You have requested a letter ruling on behalf of [Fund 1], a Nebraska limited partnership, [Fund 2] , a series of a business trust organized under the laws of Massachusetts (hereinafter referred to as the "Funds"), and [Advisor],
the investment advisor to the Funds. You have stated that the Funds will reorganize under the laws of the State of Delaware (12 Del.C. § 3801 et seq.)as "business trusts," the beneficial interest of which is represented by transferable shares (hereinafter referred to as the "Trust"). 1
You request a ruling that each Trust will not be subject to the Massachusetts corporate excise if the Trusts organize under the laws of the State of Delaware as a separate series of "business trusts" the beneficial interest of which are represented by transferable shares. In the alternative, you request a ruling that, if the Trust is considered a "foreign corporation" for Massachusetts tax purposes, the operations and activities of the Trust are such that the Trust is not considered "doing business" in Massachusetts.
For the reasons stated below, we make the following rulings:
- The Trust, a "business trust" governed by the laws of the State of Delaware will not be a "corporate trust" as defined by G.L. c. 62, § 1(j), but will come within the meaning of a "foreign corporation," as defined by G.L. c. 63, § 30(2). Further, the Trust will not be exempt from Massachusetts income taxation by virtue of G.L. c. 62, § 8(b)(i), but instead will be treated as a foreign corporation, as provided by G.L. c. 63, § 39, or, if the Trust qualifies and so chooses, as a security corporation, as provided by G.L. c. 63, § 38B.
- The Trust will not be subject to the corporate excise because the circumstances that subject a foreign corporation to the corporate excise under G.L. c. 63, § 39, will not be present. That is, the Trust's activities will be such that it does not have nexus with Massachusetts.
Fund 1 is currently organized as a Nebraska limited partnership and is taxed as a partnership. Fund 2 is currently a series of [Common Law Trust] , which is organized as a trust with transferable shares under the common law of Massachusetts, and taxable federally as a corporation. Fund 2 has elected to be taxed as a regulated investment company (RIC). Each Fund is an open-end management investment company (or a series thereof) registered under the Investment Company Act of 1940, as amended.
The board of each Fund believes that it is in the interest of such Fund's investors to reorganize it as a series of a business trust under Chapter 38 of Title 12 of the Delaware Code. Each Fund and its investment advisor have identified the Delaware business trust law, as amended in 1990, as particularly suitable for use because, among other things, it makes provision of the establishment of separate series of shares that are liable only for the debts of that series and permits flexibility in matters of governance of the trust, including the manner of transmission of proxies and the like.
Subject to this ruling, the board of each Fund proposes to call a meeting of its shareholders to authorize its reorganization. Assuming the necessary approvals, each reorganization will be accomplished by each Fund's transferring its assets to a separate series of the Trust in exchange for shares of the appropriate Trust series, which will be distributed to the shareholders in termination of their interests in the applicable fund. For federal tax purposes, each series of the Trust and the shareholders of such series will be subject to taxation under the rules of the Internal Revenue Code applicable to RICs.
The Trust's principal office will be located outside of Massachusetts. The Trust will maintain no office, telephone number, or postal address within Massachusetts. Any tangible property owned by the Trust will be located outside Massachusetts. Substantially all of the assets of the Trust will consist of securities, cash balances, bank accounts and similar investment assets (hereinafter referred to as "Intangible Assets"). All of the Intangible Assets will be held by a custodian (which may be a bank or other financial institution within Massachusetts). The custodian will hold securities directly on behalf of the Trust, as well as through subcustodians, securities depositories, and book-entry systems.
A substantial percentage of the Trust's Intangible Assets will be represented by book-entries or will otherwise be uncertified. Such securities have no physical existence. The principal securities book-entry system for corporate stocks and bonds is maintained by the Depository Trust Company, located in New York City. The book-entry systems for Treasury obligations and federal agency securities is maintained by the Federal Reserve System, including the Federal Reserve Bank of Boston, through which transfers of such securities are effected on behalf of Massachusetts banks who are members of the Federal System.
To the extent that the Trust owns certificated securities (i.e., securities represented by a piece of paper), these securities generally will be held by subcustodians or securities depositories outside of Massachusetts, except in occasional instances in which the custodian holds the certificates in the course of its duties of safekeeping Trust assets. The custodian also will hold cash on behalf of various series of the Trust, which in each case will be in an amount which is minor relative to the size of the series.
