June 24, 1999

This is in reply to your request for certain rulings with respect to *************** (the "Parent") and *************** (the "Sub," together, the "Taxpayers").

STATEMENT OF FACTS

Parent and Sub are each Delaware corporations. Parent owns 100 percent of Sub's capital stock. Sub is included as a subsidiary in Parent's consolidated federal income tax returns, and commencing in ********** Sub will be included in Parent's combined Massachusetts income tax returns.

Parent is headquartered in Massachusetts and, together with its subsidiaries, it manufactures, markets and distributes a wide range of products within the U.S. and worldwide. [1] Within the United States, almost all of the Parent Group's operations are held directly by Parent rather than through subsidiaries. Parent is currently taxable in not fewer than thirty-five states, while Sub in taxable only in Massachusetts.

In the latter part of ********** Parent commenced a worldwide business reorganization intended to enable the Parent Group to respond better to the needs of its trade customers and to improve operating synergies. When the reorganization is complete, Parent envisions having one wholly-owned distribution subsidiary in each country in which the Parent Group has a significant business presence that will distribute and sell all of the Parent Group's products in that country, in contrast to the pre-reorganization structure under which the Parent Group manufactured and sold its different products through separate legal entities. Each distribution company will purchase finished products from related Parent Group suppliers at arm's-length prices, computed so as to leave an appropriate distributor's profit margin (after all expenses) at the distribution company level.

Parent wishes to implement this worldwide distribution structure within the United States, using one separate distribution entity. Parent represents that it is a manufacturing corporation eligible to apportion its income under G.L. c. 63, § 38(1), that it wishes to ensure that it will remain such a manufacturing corporation and that its apportionment factor computations will not be materially affected. The proposed structure is intended to achieve that goal.

To facilitate the reorganization within the United States, Parent and Sub intend to organize a general partnership under Massachusetts law to serve as the separate United States distribution entity ("Sale Partnership"). See G.L. c. 108A, § 6. Parent will hold a 99.9 percent interest in Sales Partnership, with the remaining 0.1 percent interest held by Sub.

PROPOSED TRANSACTION

The proposed reorganization would be implemented by Parent contributing its domestic sales force and distribution assets and activities to Sales Partnership. Parent and Sales Partnership would enter into an agreement under which Sales Partnership would be the exclusive United States merchandiser and distributor of all of Parent's products. Consistent with the worldwide restructuring Parent would retain research and development, manufacturing, and strategic marketing functions (as well as head office stewardship and other related strategic functions). Parent would also retain ownership of all patents, trademarks, trade names and other intellectual property. Parent would sell its products to Sales Partnership using a "resale price method" that would provide Sales Partnership an appropriate arm's-length profit commensurate with the distribution and selling functions to be undertaken by Sales Partnership.

Parent and Sub plan to cause Sales Partnership to make an election under Treas. Reg. § 301.7701-3 (the federal income tax "check-the-box" regulation) to have Sales Partnership treated as a corporation for federal income tax purposes. This treatment will permit Sales Partnership to be included as a subsidiary in Parent's federal consolidated tax return. However, the Massachusetts income tax classification of an unincorporated business entity such as Sales Partnership is governed by Massachusetts law, which makes no reference to an entity's federal classification or to the "check-the-box" election. [2]

In the absence of the "check-the-box" election, the Taxpayers represent that Sales Partnership would be classified as a partnership for federal income tax purposes. Treas. Reg. § 301.7701-2(c)(1). The Taxpayers further represent that Sales Partnership would have been treated as a partnership for federal income tax purposes under the former federal "Kintner" regulation tests for entity classification, Treas. Reg. § 301.7701-2 (as in effect prior to January 1, 1997), because it would have associates and an objective to carry on business and divide the gains therefrom, and because it will lack all four of the corporate attributes identified in those regulations, namely, centralized management, [3] continuity of life, [4] free transferability of interests, [5] and limited liability. [6]

RULINGS REQUESTED

The Taxpayers request the following rulings with respect to the proposed transaction described above:

1. Sales partnership will not be a corporate trust within the meaning of G.L.c. 62, § 1(j), but rather will be a partnership that is not subject to income taxation in Massachusetts under G.L. c. 62, § 17.

2. Under G.L. c. 62, § 17 and 830 CMR 63.38.1(13)(c), Parent and Sub would include their respective distributive shares of Sales Partnership's separately determined income, loss, credits and other partnership items in calculating their respective incomes.

3. Sales Partnership's property, payroll and sales apportionment would flow through to, and be reported by Parent and Sub, in accordance with 830 CMR 63.38.1(13)(d).

4. A portion of Parent's sales to Sales Partnership (and any other relevant transactions between Parent and Sales Partnership) equal to Parent's percentage ownership in the partnership would be eliminated for apportionment purposes. See, e.g., 830 CMR 63.38.1(13)(d) 3.a.i (elimination of corporate partner sales to partnership).

