process or ordinary operations

430
00:18:13.650 --> 00:18:17.820
of private enterprise without the aids provided here.

431
00:18:17.820 --> 00:18:21.360
And so the legislature intended, and did intend

432
00:18:21.360 --> 00:18:23.640
to provide extraordinary incentives

433
00:18:23.640 --> 00:18:26.850
to bring private capital into blighted areas.

434
00:18:26.850 --> 00:18:28.410
So that was by clear design

435
00:18:28.410 --> 00:18:30.660
when they made the statute very broad.

436
00:18:30.660 --> 00:18:32.760
That statute that has no carve out

437
00:18:32.760 --> 00:18:35.130
for a capital gains when you sell a project.

438
00:18:35.130 --> 00:18:37.050
<v ->But it does...</v>

439
00:18:37.050 --> 00:18:41.010
I guess here's my problem with the broad statutory language

440
00:18:41.010 --> 00:18:45.180
and how that favors or disfavors your client.

441
00:18:45.180 --> 00:18:50.180
If I sell your 39, 11 months, and 28 days,

442
00:18:52.620 --> 00:18:55.440
I, under your theory,

443
00:18:55.440 --> 00:18:59.580
have the exemption after the capital gain.

444
00:18:59.580 --> 00:19:04.580
If I sell at year 40 and one day I don't.

445
00:19:05.130 --> 00:19:05.963
<v Richard>That's right.</v>

446
00:19:05.963 --> 00:19:07.487
I think that's, I think it's-

447
00:19:07.487 --> 00:19:11.313
<v ->And so I guess what is your best argument</v>

448
00:19:11.313 --> 00:19:16.313
that this additional incentive for private investment

449
00:19:17.070 --> 00:19:22.070
in urban development is required if one day difference

450
00:19:23.310 --> 00:19:28.310
gives you a tax on the capital gain or not?

451
00:19:28.920 --> 00:19:29.970
<v ->It's very interesting.</v>

452
00:19:29.970 --> 00:19:32.220
I actually wanna backtrack slightly.

453
00:19:32.220 --> 00:19:34.293
If you sell it one day after,

454
00:19:36.210 --> 00:19:38.441
I'm not exactly sure that's not exempt.

455
00:19:38.441 --> 00:19:41.310
I kind of set it up because it's not our facts,

456
00:19:41.310 --> 00:19:43.887
but because it's on account of a project.

457
00:19:43.887 --> 00:19:45.900
And so it still might be exempt.

458
00:19:45.900 --> 00:19:48.030
But even if there were that kind of cliff,

459
00:19:48.030 --> 00:19:50.790
the legislature considered that people would,

460
00:19:50.790 --> 00:19:53.520
the 40-year term, which was at issue here,

461
00:19:53.520 --> 00:19:54.540
that is the maximum.

462
00:19:54.540 --> 00:19:55.980
You're not allowed to do that.

463
00:19:55.980 --> 00:19:57.450
But the towns may want you to do that.

464
00:19:57.450 --> 00:19:59.040
So they may encourage you to sell to someone

465
00:19:59.040 --> 00:20:01.140
and they can renew their term, which is what happened here.

466
00:20:01.140 --> 00:20:03.870
One was about to expire, got renewed by the city of Boston

467
00:20:03.870 --> 00:20:05.763
with the new owner for 38 years.

468
00:20:07.530 --> 00:20:11.850
But the legislature has provisioned section 11.

469
00:20:11.850 --> 00:20:13.650
It contemplates exactly this.

470
00:20:13.650 --> 00:20:16.680
It says you may sell during the project term,

471
00:20:16.680 --> 00:20:18.033
and when you do that,

472
00:20:19.020 --> 00:20:21.150
the city of Boston or the city involved

473
00:20:21.150 --> 00:20:22.710
has the right to approval,

474
00:20:22.710 --> 00:20:25.350
and this is how the transfers of restrictions

475
00:20:25.350 --> 00:20:26.670
and rights would go.

476
00:20:26.670 --> 00:20:28.620
So they understood that that would happen.

477
00:20:28.620 --> 00:20:30.960
And it turns out to be quite beneficial here

478
00:20:30.960 --> 00:20:32.460
for the city of Boston.

479
00:20:32.460 --> 00:20:37.460
So wouldn't have been any intent to discourage these sales

480
00:20:37.800 --> 00:20:40.860
and with 40 being the maximum period,

481
00:20:40.860 --> 00:20:43.410
it might have been well understood that they wanted

482
00:20:43.410 --> 00:20:47.520
or expected turnover to happen before the end of the term.

483
00:20:47.520 --> 00:20:49.740
<v ->But only if they restricted the turnover</v>

484
00:20:49.740 --> 00:20:53.220
to somebody who was going to continue the urban development.

485
00:20:53.220 --> 00:20:55.110
<v ->Well that-</v>
<v ->Did they do that?</v>

486
00:20:55.110 --> 00:20:57.300
<v ->So there could be sales to someone</v>

487
00:20:57.300 --> 00:21:00.120
who is not continuing the development.

488
00:21:00.120 --> 00:21:02.250
And that might be in the city's interest, too,

489
00:21:02.250 --> 00:21:04.740
again, subject to the city approval.

490
00:21:04.740 --> 00:21:07.230
So it wasn't that the legislature

491
00:21:07.230 --> 00:21:09.390
had any intent to discourage these sales.

492
00:21:09.390 --> 00:21:11.130
They seemed like they contemplated 'em,

493
00:21:11.130 --> 00:21:14.850
and then they left it to the city to

494
00:21:14.850 --> 00:21:17.706
make those discretionary decisions as to what's good.

495
00:21:17.706 --> 00:21:19.680
Maybe they didn't want the project to continue

496
00:21:19.680 --> 00:21:21.630
in the city or what's not.

