September 4, 2001

You request a letter ruling on behalf of *************** ("Company"), a Delaware corporation with its principal headquarters in Massachusetts. Your request pertains to a proposed restructuring to be effected by Company and its affiliates, as more fully documented below.

I. Statement of Facts

A. Legal Structure

The Company has formed *************** ("Investments"). Investments is a corporation organized under the laws of Massachusetts. The Company is and will be the sole shareholder of Investments, to which it has made an initial cash contribution and will make additional cash contributions.

The Company has also formed *************** ("Ventures"). Ventures is a corporation organized under the laws of Delaware. The Company is the sole shareholder of Ventures, to which it will make an initial cash contribution.

The Company, Ventures, and various individuals (the "Individuals") intend to form *************** ("Limited Partnership"). The Individuals may include persons affiliated with the Company, such as officers, employees, or others. The Company, Ventures, and Individuals will be the sole partners of Limited Partnership, to which they will make an initial cash contribution. Limited Partnership will be a Delaware limited partnership. Limited Partnership will be treated as a partnership for federal tax purposes under Treas. Reg. § 301.7701-3. Ventures will be the sole general partner of Limited Partnership. The Company and Individuals will be limited partners in Limited Partnership. Limited Partnership will have more than one class of limited partnership interests.

Shortly after their formation, Investments and Limited Partnership will themselves form a Delaware limited partnership (the "Fund"). Investments will contribute cash received from the Company to the Fund in exchange for a limited partnership interest in the Fund. Limited Partnership will contribute cash (received from the Company, Ventures and from Individuals) to the Fund in exchange for a general partnership interest in the Fund. Limited Partnership initial interest in the capital of the Fund will equal one half of one percent. The Fund will be treated as a partnership for federal tax purposes under Treas. Reg. § 301.7701-3. Limited Partnership will be the sole general partner of the fund. The Fund will continue until December 31, 2011.

Investments' interest in the Fund will be a limited partnership interest. Investments will not have any assets other than its interest in the Fund and will not undertake any activities other than holding its interest in the Fund.

The Fund intends on selling limited partnership interests of the same class as those held by Investments to other investors ("Investors"), which may include officers and employees of the Company and other unrelated persons or entities. The terms upon which such interests will be offered will be typical of those in the venture fund industry. It is the intention of the Fund to sell such additional interests in the Fund such that two thirds of the capital of the Fund is held by Investments and Limited Partnership, with the remaining one-third of the capital of the Fund to be held by Investors. The purpose of adding the Investors is to afford certain persons the opportunity to join in the investment opportunities available to the Fund and to provide the Fund with additional capital to expand its investment abilities and to diversify its holdings.

B. Investments' Limited Partnership Interest in the Fund

Limited partnership interests in the Fund will be transferable. Transfer of such interests, however, will be subject to restrictions, including the required consent of the general partner. Such consent of the general partner may be granted or withheld in its sole discretion.

Limited partnership interests in the Fund will not generally confer on their owners the right or ability to participate in the management, control, or direction of the Fund's activities. Investment's limited partnership interest in the Fund will have no rights in the Fund greater than the fundamental voting rights and rights to information typically conferred upon holders of common stock in a corporation. These rights include the voting rights typically relating to a shareholder's contract with a corporation, such as voting rights regarding the election of directors, amendments of the corporate charter or by-laws, dissolution, or the sale of substantially all of the corporate assets. Moreover, Investments' limited partnership interest in the Fund will have no actual veto rights or effective veto rights with regard to the Fund or the activities of the Fund.

C. The Fund's Activities

The purpose of the Fund is to achieve a superior return on investments for its partners. The Fund will use its cash to purchase equity or equity related securities for investment purposes. The Fund will invest in common stock, preferred stock, and/or convertible debentures. Incidental to these activities, the Fund will at times have short-term positions in cash or debt securities. The Fund will not make loans.

Except for its incidental short-term position in cash and/or debt securities, the Fund will invest solely in equity or equity related securities (common stock, preferred stock, and/or convertible debentures). The Fund's rights with respect to such securities will be limited to voting and information rights. These rights will be no greater than the fundamental voting rights and information rights typically available to corporate shareholders. The Fund may at times, with respect to some of the companies it invests in, own a significant percentage of the equity of such companies. Accordingly, the Fund may have representatives on the boards of directors of companies in which the Fund invests. Such representatives may include individuals that are officers of employees of the Company or its affiliates. Nevertheless, neither the Fund, Company, Ventures, Limited Partnership, Investments, nor their officers or affiliates, will participate in the management of the businesses of the companies in which the Fund invests, either directly or indirectly.

D. The Fund's Operations and Management

The Fund will contract with Ventures for management services. Ventures will have employees, office space, and employ a Managing Director. The Fund will enter into a management agreement with Ventures and pay a fee that is intended to cover day-to-day operating expenses, including salaries, travel, office space, telephone, and general administrative services. Pursuant to the management agreement, Ventures will perform day-to-day activities for the Fund.

The Board of Directors of Ventures will create an investment committee (the "Investment Committee"). The Investment Committee will consist of the Managing Director of Ventures and certain executive officers and members of the Board of Directors of the Company. Significant operating decisions with respect to the Fund will require the approval of the Investment Committee. Such decisions will include, among others, investment in securities, disposition of securities, Fund distributions, hiring and firing of the management of Ventures, and the valuation of securities held by the Fund.

