June 12, 1989

I. Facts

(the Corporation) is a not-for-profit Delaware membership corporation which has qualified as a tax-exempt trade association under section 501(c)(6) of the Internal Revenue Code (the Code). Its principal offices are in Massachusetts.
The Corporation may not issue stock, but has two classes of membership: voting members (Sponsors) and non-voting members (Members). The Sponsors are major participants in the computer industry that have made substantial contributions of capital to the Corporation and are subject to additional capital assessments. Each Sponsor appoints one Director to the Corporation's Board and votes for at-large Directors. Additional Sponsors may be admitted upon a four-fifths vote of the Board. Members pay annual dues of $ (not-for-profit organizations) or $ (others). Any business, governmental, academic or non-profit organization may become a Member of the Corporation upon payment of the appropriate dues.

The Corporation has been organized [for an appropriate purpose.]
The Corporation is not for profit. With one exception, 1 Sponsors may not withdraw contributions made to the Corporation. Upon liquidation, the assets of the Corporation may not be paid to any for-profit firm or corporation.

II. Issues

The Corporation has requested rulings on the following issues:

  1. Whether the Corporation is engaged in research and development as defined in G.L. c. 64H, §§ 6(r), 6(s) and 830 CMR 64H.6.4(2).
  2. Whether annual assessments and dues received by the Corporation from its Sponsors and Members are receipts from the research and development of tangible personal property capable of being manufactured in Massachusetts for purposes of G.L. c. 63, § 42B.
  3. Whether, once the Corporation begins to license the operating system it develops, it will be a manufacturing corporation as defined in General Laws Chapter 63, Section 42B and Chapter 58, Section 2.

We rule that an entity that is not subject to the excise under G.L. c. 63 may not qualify as a research and development corporation or a manufacturing corporation under G.L. c. 63, §§ 38C, 42B, regardless of the nature of its activities. Accordingly, we decline to decide the first two issues listed above. On the third issue, we conclude that the Corporation will not qualify as a manufacturing corporation.

III. Analysis

A. Background

We begin our analysis by noting that G.L. c. 63 imposes an excise on all "domestic corporations" and on all "foreign corporations" doing business in Massachusetts. The definitions of "domestic corporation" and "foreign corporation," found in G.L. c. 63, § 30, expressly exclude organizations exempt from taxation under Code § 501. Thus it is clear that the Corporation is not a "foreign corporation" subject to the excise under G.L. c. 63, even though it owns property and does business in the Commonwealth.

Next we observe that the Legislature has conferred preferred tax treatment upon entities that are designated "domestic manufacturing corporations" or "foreign manufacturing corporations" and (to a lesser extent) upon entities that are designated "domestic research and development corporations" or "foreign research and development corporations." The definitions of "domestic manufacturing corporation" and "domestic research and development corporation" are found in G.L. c. 63, § 38C, in a statutory subdivision (i.e. §§ 32-38K) entitled "Domestic Corporations." The definitions of "foreign manufacturing corporation" and "foreign research and development corporation" are found in G.L. c. 63, § 42B, in a statutory subdivision (i.e. §§ 39-42B) entitled "Foreign Corporations. 2
B. Relationship Between G.L. c. 63, Sections 38C and 42B
Under G.L. c. 63, § 42B, "[e]very corporation, association or organization established, organized or chartered under laws other than those of the Commonwealth" that engages in manufacturing or research and development as specified in the statute is "deemed to be a foreign manufacturing corporation or a foreign research and development corporation." You assert, therefore, that any foreign entity that can be described as a "corporation, association or organization" and that engages in the appropriate activities is entitled to the benefits of classification under § 42B. An examination of the provisions of G.L. c. 63, § 38C, which limit the domestic entities entitled to corresponding preferred tax treatment, shows that this assertion is incorrect.