5. The tax attributes of Sales Partnership would flow through to Parent and Sub in accordance with their respective interests in Sales Partnership (including, for example, that Parent would be deemed to have nexus in those states in which Sales Partnership has taxable nexus, in accordance with 830 CMR 63.38.1(13)(b); and for purposes of the Massachusetts research credit, Sales Partnership's gross receipts would be used, in accordance with 830 CMR 63.38M.1(3)(f) and (7)(c)).

DISCUSSION

Ruling 1: Sales Partnership Not a Corporate Trust

A partnership and its partners are subject to the pass-through rules of G.L. c. 62, § 17 unless the partnership is a "corporate trust" subject to G.L. c. 62, § 8. G.L. c. 62, § 1(j) defines a corporate trust as "any partnership, association or trust, the beneficial interest of which is represented by transferable shares." Sales Partnership will not be treated as a corporate trust because the Taxpayers have represented that the partnership agreement of Sales Partnership will provide that interests in Sales Partnership are nontransferable. Accordingly, Sales Partnership will not be subject to G.L. c. 62, § 8.

Ruling 2: Applicability of Flow-Through Provisions of G.L. c. 62, § 17

The taxpayers have represented that Sales Partnership will be formed as a partnership under G.L. c. 108A, and that it will lack all four of the corporate attributes listed in the federal "Kintner" regulations: centralized management, continuity of life, free transferability of interests, and limited liability. Further, Sales Partnership cannot be classified as a corporation for Massachusetts purposes, as it will not fit the statutory definitions of the term set forth in G.L. c. 63, §§ 30(1) and 30(2). Similarly, Sales Partnership cannot be classified as a "trust" taxable under G.L. c. 62, § 10 because it will involve no trustee relationship: Parent and Sub will retain direct ownership of their partnership interests, including all of the rights of control over and participation in the management of Sales Partnership's affairs. See LR 97-2, n. 2 (May 23, 1997) and accompanying text; LR 95-7 (May 9, 1995). Accordingly, Sales Partnership will be treated as a partnership for Massachusetts tax purposes.

Since under Ruling 1, Sales Partnership will be treated as a partnership that is not a corporate trust, it will not itself be subject to income taxation in Massachusetts; instead, its partners (i.e., Parent and Sub) will each include in its taxable income its respective distributive share of Sales Partnership's income, loss, and other partnership items. G.L. c. 62, § 17; 830 CMR 63.38.1(13)(c).

Ruling 3: Flow-through of Apportionment Factors under 830 CMR 63.38.1(13)(d)

In apportioning Parent and Sub's income, Sales Partnership's property, payroll and sales apportionment factors will flow through to, and be reported by, Parent and Sub, in accordance with 830 CMR 63.38.1(13)(d). Thus, Parent and Sub will each take into account in apportioning its income its percentage interest of Sales Partnership's property, payroll, and sales. 830 CMR 63.38.1(13)(d)1, (d)2, (d)3, and (f).

Ruling 4: Elimination of Portion of Parent's Sales to Sales Partnership

Pursuant to 830 CMR 63.38.1(13)(d)3.a.i, Parent must eliminate from its sales factor computation an amount equal to the total of all sales by Parent to Sales Partnership multiplied by Parent's percentage ownership in the Sales Partnership.

Ruling 5: Flow-Through of Certain Tax Attributes of Sales Partnership to Parent and Sub

In accordance with 830 CMR 63.38.1(13)(b), Parent and Sub will be deemed to have nexus for Massachusetts corporate excise tax purposes in those states in which Sales Partnership has taxable nexus. All amounts relevant to the Massachusetts research credit that are paid or received by Sales Partnership will be attributed to Parent and Sub for purposes of the Massachusetts research credit in accordance with Section 704 of the Internal Revenue Code, as amended and in effect for the applicable year, as required by 830 CMR 63.38M.1(3)(f), (7)(c).

Very truly yours,

/s/Frederick A. Laskey

Frederick A. Laskey
Commissioner of Revenue

FAL:DMS:atf

LR 99-13



[1] Parent and its subsidiaries are referred to collectively herein as the "Parent Group."

[2] There is an exception to this general rule: a limited liability company that "is not classified for the taxable year as a partnership for federal income tax purposes" is classified as a corporation for Massachusetts corporate excise tax purposes by G.L. c. 63, §§ 30(1) and (2), while one that is so classified as a partnership will be deemed to be a partnership under G.L. c. 63, § 17. See also TIR 97-8 (June 16, 1997).

[3] Treas. Reg. § 301.7701-2(c)(4) (as in effect prior to January 1, 1997); see G.L. c. 108A, § 9.

[4] The partnership agreement of Sales Partnership will provide that any partner may withdraw from the partnership at any time and that the term of the partnership will expire and the partnership will be dissolved in the event of such a voluntary withdrawal or in the event of any Partner's bankruptcy, retirement, resignation, dissolution, insanity, or other involuntary withdrawal from the partnership.

[5] The partnership agreement of Sales Partnership will provide that no partner may dispose of, sell, alienate, assign, encumber, or otherwise transfer all or any part of its interest in the partnership without the written consent of each other partner of the Partnership, and that any such transfer in contravention of those restrictions will be void and ineffectual and will not bind or be recognized by the partnership.

[6] G.L. c. 108A, § 15(1).