February 13, 1985

__________ ("Company") is a subsidiary of ___________ ("Parent") which is considering opening an office of the Company in Massachusetts. You ask whether the Company will qualify as a "corporation dealing exclusively in securities" under General Laws Chapter 63, Section 38B. If the Company is ineligible for security corporation classification, you inquire as to the proper method of apportioning its income to Massachusetts.

You state that the nature of the Company's business is to generate capital gains through equity investments in high-risk ventures and selected public companies. It buys and sells minority equity positions primarily in early-stage development companies, both public and privately held. Its securities are held mainly in the form of convertible preferred and common stock, for periods ranging from one to ten years, and are then sold in the public market or occasionally to private investors. You also state that the Company is not a "regulated investment company" under Internal Revenue Code Section 851(a) or a "venture capital company" under Code Section 851(e).

According to the Company's 1983 Annual Report, it also engages in the following activities: introducing other venture capitalists to its portfolio companies and giving management assistance in the course of financings; introducing various operating divisions within the Parent to its portfolio companies; guaranteeing leaselines from the Parent's Credit Corporation for its portfolio companies; negotiating on behalf of the portfolio companies for OEM and resale contracts, and for test sites in the Parent's facilities; and pursuing acquisitions or mergers by third parties for its portfolio companies. In addition, the Company's representatives serve on the boards of directors of several portfolio companies.

General Laws Chapter 63, Section 38B confers tax benefits on certain corporations "engaged exclusively in buying, selling, dealing in, or holding securities" (except securities of a Domestic International Sales Corporation) in their own behalf and not as brokers. In the case of a corporation that is not a "regulated investment company" under Code Section 851, the tax is equal to 1 32/100% of its gross income received during the taxable year, or 228 dollars, whichever is greater.

The term "exclusively" in the statute is interpreted strictly, and any presence of regular business operation is enough to prevent the classification as a securities corporation. "The fact that a major portion of [a corporation's] activities may have fit the statutory definition does not satisfy the statutory requirement." ( State Tax Commission v. PoGM Co., 369 Mass. 611, at 612 (1976)). The distinction to be made is between activities that an ordinary investor in a securities market would engage in, as opposed to activities the normal investor would not pursue such as taking part in the management of a business or providing capital in the form of loans evidenced by promissory notes. ( Industrial Finance Corporation v. State Tax Commission, 367 Mass. 360 (1975); LR 82-8)

Therefore, the Company may not elect to be taxed as a corporation dealing exclusively in securities as provided in General Laws Chapter 63, Section 38B.

Every foreign or domestic corporation exercising its charter, or qualified to do business or actually doing business in Massachusetts, or owning or using any part or all of its capital, plant or any other property in Massachusetts, must pay the Massachusetts corporate excise (G.L. c. 63, §§ 32, 39).

The taxable net income of a corporation not having income from business activity which is taxable in another state is allocated in its entirety to Massachusetts. (G.L. c. 63, § 38(b)).

The taxable net income of a corporation having income from business activity which is taxable both within and without Massachusetts must be apportioned to Massachusetts by multiplying its taxable net income by a fraction, the numerator of which is the property factor plus the payroll factor plus twice the sales factor, and the denominator of which is four. (G.L. c. 63, § 38(c)).

In a case where only two of the three factors are applicable, the taxable net income of the corporation must be apportioned by a fraction, the numerator of which is the remaining two factors with their respective weights and the denominator of which is the number of times that such factors are used in the numerator. (G.L. c. 63, § 38(g)).

Chapter 63, Section 38 defines the property, payroll, and sales factors, and sets forth the criteria used in determining which property, payroll, and sales are to be apportioned to Massachusetts. For purposes of the sales factor, "sales" means all gross receipts of the corporation, except interest, dividends, and gross receipts from the maturity, redemption, sale, exchange or other disposition of securities. (G.L. c. 63, § 38(f)).

Therefore, maintaining an office in Massachusetts for carrying out its business will subject the Company to the Massachusetts corporate excise. The Company will be required to file a Massachusetts corporate excise return pursuant to General Laws Chapter 62C, Section 11 and pay the Massachusetts corporate excise on its income apportioned to Massachusetts as determined by the formula in Section 38.

Accordingly, if the disposition of equity positions is the Company's only revenue producing activity, the Company will apportion its income on the basis of a two-factor formula (property and payroll).

Very truly yours,

/s/Ira A. Jackson

Ira A. Jackson

Commissioner of Revenue

IAJ:VGS:loc

LR 85-23