The trust instrument will be executed and delivered outside of Massachusetts. That instrument will provide that all trustees and shareholders meetings will be held exclusively outside of Massachusetts. The trust instrument will provide that the trustees are authorized to act for the Trust only in their collective capacity at trustees meetings or by written consent. The Trustees are responsible for the management and direction of the Trust, and determining the investment policies of the Trust. At all times a majority of trustees will be nonresidents of Massachusetts. The Trust will not qualify to do business in Massachusetts.
The Trust contracts with third parties for the performance of all the services necessary for its operation. All contracts to which the Trust is a party will be executed outside Massachusetts. Accordingly, the Trust has no need for employees in the conventional sense. The Trust will of necessity have officers; however, the officers will serve without compensation from the Trust.
The principal books and records of the Trust all will be located outside of Massachusetts. Copies of Trust records utilized by parties performing services for the Trust under contract may be located within Massachusetts.
Advisor is expected to be engaged as the investment advisor of the Trust. Advisor acts in a similar capacity for over 180 other RICs, pursuant to similar contracts. Advisor has offices in Massachusetts and performs a substantial part of its work of advising mutual funds from within Massachusetts.
Each Fund's current transfer agent is [Service Company] , a division of Advisor, whose principal office is located in Massachusetts; the Trust is expected to continue to contract with [Service Company] as transfer agent. The transfer agent will accept orders for the purchase and redemption of shares and make distributions to shareholders. However, decisions to declare dividends will be made exclusively at trustees meetings taking place outside Massachusetts or by written consent of the trustees.
Each Fund contracts with [Distributor Corporation], whose principal office is located in Massachusetts, to serve as principal underwriter for the purpose of selling its shares; the Trust is expected to do likewise. Massachusetts residents likely will be among the owners of such shares.
III. The Trust, a "business trust" governed by the provisions of Chapter 38, Title 12, of the Delaware Code, is a "foreign corporation" for Massachusetts tax purposes.
A. The Delaware Business Trust Act.
The Delaware Business Trust Act is codified in Chapter 38 of Title 12 of the Delaware Code, 12 Del.C. § 3801 et seq. The Act was originally enacted on July 21, 1988, and subsequently amended, effective July 5, 1990. Prior to the Act, the Delaware courts had recognized the existence of a business trust under Delaware law, see Commonwealth Trust Co. v. Capital Retirement Plan, 54 A.2d 739 (Del. Ch. 1947), but its legal existence was not expressly recognized under Delaware law until the passage of the Act. Once effective, the Act is applicable to any business trust whenever created that elects to be governed by the provisions of the Act. Id. The Act becomes applicable once the business trust files a certificate of trust with the Delaware Secretary of State. However, the Act is not exclusive and is not intended to affect the legal status of "common law" business trusts created before or after the effective date of the Act. See 2 Fenton & Mazie, THE DELAWARE LAW OF CORPORATIONS & BUSINESS ORGANIZATIONS, Delaware Business Trusts, c. 25, 25-5 (Prentice-Hall Law & Business 2d ed.) (hereinafter "Fenton & Mazie")
The definition of a business trust under the Act focuses on two elements: first, a business trust is an "unincorporated association" that is created by a trust instrument, and second, it files a certificate of trust with the Delaware Secretary of State. Id. Thus, the Act provides a bright line test for determining whether or not a particular trust arrangement is governed by the Act's provisions, 2 or at common law. Moreover, the definition contained in the Act is broader than the definition of a business trust generally found in the common law and in the statutes of other states, and eliminates the requirement that the trust issue certificates or shares. Id. at 25-6.
Certain provisions of the Act limiting personal liability of the beneficial owners, 12 Del.C. § 3803, were enacted so as to provide beneficial owners certainty relative to limiting their personal liability, and to eliminate the effects of the "control test" announced in Williams v. Inhabitants of Milton, 215 Mass. 1 (1913), for determining whether an entity is a "trust" rather than an "association." See Fenton & Mazie, at 25-7-8.