497
00:21:21.630 --> 00:21:24.210
But I think that's where the intention was.

498
00:21:24.210 --> 00:21:27.030
The other thing, the last thing I'd say is,

499
00:21:27.030 --> 00:21:29.460
if you look at what the incentive,

500
00:21:29.460 --> 00:21:32.190
the extraordinary incentive the commissioner was trying,

501
00:21:32.190 --> 00:21:34.200
the legislature was trying to give here,

502
00:21:34.200 --> 00:21:38.100
we have to remember that there is a special excise already,

503
00:21:38.100 --> 00:21:40.200
and the special excise is,

504
00:21:40.200 --> 00:21:45.000
in this case it was 10 or 15% of gross revenue.

505
00:21:45.000 --> 00:21:46.620
That was the rents.

506
00:21:46.620 --> 00:21:48.630
Compare that to the personal income tax rate,

507
00:21:48.630 --> 00:21:49.710
which is now 5%.

508
00:21:49.710 --> 00:21:52.020
And for all these years between five and six.

509
00:21:52.020 --> 00:21:55.020
This special excise was a lot higher on the income tax side.

510
00:21:55.020 --> 00:21:57.090
They pay 1% of the value on property.

511
00:21:57.090 --> 00:22:00.810
Where is this extraordinary incentive

512
00:22:00.810 --> 00:22:03.700
if not for the gain for all of

513
00:22:04.848 --> 00:22:07.590
the revitalization of a blighted area

514
00:22:07.590 --> 00:22:09.420
that gets sold at the end of the project?

515
00:22:09.420 --> 00:22:11.010
Where is that extraordinary incentive?

516
00:22:11.010 --> 00:22:13.440
And I refer to the amicus briefs that were filed

517
00:22:13.440 --> 00:22:14.760
that touch on that as well.

518
00:22:14.760 --> 00:22:16.860
<v ->Okay, thank you very much.</v>
<v ->Thank you.</v>

519
00:22:17.760 --> 00:22:20.103
<v ->Okay, Attorney de la Foscade-Condon.</v>

520
00:22:25.680 --> 00:22:27.750
<v ->Good morning, Celine de la Foscade-Condon</v>

521
00:22:27.750 --> 00:22:29.790
for the Massachusetts Department of Revenue,

522
00:22:29.790 --> 00:22:30.900
may it please the court.

523
00:22:30.900 --> 00:22:32.820
So actually I would like to start

524
00:22:32.820 --> 00:22:35.760
by answering the question of Justice Kafker.

525
00:22:35.760 --> 00:22:37.230
<v ->Can I interrupt you and ask you</v>

526
00:22:37.230 --> 00:22:40.110
to answer counsel's last question,

527
00:22:40.110 --> 00:22:42.240
where was the incentive?

528
00:22:42.240 --> 00:22:43.290
<v ->So that's going to</v>

529
00:22:43.290 --> 00:22:45.210
also Justice Kaskar-
<v ->Excellent.</v>

530
00:22:45.210 --> 00:22:46.470
So let's do it. (laughing)

531
00:22:46.470 --> 00:22:50.733
<v ->So here we were talking about three buildings,</v>

532
00:22:51.840 --> 00:22:54.720
residential apartment buildings,

533
00:22:54.720 --> 00:22:56.220
that were pretty large,

534
00:22:56.220 --> 00:23:01.220
and the incentive was tax-free rental income,

535
00:23:01.860 --> 00:23:04.350
almost, for 40 years.

536
00:23:04.350 --> 00:23:06.590
So when you think of like 121A projects-

537
00:23:06.590 --> 00:23:07.500
<v ->Are these-</v>
<v ->The rental income</v>

538
00:23:07.500 --> 00:23:09.870
was what was taxed.

539
00:23:09.870 --> 00:23:10.703
<v ->It's based...</v>

540
00:23:11.880 --> 00:23:15.270
That's what is used to calculate the excise tax.

541
00:23:15.270 --> 00:23:19.440
But when you think about it, there's no income tax

542
00:23:19.440 --> 00:23:22.568
on the revenues that the partners are receiving.

543
00:23:22.568 --> 00:23:24.360
That's the exemption.

544
00:23:24.360 --> 00:23:25.560
So for 40 years-

545
00:23:25.560 --> 00:23:28.920
<v ->But, I'm sorry, was this like a 40B project?</v>

546
00:23:28.920 --> 00:23:30.780
Is this a low income housing building?

547
00:23:30.780 --> 00:23:32.730
<v ->It is a low income housing project.</v>

548
00:23:32.730 --> 00:23:35.220
<v ->So, again, so we've got,</v>

549
00:23:35.220 --> 00:23:39.540
we've got someone building a low income housing project

550
00:23:39.540 --> 00:23:41.280
in a blighted area, just what

551
00:23:41.280 --> 00:23:43.503
we want the statute to do, right?

552
00:23:44.373 --> 00:23:48.240
So they're getting those tax benefits, which are limited.

553
00:23:48.240 --> 00:23:49.740
This is not...

554
00:23:49.740 --> 00:23:52.380
they're not making a killing on this kind of

555
00:23:52.380 --> 00:23:55.560
building a low income housing project in a blighted area.

556
00:23:55.560 --> 00:23:58.680
Again, that's what the legislature wanted to encourage.

557
00:23:58.680 --> 00:24:00.363
So the one thing that,

558
00:24:01.230 --> 00:24:04.050
where there's potentially,

559
00:24:04.050 --> 00:24:06.630
then we're gonna convert it into a for-profit building

560
00:24:06.630 --> 00:24:08.330
at the end for the sale.

561
00:24:08.330 --> 00:24:09.247
Just...

562
00:24:09.247 --> 00:24:12.780
I don't know, just seems completely counterintuitive

563
00:24:12.780 --> 00:24:15.210
to the whole purpose of the statute to me.

