August 28, 1991

I. Issues

("the Company") is a Delaware corporation that is engaged in business in Massachusetts. The Company is considering forming a wholly-owned subsidiary (Newco) to carry on investment activities. You have asked us to rule whether certain banking activities that Newco anticipates conducting in Massachusetts will subject Newco to tax under G.L. c. 63, § 39. We conclude that Newco will not be doing business in Massachusetts within the meaning of G.L. c. 63, § 39, and will not be subject to the excise imposed by that section, provided that its activities in Massachusetts do not exceed those described in this ruling.

II. Facts

The Company is a manufacturer with operations in approximately forty states, including Massachusetts. Its administrative headquarters and manufacturing facility are in Texas. The Company recently raised additional capital through a stock offering. This capital is not needed in the near future to fund the operation of the Company, and the Company is considering investment opportunities for its excess cash.

In the past, the Company has commingled any excess cash with its operating funds. The Company now wishes to separate its investment activities from its business operations for purposes of management control. The Company proposes to form a subsidiary (Newco) to handle its investment activities. The Company will operate and evaluate Newco on its own separate activities.

The assets of Newco will be invested primarily in intangibles such as U.S. government and agency obligations, corporate commercial paper, bonds, promissory notes and other corporate obligations, demand deposits, certificates of deposit, other time deposits, bankers' acceptances, Eurodollar time deposits and CD's. Newco will not invest in any real or personal property in Massachusetts. Newco plans to hire outside investment consultants to manage its cash balances on a day-to-day basis. It will have bank accounts with at least one Massachusetts bank.

Newco will reimburse the Company for the time of certain Company employees who are based at the Company's Texas headquarters and who will devote a maximum of thirty percent of their hours to the administration of Newco. 1 The "loaned" employees will confer with Newco's consultants and bankers from time to time to discuss the rates of return on various investments and the objectives of Newco's investment activities. You anticipate that these employees will visit Massachusetts a few times each tax year, for one to two days per trip, to meet with Newco's consultants and bankers.

Apart from the brief visits described above, Newco will have no employees in Massachusetts. The Company's Massachusetts employees will have no contact with Newco. Newco will not be qualified to do business in Massachusetts.

III. Analysis

The circumstances under which a foreign corporation is subject to tax in Massachusetts are described in G.L. c. 63, § 39, which states in relevant part:
Except as otherwise provided herein, 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 in the commonwealth, shall pay, on account of each taxable year, the excise provided in subsection (a) or (b) of this section, whichever is greater.
The excise levied herein is due and payable on any one or all of the following alternative incidents:

  1. The qualification to carry on or do business in this state or the actual doing of business within the commonwealth in a corporate form. The term "doing business" as used herein shall mean and include each and every act, power, right, privilege, or immunity exercised or enjoyed in the commonwealth, as an incident to or by virtue of the powers and privileges acquired by the nature of such organizations, as well as, the buying, selling or procuring of services or property.
  2. The exercising of a corporation's charter or the continuance of its charter within the commonwealth.
    The owning or using any part of all of its capital, plant or other property in the commonwealth in a corporate capacity.
    It is the purpose of this section to require the payment of this excise to the commonwealth by foreign corporation for the enjoyment under the protection of the laws of the commonwealth, of the powers, rights, privileges and immunities derived by reason of the corporate form of existence and operation.


We conclude that under the facts stated, Newco will not be subject to the excise under G.L. c. 63, § 39. First, a foreign corporation generally does not "do business" in Massachusetts for purposes of G.L. c. 63, § 39, merely because an independent contractor performs services for the foreign corporation in this state. 2 We have ruled in other contexts, for example, that a foreign corporation may retain a Massachusetts financial institution as a custodian, dividend disbursing agent, and transfer agent without subjecting itself to the jurisdiction of Massachusetts under G.L. c. 63, § 39. See Letter Ruling 1980-41, 1991-2. In this context, the infrequent trips, described above, similarly will not rise to the level of "doing business," provided that the substance of the trip is limited to the banking and investment consultation described above, and provided that Newco's employees do not execute contracts on its behalf when they are in Massachusetts. 3

Second, although the intangible assets of Newco that will be managed by bankers or financial consultants in Massachusetts clearly constitute "all or part of its capital, plant or other property," we do not believe that the type of intangible assets that Newco contemplates holding are owned or used in Massachusetts for the jurisdictional purposes of G.L. c. 63, § 39, merely because they are managed by an independent contractor located in this state. Cf. Letter Ruling 1980-41. 4


Very truly yours,
/s/Mitchell Adams
Mitchell Adams
Commissioner of Revenue
August 28, 1991
LR 91-6


Footnotes:

1 You state that Newco may, in the future, hire its own employees to replace the "loaned" employees.

2 We interpret the "buying....or procuring of services" in G.L. c. 63, § 39, as referring to the obtaining of services of agents or employees from another person, such as a payroll company or personnel service, not the obtaining of services of a bona fide independent contractor.

3 We emphasize that this ruling is limited to its facts. Occasional visits to Massachusetts of corporate agents or employees may constitute "doing business" if conducted for other purposes.

4 This ruling is limited to jurisdiction over foreign corporations under G.L. c. 63, § 39. Management of intangible assets in the state may lead to tax jurisdiction in other circumstances. See e.g. Frost v. Commissioner, 363 Mass 235, 241 (1973) (estate tax).