November 30, 1999

You request a letter ruling on behalf of *************** (the "Corporation") to the effect that if the Corporation reorganizes such that it (a) is classified for purposes of federal taxation as a qualified S corporation subsidiary ("QSSS") pursuant to Internal Revenue Code ("I.R.C." or the "Code") § 1361(b)(3)(B), and (b) is wholly owned by a Massachusetts corporate trust, then for Massachusetts tax purposes:

1. all of the Corporation's items of income, gain, loss, deduction, and credit will be treated as those of the corporate trust;

2. the corporate trust will be taxed at the entity level under G.L. c. 62, § 8 on the combined income of itself and the Corporation;

3. the Corporation will not be subject to the net income measure of the corporate excise imposed under G.L. c. 63, § 32 nor to the entity level income tax imposed under G.L. c. 63, § 32D; and

4. as a QSSS, the Corporation will be subject to the greater of the non-income measure of the corporate excise or the minimum corporate excise imposed under G.L. c. 63, § 32.

Additionally, you request a ruling that if the corporate trust (a) establishes a Delaware single-member limited liability company ("LLC") (of which the corporate trust will be the sole member), and (b) elects to treat the LLC as a non-entity for federal income tax classification purposes, then such LLC will not be subject to tax under G.L. c. 63.

Facts

The Corporation is a Massachusetts corporation that organized on January 2, 1984, under chapter 156B of the Massachusetts General Laws. The Corporation has two shareholders and one class of stock outstanding: no par value common stock. The bulk of the Corporation's business activity is conducted in Massachusetts. The Corporation operates two businesses; a *************** business and a *************** business. Pursuant to I.R.C. § 1362, the Corporation made an S corporation election, effective November 1, 1986, and at all times thereafter has been treated as an S corporation for purposes of federal income taxation.

For various reasons, the Corporation's two shareholders have proposed to reorganize the Corporation by converting it into a wholly-owned subsidiary of a corporate trust holding company. Pursuant to that end, the shareholders propose to organize a trust whose beneficial interest is represented by transferable shares, i.e., a corporate trust, under a declaration of trust pursuant to chapter 182 of the Massachusetts General Laws. For purposes of federal taxation, however, the corporate trust will elect to be treated as an S corporation pursuant to § 1362 of the Code. Additionally, the shareholders propose to transfer, tax free, 100% of their stock in the Corporation to the corporate trust pursuant to I.R.C. §§ 351(a) and 354. The intention is that after the transfer both shareholders will own beneficial interests in the corporate trust in the same proportion as they currently own shares in the Corporation. Finally, the shareholders propose that, immediately after the transfer, (1) the corporate trust will make an I.R.C. § 1361(b)(3) (B)(ii) election to treat the Corporation as a QSSS, and (2) the single-member LLC mentioned above will be organized. Regarding the LLC, the intention is that if and when the Corporation's business achieves a certain volume of business, it will be transferred to the LLC.

Discussion

A. Applicable Massachusetts General Laws

Under the General Laws, all domestic business, manufacturing, and research and development corporations are subject to the excise imposed by G.L. c. 63, § 32. Similarly, all foreign business, manufacturing, and research and development corporations doing business in the Commonwealth are subject to the excise imposed by G.L. c. 63, § 39. Under both sections, the excise is comprised of a number of components ( i.e., a minimum corporate excise; a property measure consisting of two alternative amounts, a tangible property amount or a net worth amount; and a net income measure), and is expressed as the minimum corporate excise or the combined property measure and net income measure, whichever is greater. In the case of a federal S corporation that is also a Massachusetts S corporation, however, the net income measure of the corporate excise is determined under G.L. c. 63, § 32D. "Net income," as that term is used in §§ 32, 39, and 32D, is defined, in relevant part, as "gross income less the deductions, but not credits, allowable under the provisions of the Federal Internal Revenue Code, as amended and in effect for the taxable year." G.L. c. 63, § 30. For corporate excise purposes, Massachusetts generally adopts the current Code. See, e.g., G.L. c. 63 §§ 30.3, 30.4, and 32D.

Corporate trusts that are treated as S corporations for federal income tax purposes do not qualify for S corporation treatment in Massachusetts. 830 CMR 62.17A.1(3)(e). Instead, under the Massachusetts General Laws, such corporate trusts are subject to tax in the same manner as any other corporate trust at the entity level under § 8 of G.L. c. 62. Id.; G.L. c. 62. "Corporate trust," as that term is used in the General Laws, is defined as "any partnership, association or trust, the beneficial interest of which is represented by transferable shares." G.L. c. 62 § 1(j). All corporate trusts meeting this definition are taxable under § 8, regardless of their treatment for federal tax purposes. Minkin v. Commissioner of Revenue, 425 Mass. 174, 178 n. 9 (1997).