564
00:24:15.210 --> 00:24:17.640
<v ->Well, I would disagree with you, Justice Kafker,</v>

565
00:24:17.640 --> 00:24:21.600
as I said, having income for 40 years,

566
00:24:21.600 --> 00:24:24.540
that is almost tax-free, it is a huge incentive.

567
00:24:24.540 --> 00:24:27.570
Also, you have to think of what 121A projects you have.

568
00:24:27.570 --> 00:24:30.210
I mean, the Prudential Center, it's a 121A project.

569
00:24:30.210 --> 00:24:32.490
So when you think about the rental income

570
00:24:32.490 --> 00:24:33.930
on the Prudential Center,

571
00:24:33.930 --> 00:24:37.350
which is tax free for 40 years, it's a huge benefit.

572
00:24:37.350 --> 00:24:38.730
And here-

573
00:24:38.730 --> 00:24:40.110
<v ->Just, again, I thought that that,</v>

574
00:24:40.110 --> 00:24:44.357
that the taxes were on the rental income.

575
00:24:45.690 --> 00:24:50.203
<v ->So the exemption that's provided under 121A</v>

576
00:24:50.203 --> 00:24:54.900
is like no personal or real property tax

577
00:24:54.900 --> 00:24:56.670
on account of the project.

578
00:24:56.670 --> 00:24:59.400
So during the time that they have the project,

579
00:24:59.400 --> 00:25:01.080
and partners being,

580
00:25:01.080 --> 00:25:02.640
here since we're talking about partnership,

581
00:25:02.640 --> 00:25:03.780
it's a flow through.

582
00:25:03.780 --> 00:25:08.160
So partners are not being taxed on the revenues

583
00:25:08.160 --> 00:25:09.660
that are being received from the-

584
00:25:09.660 --> 00:25:12.353
<v ->Did you say, though, property tax?</v>

585
00:25:12.353 --> 00:25:13.680
<v ->No property tax.</v>
<v ->No property tax.</v>

586
00:25:13.680 --> 00:25:14.655
<v ->Correct.</v>

587
00:25:14.655 --> 00:25:15.538
There's no property tax,

588
00:25:15.538 --> 00:25:16.371
and there's no-
<v ->Property tax.</v>

589
00:25:16.371 --> 00:25:17.880
<v ->And there's no,</v>

590
00:25:17.880 --> 00:25:20.220
here since we're talking about partners,

591
00:25:20.220 --> 00:25:23.010
there's no income tax under 62.

592
00:25:23.010 --> 00:25:25.710
<v ->Could you help us out with regard to</v>

593
00:25:25.710 --> 00:25:28.170
whether or not this is a new interpretation?

594
00:25:28.170 --> 00:25:30.420
<v ->So it is not a new interpretation.</v>

595
00:25:30.420 --> 00:25:32.220
I mean the commissioner has been following

596
00:25:32.220 --> 00:25:35.040
the same interpretation since the beginning.

597
00:25:35.040 --> 00:25:39.420
That's what letter ruling 94-7 states, that the tax-

598
00:25:39.420 --> 00:25:40.920
<v ->That's just the last sentence.</v>

599
00:25:40.920 --> 00:25:44.610
That's not really what that letter ruling is about.

600
00:25:44.610 --> 00:25:49.610
Are there corporations that have turned over

601
00:25:50.160 --> 00:25:53.400
before the 40-year expiration

602
00:25:53.400 --> 00:25:55.800
as to which the commissioner has taken

603
00:25:55.800 --> 00:25:59.640
this position that the capital gain is taxable?

604
00:25:59.640 --> 00:26:02.250
<v ->So I'm not aware of any cases.</v>

605
00:26:02.250 --> 00:26:06.750
So that would suggest that they reported the capital gain,

606
00:26:06.750 --> 00:26:09.060
and therefore, that's the reason why it wasn't audited,

607
00:26:09.060 --> 00:26:10.830
that the capital again was reported

608
00:26:10.830 --> 00:26:12.143
when they sold the property.

609
00:26:12.143 --> 00:26:13.830
<v ->I'm confused.</v>
<v ->I'm not aware of any case.</v>

610
00:26:13.830 --> 00:26:15.840
<v ->File taxes every year, right?</v>

611
00:26:15.840 --> 00:26:16.673
<v ->I'm sorry?</v>

612
00:26:17.970 --> 00:26:21.570
<v ->These corporations file taxes every year that you review.</v>

613
00:26:21.570 --> 00:26:23.703
<v ->Mm-hmm, that's correct.</v>

614
00:26:23.703 --> 00:26:26.400
<v ->So did they or didn't they?</v>

615
00:26:26.400 --> 00:26:29.550
<v ->I'm not aware of any case where a corporation</v>

616
00:26:29.550 --> 00:26:32.400
or a partnership sold a property

617
00:26:32.400 --> 00:26:36.210
prior to the expiration of the 40 years

618
00:26:36.210 --> 00:26:39.574
and did not report the capital gain on it.

619
00:26:39.574 --> 00:26:41.174
<v ->Are you aware of any that did?</v>

620
00:26:42.200 --> 00:26:43.187
If you phrase it in the negative.

621
00:26:44.068 --> 00:26:46.590
Do you just have no clue whatsoever

622
00:26:46.590 --> 00:26:48.420
how this has been done before?

623
00:26:48.420 --> 00:26:50.593
Or do you have a, I mean...

624
00:26:50.593 --> 00:26:52.383
I mean we can send you back,

625
00:26:52.383 --> 00:26:55.893
and if you have records to this effect.

626
00:26:58.552 --> 00:27:02.610
<v ->We have no cases where this issue came up.</v>

627
00:27:02.610 --> 00:27:05.700
So that would mean that it was reported correctly.