The "control test" focuses on the ability or inability of the owners to control or manage the trustees in the administration of the trust and its assets. In cases where "control" existed, the Massachusetts Supreme Judicial Court concluded that the entity created was not a "business trust" under Massachusetts common law. See Bouchard v. First People's Trust, 253 Mass. 351, 360-61 91925); Frost v. Thompson, 219 Mass. 360, 365 (1914). The "control test" fosters the Commonwealth's policy of prohibiting business entities from achieving limited liability without compliance with the Massachusetts corporate franchise laws. See Fenton & Mazie, at 25-7-8.
In line with the Act's rejection of the "control test," the beneficial owners are permitted to participate in the management of the "business trust" without assuming personal liability for the obligations of the trust. 12 Del. C. § 3806(a). In fact, the Act specifically states that, to the extent not otherwise provided in the declaration of trust, neither the power to give direction to a trustee nor the exercise thereof by any person, including a beneficial owner, will cause such person to be a trustee. Id.
The Act allows a "business trust" to merge or consolidate with or into one or more business trusts or "other business entities." 12 Del.C. § 3815(a). The Act defines "other business entity" to include a corporation, a partnership (general or limited), a common law trust or any other unincorporated business, whether formed or existing under Delaware law, the laws of any other state of the United States or any foreign country. The merger and consolidation provision of the Act are designed to interface with the merger and consolidation provisions of Delaware law relating to corporations and limited partnerships. Fenton & Mazie, at 25-17.
Also, the Act allows the beneficial owner of a "business trust" to bring a derivative action in the Delaware Court of Chancery in the name of the business trust in order to recover a judgment if the trustees have refused to bring the action or if an effort to cause those trustees to bring the action is not likely to succeed. 12 Del. C. § 3816(a). The bringing of a derivative action by a beneficial owner is subject to a number of conditions precedent that are consistent with Rule 23.1 of the Delaware Court of Chancery and the provisions of Delaware law applicable to corporations and limited partnerships. See Fenton & Mazie, at 25-17-18.
B. Taxation of Associations in Massachusetts
1. Associations Subject to Personal Income Taxation
In the past the Massachusetts Legislature has attempted to impose an excise, similar to the corporate excise, on associations, partnerships and trusts, the beneficial interest of which are represented by transferable shares. See Gleason v. McKay, 134 Mass. 419 (1883); Opinion of Justices, 266 Mass. 590 (1929). The Supreme Judicial Court has held the imposition of such taxes unconstitutional, since the transaction of business by such entities is not a "commodity" within the meaning of c. 1, § 1, art. 4, of the Constitution of Massachusetts. In Gleason, the Court reasoned that such associations enjoyed no franchises conferred by the Legislature, but were exercising a common law right, and that the transferable certificates of participation or shares did not make the doing of business by such associations a commodity. Gleason v. McKay, 134 Mass. at 425.
Accordingly, an "association" subject to personal income taxation is an association which enjoys no franchise or corporate powers and privileges conferred upon it by a legislature, and has constituted itself a "partnership" under its common law rights and such legal agreements as it chooses to make, including the transferability of its certificates of beneficial interest. See Opinion of Justices, 196 Mass. 604, 627 (1908).
All Massachusetts "associations" regulated and governed by the provisions of Chapter 182 of the General Laws are subject to personal income taxation. The same rule applies to foreign associations that enjoy no corporate privileges or franchises. However, where a foreign association is clothed with corporate powers and privileges under the statutory authority of its legislature, and the Massachusetts corporate statute specifically makes such associations taxable, the Court has recognized that such entities can be subject to taxation as corporations. See Id. at 626.
2. Associations Subject To Corporate Taxation
For Massachusetts tax purposes, a "foreign corporation" is defined as "every corporation, association....established, organized or chartered under laws other than those of the commonwealth, for purposes for which domestic corporations may be organized under [Chapter 156, 156A, 156B, or 180] which has privileges, powers, rights or immunities not possessed by individuals or partnerships;...." G.L. c. 63, § 30, cl. 2 (emphasis added). This definition of a "foreign corporation" has remained basically the same, substantively as well as literally, since its original enactment. 3
The Massachusetts Legislature clearly intended to distinguish between "corporations" and "associations" in the statutory definition of a "foreign corporation." Associations were included within the definition of a "foreign corporation" in recognition of the fact that many associations organized in other States or countries under statutes that give them corporate privileges are in fact more like corporations than partnerships. See Opinion of Justices, 196 Mass. at 626. Such associations are "so far clothed with the functions and attributes of a corporation as to come within the just application of principles relating to corporations ...." Id (quoting Oliver v. Liverpool & London Ins. Co., 100 Mass. at 538. Thus, "[a]ll such associations, and all others which are organized and enjoy the privileges in this Commonwealth under the legislative authority of this State, may be subject to an excise tax upon the commodity so enjoyed...." 4 Id.
