September 16, 1992

You represent (the "Company"), a Massachusetts corporation that provides investment management services to individuals and businesses. The Company's clients deposit money in investment accounts at the Company and by written agreement authorize the Company to invest the funds in any manner that the Company decides will maximize their returns. The Company evaluates market conditions and decides the appropriate mix of stocks and cash to be maintained in each account. In order to maximize returns on its clients' cash holdings, the Company pools the cash balances in its clients' accounts and invests the money in high denomination United States Treasury securities and certificates of deposit. The Company purchases these securities for its clients as a nominee and, after deducting a fee for its services, allocates the interest attributable to the securities to its clients' accounts based on the cash balances of each account. The allocations are made on a daily basis.

In determining its federal income tax liability, the Company includes the fees in gross income, but does not include the portion of the interest allocated to its clients' accounts. You maintain that this treatment is proper because the Company receives the interest as an agent for its clients. The Company treats the interest allocated to its clients' accounts as income to the clients and reports it as such to the Internal Revenue Service and the clients as required by I.R.C. § 6049, and to the Department of Revenue as required by G.L. c. 62C, § 8.

You ask whether interest received by the Company as an agent for its clients and allocated to its clients' accounts retains its character for purposes of determining the clients' Massachusetts personal income tax liability. Specifically you ask whether interest derived from obligations of the United States and allocated to the clients' accounts in this manner retains its character as exempt interest from federal obligations under G.L. c. 62, § 2(a)2(A). You do not ask, and we do not rule on, whether an agency relationship exists between the Company and its clients. Rather, for purposes of this ruling only, we rely on your assertion that the Company receives the interest income allocated to its clients' accounts as an agent for its clients.

Discussion

Massachusetts gross income equals federal gross income with certain modifications. G.L. c. 62, § 2(a). For federal tax purposes, when an agent receives income on behalf of a principal, the principal, and not the agent, is required to include the income in federal gross income. See Goldwasser, Edith, 47 B.T.A. 445 (1942), aff'd 142 F.2d 556 (2nd Cir. 1944), cert. denied 323 U.S. 765 (1944) (Where an individual receives stock as an agent for a second individual, the second individual must include the value of the stock in federal gross income); Johnson, A.M., 32 B.T.A. 156 (1935) (Where an individual sells stock in his own name as an agent of a second individual, the second individual recognizes the income attributable to the sale); Advance Homes, Inc. v. Commissioner, T.C. Memo. 1990-302 (Where a company manages residential units as an agent for investment companies, the management company does not recognize income received on behalf of the investment companies for purposes of determining the management company's status as a personal holding company); Van Sickle Development Co., Inc. v. Commissioner, T.C. Memo. 1978-161 (Income from securities held by a corporation as an agent for corporate and individual principals is properly included in the principals' federal gross income). Thus, when the Company receives interest income as an agent for its clients and allocates the interest to its clients' accounts, the clients must include the interest in federal gross income. Therefore, the clients must also include the interest in Massachusetts gross income, unless a provision G.L. c. 62, § 2(a)(2) applies to exclude the interest income.

Generally, both for federal tax purposes and under Massachusetts law, the activity of an agent is attributed to the principal. See George v. Commissioner of Revenue, 844 F.2d 225 (5th Cir. 1988) (Members of a partnership may deduct losses attributable to real property where a corporation holds title to the real property as an agent for the partnership); see also Ritson v. Atlas Assur. Co., 272 Mass. 73 (1930). Thus, for purposes of determining the appropriate Massachusetts tax treatment of income received from an agent, the income retains the same characteristics in the hands of the principal as it has when received by the agent. The income exclusions of G.L. c. 62, § 2(a)(2), and the income classification provisions of G.L. c. 62, § 2(b), therefore apply to the interest allocated to the clients' accounts as though the interest is received directly by the clients.

G.L. c. 62, § 2(a)(A) excludes from Massachusetts gross income "[i]nterest on obligations of the United States exempt from state income taxation...." Based on the foregoing analysis, the exclusion applies to interest from federal obligations allocated to clients' accounts, where the Company purchases the obligations as an agent for its clients. The Company may therefore treat such interest as exempt interest for Massachusetts income reporting purposes and its clients may exclude such interest from Massachusetts gross income under G.L. c. 62, § 2(a)(2)(A), if the Company clearly identifies the interest as exempt interest in its books and records and on its statements to its clients.

G.L. c. 62, § 2(b), requires Massachusetts gross income to be separated into Part A and Part B income. Generally, interest income is classified as Part A income. G.L. c. 62, § 2(b)(1). Section 2(b)(1)(A), however, provides an exception under which interest from certain Massachusetts chartered financial institutions and federally chartered financial institutions located in Massachusetts is classified as Part B income. For the reasons discussed above, income received through an agent retains its character as Part A or Part B income in the hands of the principal. Therefore, when the Company acts as an agent in purchasing certificates of deposit from a financial institution enumerated in G.L. c. 62, § 2(b)(1)(A), the interest from the certificates of deposit allocated to the clients' accounts is Part B income to the clients if the Company clearly identifies the interest as Massachusetts bank interest in its books and records and on its statements to its clients. Otherwise, all non-exempt interest allocated to the clients' accounts is Part A income to the clients.

Conclusion

When the Company acts as an agent for its clients in purchasing federal obligations or certificates of deposit, the clients' Massachusetts tax liability with respect to the interest allocated to the clients' accounts is determined as though the clients received the interest directly. Thus, interest derived from exempt federal obligations received by the Company as an agent and allocated to the clients' accounts is exempt interest to the clients. Interest derived from certificates of deposit purchased by the Company as an agent for its clients is Part A income to the clients, unless the Company identifies the interest as Massachusetts bank interest as provided above.


Very truly yours,
Mitchell Adams
Commissioner of Revenue
September 16, 1992
LR 92-4