628
00:27:05.700 --> 00:27:07.470
I mean, is it possible that if something

629
00:27:07.470 --> 00:27:09.720
was not reported correctly, it wasn't picked up?

630
00:27:09.720 --> 00:27:11.700
<v ->Of course.</v>
<v ->Meaning that they all</v>

631
00:27:11.700 --> 00:27:16.470
converted their properties into private, or I mean-

632
00:27:16.470 --> 00:27:20.573
<v ->Well, they might have kept the project for the 40 years.</v>

633
00:27:20.573 --> 00:27:22.740
<v Justice>It could be that they paid the tax.</v>

634
00:27:22.740 --> 00:27:24.750
<v ->Exactly that they reported it correctly,</v>

635
00:27:24.750 --> 00:27:26.700
and therefore it was not audited,

636
00:27:26.700 --> 00:27:30.870
or they had kept the property for the 40 years,

637
00:27:30.870 --> 00:27:34.127
and therefore afterwards it would be also reported

638
00:27:34.127 --> 00:27:37.020
on their return because it's not exempt anymore.

639
00:27:37.020 --> 00:27:38.070
<v Justice>We don't know either way.</v>

640
00:27:38.070 --> 00:27:39.300
<v Justice>We don't know either way, yeah.</v>

641
00:27:39.300 --> 00:27:40.133
<v ->Correct.</v>

642
00:27:40.133 --> 00:27:42.000
<v ->And you looked?</v>
<v ->Have I looked?</v>

643
00:27:42.000 --> 00:27:43.200
No, I have not looked.

644
00:27:43.200 --> 00:27:44.280
<v ->Okay.</v>
<v ->Me personally</v>

645
00:27:44.280 --> 00:27:47.013
as to whether-
<v ->Or not, yeah, okay.</v>

646
00:27:48.180 --> 00:27:50.070
<v ->So the board's decision here</v>

647
00:27:50.070 --> 00:27:52.860
is consistent with the statutory scheme.

648
00:27:52.860 --> 00:27:55.830
I mean as Justice Wendlandt was saying,

649
00:27:55.830 --> 00:28:00.030
project is defined as including construction

650
00:28:00.030 --> 00:28:02.070
and any activities that are related

651
00:28:02.070 --> 00:28:05.070
to maintenance and operations of the project.

652
00:28:05.070 --> 00:28:08.534
It does not include sale of the project

653
00:28:08.534 --> 00:28:09.583
within the definition.
<v ->Why not?</v>

654
00:28:09.583 --> 00:28:14.583
Why isn't a sale of a 121A project,

655
00:28:15.090 --> 00:28:19.470
on account of it being a 121A project?

656
00:28:19.470 --> 00:28:22.890
I build a blighted building for the commonwealth.

657
00:28:22.890 --> 00:28:24.183
That's a good thing.

658
00:28:25.140 --> 00:28:30.140
I did it to correct the blight and build a 40B project.

659
00:28:31.920 --> 00:28:34.050
Why isn't the sale of that

660
00:28:34.050 --> 00:28:36.660
and the profits that they make from that

661
00:28:36.660 --> 00:28:39.810
on account of it being a 121A project?

662
00:28:39.810 --> 00:28:43.230
<v ->So first it would be in contradiction</v>

663
00:28:43.230 --> 00:28:45.950
with another provision of the statute, which is 18D.

664
00:28:45.950 --> 00:28:50.336
So 18D is a statutory provision that deals with condominium.

665
00:28:50.336 --> 00:28:54.030
Project owners can develop condominiums

666
00:28:54.030 --> 00:28:57.333
in order to develop 121A projects.

667
00:28:57.333 --> 00:29:00.690
18D states that if you sell a condominium,

668
00:29:00.690 --> 00:29:03.240
this is subject to federal and state tax,

669
00:29:03.240 --> 00:29:05.550
and of course here, state tax would be Massachusetts.

670
00:29:05.550 --> 00:29:07.650
<v ->But you're talking about the,</v>

671
00:29:07.650 --> 00:29:09.630
when they have a dual project, right?

672
00:29:09.630 --> 00:29:12.690
When they have something that's a 121A,

673
00:29:12.690 --> 00:29:16.740
and they also have a separate private sector activity.

674
00:29:16.740 --> 00:29:18.420
<v ->Well, I mean that wouldn't...</v>

675
00:29:18.420 --> 00:29:20.190
No, because I mean, if you have a,

676
00:29:20.190 --> 00:29:24.230
if you develop condominium within the 121A project,

677
00:29:24.230 --> 00:29:26.310
if you sell those property,

678
00:29:26.310 --> 00:29:28.380
then those are subject to taxation.

679
00:29:28.380 --> 00:29:31.170
So you can't reconcile the claim

680
00:29:31.170 --> 00:29:34.350
that a portion of the project would be subject to tax,

681
00:29:34.350 --> 00:29:38.414
but then that the whole project is exempt from taxation.

682
00:29:38.414 --> 00:29:39.378
<v ->[Justice Wendlandt] Why not?</v>

683
00:29:39.378 --> 00:29:40.211
<v ->Well that would make no sense,</v>

684
00:29:40.211 --> 00:29:43.980
because one portion of the project would be taxable.

685
00:29:43.980 --> 00:29:45.870
But then they're saying that the whole,

686
00:29:45.870 --> 00:29:48.600
the sale of the whole project is exempt.

687
00:29:48.600 --> 00:29:51.510
So you can't reconcile the two.

688
00:29:51.510 --> 00:29:54.180
If one is taxable, then the entire thing is taxable.

689
00:29:54.180 --> 00:29:57.270
<v ->Well, I mean, wouldn't just the part</v>

690
00:29:57.270 --> 00:30:00.720
that's subject to 121A be non-taxable?

