Appeal from a decision of the Appellate Tax Board. 

      Michael J. Bowen (Eric P. Rothenberg also present) for the taxpayers.

      Celine E. de la Foscade-Condon for Commissioner of Revenue.

      GRANT, J.  In this case, we consider whether the Commissioner of Revenue (commissioner) may treat as Massachusetts source income the gain realized by Craig H. Welch (Welch) and his spouse, Natalia I. Welch (collectively, the Welches), from the sale of stock in Welch's former employer, AcadiaSoft, Inc. (AcadiaSoft).2  Welch acquired the stock in 2005 soon after founding AcadiaSoft and continued to work for AcadiaSoft in Massachusetts, where he also resided, for the next decade, but was no longer a Massachusetts resident when he sold the stock in 2015.  The Welches appeal from a decision of the Appellate Tax Board (board) concluding that they were not entitled to an abatement of Massachusetts income tax on Welch's gain from that sale.

      The central issue before us is whether the gain from that sale was Massachusetts source income subject to tax under G. L. c. 62, § 5A, and 830 Code Mass. Regs. § 62.5A.1(3)(c)(8) (2006) (regulation).  In the circumstances of this case, we conclude that Welch's gain from the sale was "derived from or effectively connected with" his trade or business or employment at AcadiaSoft, G. L. c. 62, § 5A (a), even though at the time of the sale he was no longer "actively engaged in a trade or business or employment in the commonwealth," id.  Accordingly, we hold that the gain was Massachusetts source income and affirm the board's decision.

      Background.  The case was submitted to the board on a statement of agreed facts with attached exhibits, including deposition testimony of Welch and outside counsel for AcadiaSoft.  We summarize the facts found by the board, supplemented by other uncontested facts.

      AcadiaSoft develops and markets derivative and collateral management solutions for institutional investors.  At all relevant times, AcadiaSoft was headquartered in Massachusetts and filed Massachusetts corporate excise tax returns apportioning one hundred percent of its income to Massachusetts.

      In 2003, Welch formed AcadiaSoft as a Massachusetts corporation.  He was its sole stockholder and held the titles of president, treasurer, clerk, and sole director.  That corporation was voluntarily dissolved, and in 2005, another Massachusetts corporation by the same name was organized.  Welch was its chief executive officer (CEO) and treasurer, and Danny J. Moyse, a software engineer, was its chief technology officer, president, and secretary.  Welch and Moyse were AcadiaSoft's sole directors, and each held a fifty percent interest in its common stock.

      Between 2003 and 2015, Welch worked exclusively for AcadiaSoft.  In AcadiaSoft's early years, Welch's main focus was sales.  He described himself as AcadiaSoft's "chief evangelist":  he "created the desire for the product with the potential customers," "designed what the product needed to do," "sold it," and "financed it."  During 2003 through 2009, he worked about eighty hours each week.  However, he reported no wage income for 2003 through 2005.  He reported only minimal income in 2006 ($5,533.77) and 2007 ($7,235.42).  Welch expected that in the future AcadiaSoft would be worth a lot more than it was when he started it, and he was looking forward to the payout from his hard work, "[w]henever that came."

      In 2006 and 2007, AcadiaSoft raised funding from a group of "angel" investors -- individuals who did not work for the company but who became the holders of 28.[2] percent of its common stock.  Welch promised he would do his best to get them "a handsome return" on their investment.  As a result of that recapitalization, Welch's share of AcadiaSoft stock was diluted to 35.9 percent.

      Until about 2009, Welch and Moyse were running AcadiaSoft from their respective homes, both located in Massachusetts.  Welch primarily worked in Massachusetts.  About twice a month he traveled to New York to solicit funding, but he returned home to Massachusetts the same day.

      In 2009, AcadiaSoft merged into a Delaware corporation by the same name.  AcadiaSoft then entered into a transaction by which it obtained funding from financial services firms, resulting in the dilution of Welch's share of AcadiaSoft stock to approximately thirteen percent.  In addition, Welch became bound by an agreement that identified him as a "[k]ey [h]older" of AcadiaSoft stock and provided him with a financial incentive to remain employed by AcadiaSoft:  if within the next eighteen months Welch left AcadiaSoft's employment in certain circumstances, AcadiaSoft would have an option to purchase his shares for one cent per share, adjusted for transactions including stock splits.  With funds from that 2009 transaction, AcadiaSoft obtained office space in Pembroke.  Welch went to the office about once a month but continued to work mainly out of his home in Lynnfield.

      Beginning in 2010, Welch was the CEO of AcadiaSoft.[3]  He focused on operations, management, and sales.  All AcadiaSoft personnel reported to Welch, and he was involved in matters including hiring, assessing legal claims, formulating business plans, and seeking equity financing.