Under § 38C, an entity organized under the laws of Massachusetts may qualify as a domestic manufacturing or research and development corporation if it is organized under or subject to G.L. c. 156B (entitled "Certain Business Corporations"). Thus some Massachusetts entities which can, in the abstract, be described as "corporations, associations or organizations," such as partnerships and corporate trusts, are unquestionably excluded from treatment as domestic manufacturing or research and development corporations. We are aware of no authority, and you cite none, that indicates that the Legislature intended to grant preferred tax treatment under §42B to a class of foreign entities broader than the class of domestic entities that, under § 38C, may receive preferred treatment for the same activities. In the absence of such authority, the Department has in the past construed sections 38C and 42B as parallel provisions of equal breadth. It has denied § 42B classification to foreign entities that clearly would not qualify under § 38C if organized in Massachusetts. 3 See 830 CMR 64H.6.4(4)(a) (foreign partnership is not a "corporation, association or organization" within the meaning of G.L. c. 63, § 42B); LR 82-74 (foreign partnership could not be a research and development corporation under § 42B).

C. Application of G.L. c. 63, §§ 38C, 42B, to Not-For-Profit Organizations
Given that § 42B does not apply to all foreign entities engaged in the specified manufacturing or research and development activities, it is necessary to determine in general the types of foreign entities to which it does apply and, in particular, whether it extends to organizations qualified under Code § 501. At this point it becomes necessary to distinguish "not-for-profit" entities generally from entities that are exempt from taxation under Code § 501. It is possible for an entity to be organized for charitable or other non-profit purposes under G.L. c. 180 or similar foreign statutes without receiving a tax exemption under Code § 501. Such "not-for-profit" entities fall within the definitions of "domestic corporation" or "foreign corporation" under G.L. c. 63, § 30, and are therefore subject to the excise under Chapter 63.

You point out that a corporation organized for charitable or other non-profit purposes under G.L. c. 180 is "subject to" the provisions of G.L. c. 156B in certain respects. You argue that not-for-profit corporations organized under G.L. c. 180 meet the § 38C requirement of being a "corporation organized under or subject to" G.L. c. 156B, and that entities organized under G.L. c. 180 or comparable foreign statutes may therefore qualify as manufacturing or research and development corporations under G.L. c. 63, §§ 38C, 42B, respectively.
We agree that a corporation organized for charitable or related purposes under G.L. c. 180 is subject in part to G.L. c. 156B and may therefore qualify as a domestic manufacturing or research and development corporation under § 38C, but only where, because it has not received a tax exemption under Code § 501, it is first a domestic corporation subject to the Chapter 63 excise. We also agree that a not-for-profit foreign entity organized for purposes permissible under G.L. c. 180 may qualify as a foreign manufacturing or research and development corporation under § 42B, but only where, because it has not received a Code § 501 exemption, it is first a "foreign corporation" subject to tax under G.L. c. 63. Where a foreign or domestic organization has received a Code § 501 exemption and is therefore not subject to the excise under Chapter 63, the language of G.L. c. 63, §§ 38C, 42B, together with the language and purpose of related statutory sections preclude it from qualifying as a manufacturing or research and development corporation.

1. Language of G.L. c. 63, §§ 38C, 42B

The first indication that Code § 501 corporations are precluded from manufacturing or research and development corporation status is contained in the language of §§ 38C, 42B. Section 42B states that "every foreign manufacturing corporation shall be taxed in the same manner and shall have the same duties under this chapter and chapter sixty-two C as other foreign corporations" (emphasis added) with the exception of the exemption of its machinery from local property tax. The corresponding language in § 38C states that "every domestic manufacturing corporation shall be taxed in the same manner and shall have the same duties as a domestic business corporation" with the same local property tax exception. 4
There are two points here. The first is the word "other." You state that this word "is technically without meaning" because a "foreign manufacturing corporation" is excluded from the definition of "foreign corporation" under G.L. c. 63, § 30(2). While we agree that a corporation may not simultaneously be a "foreign corporation" and a "foreign manufacturing corporation," we do not agree that this renders the word "other" meaningless. Rather, the word "other" indicates that a "foreign manufacturing corporation" must have been a "foreign corporation" before being classified under § 42B. 5

