You represent two diversified management investment companies, ("Trust A") and ("Trust B"), which are organized in Massachusetts as corporate trusts within the meaning of G.L. c. 62, § 1(j), and which have qualified as regulated investment companies under section 851 of the Internal Revenue Code of 1986, as amended (the Code). Both Trusts invest in securities chosen for income and capital growth, but Trust B generally invests in corporations with lesser capitalizations than those in which Trust A invests. Trust A has owned all of the shares of Trust B since Trust B was established in 1984. 1
In order to consolidate the operations and accounting of Trust A and Trust B, Trust B plans to liquidate and to distribute all of its assets to Trust A. You represent that the transaction will qualify under Code §§ 332, 337 so that neither Trust A nor Trust B will recognize any gain or loss for federal income tax purposes in connection with the liquidation and distribution. You request a ruling on the Massachusetts tax consequences of the proposed liquidation.
In general, corporate trusts engaged in business in the Commonwealth are subject to the income tax imposed by Chapter 62 of the General Laws, and corporate trust shareholders may deduct "dividends" received from these trusts from their federal gross income when determining their Massachusetts gross income. See G.L. c. 62, §§ 2(a)(2)(D), 8(a). However, certain corporate trusts, including inter alia corporate trusts that have qualified as regulated investment companies under Code § 851, are treated as pass-through entities; the trusts themselves are not subject to taxation under Chapter 62, but their shareholders may not deduct dividends received from the trust when calculating their Massachusetts gross income. See G.L. c. §§ 2(a)(2)(D), 8(b).
Because corporate trusts that are regulated investment companies are not taxable under G.L. c. 62, 2 it is clear that neither Trust A nor Trust B will incur Massachusetts income tax liability as a result of the liquidation of Trust B and the distribution of its assets to Trust A. Furthermore, because the Massachusetts gross income of both individual shareholders of Trust A and corporate shareholders of Trust A is computed on the basis of the federal gross income of these shareholders (G.L. c. 62, § 2(a), G.L. c. 63, § 30(5)), and because the proposed liquidation will not cause these shareholders to recognize gain or loss for federal purposes, the shareholders of Trust A will not recognize Massachusetts income on account of the proposed liquidation.
We rule as follows:
- Neither Trust A nor Trust B, as regulated investment companies under Code § 851, will be subject to tax under Chapter 62 on account of the proposed liquidation of Trust B and the distribution of its assets to Trust A;
- As corporate trusts within the definition of G.L. c. 62, § 1(j), neither Trust A nor Trust B is subject to the corporate excise under G.L. c. 63;
- Because the holders of the beneficial interests of Trust A will recognize no gain or loss for federal income tax purposes in connection with the liquidation of Trust B, they similarly will recognize no gain or loss for Massachusetts tax purposes under chapters 62 or 63 of the General Laws on account of the liquidation;
- The basis of the assets currently held by Trust B will be the same in the hands of Trust A as it was in the hands of Trust B.
Very truly yours,
/s/Stephen W. Kidder
Stephen W. Kidder
Commissioner of Revenue
June 9, 1989
1 Trust B was first formed as a Massachusetts corporation in 1984. It was reorganized as a trust in 1985. It has been a wholly-owned subsidiary of Trust A since its inception.
2 This ruling is specifically limited to the liquidation of a corporate trust that qualifies as a regulated investment company and the distribution of its assets to a parent trust that is also a regulated investment company. The ruling does not apply to other corporate trust liquidations and, in particular, does not apply to the liquidation of corporate trusts that are taxable under G.L. c. 62.