      In about 2012, AcadiaSoft's office moved to Norwell.  Welch went to the Norwell office usually once a week, but otherwise he worked from his home in Lynnfield.  Welch traveled frequently to New York and London on business, but AcadiaSoft did not have an office in either city.

      In 2013, AcadiaSoft entered into another round of financing with financial services firms.  As a result, Welch's share of AcadiaSoft stock was further diluted to 11.86 percent, where it remained until he left the company in 2015.

      Beginning in about 2014, Welch perceived tension between himself and one or more of the other AcadiaSoft directors, and he became concerned that his so-called "sweat equity" was in jeopardy.  By January 2015, Welch was CEO in name only:  he no longer had any operational role in AcadiaSoft but retained the CEO title at the request of the board of directors because he was "high profile" in the industry.

      For the years 2003 through 2014, the Welches filed Massachusetts resident income tax returns.  The Welches moved to New Hampshire on or about April 30, 2015, which was the last day of the Welches' Massachusetts residency.[4]

      In June 2015, AcadiaSoft offered to purchase Welch's shares, contingent on all the holders of common stock agreeing to sell their shares.  Welch accepted the offer and, on June 26, signed a letter resigning as an officer and director of AcadiaSoft, but he made his resignation contingent on the sale of his shares so that he could retain some leverage in the form of his founder's veto in the event that the sale did not occur.  AcadiaSoft entered into another round of financing and then purchased the entirety of Welch's shares.

      AcadiaSoft issued Welch a 2015 1099-B tax form reporting that, on June 29, 2015, Welch had received cash proceeds of $4,744,759.96, with no cost or other basis, for the sale of his shares.  For 2015, the Welches filed a Massachusetts nonresident/part-year resident tax return, on which they reported that amount as having been included as a capital gain on their Federal tax return.  On their Massachusetts tax return, the Welches did not include the $4,744,759.96 gain as income from a Massachusetts source.

      After an audit, the commissioner notified the Welches of an assessment totaling $335,968.62 in tax, interest, and penalties based on the gain realized by the sale of the AcadiaSoft stock.  The Welches applied for an abatement, which was deemed denied after months of inaction.  The Welches appealed to the board from the denial of abatement.  The board ruled that Welch's gain from the sale of his AcadiaSoft shares was Massachusetts source income because it was effectively connected with his trade, business, or employment in Massachusetts within the meaning of G. L. c. 62, § 5A (a).  The Welches appeal.

      Discussion.  1.  Standard of review.  "We defer to the board's expertise with respect to the interpretation of tax laws in the Commonwealth."  U.S. Auto Parts Network, Inc. v. Commissioner of Revenue, 491 Mass. 122, 127-128 (2022), quoting VAS Holdings & Invs. LLC v. Commissioner of Revenue, 489 Mass. 669, 674 (2022) (VAS Holdings).  See Oracle USA, Inc. v. Commissioner of Revenue, 487 Mass. 518, 522 (2021) ("Because the board is an agency charged with administering the tax law and has expertise in tax matters, we give weight to its interpretation of tax statutes" [citation and alteration omitted]).  "If the board's construction of a tax law 'is reasonable, we will defer to its interpretation.'"  Reagan v. Commissioner of Revenue, 491 Mass. 446, 451 (2023), quoting Oracle USA, Inc., supra.  At the same time, "[w]e adhere to the familiar principle that tax statutes are to be strictly construed; we will not read into a statute an authority to tax that it does not plainly confer[,]" and "[a]ny ambiguity is resolved in the taxpayer's favor" (citations omitted).  Commissioner of Revenue v. Oliver, 436 Mass. 467, 470-471 (2002).  "We will not reverse a decision of the board if it is based on substantial evidence and on a correct application of the law" (quotation and citation omitted).  U.S. Auto Parts Network, Inc., supra at 128.

      2.  Statutory interpretation.  We start with the plain language of the statute as in effect on June 29, 2015, when Welch sold his AcadiaSoft shares.  The statute empowered the commissioner to tax nonresidents on their Massachusetts source income, which it defined to include

"items of gross income derived from or effectively connected with . . . any trade or business, including any employment carried on by the taxpayer in the commonwealth, whether or not the nonresident is actively engaged in a trade or business or employment in the commonwealth in the year in which the income is received" (emphasis added).

