You ask whether a trust, formed under a Pooling and Servicing Agreement ("Pooling Agreement") among ("Seller"), ("Servicer"), and the ("Trustee"), is subject to tax under G.L. c. 62.
The trust formed by the Pooling Agreement will qualify and elect to be treated as a real estate mortgage investment conduit (REMIC) as defined by section 860D of the Internal Revenue Code of 1986 (I.R.C.). A pool of assets consisting of "qualified mortgages," as defined by I.R.C. § 860G, will be transferred to the trustee in return for REMIC certificates. There will be two classes of regular interests ("Senior Certificates") and one class of residual interests ("Junior Certificates"). We conclude that the trust is not subject to trust-level tax under G.L. c. 62, § 8(a), given the restrictions placed upon the management of trust assets by this particular Pooling Agreement, and provided that the trust maintains its REMIC status for federal tax purposes.
Under the Pooling Agreement, substantially all the trust assets will consist of "qualified mortgages" and "permitted investments" as defined by I.R.C. § 860G. The Pooling Agreement further restricts the mortgage assets held by the trust to uninsured, conventional, fixed-rate mortgage loans, originated by the Servicer or its affiliate, in the ordinary course of business, and secured by first liens on commercial properties located in different states. Although the Servicer has been granted certain enforcement rights by the Pooling Agreement, the Trustee may enforce the rights of a Trustee on behalf of the certificateholders in the event of default of a qualified mortgage. The Trustee executes the REMIC certificates; distributes amounts due to the certificateholders; maintains the "Certificate Account" and the "Reserve Fund" and invests amounts therein; and issues statements to certificateholders. The Servicer is charged with responsibility for administering and servicing mortgage loans, including the making of advances from its own funds for expenses of the trust for which it is reimbursed on subsequent distribution dates.
The trust must distribute all amounts received between distribution dates, except for assets held in the Reserve Fund (which is a "qualified reserve fund" under I.R.C. § 860G(a)(7)), by no later than the next monthly distribution date. The Seller may make substitutions of defective mortgage obligations no later than two years from the "startup day" as defined in I.R.C. § 860G(a)(9). Substitute mortgage obligations will be "qualified replacement mortgage[s]" as defined by I.R.C. 860G(a)(3). The Pooling Agreement places various restrictions on substitute mortgages regarding maturity date, initial principal balance, Seller's warranties, average loan life, security, loan-to-value ratio, and loan quality, which effectively ensure that substitute mortgage loans will be comparable to the loans in the original pool.
"Any trust, the beneficial interest of which is represented by transferable shares" is a corporate trust. Unless exempted pursuant to G.L. c. 62, § 8(b), "a corporate trust engaged within the commonwealth in any business, activity or transaction" is subject to the taxes imposed by G.L. c. 62. G.L. c. 62, § 8(a). A fixed investment trust "is not, as an entity, engaged in any business, activity or transaction for purposes of M.G.L. c. 62, § 8(a)." 830 CMR 62.08(1). Because of the restrictions imposed by the Pooling Agreement on the discretion and activity of the Trustee and on the assets that can be held by the trust, the trust formed under this Pooling Agreement can undertake only activities that are conducted by fixed investment trusts. Because of the similarities between the provisions of the trust formed under this Pooling Agreement and trusts that are classified as fixed investment trusts, we rule that the trust is not engaged within the Commonwealth in any business, activity or transaction for purposes of G.L. c. 62, § 8(a). The trust, therefore, is not subject to Massachusetts taxation under G.L. c. 62.
Very truly yours,
Stephen W. Kidder,
Commissioner of Revenue
April 20, 1988
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