The ______ Fund is an open-end management investment company organized in 1983 under the laws of Massachusetts as a corporate trust and registered under the Investment Company Act of 1940. It operated as a single regulated investment company (RIC) until 1987.
At that time, under an amendment to the trust, separate Series of investment portfolios were created, each of which is intended to be treated as a separate RIC under Code § 851(g)(h), as amended by the Tax Reform Act of 1986 (hereafter the 1986 Code). The assets and shares of the original Trust became the assets and shares of one of the new Series. The other Series (one of which is the Massachusetts Tax-Free Fund discussed below), have acquired assets consistent with their investment objectives of distributing interest income exempt from federal and state income taxes and have acquired shareholders who are, primarily, residents of the state to which the Series relates. Each Series is separate with respect to the rights of shareholders and creditors, and the beneficial interest represented by the shares is freely transferable. The original Trust itself has no assets, liabilities, or income because everything is allocated among the Series. The function of the original Trust is to make it easier to file amendments and other documents with the securities and Exchange Commission.
You represent that for federal income tax purposes each Series is treated under the 1986 Code as a separate taxpayer that owns the assets allocated to it by the Trustees of the Trust and realizes and distributes the income derived from such assets. You further represent that each Series, had it existed, would have been properly treated as a separate corporation eligible for treatment as a RIC under the Code, as amended on January 1, 1985, and in effect for the taxable year. You also represent that the original Trust will not file any federal tax returns and has no function for federal tax purposes.
The Massachusetts Fund will invest primarily in debt obligations issued by or on behalf of the Commonwealth of Massachusetts, political subdivisions thereof, and agencies and instrumentalities of the Commonwealth or its political subdivisions. The Massachusetts Fund may also invest in debt obligations issued by or on behalf of the governments of the Commonwealth of Puerto Rico and its authorities or municipalities, the territories of the United States, the Virgin Islands and Guam. Interest on each issue of these obligations will, in the opinion of bond counsel with respect to each issue, be excluded from gross income for regular federal income tax purposes under the 1986 Code § 103(a) as amended, or other provisions of federal law. Dividends from net investment income of the Massachusetts Fund will be declared daily and paid to shareholders of the Massachusetts Fund monthly, while capital gains, if any, will be distributed annually or semiannually.
Is a Series which would have qualified as a RIC under Code 851, as amended January 1, 1985 and in effect for the taxable year, subject to Massachusetts income tax?
Is the original Trust subject to Massachusetts income taxation under M.G.L. c. 62 since it no longer qualifies for the RIC exemption under M.G.L. c. 62, § 8(b)(i)?
Are the distributions to persons, estates and trusts subject to Massachusetts income taxation, from the Massachusetts Fund, subject to Massachusetts personal income tax to the extent such distributions represent tax-exempt interest on the Massachusetts Fund's obligations as described above?
1. At M.G.L. c. 62, § 8(a) a corporate trust engaged within the Commonwealth in any business, activity or transaction, shall be subject to taxes under M.G.L. c. 62, unless exempted under M.G.L. c. 62, § 8(b). A corporate trust which is a regulated investment under Code 5 851 is not subject to the tax in M.G.L. c. 62, § 8(a). M.G.L. c. 62,§ 8(b)(i). The applicable Code is the Code as amended on January 1, 1985, and in effect for the taxable year. M.G.L. c. 62, § l(c) (hereafter 1985 Code). A corporate trust is any partnership, association, or trust, the beneficial interest of which is represented by transferable shares. M..L. c. 62, § 1(j).
In private Letter Ruling issued in 1984 and 1985 the Internal Revenue Service permitted business trusts meeting certain criteria to establish separate Series of investment portfolios, each with its own distinct investment objective, and to treat each Series as a separate association taxed as a corporation and eligible for treatment as a RIC for federal income tax purposes. See, e.g., PLR 8512056 (December 27,1984). This treatment was ratified with the addition of Code § 851(q)() by the Tax Reform Act of 1986, which permits corporations as well as trusts to organize RICs consisting of separate Series of investment portfolios.
A corporate trust, as defined at M.G.L. c. 62, § 1(j), merely requires the existence of an association or trust with transferable shares. At M.G.L. c. 182, § 1, both "association" and "trust" are defined similarly as entities operating under a written instrument or declaration of trust, the beneficial interest under which is divided into transferable certificates of participation or shares. Nothing in the statute precludes one instrument from creating several trusts. Each Series, then, is a corporate trust under Massachusetts law. Accordingly, if each Series would have been treated as a separate RIC under Code § 851, as amended January 1, 1985, and in effect for the taxable year, then as long as each Series is also properly classified as a corporate trust under Massachusetts law, each Series would be exempt from personal income tax under M.G.L. c. 62, § 8(b)(i).
2. The original Trust does not have income, expense or assets because all are allocated among the Series. Clearly it would not meet the requirements 1985 Code § 851 and would not be exempt from tax under any provision of M.G.L. c. 62, § 8(b).
Under M.G.L. c. 62, § 2(a) Massachusetts gross income is federal gross income with certain modifications. If a trust does not have federal gross income, as defined in M.G.L. c. 62, 5 1, in excess of $100, then it is not required to pay a tax or file a return. M.G.L. c. 62C, § 6(a). It follows that if the original Trust does not have federal gross income, as modified by statute, then it is not required to pay a tax or file a return.
3. Under the regulated investment company provisions of the 1985 Code a RIC with at least 50 per cent of its assets in obligations described in 1985 Code § 103(a) is qualified to pay exempt-interest dividends to its shareholders. 1985 Code § 852(b)(5). obligations described in 1985 Code § 103(a) are interest on obligations of a state, territory, or a possession of the United States or any political subdivision thereof. An exempt-interest dividend is defined as any dividend, other than a capital gain dividend, paid by a RIC and designated as an exempt-interest dividend in a written notice to the shareholder. 1985 Code § 852(b)(5). Obligations described in 1985 code § 103(a) are interest on obligations of a state, territory, or a possession of the United States or any political subdivision thereof. An exempt-interest dividend is defined as any dividend, other than a capital gain dividend, paid by a RIC and designated as an exempt-interest dividend in a written notice to the shareholder. 1985 Code § 852(b)(5)(A). An exempt-interest dividend is treated by the shareholders for federal tax purposes as an item excludable from gross income. 1985 Code § 852(b)(5)(B). Massachusetts gross income is federal gross income modified by the addition thereto of interest from governmental obligations excluded under 1985 Code § 103, other than interest from any such obligation issued by the Commonwealth, any political subdivision thereof or any agency or instrumentality of either of the foregoing which is exempt from tax under M.G.L. c. 59, § 5, Cl. Twenty-fifth, or any other provision of law. M.G.L. c. 62, § 2(a)(1)(A). In TIR 1985-4, the Department concluded that income derived from interest on 'obligations issued by the Commonwealth, its political subdivisions or any agency or instrumentality thereof and distributed by any corporate trust to its beneficiaries will not be included in the gross income of the beneficiaries. To the extent the exempt interest earned on the obligations described in this ruling request meets the requirements of M.G.L. c. 62, § 2(a)(1)(A), the shareholders will not be subject to tax under M.G.L. c. 62.
Very truly yours,
Commissioner of Revenue
December 21, 1987