G. L. c. 62, § 5A (a).  In 2003, the Legislature amended § 5A (a) to add the words underlined above.  See St. 2003, c. 4, § 7 (2003 amendment).[5]

      Before the 2003 amendment, Massachusetts courts construed the prior version of the statute as not permitting taxation of income derived from a nonresident's Massachusetts employment in a prior year.  See Oliver, 436 Mass. at 474 (prior version of § 5A did not permit taxation of nonresident on pension benefits earned from past Massachusetts employment); Destito v. Commissioner of Revenue, 23 Mass. App. Ct. 977, 978 (1987) (reading prior version of § 5A to imply that for income earned by nonresident to be taxable, it must be received within same tax year as nonresident worked in Massachusetts).  "As amended, the statute now permits a tax on a nonresident who did business in the Commonwealth regardless of whether the business was conducted in that particular year."  VAS Holdings, 489 Mass. at 688 n.23.

      Before the 2003 amendment, § 5A also did not define the phrase "derived from or effectively connected with any trade or business."  By the 2003 amendment, the Legislature added the following language:

"For purposes of this section, gross income derived from or effectively connected with any trade or business, including any employment, carried on by the taxpayer in the commonwealth shall mean the income that results from, is earned by, is credited to, accumulated for or otherwise attributable to either the taxpayer's trade or business in the commonwealth in any year or part thereof, regardless of the year in which that income is actually received by the taxpayer and regardless of the taxpayer's residence or domicile in the year it is received.  It shall include, but not be limited to, gain from the sale of a business or of an interest in a business . . . ."

G. L. c. 62, § 5A (a), as amended by St. 2003, c. 4, § 7.

      In construing that language added by the 2003 amendment, the board noted that § 5A (a) "incorporates an exceedingly broad definition" of the phrase "derived from or effectively connected with any trade or business."  That definition includes the list of phrases "results from, is earned by, is credited to, accumulated for or otherwise attributable to," and specifically enumerates sources of taxable income as including what occurred here:  "gain from the sale of . . . an interest in a business."  G. L. c. 62, § 5A (a).

      The board's interpretation of § 5A (a) is further informed by the regulation.  As in effect on June 29, 2015, the regulation stated,

"Income from a trade or business may include income that results from the sale of . . . an interest in a business.  This rule . . . generally does not apply . . . to the sale of shares of stock in a C or S corporation, to the extent that the income from such gain is characterized for federal income tax purposes as capital gains. . . .  Such gain may . . . give rise to Massachusetts source income if, for example, the gain is otherwise connected with the taxpayer's conduct of a trade or business, including employment (as in a case where the stock is related to the taxpayer's compensation for services) . . . ."[6]  (Emphases added.)

830 Code Mass. Regs. § 62.5A.1(3)(c)(8).

      Focusing on the word "not" underlined above, the Welches argue that the regulation means that the commissioner may not treat as Massachusetts source income Welch's gain from the sale of his shares in AcadiaSoft, a C corporation.[7]  As the commissioner points out, however, in that sentence, the word "not" is qualified by the word "generally."  See Bartenwerfer v. Buckley, 598 U.S. 69, 78 (2023) ("[a]s the word 'generally' indicates, [the] rule is not absolute").  Read as a whole, the regulation makes clear that the gain from the sale of stock in a C corporation may constitute Massachusetts source income if "the stock is related to the taxpayer's compensation for services."  830 Code Mass. Regs. § 62.5A.1(3)(c)(8).

      We conclude that the board's interpretation of § 5A (a) is reasonable.  See VAS Holdings, 489 Mass. at 674.  Against that statutory and regulatory framework, this case turns on whether Welch's gain from his AcadiaSoft shares was "derived from or effectively connected with" his trade or business or employment, G. L. c. 62, § 5A (a), or "related to [his] compensation for services," 830 Code Mass. Regs. § 62.5A.1(3)(c)(8).

      3.  Application to this case.  Applying § 5A (a) to "the unique circumstances" of this case, the board concluded that Welch's gain from the sale of his AcadiaSoft shares was "compensatory" and "a remuneration that derived from and was effectively connected with his AcadiaSoft employment."

      At oral argument, the Welches contended that the board's determination that Welch's gain was "compensatory" is a conclusion of law that we should review de novo.  The commissioner countered that it is a finding of fact to which we should defer.  We view it as a mixed question of fact and law, and accord "some deference" to the board's decision.  Boston Professional Hockey Ass'n v. Commissioner of Revenue, 443 Mass. 276, 285 (2005), quoting Koch v. Commissioner of Revenue, 416 Mass. 540, 555 (1993) ("In reviewing mixed questions of fact and law, the board's expertise in tax matters must be recognized, and its decisions are due 'some deference'").

      The board concluded that Welch "was not a passive investor in AcadiaSoft, but a founder whose continued employment with the company ‑‑ in prominent, powerful, and crucial roles -- contributed to its value."  He "exclusively devoted his life for more than a decade" to AcadiaSoft, "to which he made crucial contributions that added to, and were critical to, the company's value."  The board emphasized several events that linked Welch's ownership of AcadiaSoft stock to his compensation.  He acquired that stock soon after he founded AcadiaSoft, dedicated himself to the success of AcadiaSoft, and expected a payout for his sweat equity.  In connection with the 2009 refinancing, he became bound by an agreement that tied his status as a key holder of AcadiaSoft stock to his continued employment with the company.  Finally, Welch made his resignation from AcadiaSoft contingent on the sale of his shares.