Whether or not an "association" comes within the definition of a "foreign corporation" for Massachusetts tax purposes is a factual determination. In the past, the Court has considered the relevant foreign statutory provisions, the treatment of such "associations" as corporations or partnerships by the foreign state, and the operation of the "association." See e.g., Oliver v. Liverpool & London Life & Fire Insurance Co., 100 Mass. 531. No one factor is controlling.
C. Discussion - Taxation of the Trust as a Corporation for Massachusetts Tax Purposes.
Notwithstanding the Act's definition of a "business trust" as including a "Massachusetts trust," a "business trust" established under the Act, per se is not a business trust but an association under Massachusetts law. The Act expressly limits the personal liability of the beneficial owners. 5 In rejecting the "control test" of Williams v. Inhabitants of Milton, 215 Mass. at 8, the Act conflicts with Massachusetts law and principles that distinguish a business trust from an association or partnership under common law. See Fenton & Mazie, at 25-7-8. Moreover, in line with the Act's rejection of the "control test," the degree of control available to the beneficial owners of a Delaware "business trust" is far greater than that permitted to a Massachusetts business trust. Accordingly, an entity governed by the provisions of the Act is not a business trust under Massachusetts common law.
For Massachusetts tax purposes, the definition of a "foreign corporation" includes "every corporation, association, or organization established, organized or chartered under laws other than those of the commonwealth,...." G.L. c. 63, § 30(2) (emphasis added). When the Trust files its declaration of trust with the Delaware Secretary of State, it will become an "association or organization established, organized or chartered under the laws of Delaware." The Act provides a bright line test in determining whether a trust arrangement is governed by the Act, that is, the filing of a declaration of trust with the Delaware Secretary of State. See 12 Del.C. § 3801(a).
A Delaware "business trust" under the Act is the type of "association" that falls within our statutory definition of a "foreign corporation. First, its very existence is dependent upon legislative grace. Second, it is the type of association that the Legislature intended to include within the definition of a "foreign corporation," namely, an association organized under another state statute that is "so far clothed with the functions and attributes of a corporation as to come within the just application of principles relating to corporations...." See Opinion of the Justices, 196 Mass. at 626 (quoting Oliver v. Liverpool & London Ins. Co., 100 Mass. at 538).
The Act clothes a Delaware "business trust" with "functions and attributes of a corporation." Except to the extent provided by the declaration of trust, the beneficial owners are entitled to the same limitations of personal liability extended to stockholders of private corporations for profit (12 Del.C. § 3803(a)); the "business trust" has perpetual existence (12 Del. C. § 3808(a)); the death, incapacity, dissolution, termination or bankruptcy of a beneficial owner will not result in the termination or dissolution of a "business trust" (12 Del.C. § 3808(b)); for tax purposes under Delaware law, the "business trust" will be classified as a corporation, partnership, trust or otherwise, as determined by the Internal Revenue Code (12 Del.C. § 3809); the merger and consolidation provisions of the Act are designed to interface with the merger and consolidation provisions of Delaware law relating to corporations and limited partnerships (12 Del.C. § 3815(a)); and the derivative action provisions are subject to a number of conditions precedents that are consistent with Rule 23.1 of the Delaware Court of Chancery and the provisions of Delaware law applicable to corporations and limited partnerships (12 Del.C.§ 3816(a).
Clearly, the Delaware "business trust" may adopt many powers and privileges associated with a corporation, which have been conferred by the Delaware Legislature. The Delaware Legislature intended to permit a more versatile type of enterprise to qualify as a "business trust" under the Act than is possible at common law. See 12 Del.C. § 3801(a) (definition of a "business trust"). Also, the State of Delaware still recognizes and distinguishes between business trusts operating at common law and those operating under the Act - applying the provisions of the Act to those "business trusts" governed by the Act, while applying its "common law" to common law business trusts. See Fenton & Mazie, at 25-5-6.
