Facts : A Massachusetts corporation (M) wholly owns a foreign corporation (F1) which, in turn, owns 15% of the voting stock of another foreign corporation (F2). Neither foreign corporation distributes dividends to its shareholders, but M is required to include in its federal gross income its pro rata share of subpart F income from F1 and F2. In addition, United States shareholders unrelated to M own, directly or indirectly, the other 85% of F2; and M holds its interest in F1, and F1 holds its interest in F2, on the last day of M's taxable year.

Issue : Is the subpart F income includible in M's federal gross income eligible for the Massachusetts dividends received deduction?

Directive : Subpart F income includible in a corporation's federal gross income is eligible for the Massachusetts dividends received deduction, provided that the corporation receiving the dividend either directly owns, or constructively owns under the rules of Internal Revenue Code § 958(b), at least 15% of the voting stock of the corporation paying the dividend. Since M directly owns 100% of the voting stock of F1 and constructively owns 15% of the voting stock of F2, the subpart F income M must include in federal gross income from these foreign subsidiaries is eligible for the Massachusetts dividends received deduction.

Discussion of Law :

Subpart F income that is included in a corporation's federal gross income is treated as a dividend for Massachusetts corporate excise tax purposes and qualifies for the dividends received deduction. Dow Chemical Co. v. Commissioner of Revenue, 378 Mass. 254, 267 (1979). Although, as a general rule, constructive ownership rules do not apply in determining whether a dividend is eligible for the Massachusetts dividends received deduction, an exception is made for subpart F income. Since Massachusetts accepts the application of Internal Revenue Code § 958's ownership attribution rules in determining that all subpart F income includible in a corporation's federal gross income is treated as a dividend for Massachusetts purposes, Massachusetts will also accept the application of such rules for purposes of determining whether a dividends received deduction is available to offset the imputed subpart F income dividend. Under Internal Revenue Code § 958, M directly owns 100% of the voting stock of F1 and constructively owns 15% of the voting stock of F2. Thus, the subpart F income M must include in federal gross income from F1 and F2 is eligible for the Massachusetts dividends received deduction.

/s/Mitchell Adams
Mitchell Adams
Commissioner of Revenue

MA:HMP:smd

October 26, 1998

DD 98-2