      The Welches argue that Welch's gain from the sale of his AcadiaSoft shares was not "derived from or effectively connected with" his trade or business or employment within the meaning of § 5A (a).  They advance two arguments, neither of which persuades us that the board erred.

      First, focusing on the terms "trade or business" in § 5A (a), the Welches argue that it was AcadiaSoft that conducted the trade or business of developing and marketing derivative and collateral management solutions, not Welch personally.[8]  This argument is unavailing because, as the Welches acknowledge, the gain is taxable if it derived from Welch's trade or business of working for AcadiaSoft.  On that point, the Welches argue that the stock was not compensation for Welch's employment because AcadiaSoft had not yet conducted any business when Welch acquired the stock in 2005, there is no evidence of an explicit agreement that the shares were issued as compensation, and he was later paid a salary.  While it is true that in many circumstances when an employee of a corporation receives stock, the employer formally designates it as compensation, see, e.g., Jones v. Jones, 101 Mass. App. Ct. 673, 682 n.13 (2022), the absence of such a formal designation is not determinative of the issue before us.  Here, because Welch obtained the stock soon after founding AcadiaSoft, expected that in the future AcadiaSoft would be worth a lot more than it was when he started it, and was looking forward to the payout from his hard work, the board had substantial evidence on which to base its determination that Welch's gain from the sale of the AcadiaSoft stock was derived from his employment.

      Second, the Welches contend that Welch held his AcadiaSoft shares as an investment.  They point to the regulation's example (3)(c)(8.4), which posits that, where an employee of a Massachusetts corporation lives out of State and "purchases stock" in his employer's corporation "as an ordinary investment unrelated in any way to his compensation," gain from the sale of that stock would not be treated as Massachusetts source income.  That example is not on point here because Welch did not "purchase" his AcadiaSoft shares, and, as discussed above, his acquiring the stock was related to his compensation.

      We conclude that the board had substantial evidence on which it based its determination that Welch's gain from the sale of his AcadiaSoft shares was derived from his own trade or business of software development.  See Commissioner of Internal Revenue v. Groetzinger, 480 U.S. 23, 35 (1987) (full-time gambler was engaged in "trade or business" within meaning of 26 U.S.C. §§ 162[a] and 62[1]; "to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and . . . the taxpayer's primary purpose for engaging in the activity must be for income or profit").

      Conclusion.  The board determined that Welch's gain from the sale of his shares of AcadiaSoft stock was "derived from and was effectively connected with" his trade or business or employment, and therefore it was taxable as Massachusetts source income.  We conclude that the board's decision was based on substantial evidence and a correct application of the law.

Decision of the Appellate Tax Board affirmed.

footnotes

[1] Natalia I. Welch.

[2] During Welch's employment, AcadiaSoft took three different corporate forms, each of which was called by the same name.  We use that name to refer to each of them.

[3] Moyse had served as CEO for several months beginning in December 2009.

[4] The commissioner does not argue that when Welch sold his AcadiaSoft shares on June 29, 2015, his domicile was Massachusetts, and so we do not consider that issue.

[5] The Legislature has made additional amendments to the statute since then, but none of those amendments have altered the quoted language.

[6] The regulation also provides that "gain from . . . the disposition of shares of corporate stock will be considered Massachusetts source income if it is treated as compensation for federal income tax purposes."  830 Code Mass. Regs. § 62.5A.1(3)(c)(8).  The parties do not argue that that part of the regulation applies, and so we do not consider the issue.

[7] After its 2009 merger into the Delaware corporation, AcadiaSoft was taxed as a C corporation.  See Bernier v. Bernier, 449 Mass. 774, 775 n.2 (2007).

[8] The Welches rely on Oliver, in which the court, construing the pre-2003 amendment version of § 5A, concluded that a retiree living out of State and receiving a pension from his former employer in Massachusetts did not "personally conduct the Massachusetts business giving rise to the income."  Oliver, 436 Mass. at 472, quoting Commissioner of Revenue v. Dupee, 423 Mass. 617, 620 (1996).  Oliver is inapposite.  At the time, § 5A permitted taxation of a nonresident who conducted business in the Commonwealth during the taxable year at issue.  The version of § 5A (a) at issue here permits taxation of a nonresident who conducts business in the Commonwealth "regardless of whether the business was conducted in that particular year," VAS Holdings, 489 Mass. at 688 n.23.