Reagan v. Commissioner of Revenue, 491 Mass. 446

Background

James J. Reagan, Jr. (and spouse) were partners through Newbury Realty Trust in three §18C limited partnerships that owned, operated, and maintained urban redevelopment projects in Boston developed under G. L. c. 121A.
Each project had a §6A contract with the city and §18C regulatory agreements with the Boston Redevelopment Authority, paid the Chapter 121A excise and other required payments, and were subject to capped returns.
Near the end of their forty-year tax‑exempt terms the partnerships sold the projects in 2012 to unrelated buyers who continued operating the projects under §6A/§18C agreements.
The Reagans reported the capital gains on their Federal return but excluded those gains from Massachusetts taxable income, claiming the gains were exempt under G. L. c. 121A, §18C(f) as taxes “on account of” the projects.
The Commissioner assessed Massachusetts tax on the gains, denied abatement, and the Appellate Tax Board upheld that assessment; the Supreme Judicial Court reversed the ATB and held the capital gains were exempt.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether capital gain on sale of a §121A project during the exemption period is exempt under §18C(f) as a tax “on account of” the project	Reagan: gain is causally related to the project and therefore exempt as a tax "on account of" the project	Commissioner: gains realized after the project is sold (so no longer a §121A entity), §18D/condo-profit language and prior letter ruling show taxes apply	Held exempt: "on account of" means "because of," and capital gain is causally connected to the project and realized at sale, so covered by §18C(f)
Timing — is gain realized after entitlement to exemption ends?	Reagan: gain is realized simultaneous with sale and during the entities’ performance of duties	Commissioner/ATB: sale terminates §121A status so gain not within exemption	Held for Reagan: capital gain is realized at sale; timing does not exclude exemption
Effect of §18D condominium guaranty language (mentioning taxes on profit) on exemption scope	Reagan: §18D serves other policy goals and does not imply taxable status for project sales generally	Commissioner/ATB: §18D’s definition of "profit" reduces proceeds by "all state...taxes," implying taxability	Held for Reagan: §18D’s language does not override the broad §18C(f) exemption and would produce an absurd result contrary to statutory purpose
Weight of Commissioner Letter Ruling 94-7 and internal memoranda	Reagan: agency statement conflicts with statute and is not entitled to deference	Commissioner/ATB: prior letter and memo support taxation of sale proceeds	Held for Reagan: the agency pronouncement is conclusory, inconsistent with statute, and not binding or entitled to deference

Key Cases Cited

New England Forestry Found., Inc. v. Assessors of Hawley, 468 Mass. 138 (de novo review of statutory construction)
Oracle USA, Inc. v. Commissioner of Revenue, 487 Mass. 518 (give weight to ATB but review legal questions de novo)
South Boston Sav. Bank v. Commissioner of Revenue, 418 Mass. 695 (tax exemptions construed narrowly; taxpayer bears burden)
State Tax Comm'n v. Blinder, 336 Mass. 698 (exemptions are special favors and strictly construed)
Rousey v. Jacoway, 544 U.S. 320 ("on account of" requires causal connection)
O'Gilvie v. United States, 519 U.S. 79 (interpreting "on account of" as "because of")
Minkin v. Commissioner of Revenue, 425 Mass. 174 (capital gain realized when property is liquidated at a profit)
Boston Edison Co. v. Boston Redev. Auth., 374 Mass. 37 (Chapter 121A projects serve public purposes and are subsidized by tax concessions)