B. Taxation of QSSSs

Under I.R.C. § 1361, federal S corporations are allowed to own QSSSs. A "QSSS," as that term is used in § 1361 means any domestic corporation that qualifies as an S corporation and is 100% owned by an S corporation parent, that elects to treat it as a QSSS. I.R.C. § 1361(b)(3)(B). [1] Federally, a QSSS is not treated as a separate corporation. I.R.C. § 1361(b)(3)(A)(i). Rather, all assets, liabilities, items of income, deduction, and credit of the QSSS are treated as belonging to the S corporation parent. I.R.C. § 1361(b)(3)(A)(ii).

For the purpose of defining S corporations, including QSSSs, and characterizing income as S corporation income, the Massachusetts S corporation regulation adopts the current Code with certain eligibility requirements, not relevant here. 830 CMR 62.17A.1(2); TIR 97-6. Accordingly, for Massachusetts income tax purposes, a QSSS is not treated as a separate corporation. As expressly stated in TIR 97-6, all assets, liabilities, items of income, deduction, and credit of a QSSS are treated as though they were realized directly by the parent.

Applying the above criteria to the facts at issue here, if the Corporation reorganizes as stated above, then all of the Corporation's items of income, gain, loss, deduction, and credit will be treated as though they were realized by the corporate trust parent. Additionally, notwithstanding the fact that federally the corporate trust parent will be treated as an S corporation, for Massachusetts income tax purposes the corporate trust will be subject to tax at the entity level under G.L. c. 62, § 8 on the combined income of itself and the Corporation. 4 Bailey & Van Dorn, Massachusetts Practice, Taxation §97 (1998). Finally, the Corporation will not be subject to the net income measure of the corporate excise imposed under G.L. c. 63, § 32, nor to the entity level income tax imposed under G.L. c. 63, § 32D.

C. QSSSs Are Subject, In Part, to Excise Imposed Under Chapter 63 § 32

Even though a QSSS is not subject to the net income measure of the corporate excise, the Commissioner of Revenue ruled in TIR 97-6 that a QSSS doing business in Massachusetts is separately subject to the greater of the property measure of the corporate excise or the minimum corporate excise. Accordingly, if the Corporation reorganizes as stated above, then it must file a corporate excise return to report the greater of (i) any corporate excise attributable to its taxable tangible property or taxable net worth or (ii) the minimum corporate excise. TIR 97-6.

D. The LLC

In determining the Massachusetts income tax treatment of a non-Massachusetts single-member LLC, Massachusetts adopts the entity's federal income tax classification, as determined under the federal check-the-box rules in Treasury Regulation § 301.7701. TIR 97-8. [2] Accordingly, "a non-Massachusetts single-member LLC will be disregarded as an entity separate from its owner for Massachusetts income tax purposes if it is so disregarded for federal income tax purposes." Id.

Based on the foregoing criteria, if the corporate trust establishes an LLC that is disregarded as an entity separate from its owner for federal income tax purposes, then the LLC will not be subject to tax under G.L. c. 63. Rather, the income of the LLC will be combined with that of its owner, the corporate trust, and taxed under G.L. c. 62, § 8.

Conclusion

We rule that if the Corporation reorganizes as stated above, then, although it will be subject to the greater of the non-income measure of the corporate excise or the minimum corporate excise imposed under G.L. c. 63, § 32, it will not be subject to the net income measure of the corporate excise imposed under § 32, nor to the entity level income tax imposed under G.L. c. 63, § 32D. Additionally, we rule that the corporate trust will be subject to tax at the entity level under G.L. c. 62, § 8 on the combined income of itself, and the Corporation. Finally, we rule that if the corporate trust establishes an LLC that is disregarded as an entity separate from its owner for federal income tax purposes, then the LLC will not be subject to tax under G.L. c. 63. Rather, the income of the LLC will be combined with that of its owner, the corporate trust, and taxed under G.L. c. 62, § 8.

Very truly yours,

/s/Frederick A. Laskey

Frederick A. Laskey
Commissioner of Revenue

FAL:DMS:pls

LR 99-17



[1] Corporations ineligible to elect S corporation status are: financial institutions that use the reserve method of accounting for bad debts described in § 585 of the Code, insurance companies subject to tax under subchapter L of the Code, corporations to which an election under § 936 of the Code applies, and DISCs or former DISCs. I.R.C. § 1361(b)(2).

[2] Pursuant to the federal rules, single-member LLC's may elect either to be taxed as corporations or to be disregarded as entities separate form their owners, in which case they will be treated as a sole proprietorship, branch, or division of the owner. TIR 97-8.