691
00:30:00.720 --> 00:30:05.010
<v ->Well, there's no splitting of the part of the project.</v>

692
00:30:05.010 --> 00:30:07.710
It's like when they sell the whole project,

693
00:30:07.710 --> 00:30:10.800
according to the appellant, it's completely exempt.

694
00:30:10.800 --> 00:30:15.450
Here we're saying since here, the statute 18D is clear

695
00:30:15.450 --> 00:30:19.433
that the sale of a condominium is subject to tax,

696
00:30:19.433 --> 00:30:21.990
then it wouldn't make any sense that a portion

697
00:30:21.990 --> 00:30:24.540
of the project is taxable,

698
00:30:24.540 --> 00:30:27.270
but that the rest of the project is not.

699
00:30:27.270 --> 00:30:29.370
<v ->Well, I understand that</v>

700
00:30:29.370 --> 00:30:32.010
if it's an all or nothing proposition,

701
00:30:32.010 --> 00:30:33.840
that that may be true.

702
00:30:33.840 --> 00:30:35.253
But does it have to be?

703
00:30:37.617 --> 00:30:41.490
And there are ways to figure out

704
00:30:41.490 --> 00:30:44.820
what the capital gain attributable

705
00:30:44.820 --> 00:30:49.820
to the low income housing would be.

706
00:30:51.480 --> 00:30:53.910
<v ->Well, so I disagree with you.</v>

707
00:30:53.910 --> 00:30:57.660
I generally, when it's sold it's as a whole.

708
00:30:57.660 --> 00:31:01.830
<v ->Yes, but there are economic tools</v>

709
00:31:01.830 --> 00:31:04.740
that could be used to figure out

710
00:31:04.740 --> 00:31:09.210
which portion was low income.

711
00:31:09.210 --> 00:31:12.600
<v ->So even if true,</v>

712
00:31:12.600 --> 00:31:17.180
it would still disagree that the sale of a,

713
00:31:18.450 --> 00:31:21.150
that the capital gain from the sale of a project

714
00:31:21.150 --> 00:31:23.130
is on account of a project.

715
00:31:23.130 --> 00:31:25.170
Because first of all, on account,

716
00:31:25.170 --> 00:31:28.920
as the Supreme Court defined in the Ogilvy matter,

717
00:31:28.920 --> 00:31:31.577
is very narrowly construed.

718
00:31:31.577 --> 00:31:33.676
<v ->It means because, right?</v>

719
00:31:33.676 --> 00:31:35.550
<v ->It it means because, right?</v>

720
00:31:35.550 --> 00:31:40.550
And here there is no reason to, and 18,

721
00:31:42.000 --> 00:31:45.570
the language of on account of,

722
00:31:45.570 --> 00:31:50.570
which is found in 18CF is,

723
00:31:50.640 --> 00:31:52.620
in that section it says that

724
00:31:52.620 --> 00:31:56.550
in exchange of the 121A exemption, there will no,

725
00:31:56.550 --> 00:31:58.587
there won't be any property or-

726
00:31:58.587 --> 00:31:59.550
<v ->But why?</v>

727
00:31:59.550 --> 00:32:02.160
What the United States Supreme Court said

728
00:32:02.160 --> 00:32:04.110
on account of means

729
00:32:04.110 --> 00:32:09.110
in dealing with the relationship between punitive damages,

730
00:32:10.410 --> 00:32:13.800
what does that tell us about this circumstance

731
00:32:13.800 --> 00:32:17.250
that we should look to that case

732
00:32:17.250 --> 00:32:19.620
to help in the statutory interpretation?

733
00:32:19.620 --> 00:32:23.130
<v ->So here is to look at what means on account of.</v>

734
00:32:23.130 --> 00:32:24.279
<v ->But why?</v>

735
00:32:24.279 --> 00:32:28.050
Why in that circumstance, so divorced from this,

736
00:32:28.050 --> 00:32:30.063
does that interpretation matter?

737
00:32:31.320 --> 00:32:34.650
<v ->I mean, it is the Supreme Court's decision,</v>

738
00:32:34.650 --> 00:32:37.410
I think it makes sense to look at that decision

739
00:32:37.410 --> 00:32:42.060
to figure out what on account of.

740
00:32:42.060 --> 00:32:43.900
I think here it doesn't mean

741
00:32:44.761 --> 00:32:49.048
that the capital gain derive from the sale

742
00:32:49.048 --> 00:32:51.720
of the project is on account of the project.

743
00:32:51.720 --> 00:32:53.400
Because what that definition,

744
00:32:53.400 --> 00:32:57.270
what that section meant was that on account of

745
00:32:57.270 --> 00:32:59.790
the income derived from the maintenance

746
00:32:59.790 --> 00:33:03.000
and the operation of the project, you have an exemption.

747
00:33:03.000 --> 00:33:05.430
<v ->Because we get into the whole dizzying world</v>

748
00:33:05.430 --> 00:33:07.290
of approximate causation

749
00:33:07.290 --> 00:33:10.320
and but for causation that this court struggled with,

750
00:33:10.320 --> 00:33:13.440
with Justice Law and Justice Kafker recently,

751
00:33:13.440 --> 00:33:15.810
if we start doing the because of, right?

752
00:33:15.810 --> 00:33:17.410
<v ->Right, that's correct.</v>

753
00:33:18.420 --> 00:33:20.700
But here it should not be...

754
00:33:20.700 --> 00:33:23.280
I mean the on account of in that section

755
00:33:23.280 --> 00:33:27.690
should not be read to include the income

756
00:33:27.690 --> 00:33:30.450
upon the sale of the project,

757
00:33:30.450 --> 00:33:33.990
which is not at all referenced in section one,

758
00:33:33.990 --> 00:33:35.853
which defines project.

