Corporations and financial institutions that hold REMIC residual interests may have a Massachusetts corporate excise tax refund opportunity. REMICs are essentially pools of mortgages that are taxed on a pass-through basis for federal income tax purposes. Interests in REMICs fall into two general categories: regular interests and residual interests. Typically, the holders of the REMIC residual interests are not entitled to any payments with respect to their interests until the regular interests have been fully satisfied. However, under the federal income tax rules governing REMICs, residual interest holders may still be required to recognize income in years in which they receive no payments with respect to their interests. This “phantom” income recognition is referred to as “excess inclusion income”. Mechanically, excess inclusion income is reported as an annual “true up” to the federal taxable income of a residual interest holder. Thus, REMIC residual interest holders are instructed that the taxable income they report on Line 30 of their federal income tax return (Form 1120) for each year must be no less than the excess inclusion amount. Many residual holders assume that excess inclusion income must also be included in net income for Massachusetts corporate income tax purposes. However, it is not clear that this treatment is correct. First, the starting point for computing net income for Massachusetts corporate excise tax purposes is “gross income as defined under the provisions of the Internal Revenue Code”. G.L. c. 63, §§ 1, 30. Excess inclusion income is not included in gross income. Instead, excess inclusion income operates as a minimum, or floor, imposed on the calculation of federal taxable income after NOL and special deductions (Form 1120, Line 30). See 2016 Instructions for Form 1120, U.S. Corporation Income Tax Return, p. 15. As a consequence, excess inclusion income should not be included in the calculation of net income for Massachusetts purposes. The corporate excise tax return instructions support this position, because they direct taxpayers to use taxable income before NOL and special deductions (Line 28 of Form 1120), rather than Line 30, as the starting point for computing net income. See, e.g., MA - 2016 Instructions for Form 1120 2016 Massachusetts Corporate Excise Return, Form 355, Instructions, p. 12. Second, the Massachusetts courts have long viewed the authorization for the imposition of an income tax in Article 44 of the Amendments to the Massachusetts Constitution as limited to taxes imposed on “true” income. Thus, in several cases, the Supreme Judicial Court has found taxes to be invalid to the extent imposed on “fictional” or “paper” income. See, e.g., Bill DeLuca Enterprises, Inc. v. Commissioner, 431 Mass. 314 (2000). Excess inclusion income would seem to fall squarely within the scope of fictional income—because it can be recognized by a residual interest holder independent of any distribution, disposition or other realization event.