Massachusetts Supreme Judicial Court Issues a Win for Sullivan Client in State Tax Dispute

Justices Strike Down Tax Assessed on Capital Gain from Sale of Exempt Urban Redevelopment Project, a Win for Massachusetts Urban Redevelopment and Affordable Housing
Press Release
March 14, 2023

Boston, MA - On Friday, March 10, 2023, the Supreme Judicial Court ("SJC") issued its decision in James J. Reagan, Jr. v. Commissioner of Revenue, finding that capital gains arising from the sale of urban redevelopment projects organized and operated under G.L. c. 121A are exempt from Massachusetts taxation. The decision represents a big win for urban renewal and affordable housing efforts in the commonwealth, as well as an important check on the Massachusetts Commissioner of Revenue’s (“Commissioner”) attempts to chip away tax benefits afforded to taxpayers by statute (for more on this trend, see our alert about the SJC’s Decision in Oracle, USA Inc. v. Commissioner of Revenue, here).

The case concerned the application of tax exemptions afforded under G.L. c. 121A, a special regime designed to incentivize the investment of private capital in blighted areas, to capital gain on the sale of three urban redevelopment projects ("121A projects"). Here, the 121A project owners collectively built and maintained more than 500 units of affordable housing and housing designated for the elderly and disabled, while helping to revitalize areas of Boston. Under G.L. c. 121A, the project owners were obligated to pay a special excise on property value and gross receipts and were subject to an annual cap on operating profits and property use restrictions. In exchange, 121A project owners are exempt from "any" Massachusetts state or local tax arising "on account of" a 121A project. 

At issue in the case was whether G.L. c. 121A’s exemption applied to capital gain arising from the 2012 sale of the 121A project properties. The Commissioner contended that the gain was not exempt and assessed the 121A project owners, including Mr. Reagan. On appeal, the Massachusetts Appellate Tax Board ("ATB") upheld those assessments based on multiple arguments advanced by the Commissioner. 

On behalf of Mr. Reagan, Sullivan attorneys Richard Jones and Caroline Kupiec brought an appeal to the state’s highest court. In their briefs and at the oral argument before the SJC’s seven justices, Attorneys Jones and Kupiec contended that G.L. c. 121A’s broad exemptions must be applied to capital gains and explained why each of the Commissioner’s arguments to the contrary must be rejected. The SJC agreed and reversed the ATB decision. Notably, the SJC disagreed with the Commissioner’s assertion that capital gain on the sale of a 121A project was not "on account" of that 121A project. The SJC also refused to adopt the Commissioner’s notion that the sale of the 121A projects caused the G.L. c. 121A exemption period to end before the capital gains arose. Instead, the SJC agreed with the reasoning articulated by Sullivan attorneys – that the capital gains necessarily arose simultaneously with the sale of the 121A project properties and thus were within the exemption period.

In its decision, the SJC emphasized that both the plain language and legislative intent of G.L. c. 121A clearly mandated the tax exemption of the capital gains from the 121A project property sales. The SJC observed that G.L. c. 121A itself:


sets forth the Legislature’s intent to provide a significant incentive to spur private investment to transform blighted areas of the Commonwealth’s cities and towns, and to build sorely needed low income housing, to remedy a situation that had become a public exigency, which the Commonwealth’s police powers alone could not solve and which was not being addressed by operation of the private marketplace in the absence of such an incentive.


To this end, the SJC noted the many monetary restrictions that G.L. c. 121A imposes, including a special excise and caps to operating profits, and remarked that “[t]hese other limiting provisions of the statute bolster our construction of the tax concession . . . in order to achieve the codified [legislative] intent."

Importantly, the SJC’s decision has potentially broad beneficial impacts for urban revitalization and affordable housing efforts at a time of limited housing supply for those of lesser means by further incentivizing investment in blighted areas via 121A projects.

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Richard Jones leads Sullivan & Worcester's Tax Practice Group, and along with Caroline Kupiec, a tax associate, concentrates on SALT and Tax Controversy

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