he Massachusetts Court of Appeals has ruled that, in some situations, a former resident of the Commonwealth can be liable for Massachusetts income tax on the sale of shares in a Massachusetts-headquartered company even after becoming a resident of another state. This case highlights a potential risk for business owners who assume that their liability for Massachusetts income taxes will end after they leave the Commonwealth.

The Case

Welch v. Commissioner of Revenue¹ was an appeal from a decision by the Massachusetts Appellate Tax Board. Craig Welch founded AcadiaSoft, Inc. in 2003 when he was a Massachusetts resident. He worked for the company extensively and was a Massachusetts resident from the time he founded the business until he left the state for New Hampshire in 2015. From 2003 to 2014, he filed Massachusetts resident income tax returns. He took little salary for some of these years, but expected that his hard work would cause his shares in the company to appreciate. For all years in question, AcadiaSoft was headquartered in Massachusetts and paid Massachusetts corporate income tax.

Within two months of moving to New Hampshire, Mr. Welch entered into an agreement to sell his shares in AcadiaSoft and resigned as an officer and director of the company, contingent upon that sale. Despite Mr. Welch’s move north of the border before the sale, the Appeals Court upheld a prior ruling that Mr. Welch was nonetheless liable for Massachusetts state income tax on the capital gain. State tax law provides nonresidents of Massachusetts remain liable for tax on their “Massachusetts source income.” This includes “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.”² A Massachusetts tax regulation adds that income that is effectively connected with a trade or business generally does not include the sale of shares of stock in a C or S corporation if the gain is treated as capital gain for federal purposes. However, this gain can generate Massachusetts source income if it is related to the taxpayer’s compensation for services in Massachusetts.³

The Decision

The Appellate Tax Board concluded – and the Massachusetts Appeals Court agreed – that Mr. Welch’s gain from the sale of the shares was compensatory and effectively connected with his employment at AcadiaSoft. The court reasoned that Mr. Welch obtained the stock soon after founding the company, expected that it would be worth more in the future than when he started the company, and looked forward to a payout for his hard work. All of this made the gain from the sale of the shares Massachusetts source income – for a taxpayer who had already left the state. 

Looking Ahead

The court’s opinion mentions the unique circumstances of the case, but it is easy to see how the reasoning could be applied more broadly. It is not unusual for an entrepreneur to expect that appreciation in a company in the future will be the reward for commitment to the business in the present. If such an entrepreneur devotes time and energy to a venture in Massachusetts, Welch suggests that the Commonwealth could tax resulting appreciation when a liquidity event eventually occurs, wherever that entrepreneur may then live. 

If you have any questions about the information in this advisory, please contact your usual Goulston & Storrs attorney. 

¹ Welch v. Commissioner of Revenue, No. 24-P-109 (Mass. App. Ct. April 3, 2025). 

² G.L. c. 62, § 5A(a).

³ 830 CMR ֻ§ 62.5A.1(3)(c)(8).