November 5, 2001

You have requested a letter ruling on behalf of *************** a Connecticut Limited Partnership (the "Partnership") concerning the Partnership's ability to file a composite partnership tax return for Massachusetts tax purposes on behalf of its limited partners.

Facts

The Partnership has 16 partners. The partners of the partnership all ultimately trace to related parties of the same family. The general partner is an individual and the 15 other partners are limited partners, each of which is either a trust or another partnership. In particular, the 15 limited partners consist of four grantor trusts each flowing to four separate individuals, nine complex trusts established to benefit the same four individuals, and two partnerships whose partners are eight additional trusts again established for the benefit of the same four individuals. The four individuals that are the beneficiaries of the various trusts that hold an interest in the Partnership, either directly or indirectly, are the children of the general partner. The four children are, respectively, the four grantors of each of the grantor trusts.

Each of the partners of the Partnership is a non-resident of Massachusetts. The general partner and each of the four children who are beneficiaries of the various trusts are individual residents of New York, whereas the trusts are all established under the laws of Connecticut. [1] The general partner owns property in Massachusetts and currently files a tax return with the Department. You are not requesting composite return treatment as to the general partner, who you state will continue to file a separate tax return.

The Partnership, through single member LLCs, recently invested in a real estate venture in Massachusetts. Thus, each of its limited partners now has a filing requirement in Massachusetts. These limited partners wish to comply with the tax laws of Massachusetts and pay their correct share of tax.

Each of the 21 trusts that are either limited partners of the Partnership or partners in a "second tier" partnership that owns a limited partnership in the Partnership has a separate tax identification number. Each of the 17 trusts that are not grantor trusts will report its share of Massachusetts source income for state tax purposes and will pay state tax at the entity level in the same manner as an individual. In the case of the four grantor trusts, the trust income will be reported to the grantor for federal tax purposes and the grantor will report its share of Massachusetts source income for state tax purposes. In each case, the state income of the trusts will ultimately be subject to tax at the same Massachusetts rate of tax. Further, each of the reporting trusts and the grantors will file their state tax returns on a calendar year basis.

Discussion

Under Massachusetts law, a partnership doing business in the state may file a composite tax return as an agent for its qualified electing non-resident partners under certain circumstances. See 830 CMR 62.5A.1(12)(f). In general, to be "qualified," a non-resident partner must meet several requirements set forth in the Nonresident Income Tax Regulation (the "Nonresident Regulation"), including the requirement that "the partner must be an individual or the estate or trust of a deceased non-resident partner." See 830 CMR 62.5A.1(12)(f)1.a. The other requirements are that the non-resident partner must: (1) be a non-resident for the entire year; (2) have no other Massachusetts source income other than income from the Partnership; [2] (3) sign the required Massachusetts statement for composite returns; and (4) waive the right to claim Massachusetts deductions, exemptions and credits. See 830 CMR 62.5A.1(12)(f)1.b-e. Partners included in a composite return must also have the same taxable year, which generally will be the calendar year. See 830 CMR 62.5A.1(12)(f)3.

In this case, the Partnership is not entitled to a file a composite return on behalf of its limited partners under the literal language of the Nonresident Regulation since the limited partners include trusts that are not the trusts of a deceased nonresident partner. We nonetheless conclude that the filing of a composite return is appropriate under these circumstances.

In the interest of balancing the receipt of tax revenues versus the ease of tax administration, the Department has liberalized the rules for composite returns somewhat over the years. Under the Department's 1987 Nonresident Regulation, only personal service partnerships were entitled to file a composite return. In 1996, this regulation was amended to permit composite return filings by S corporations and tiered partnerships under certain circumstances. See generally 830 CMR 62.5A.1(12)(g), (f). With respect to tiered partnerships, a composite filing requires, in part, that the partnership income must flow through to individuals who otherwise meet the requirements of the Nonresident Regulation. See 830 CMR 62.5A.1(12)(f). [3]

In addition to the above, the Department has permitted a composite filing in a recent ruling where this filing was not expressly permitted under the Nonresident Regulation. See LR 98-19. In Letter 98-19, the Department permitted a composite filing by an S corporation on behalf of several shareholders that were Electing Small Business Trusts ("EBSTs"). Although an EBST is neither an individual nor the estate or trust of a deceased individual, the ruling noted that an EBST has many of the tax attributes of an individual who owns shares in an S corporation. For example, an ESBT has a separate tax identification number, includes in income its pro rata share of the S corporation income, and pays tax on its pro rata share of S corporation income for both Massachusetts and federal purposes. Further, when an ESBT distributes income to a beneficiary, there is no additional tax since the income was previously taxed at the trust level.

In this instance, we think that the dual goals of revenue enhancement and administration are served by permitting a composite return. As you note, an administrative burden would be placed on your client if multiple trust filings were required each time quarterly estimates were due and each time an annual return was due. These filings would, in turn, place a processing burden on the Department.

Further, the facts of this case do not suggest that a composite filing would impede the Commissioner's tax collection efforts in any way. Although each of the tax filers in this case would be a trust that is not technically permitted to be a "qualified" partner pursuant to the Nonresident Regulation, nonetheless each of the 21 trusts ultimately benefits one or more of only four individuals. [4] In addition, each of these trusts, like the EBSTs evaluated in Letter Ruling 98-9, possesses many of the tax attributes of an individual. For example, the trusts each have a separate tax identification number and the Massachusetts source income of each trust would ultimately be taxed at the state's personal income tax rate. Further, when prior year income is distributed by one of the non-grantor trusts to a beneficiary of that trust, there is no additional tax since the income would have been previously taxed at the trust level.

Conclusion

We rule that the Partnership may file a composite return on behalf of the 21 trusts that own a limited partnership interest, provided that the trusts otherwise meet the definition of a "qualified" electing partnership under the Nonresident Regulation and the filing otherwise comports with those regulatory rules. This ruling will be effective for the calendar tax year ending December 31, 2001. The Department will apply any estimated payments previously made on behalf of the partners in the Partnership to the Partnership's composite filing for the year 2001 so long as the Partnership provides the Department with any information that it may need for purposes of this application.

Very truly yours,

/s/Bernard F. Crowley, Jr.

Bernard F. Crowley, Jr.
Acting Commissioner of Revenue

BFC:DMS:mtf

LR 01-10



[1] Under 830 CMR 62.5A.1(11), a non-resident trust is defined as "[a] trust, other than a corporate trust, deriving Massachusetts source income and which is [either] (a) a trust under the will of a decedent who was a non-resident at the time of death; (b) a trust all of whose trustees are non-residents; or (c) a trust all of whose grantors are non-residents; [and] is subject to Massachusetts income taxation on its Massachusetts source income determined as if the trust were a non-resident individual."

[2] This includes consideration of the partner's spouse, if any. See 830 CMR 62.5A.1(12)(f)1.c.

[3] There are several requirements that are specific to composite returns for tiered partnerships, including the requirement that "each of the lower-tier partnerships (including any related flow-through entity with individual partners or shareholders) must join in the filing of [the] single composite return…" See 830 CMR 62.5A.1(12)(g).

[4] Sixteen of these trusts benefit only one of the general partner's four children, while one of the trusts benefits all four children in about equal proportion.