759
00:33:37.350 --> 00:33:42.330
Also the tax exemptions are directly related

760
00:33:42.330 --> 00:33:44.760
to the owner's obligation to comply

761
00:33:44.760 --> 00:33:47.820
with the statutory provision of 121A.

762
00:33:47.820 --> 00:33:52.650
So the 121A partnerships transferred the property

763
00:33:52.650 --> 00:33:54.540
to unrelated buyer,

764
00:33:54.540 --> 00:33:57.330
they were released from the statutory

765
00:33:57.330 --> 00:34:00.990
and the contractual limitation,

766
00:34:00.990 --> 00:34:03.510
limiting their return on investment

767
00:34:03.510 --> 00:34:05.250
and the other obligation.

768
00:34:05.250 --> 00:34:08.970
<v ->Can I ask you a question about the words of F?</v>

769
00:34:08.970 --> 00:34:12.153
It says in consideration of this tax exemption,

770
00:34:15.030 --> 00:34:20.030
the taxpayer will pay the excises, the 121A excises.

771
00:34:20.700 --> 00:34:25.700
Did the taxpayer pay the 121A excises

772
00:34:25.860 --> 00:34:27.483
for this particular year?

773
00:34:28.350 --> 00:34:31.260
<v ->For the year of the sale?</v>
<v ->Yes.</v>

774
00:34:31.260 --> 00:34:33.590
<v ->I do not know.</v>

775
00:34:33.590 --> 00:34:35.070
I do not know.
<v ->Well, isn't that important?</v>

776
00:34:35.070 --> 00:34:39.177
Because it says in consideration of the exemption,

777
00:34:40.320 --> 00:34:44.130
which you dispute here, they pay the excise taxes.

778
00:34:44.130 --> 00:34:45.627
Did they pay the excise taxes?

779
00:34:45.627 --> 00:34:49.080
<v ->But did pay the excise tax on the-</v>

780
00:34:49.080 --> 00:34:51.450
<v ->So they've paid the consideration,</v>

781
00:34:51.450 --> 00:34:56.450
and you're not giving them what they're entitled to.

782
00:34:58.080 --> 00:35:01.500
<v ->Well, so the excise tax is based on</v>

783
00:35:01.500 --> 00:35:04.347
the gross income coming from the rental income, right?

784
00:35:04.347 --> 00:35:07.590
The capital gain would not be included

785
00:35:07.590 --> 00:35:10.047
into that calculation of the excise.

786
00:35:10.047 --> 00:35:11.880
<v ->But that's neither here nor there.</v>

787
00:35:11.880 --> 00:35:16.557
They've paid their consideration part of section F.

788
00:35:17.970 --> 00:35:18.803
<v ->That's correct.</v>

789
00:35:18.803 --> 00:35:22.920
<v ->And in exchange for that, they get the tax exemption.</v>

790
00:35:22.920 --> 00:35:24.480
<v ->They get the tax exemptions.</v>

791
00:35:24.480 --> 00:35:26.397
Once they transfer the property,

792
00:35:26.397 --> 00:35:29.460
the tax exemptions are over.

793
00:35:29.460 --> 00:35:32.070
<v ->Yeah, but then we get into the sort of metaphysical,</v>

794
00:35:32.070 --> 00:35:36.300
like when does the sale occur and...

795
00:35:36.300 --> 00:35:38.910
I mean, to me, you lose that argument,

796
00:35:38.910 --> 00:35:43.410
because the capital gain doesn't happen until the sale.

797
00:35:43.410 --> 00:35:47.760
So let's just say there was an accident on the project

798
00:35:47.760 --> 00:35:51.360
at the urban development, who would be liable for that?

799
00:35:51.360 --> 00:35:55.710
Until the moment of sale the liability would go to whom?

800
00:35:55.710 --> 00:35:57.540
<v ->Well, until the moment of sale,</v>

801
00:35:57.540 --> 00:36:00.300
the liability would go to the owners.

802
00:36:00.300 --> 00:36:03.540
<v ->Okay, so up until the sale, the very sale,</v>

803
00:36:03.540 --> 00:36:06.540
when they get the check, that's, they're liable,

804
00:36:06.540 --> 00:36:08.280
they're on the hook for anything that happens

805
00:36:08.280 --> 00:36:09.990
on that project, right?

806
00:36:09.990 --> 00:36:13.650
So why does it make sense to say that the gain

807
00:36:13.650 --> 00:36:16.380
somehow happens after the sale?

808
00:36:16.380 --> 00:36:18.244
<v ->Well, I think it's actually simultaneous,</v>

809
00:36:18.244 --> 00:36:19.320
right?
<v ->Yes.</v>

810
00:36:19.320 --> 00:36:20.153
Right, isn't that-
<v ->To whom does that-</v>

811
00:36:20.153 --> 00:36:20.986
<v ->A problem for you?
(indistinct)</v>

812
00:36:20.986 --> 00:36:21.870
<v ->I'm sorry?</v>
<v ->Why isn't that</v>

813
00:36:21.870 --> 00:36:23.730
helpful to the taxpayer?

814
00:36:23.730 --> 00:36:25.893
<v ->Because once-</v>
<v ->If it's simultaneous.</v>

815
00:36:25.893 --> 00:36:28.830
Once this, when they sold the property,

816
00:36:28.830 --> 00:36:33.630
they were no longer under the provision of 121A.

817
00:36:33.630 --> 00:36:36.300
They will no longer have to comply

818
00:36:36.300 --> 00:36:39.930
with the regulation of 18CA through 18CF,

819
00:36:39.930 --> 00:36:42.639
which is a requirement if you have a 121-

820
00:36:42.639 --> 00:36:45.990
<v ->Yeah, but up until the moment of sale, they do.</v>

821
00:36:45.990 --> 00:36:48.090
And that's the moment of sale

822
00:36:48.090 --> 00:36:53.000
is when they earn the capital gain.

