Court Upholds Massachusetts Tax on Business Gain After Owner Relocates

In this article:

• Background on the Welch Case
• Legal Reasoning and Court Ruling
• Implications for Entrepreneurs and Executives
• Potential Next Steps and Appeals
• Ruling Highlights Tax Risks on Sale of Founder Stock
• How We Help

The Massachusetts Appeals Court recently ruled that a tech founder’s $4.7 million stock sale could be subject to state income tax, despite his move out of state. Craig Welch, who co-founded AcadiaSoft, Inc. in 2003, initially held a 50-50 ownership split with one partner, though his interest was diluted over time as the company brought in additional investors, according to the ruling. Welch sold his shares in 2015 after relocating to New Hampshire. He had served as AcadiaSoft’s CEO, president, vice president, and treasurer during his tenure. The court held that the gain was Massachusetts-source income tied to his prior employment. The decision challenges common assumptions about state tax liability for entrepreneurs who sell company interests after leaving Massachusetts. It may prompt business owners and executives to reconsider tax planning around stock sales and residency changes.

Background on the Welch Case

Craig Welch co-founded AcadiaSoft in 2003, launching the firm with one partner in a home office setting. The company developed software to help large financial institutions manage collateral requirements and soon attracted industry backing. As capital flowed in, Welch’s ownership stake—initially split 50-50—was diluted to accommodate new investors. In time, his role within the firm diminished, reflecting both internal friction and a shift in the company’s leadership structure.

By early 2015, Welch had stepped back from day-to-day management and moved with his wife to New Hampshire. That spring, as part of a broader Series D funding round, AcadiaSoft offered to repurchase common stock, and Welch elected to sell his shares for $4.7 million. While Welch viewed the transaction as the sale of a passive investment, the Massachusetts Department of Revenue argued that his equity represented deferred compensation linked to years of in-state work. The court ultimately agreed, citing his long-running involvement in company operations while based in Massachusetts.

Legal Reasoning and Court Ruling

The Massachusetts Appeals Court based its decision on a state statute that defines Massachusetts-sourced income as income “derived from or effectively connected with… any trade or business, including any employment carried on by the taxpayer in the Commonwealth.” The court found that Welch’s sale of AcadiaSoft shares met this definition because his ownership interest was tied to his employment and business activities in Massachusetts.

Although Welch’s legal team maintained that the stock was held as a long-term investment rather than compensation, the court disagreed. It emphasized that Welch acquired the stock soon after founding AcadiaSoft and worked actively to grow the company with the expectation of eventual financial benefit. The absence of a formal employment agreement or stock option plan did not override the connection between Welch’s efforts and the resulting payout. This interpretation extends Massachusetts’ reach to tax certain gains even after a taxpayer relocates out of state.

Implications for Entrepreneurs and Executives

This ruling signals a shift for entrepreneurs who relocate before selling their interests in Massachusetts-based companies. Those who previously believed that moving out of state would shield them from Massachusetts income tax on such gains may now face unexpected tax liabilities. The decision clarifies that the state can claim income tax on stock sales if the gain is linked to business activities conducted within Massachusetts.

For business leaders, the ruling adds complexity to tax planning and may influence decisions about where to live or structure ownership interests. It arrives amid growing concerns about the so-called millionaires tax in Massachusetts, which some say encourages executives and founders to consider relocating. The ruling underscores the importance of consulting with tax professionals when navigating the tax consequences of equity sales, especially in states with aggressive sourcing rules.

Potential Next Steps and Appeals

Welch is reportedly considering an appeal to the Massachusetts Supreme Judicial Court, which has not previously ruled on this issue. Such an appeal could provide further guidance on how the state defines income sourcing for stock sales linked to business activities. The court’s decision will likely influence future cases involving out-of-state taxpayers with ties to Massachusetts companies.

The Massachusetts Department of Revenue supports the appeals court ruling, indicating a firm stance on enforcing this interpretation of state income tax law. Taxpayers in similar circumstances may face heightened scrutiny. Clients are encouraged to contact AAFCPAs to assess potential risks and compliance requirements in light of their specific circumstances.

Ruling Highlights Tax Risks on Sale of Founder Stock

The recent Massachusetts appeals court decision signals a shift in how gains from the sale of founder stock may be taxed when the sale occurs after relocating out of state. The court ruled that the gain Welch realized from selling his shares in AcadiaSoft is Massachusetts-source income because it was closely tied to his employment and efforts in the state. This challenges the common assumption that such gains are purely capital gains not subject to Massachusetts tax for nonresidents.

AAFCPAs cautions that this ruling could lead to more gains being taxed as ordinary income, which carries higher rates than long-term capital gains. The decision underscores the importance of examining the connection between the wealth created and the state where the business operated. It raises questions about how founders and executives can structure the timing and nature of their business sales to minimize tax exposure.

AAFCPAs advises that clients review the specifics of equity ownership and sale agreements to identify potential Massachusetts tax obligations. Thoughtful planning, including the possibility of restructuring the ultimate sale of the business, may help in separating the source of income from the state’s taxing jurisdiction. Engaging with your AAFCPAs advisor early can help develop strategies to protect wealth and ensure compliance with evolving tax interpretations.

How We Help

AAFCPAs’ Tax Planning & Compliance practice offers proactive, personalized guidance to help business owners, executives, and high-net-worth individuals make informed decisions about tax exposure—especially in moments that involve liquidity events, business transitions, or concentrated stock positions. Our integrated team of CPAs, consulting tax attorneys, and wealth advisors brings specialized technical knowledge and cross-disciplinary insight to each engagement, applying a holistic lens to reduce tax liabilities while aligning strategies with long-term financial goals. We help clients evaluate potential scenarios, such as how investment gains are taxed at the sale, and explore options to preserve wealth—whether through business structuring, charitable giving, or timing strategies. With a clear focus on both compliance and opportunity, we aim to shield clients from avoidable risk and deliver lasting value through proactive planning.

These insights were contributed by Joshua England, LLM, Esq., Partner & Tax Attorney and Kelly Zack, MST, Partner, State & Local Tax (SALT). Questions? Reach out to our authors directly or your AAFCPAs partner. AAFCPAs offers a wealth of information on tax planning and wealth advisory for company founders, executives, and high-net-worth individuals navigating complex financial decisions. Subscribe to get alerts and insights in your inbox.