The second point is that under the language of §§ 38C, 42B quoted above, foreign and domestic manufacturing corporations are taxed in the same manner and have the same duties as "foreign corporations" and "domestic business corporation[s]," respectively. Thus, if we assume that a tax-exempt Code § 501 corporation may be classified as a manufacturing corporation, we conclude that it would be subject to the excise under Chapter 63 as if it were a foreign corporation or a domestic corporation, regardless of its § 501 status. Given the explicit statutory exemption in G.L. c. 63, § 30, for Code § 501 organizations, this result is implausible and strongly indicates that the Legislature did not intend a Code § 501 organization to be a manufacturing corporation.

You argue that the language of G.L. c. 63, § 42B, need not be read as subjecting a § 501 organization to taxation as a foreign corporation if it qualifies as a foreign manufacturing corporation. You state that the intent of § 42B is to provide that, except for the local property exemption, "'foreign manufacturing corporations' are to be subject to tax under Chapter 63 or Chapter 62C as are 'other' foreign organizations." This is simply not what the statute says. Rather, it says "other foreign corporations." In the context of Chapter 63, the term "foreign corporation" is a term of art. It does not mean "foreign organization." It means an entity defined in G.L. c. 63, § 30(2). Such entities are subject to the excise under Chapter 63.
Finally, we observe that the language of G.L. c. 63, § 42B, has been construed by regulation as limiting foreign manufacturing and research and development corporations to foreign entities that are "foreign corporations." See 830 CMR 64H.6.4(4) (Research and Development) which, in defining "manufacturing corporation" and "research and development corporation" for purposes of both G.L. c. 63, §§ 38C, 42B and G.L. c. 64H, §§ 6(r), 6(s), speaks only of domestic corporations and foreign corporations qualifying as manufacturing or research and development corporations.

2. Related Statutory Provisions

In general, classification as a manufacturing or research and development corporation under G.L. c. 63, §§ 38C, 42B, has three effects: certain sales tax exemptions under G.L. c. 64H, §§ 6(r), 6(s); certain exemptions from local property taxation under G.L. c. 58, § 2, and G.L. c. 59, § 5(16); and an investment tax credit against the Chapter 63 excise under G.L. c. 63, § 31A. Although the language of G.L. c. 63, § 42B, appears adequate on its own to support the conclusion that a Code § 501 corporation may not qualify as a foreign manufacturing or research and development corporation, this conclusion is reinforced by the language and purpose of these other statutory sections.
First, G.L. c. 64H, §§ 6(r), 6(s) grants a limited sales tax exemption to manufacturing and research and development corporations. These sections merely cross-reference G.L. C. 63, §§ 38C, 42B, for definitions of manufacturing and research and development corporations without elaborating on the nature of these entities. Therefore, these sections are not very useful for construing the Chapter 63 definitions. We note that the encouragement of manufacturing and research and development in Massachusetts, which is a clear purpose in G.L. c. 64H, §§ 6(r), 6(s), is not inconsistent with a Code § 501 corporation qualifying as a manufacturing or research and development corporation. On the other hand, as mentioned above, the qualification under §§ 6(r) and 6(s) has been interpreted by regulation as limited to entities that are first foreign or domestic corporations. See 830 CMR 64H.6.2(4).

The second benefit obtained by entities classified under G.L. c. 63, §§ 38C, 42B is a local property tax exemption. See G.L. c. 58, § 2; G.L. c. 59, § 5(16). We note that the language of G.L. c. 58, § 2, is inconsistent with the suggestion that a Code § 501 corporation may qualify under G.L. c. 63, §§ 38C, 42B. This section instructs the Commissioner is distribute to boards of assessors lists of corporations liable to tax under "chapters fifty-nine, sixty A and sixty-three" (emphasis added) and to indicate which of "said corporations" are manufacturing corporations. Code § 501 corporations are not subject to tax under Chapter 63 and would therefore not appear on the lists used by assessors to determine local property tax exemptions.