823
00:36:53.000 --> 00:36:54.450
<v ->Right, so I'm saying that</v>

824
00:36:54.450 --> 00:36:55.920
once they sold the property-

825
00:36:55.920 --> 00:36:57.660
<v ->Yeah, but you're talking about afterwards.</v>

826
00:36:57.660 --> 00:36:58.800
I wanna...

827
00:36:58.800 --> 00:37:02.600
That admission you just made about the simultaneous nature

828
00:37:02.600 --> 00:37:07.600
of the sale and the liabilities, and I would say the gain,

829
00:37:10.950 --> 00:37:12.840
I don't, I guess I don't understand

830
00:37:12.840 --> 00:37:13.857
the commissioner's position on that.

831
00:37:13.857 --> 00:37:17.970
<v ->The thing, once it was sold, everything terminate.</v>

832
00:37:17.970 --> 00:37:18.803
<v ->Yes.</v>
<v ->Right.</v>

833
00:37:18.803 --> 00:37:20.460
It terminates, the obligation terminates,

834
00:37:20.460 --> 00:37:23.081
and the benefits terminates at the same time.

835
00:37:23.081 --> 00:37:24.213
<v ->Agreed, agreed.</v>
<v ->That is our position.</v>

836
00:37:24.213 --> 00:37:27.360
<v ->What happens until that very moment?</v>

837
00:37:27.360 --> 00:37:30.120
<v ->Well, before they sold, of course,</v>

838
00:37:30.120 --> 00:37:31.320
I mean they were still

839
00:37:31.320 --> 00:37:34.890
under the obligation of 18C, under 6A,

840
00:37:34.890 --> 00:37:38.310
and they were also benefiting from those.

841
00:37:38.310 --> 00:37:41.732
But like when they sold it, at that moment,

842
00:37:41.732 --> 00:37:43.620
it was transferred,

843
00:37:43.620 --> 00:37:47.190
and they no longer were under subject of 121A.

844
00:37:47.190 --> 00:37:49.920
They-
<v ->What's your</v>

845
00:37:49.920 --> 00:37:51.540
reasoning for that?

846
00:37:51.540 --> 00:37:56.430
That at the moment of sale, they don't get,

847
00:37:56.430 --> 00:37:58.590
they lose the exemption.

848
00:37:58.590 --> 00:38:03.590
<v ->So it would go with the same as section 16,</v>

849
00:38:04.050 --> 00:38:06.960
or I believe it's section 18C,

850
00:38:06.960 --> 00:38:09.780
relating to the partnership at the moment of

851
00:38:09.780 --> 00:38:12.030
when the project is terminated.

852
00:38:12.030 --> 00:38:17.030
When that is over, then you no longer benefit

853
00:38:17.520 --> 00:38:20.640
from the exemption under the 121A

854
00:38:20.640 --> 00:38:23.220
and you are no longer under the restriction.

855
00:38:23.220 --> 00:38:26.130
And it would make no sense for the legislature

856
00:38:26.130 --> 00:38:29.130
to give benefit, to give more benefit

857
00:38:29.130 --> 00:38:32.910
to taxpayer who sell their project before-

858
00:38:32.910 --> 00:38:34.597
<v ->It doesn't-</v>
<v ->The 40 years.</v>

859
00:38:34.597 --> 00:38:35.430
<v ->It doesn't...</v>

860
00:38:35.430 --> 00:38:37.230
What happens to the person who purchases it?

861
00:38:37.230 --> 00:38:40.800
Do they have 121A status, too?

862
00:38:40.800 --> 00:38:42.783
If they keep running this?

863
00:38:44.081 --> 00:38:46.560
Because then everything continues.

864
00:38:46.560 --> 00:38:48.060
Then there's sort of,

865
00:38:48.060 --> 00:38:52.950
if the person who buys it remains in this 121A status

866
00:38:52.950 --> 00:38:56.310
and in that for up to 40-year period,

867
00:38:56.310 --> 00:38:58.920
then the project, there's a consistency to it.

868
00:38:58.920 --> 00:39:02.520
It's non-taxable or limited taxation

869
00:39:02.520 --> 00:39:04.830
for who owns it and who buys it.

870
00:39:04.830 --> 00:39:07.200
<v ->So in this circumstance, in this case,</v>

871
00:39:07.200 --> 00:39:10.770
they sold the property at year 39.

872
00:39:10.770 --> 00:39:13.170
<v ->Say they sold it at year 10,</v>

873
00:39:13.170 --> 00:39:15.240
and the person who bought it,

874
00:39:15.240 --> 00:39:16.230
would they keep for,

875
00:39:16.230 --> 00:39:19.050
would they have 30 years of 121A status?

876
00:39:19.050 --> 00:39:19.883
<v ->That's correct.</v>

877
00:39:19.883 --> 00:39:21.870
It would not be extended for-
<v ->So doesn't that,</v>

878
00:39:21.870 --> 00:39:25.080
isn't there some level of consistency to saying,

879
00:39:25.080 --> 00:39:27.303
okay, the person who sold it,

880
00:39:28.470 --> 00:39:30.330
it was a nonprofit when it was,

881
00:39:30.330 --> 00:39:32.700
it was a 121A when it was sold,

882
00:39:32.700 --> 00:39:35.790
so we're gonna treat them under this tax regime,

883
00:39:35.790 --> 00:39:36.840
and the people who bought it

884
00:39:36.840 --> 00:39:40.383
are gonna continue that 121A tax status.

885
00:39:41.220 --> 00:39:43.050
But what you're doing is you're converting them

886
00:39:43.050 --> 00:39:47.810
into a private, outside of 121A on a sale.

887
00:39:47.810 --> 00:39:48.780
It just...

