September 13, 1977
In your letter of September 1, 1977, hereby incorporated by reference, you sate that your client, ********** proposes to establish a ********** Municipal Bond Fund (the "Fund") to hold bonds the interest on which is exempt from federal and Massachusetts income tax. [Their] present intention is to include only bonds of the Commonwealth of Massachusetts, its political subdivisions, and their agencies and instrumentalities. However, if there are not enough such bonds available or if it becomes necessary in order to maintain a competitive yield, bonds issued by the Government of Puerto Rico or by its authority may also be included.
The Fund will be organized in the form of a unit investment trust established under the laws of the Commonwealth of Massachusetts. The trustee of the Fund will be ********** Bank (the "Trustee") and the Fund's principal place of business will be in Massachusetts. Beneficial interests or shares in the Fund will be represented by transferable certificates. Such shares will be offered and sold primarily to residents of Massachusetts. However, there is no requirement that shareholders be residents of this state. It is contemplated that after shares in the first fund are sold, further funds of a similar nature may be organized.
The Trustee of the Fund will not have power to vary the original portfolio of bonds purchased by the Trust. Accordingly, under Section 301.7701-4(c) of the U.S. Treasury Regulations, the Fund will be treated as a trust for federal income tax purposes rather than as an "association" taxable as a corporation. Moreover, since each shareholder will have the right at any time to revoke his interest in the trust by having his shares redeemed, the Fund will be treated for federal income tax purposes as a "grantor trust" under Section 676(a) of the Internal Revenue Code of 1954 (the "Code").
You inquire as to the Massachusetts tax consequences.
The taxation of trusts, the beneficial interest in which is represented by transferable shares, corporate trusts, is governed by M.G.L. Chapter 62, Section 8. The statute provides that the corporate trust shall be subject to the taxes imposed on individuals. Said section specifies the corporate trusts which will not be subject to said taxes. There is no exclusion provided for so-called "grantor trusts" in said section.
St. 1976, Chapter 510, amended M.G.L. Chapter 62, Section 10 to provide that if the grantor or another person is treated as the owner of any portion of a trust by reason of the provisions of Section 671 to 678 inclusive, of the Code, the items of income, deduction and credits against tax which are attributable to that portion of the trust shall not be taken into account in calculating the income taxable to the trust. This provision applies only to trusts subject to taxation by said Section 10. It has no application to corporate trusts.
Based on the foregoing it is ruled:
1. Interest received by the Fund on bonds of the Commonwealth, and its political subdivisions, their agencies and instrumentalities and on bonds issued by the Government of Puerto Rico or by its authority will be exempt from taxation.
2. Gain or loss on the sale or exchange of bonds of the Commonwealth and its political subdivisions, their agencies and instrumentalities, except where specifically exempted by the act authorizing issuance of the bonds, will be includible in Massachusetts gross income of the Fund. Gain or loss realized on the sale or exchange of bonds issued by the Government of Puerto Rico or by its authority, will not be includible in Massachusetts gross income of the Fund.
3. Dividends on shares of the Fund will be exempt from taxation under General Laws, Chapter 62, Section 8.
Very truly yours,
/s/Owen L. Clarke
Owen L. Clarke
Commissioner of Corporations