The grant of a local property tax exemption to a Code § 501 organization is also inconsistent with the purpose of G.L. c. 59, § 5(16). The Supreme Judicial Court has stated that the purpose of this exemption is to avoid the double taxation of corporate property that is already taxed under Chapter 63. Assessors of Boston v. Metropolitan Life Insurance Company, 320 Mass. 559 (1947). Code § 501 corporations are not subject to the excise under Chapter 63 and thus should not obtain the property tax exemptions under G.L. c. 59, § 5(16).

The final effect of an entity's classification as a manufacturing or research and development corporation under G.L. c. 63, §§ 38C, 42B is the availability of an investment tax credit against the Chapter 63 excise. See G.L. c. 63, § 31A. Again, the purpose of this section has no applicability to Code § 501 corporations because they are not subject to the Chapter 63 excise. While this fact alone might not exclude Code § 501 corporations from classification under §§ 38C, 42B, the language used by § 31A does. The section specifically refers to a "manufacturing corporation, or a business corporation engaged primarily in research and development, which has been deemed to be such under section thirty-eight C or forty-two B" (emphasis added). This language clearly implies that the entities that are "deemed" to be engaged primarily in research and development by §§ 38C, 42B are business corporations.

IV. Conclusion

The Legislature has seen fit to grant certain tax benefits, as discussed above, to domestic and foreign manufacturing and research and development corporations as defined in G.L. c. 63, §§ 38C, 42B. It is clear, however, that not every entity that engages in manufacturing or research and development may qualify under §§ 38C, 42B. We conclude from the language of §§ 38C, 42B, and related sections and from the purposes of classification under §§ 38C, 42B, that a Code § 501 corporation is one of the entities excluded from manufacturing or research and development corporation status. It follows that the Corporation that you represent may not, as it is currently organized, receive the sales tax and local property tax exemption that it has sought. 6


Very truly yours,
Stephen W. Kidder
Commissioner of Revenue
June 12, 1989
LR 89-6


Footnotes:

1 The Board of Directors of the Corporation may vote to allow the Sponsors' capital contributions to the Corporation to be treated as "pre-paid royalties." Thus, once the Corporation begins to license the operating system software it is developing, the Board may excuse Sponsors from paying licensing fees to the extent of their earlier contributions.

2 Although the point is not decisive, we must initially question whether statutory sections under subdivisions entitled "domestic corporations" and "foreign corporations" should be applied to entities that are neither "domestic corporations" nor "foreign corporations" as defined in Chapter 63.

3 This construction does not render meaningless the phrase in § 42B, "every corporation, association or organization." This phrase allows foreign entities that are not organized as "corporations" under the laws of their home states to qualify as manufacturing or research and development corporations provided that they are taxed as business corporations in Massachusetts. The same phrase is used for comparable purposes in the definition of "foreign corporation" under G.L. c. 63, § 30(2).

4 The term "domestic business corporation" was the predecessor of the term "domestic corporation" now in G.L. c. 63, § 30(1). Both exclude Code § 501 corporations. See Brown, Rudnick, Freed & Gesmer v. Board of Assessors of Boston, 389 Mass. 298 (1983).

5 The significance of the absence of the word "other" in § 38C is not entirely clear. Given the broad "every corporation, association or organization" language in § 42B which does not exist in § 38C, the Legislature may have inserted the word "other" specifically to preclude applications under § 42B of entities that are not "foreign corporations."

6 We emphasize the narrow breadth of this ruling. Although a Code § 501 organization may not obtain the sales and local property tax exemptions sought in this ruling via manufacturing corporation classification, a charitable organization classified under Code § 501(c)(3) can obtain a sales tax exemption directly under G.L. c. 64H, § 6(e), and may generally obtain a local property tax exemption under G.L. c. 59, § 5(3). Thus, the practical effect of this ruling is limited to non-profit entities that have not obtained Code § 501(c)(3) classification.