888
00:39:48.780 --> 00:39:53.780
<v ->So I mean the incentive here it is to get people</v>

889
00:39:53.820 --> 00:39:55.437
to invest in those property

890
00:39:55.437 --> 00:39:57.420
and to maintain them and to operate them.

891
00:39:57.420 --> 00:39:58.863
It's not to sell them.

892
00:39:59.910 --> 00:40:02.910
<v ->No, it's to build them.</v>

893
00:40:02.910 --> 00:40:07.200
That's a big risk for someone to take and to build it.

894
00:40:07.200 --> 00:40:10.290
It's not just that they're doing this for income.

895
00:40:10.290 --> 00:40:12.840
There are lots of ways of making more income.

896
00:40:12.840 --> 00:40:13.673
You're doing a,

897
00:40:13.673 --> 00:40:17.267
you're serving a public purpose by building it, right?

898
00:40:17.267 --> 00:40:20.370
<v ->But building it and operating it and maintaining it.</v>

899
00:40:20.370 --> 00:40:22.110
I mean that is what the definition of project

900
00:40:22.110 --> 00:40:22.943
in section one.

901
00:40:22.943 --> 00:40:24.930
<v ->We don't like to have people build buildings</v>

902
00:40:24.930 --> 00:40:27.000
they can't sell, right?

903
00:40:27.000 --> 00:40:28.530
<v ->Right, and that's correct.</v>

904
00:40:28.530 --> 00:40:30.540
But here we want, I mean, as I said,

905
00:40:30.540 --> 00:40:35.040
they do have this benefit of income that is

906
00:40:35.040 --> 00:40:38.370
subject to a much lower tax rate for 40 years.

907
00:40:38.370 --> 00:40:39.960
I mean that's a long time

908
00:40:39.960 --> 00:40:42.330
and it's a really big benefit.

909
00:40:42.330 --> 00:40:44.940
<v ->How is it an incentive, though,</v>

910
00:40:44.940 --> 00:40:49.913
to have the buildings built if you are going to impose

911
00:40:51.570 --> 00:40:55.950
the depreciation that nonetheless isn't available

912
00:40:55.950 --> 00:40:58.260
under the Massachusetts tax?

913
00:40:58.260 --> 00:40:59.760
<v ->Well, it is, it is under 62.</v>

914
00:40:59.760 --> 00:41:02.880
And that is, that's a key point here.

915
00:41:02.880 --> 00:41:06.510
If we are saying there's a capital gain is taxable,

916
00:41:06.510 --> 00:41:08.430
then automatically you're under 62.

917
00:41:08.430 --> 00:41:10.140
You're no longer under 121A.

918
00:41:10.140 --> 00:41:12.240
And then because you are under 62

919
00:41:12.240 --> 00:41:16.680
then depreciation, where allowable under 62,

920
00:41:16.680 --> 00:41:18.810
and whether or not you took them,

921
00:41:18.810 --> 00:41:20.070
you still have to,

922
00:41:20.070 --> 00:41:21.870
you have to include it in the computation.

923
00:41:21.870 --> 00:41:23.955
<v ->That's a double whammy is what it is.</v>

924
00:41:23.955 --> 00:41:27.810
<v ->It seems the opposite of an incentive.</v>

925
00:41:27.810 --> 00:41:28.860
<v Justice>Right.</v>

926
00:41:28.860 --> 00:41:31.020
<v ->It's a complete disincentive.</v>

927
00:41:31.020 --> 00:41:34.920
<v ->Well, I would disagree with you Judge Wenlandt.</v>

928
00:41:34.920 --> 00:41:36.930
I mean depreciation deductions...

929
00:41:36.930 --> 00:41:38.970
I mean, first of all, this court has always,

930
00:41:38.970 --> 00:41:41.070
in all the cases that I could find,

931
00:41:41.070 --> 00:41:43.462
this court has always stated that

932
00:41:43.462 --> 00:41:46.738
if the deduction is allowable,

933
00:41:46.738 --> 00:41:50.820
it has to be included in the computation of the basis.

934
00:41:50.820 --> 00:41:55.613
And the reason for that, I think, is depreciation,

935
00:41:55.613 --> 00:41:57.964
(indistinct) deduction (indistinct)

936
00:41:57.964 --> 00:42:00.240
as the Supreme Court stated in the Virgin Hotel,

937
00:42:00.240 --> 00:42:02.220
and then you have to consider

938
00:42:02.220 --> 00:42:04.410
the wear and tear of the building,

939
00:42:04.410 --> 00:42:07.620
whether or not the taxpayer was able to benefit it,

940
00:42:07.620 --> 00:42:09.480
and they couldn't benefit it in this case,

941
00:42:09.480 --> 00:42:11.730
because yes, 121A doesn't provide

942
00:42:11.730 --> 00:42:13.200
for depreciation deduction,

943
00:42:13.200 --> 00:42:15.300
because there's no taxable income

944
00:42:15.300 --> 00:42:18.540
to offset those deduction during those 40 years.

945
00:42:18.540 --> 00:42:20.310
So that is a reason why 121A

946
00:42:20.310 --> 00:42:22.860
doesn't provide the deduction.

947
00:42:22.860 --> 00:42:26.340
But here if you're saying the capital gain is taxable,

948
00:42:26.340 --> 00:42:30.810
it's under 62, and 62 provide depreciation deduction,

949
00:42:30.810 --> 00:42:32.840
and therefore you have to include it

950
00:42:32.840 --> 00:42:35.193
in the calculation of the basis.

951
00:42:37.020 --> 00:42:38.100
<v ->Okay.</v>
<v ->If you-</v>

952
00:42:38.100 --> 00:42:39.420
If you have no further question,

953
00:42:39.420 --> 00:42:41.430
I will rest on the brief,

954
00:42:41.430 --> 00:42:45.147
and I will ask the court to affirm the decision.