In addition, as stated above, a principal purpose of the Act is to avoid the "control test" for determining whether a business entity should be treated as a corporation. The "control test" reflects the Commonwealth's public policy of prohibiting limited liability without compliance with the State's corporate franchise laws. A corollary to the "control test" is that a business entity in which the beneficial owners enjoy both significant control and limited liability must enjoy some sort of franchise under the laws of the Commonwealth or the state under which it was established. A "business trust" governed by the Act is granted such a franchise.
In contrast, Massachusetts business trusts or associations are not "governed" by the General Laws; the General Laws (c. 182) merely recognize the existence of such business entities. See n. 1 and 2, cf. 12 Del.C. § 3801 et seq. Unlike the Act, the provisions regulating Massachusetts business trusts and associations are merely administrative, rather than substantive. The trustees of a Massachusetts business trust are required to file a copy of the declaration of trust with the secretary of state and the clerk of every city or town where the trust has its usual place of business. However, the filing of the declaration of trust is not a condition precedent to the existence of the trust. Id. Other provisions of G.L. c. 182 include: (1) a prohibition on the assumption of the name of another corporation or trust; (2) authority for individuals to sue a trust as a legal entity; (3) a requirement to file an annual report which shall state (a) the name of the trust; (b) the location of its principal office; (c) the number of its issued and outstanding shares; and (d) the names and addresses of its trustees.
Finally, in Massachusetts, business trusts are subject to personal income tax and taxed as individuals because they enjoy no franchise conferred by the Legislature. Rather, the beneficial owners have associated themselves under their common law right of association and contract in a business endeavor. Thus, they are not a "commodity" subject to an excise.
IV. The pattern of activity of the Trust is such that it will not be subject to the corporate excise imposed under c, 63.
Every foreign corporation exercising its charter, or qualified to do business or actually doing business in the Commonwealth, or owning or using any part of all of its capital, plant or any other property on the Commonwealth is required to pay a corporate excise, as provided by c. 63, § 39. In the case of the Trust, it will not be qualified to do business in Massachusetts. The trustees' and shareholders' meetings will not take place in Massachusetts. The Trust will have no office, own no real estate or tangible personal property, or employees located within Massachusetts. Finally, the Trust's intangible assets will be held for the most part through the securities depository or book-entry systems, and to the limited extent certificated securities continue to exist, they will be held by a third party custodian outside of Massachusetts. The sole contact between the Trust and Massachusetts is the contracting with independent contractors for the performance of services on behalf of the Trust, which contracts will be executed outside of Massachusetts. Based on the above, we conclude that the Trust does not have nexus with Massachusetts, and, as a result, it is not subject to the Massachusetts corporate excise.
Very truly yours,
Commissioner of Revenue
July 1, 1991
1 References to the Trust apply to each series thereof as well.
2 A Massachusetts business trust is an association organized by the execution and delivery of a declaration of trust under which the beneficial interest is divided into transferable units or shares. G.L. c. 182, § 1. Filing a declaration of trust with the Commonwealth of Massachusetts is not a condition precedent to the existence of the trust. See Jones, Moret, Storey, The Massachusetts Business Trust and Registered Investment Companies, Delaware Journal of Corporate Law, 13:421, 423-24 (1988).
3 The definition of a "foreign corporation" originally was enacted by St. 1903, c. 437, § 56, which defined the term "foreign corporation" as "every corporation, association or organization which has been established, organized or charted under laws other than those of the Commonwealth for the purpose for which domestic corporations may be organized under the provisions of section seven." See Opinion of Justices, 196 Mass. at 626.
4 A number of other states have treated "foreign" business trusts and/or associations as corporations for state tax purposes where the particular state's constitution and/or statutory provisions specifically include such unincorporated entities within the definition of a "corporation." See Annotation, Massachusetts or Business Trusts, 88 ALR3d 704, 763-67 (1978).
5 The taxpayer points out that the Act's provisions relative to the beneficial owners' limited personal liability do not apply to RICs, where the RIC's trust instrument so chooses. See 12 Del.C. § 3804. The Trust is willing to waive the limited liability provisions of the Act. However, the Trust's offer to waive limited personal liability is not dispositive, since the characterization of an entity as a business trust or an association is a factual determination where no one factor is, by itself, dispositive.
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