You ask us to rule that the capital gain dividends paid by the ("Fund") will be exempt from Massachusetts personal income tax in the hands of the shareholders of the Fund, if the dividends are directly attributable to capital gain which specifically is exempt from Massachusetts taxation and so identified. We conclude that the capital gain dividends paid by the Fund to its shareholders will be exempt from Massachusetts personal income tax in the hands of the shareholders to the extent they are directly attributable to certain tax-exempt capital gain and are so identified, and provided that the Fund is a corporate trust that qualifies as a regulated investment company.
The Fund is an open-end investment company organized as a Massachusetts corporate trust. It is registered under the federal Investment Company Act of 1940 and intends to qualify as a "regulated investment company" under IRC § 851 et seq. Shares of the Fund will be sold to the public.
In addition to paying distributions from net interest income, the Fund anticipates that it will distribute substantially all its net realized long-term capital gains, if any, annually after using any capital lost carryforward available for federal income tax purposes. Fund shareholders may have their distributions automatically reinvested. The assets the Fund holds include obligations issued by the Massachusetts Health and Education Facilities Authority("HEFA"), the Massachusetts Bay Transportation Authority("MBTA"), the Massachusetts Municipal Wholesale Electric Company, and the Massachusetts Port Authority. This ruling does not apply with respect to obligations held by the Fund other than those four described in the previous sentence.
The income from the transfer of bonds issued by each of these authorities, "including any profit made on the sale" of these bonds, is exempt from taxation in Massachusetts. Spec. L. C. 53, §16; G.L. c. 161A, 5 18; Spec. L. c. 13, § 8(a); Spec. L. c. 73, §17; Technical Information Release 80-2. Income from the disposition of notes issued by the MBTA is likewise exempt from Massachusetts income tax.
G.L. c. 161A, 5 18. 1
A corporate trust which is a regulated investment company under IRC § 851 is exempt from tax under G.L. c. 62. G.L. c. 62, § 8(b). In 1985, the Massachusetts Supreme Judicial Court held that interest exempt from Massachusetts personal income tax distributed to the beneficiaries of a Massachusetts corporate trust which is itself exempt from income tax under G.L. c. 62, § 8(b) retains its tax-exempt character in the hands of the beneficiaries under G.L. c. 62. Commissioner of Revenue v. Plymouth Home National Bank, 394 mass. 66 (1985). Likewise, capital gain which is specifically exempt from tax and is distributed as capital gain dividends to the beneficiaries of the Fund, will retain its character as exempt from Massachusetts personal income tax in the hands of the beneficiaries, provided that the dividends are clearly identified as directly attributable to tax-exempt gain, and provided that the Fund qualifies as a regulated investment company.
Very truly yours,
Stephen W. Kidder
Commissioner of Revenue
October 13, 1987
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