Massachusetts puts Form 4797 gains in Part B and drops Form 4797 losses instead of using Schedule D, line 7 #9990

What's wrong

other_net_gain (Form 4797, line 18b, carried to Schedule 1, line 4) reaches ma_gross_income only through irs_gross_income, which adds its positive part. Neither ma_part_a_gross_income nor ma_part_c_gross_income includes it, so:

1. A gain stays in Part B.
2. A loss is dropped. irs_gross_income floors it at zero, ma_gross_income_loss_adjustment does not add it back, and loss_ald is disallowed for Part B AGI. The loss never offsets capital gains or dividends.

Massachusetts puts Form 4797, Part II amounts on Schedule D, line 7 (Part C), except gains and losses on business property held one year or less, which go on Schedule B, lines 12 and 17 (Part A). PolicyEngine taxes Parts B and C at the same rate, so a gain alone gives the same tax; the tax differs when there are capital losses or a Form 4797 loss.

Raised by @hua7450 in the review of #9954.

Examples (2023, single, wages 60,000)

¹ PolicyEngine also needs #9905 (Part A taxes gross dividends) fixed to reach 2,680.

Computed from the 2023 Form 1, Schedule B and Schedule D (Form 1, line 19 = 60,000 − 2,000 − 4,400 = 53,600, taxed at 5% = 2,680, in every row):

• Row 2: Schedule B, line 19c = −2,000; line 20 = 0 (line 9 is 0); line 21 = −2,000; line 22 = Schedule D, line 14 = min(2,000, 5,000) = 2,000. Schedule D, line 15 = 5,000 − 2,000 = 3,000. Tax = 2,680 + 5% × 3,000.
• Row 3: Schedule D, line 1 = 5,000; line 7 = −3,000; line 9 = 2,000 = line 13 = line 21. Tax = 2,680 + 5% × 2,000.
• Row 4: Schedule D, line 13 = −1,000; line 14 = Schedule B, line 25 = min(1,000, 3,000) = 1,000; line 15 = 0. Schedule B, line 26 = 2,000 = line 39. Tax = 2,680 + 8.5% × 2,000.
• Row 5: Schedule D, line 13 = −3,000; Schedule B, line 24 = 0, so line 14 = 0 and line 15 = −3,000. Line 32 worksheet: line 2 = 1,000; line 4 = 1,000; line 5 = 3,000; line 6 = 1,000. Schedule B, line 33 = 0. Schedule D, line 17 = −2,000 is carried over. Tax = 2,680.

Evidence

2023 Schedule D, page 1:

"7 Massachusetts long-term capital gains and losses from U.S. Form 4797, Part II (not included in lines 1 through 6)."

2023 Form 1 instructions, pages 27–28, Schedule D:

"Line 7. Massachusetts Long-Term Capital Gains and Losses from U.S. Form 4797, Part II. Enter amounts from U.S. Form 4797, Part II treated as capital gains or losses for Massachusetts purposes (not included in lines 1 through 6). These include ordinary gains from the sale of 1231 property, recapture amounts under §§ 1245, 1250 and 1255, § 1244 losses and the loss on the sale, exchange or involuntary conversion of property used in a trade or business not held for one year or less."

Same instructions, page 25, Schedule B:

"Line 12. Gain on Sale of Business Property. Enter from U.S. Form 4797 the amount of gain from the sale, exchange or involuntary conversion of property used in a trade or business and held for one year or less."
"Line 17. Loss on Sale of Business Property. Enter from U.S. Form 4797 the amount of loss from the sale, exchange or involuntary conversion of property used in a trade or business and held for one year or less."

2023 Form 4797, page 1, Part II "Ordinary Gains and Losses":

"10 Ordinary gains and losses not included on lines 11 through 16 (include property held 1 year or less)"
"b Redetermine the gain or (loss) on line 17 excluding the loss, if any, on line 18a. Enter here and on Schedule 1 (Form 1040), Part I, line 4"

2023 Schedule 1 (Form 1040):

"4 Other gains or (losses). Attach Form 4797"

other_net_gain is documented as "Other net gain/loss from Form 4797".

One input for two Massachusetts lines

other_net_gain is a single tax-unit amount, so it cannot separate the Form 4797, Part II items that Massachusetts puts on Schedule D, line 7 from the gains and losses on business property held one year or less (Schedule B, lines 12 and 17, taxed at the 8.5% or 12% short-term rate). Treating the whole amount as Schedule D, line 7 is exact for the recapture, § 1231 and § 1244 items that the line 7 instructions list; splitting out short-term business property would need a new input.

Fix

Add other_net_gain to the long-term Schedule D amount used by ma_part_c_gross_income and ma_part_a_agi, and remove its positive part (other_net_gain_gross_income) from ma_part_b_gross_income. This builds on #9954, which changes the same lines.