______ ("Corporation") is a Massachusetts corporation with a sole shareholder, ________ ("Shareholder"). Before 1984 the Corporation (then called _____ ) engaged in the business of fish processing. In late 1983, substantially all of the Corporation's assets, including all its operating assets, were sold to an unrelated third party, and the proceeds were invested in various marketable securities, including U.S. Government securities, tax-exempt securities issued by various state and local authorities, and shares of money market mutual funds.
In addition to owning all of the stock of the Corporation, the Shareholder owns, directly or through a wholly-owned intermediary corporation, all the stock of two other companies, ______ ("Companies"). Before 1984 the Companies, like the Corporation, were operating entities. The assets of the Companies were sold as part of the transaction in which the assets of the Corporation were sold, and the Companies now engage solely in passive investment activities. The shareholder also owns approximately 25 percent of a class of nonvoting common stock of _____, a corporation of which the remaining outstanding stock is held by the Corporation and which engages solely in passive investment activities.
In connection with the sale of its assets and the cessation of its conduct of an operating business, the Corporation purchased, in June 1984, single-premium immediate or deferred annuity contracts ("Contracts") on the lives of individuals previously employed either by the Corporation or by the Companies. The Contracts were purchased to fund deferred compensation obligations running to twelve individuals (the "Annuitants") in respect of prior employment. The Contracts were purchased and continue to be owned by the Corporation.
All of the Contracts, with one exception, have certain features in common. Each promises an annuity for a term certain specified in the Contract. (The term varies from Contract to Contract.) The Corporation, as owner of each Contract, is entitled to all payments under the Contract. If the annuitant dies before the expiration of the guaranteed term, annuity payments will continue (on either a reduced or unreduced basis, depending on the Contract) to the Corporation. Payments under the Contract will cease at the end of the guaranteed term, whether or not the Annuitant survives.
In the case of one Annuitant, Contracts were purchased to provide an annuity over the life of the Annuitant, rather than over a fixed period certain. However, these Contracts also have a guaranteed feature, should the Annuitant die before a specified date. As with the other Contracts, these Contracts are owned by the Corporation, which is entitled to all payments.
Because each of the Contracts has a specified beginning date, whereas commencement of deferred compensation payments to the Annuitants will depend on their date of termination of employment, it is possible that payments under the Contracts will not in all cases be made over the same period over which the corresponding deferred compensation payments are to be made. Where this proves to be the case-for example, where an Annuitant continues employment beyond the annuity commencement date under a Contract (so that some of the deferred compensation payments owing to the Annuitant will be payable after Contract payments to the Corporation have ceased)-the Corporation may purchase a supplemental Contract to fund those "uncovered" deferred compensation payments.
On behalf of the Corporation, you ask whether the Corporation will fail to qualify as a security corporation under Massachusetts General Laws Chapter 63, Section 38B, because of its holding and receiving payments under the Contracts. We conclude that the Corporation's holding of single-premium immediate or deferred annuity contracts purchased to fund deferred compensation obligations running to former employees of the Corporation or the Companies in respect to prior employment does not prevent the Corporation from classification as a security corporation under G.L. c. 63 § 38B.
Every domestic business corporation or foreign corporation "engaged exclusively in buying, selling, dealing in, or holding securities in its own behalf and not as a broker, except securities of a [domestic international sales corporation]" may be classified as a security corporation and afforded favorable tax treatment for purposes of the corporate excise. G.L. c. 63 § 38B. The requirement of exclusivity of activity in Section 38B is interpreted strictly. "The fact that 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, 612 (1976). However, the Department of Revenue applies the exclusivity requirement in a manner which allows the security corporation to do those things that must be done in order to carry on a business, that is, incurring and paying business expenses, including obligations to employees. In this light, the Department of Revenue has recognized that a security corporation's owning assets used in the conduct of its investment business, such as office furniture or supplies, or the retention of insurance on the lives of key officers of the security corporation, does not disqualify the corporation under c. 63 § 38B.
The corporation's activities otherwise exclusively consist of the dealing in investment securities. The holding of the annuity contracts, whose return is tailored to coincide directly with the accrual of the deferred compensation obligations, is part of the functioning of the business. By holding these contracts, the Corporation is not engaging in any commercial or other disqualifying business activity. The Contracts, like the "key officer insurance," are not the type of disqualifying asset contemplated by c.63, § 38B.
Therefore, the holding of the Contracts will not disqualify the Corporation from security corporation classification.
/s/ Ira A. Jackson
Commissioner of Revenue
March 4, 1986