Limited Partnership, the Fund's general partner, will form an advisory committee (the "Advisory Committee"). The Advisory Committee will have authority to resolve certain potential conflicts of interest, approve valuations of Fund investments, and waive certain investment and other restrictions. The Advisory Committee members will be selected by the Fund's general partner, and will comprise representatives of the limited partners unaffiliated with the Company or Investments.

The Fund will make annual cash distributions to each partner to cover the partner's income tax liability from Fund operations. In addition, the Fund may make discretionary distributions. Discretionary distributions generally will be in accordance with contributed capital, except however, where the value of the Fund equals or exceeds one-hundred twenty percent of contributed capital, distributions of income and gains will be made 80 percent to the partners based on capital and 20 percent to the general partner.

The Company may perform various administrative services for the Fund, Investments, Ventures and Limited Partnership, such as tax return preparation, financial accounting, coordinating legal services, etc. The recipients of such services may be called on to compensate the Company for such services based on an arm's length fee.

E. Investments

Investments' only activity will be the holding of a limited partnership interest in the Fund. Investments intends to apply for classification as a Security Corporation under General Laws, 63, § 38B. Investments will not be treated as a regulated investment company or a bank holding company for federal tax purposes. You represent that neither the Company, Investments, Ventures, Limited Partnership, the Fund, nor the affiliates of the Company, will be financial institutions within the meaning of General Laws, chapter 63, § 1.

II. Rulings Requested

The Company requests the following two rulings:

  1. That Fund will be treated as a partnership for Massachusetts tax purposes, and not as a corporate trust subject to tax pursuant to G.L. c. 62, § 8, or a foreign corporation subject to tax pursuant to G.L. c. 63, § 39.

  2. That Investments will be treated as a Security Corporation under G.L. c. 63, § 38B and, for Massachusetts tax purposes, will receive the favorable treatment afforded by that section.

III. Discussion

A. Entity Classification of the Fund

Under G.L. c. 62, § 1(j), a "corporate trust" is "any partnership, association or trust, the beneficial interest of which is represented by transferable shares." The limited partnership interests in the Fund will be transferable. However, before being able to actually transfer its interest, a limited partner requires the consent of the general partner. Under the facts here, the requirement to obtain the general partner's consent causes the interests of the limited partnership to not be considered "transferable shares" for purposes of G.L. c. 62, § 1(j). See LRs 93-11; 79-14.

Pursuant to G.L. c. 63, § 30, a foreign corporation includes "every … association … established, organized or chartered under laws other than those of the commonwealth, for purposes of which domestic corporations may be organized under [chapter 156, 156A, 156B, or 180] which has privileges, powers, rights, or immunities not possessed by individuals or partnerships." In this case, the Fund has a number of non-corporate characteristics and therefore will not be considered a foreign corporation. Cf. LR 95-8; 91-2. For example, the shares of the Fund are not freely transferable and the Fund has a finite term. Therefore, the Department will treat the Fund as a partnership. See LR 95-8 (evaluating a foreign LLP).

B. Security Corporation Status of Investments

Pursuant to G.L. c. 63, § 38B, in order for a corporation to be classified as a security corporation, its activities must be limited exclusively to buying, selling, dealing in, or holding securities on its own behalf and not as a broker. In addition, the corporation must acquire and hold the securities only for investment purposes. See, e.g., State Tax Commission v. PoGM, 369 Mass. 611 (1976); TIG, Inc. v. Commissioner, A.T.B. Nos. 139446-139448 (1993).

In this case, you represent that Investments' sole activity will be holding a large percentage limited partnership interest in the Fund, and that this partnership interest will constitute Investments' only asset. Further, you represent that, except for incidental positions in cash and/or debt securities, the Fund will invest exclusively in common stock, preferred stock, and/or convertible debentures. Also, you represent that the Fund will not make loans and that its rights with respect to its security holdings will be no greater than the fundamental voting rights and information rights typically available to corporate shareholders. [1]

We agree with the proposition stated in your request that in cases like this, where the purported security corporation owns either exclusively or primarily a large percentage interest in its investment, one difficulty is ascertaining the extent to which the activity of the investment should be attributed to the parent. See TIG, A.T.B. Nos. 139446-139448; LR 91-3. [2] However, in this case, assuming that the attribution of the Fund's investment activities to Investments, the would-be securities corporation, is appropriate, the activities of Investments would nonetheless comply with the § 38B statutory requirement. Therefore, we conclude that, given the represented facts, Investments can be properly classified as a securities corporation.

IV. Conclusion

We conclude that the Fund will be treated as a partnership for Massachusetts tax purposes, and not as a corporate trust subject to tax pursuant to G.L. c. 62, § 8, or as a foreign corporation subject to tax pursuant to G.L. c. 63, § 39. In addition, we conclude, based on the represented facts, that Investments can be classified as a security corporation pursuant to G.L. c. 63 § 38B.

Very truly yours,

/s/Bernard F. Crowley, Jr.

Bernard F. Crowley, Jr.
Acting Commissioner of Revenue

BFC:DMS:mtf

LR 01-7



[1] You have also stated that the Fund may at times own a significant percentage of the equity in a company in which it invests and may place representatives on the boards of directors of these entities. However, you represent that neither the Fund, Company, Ventures, Limited Partnership, Investments, nor their officers or affiliates, will participate in the management of the business of the companies in which the Fund invests, either directly or indirectly. See LR 91-3.

[2] As you note, in the context of a 50%-owned limited partnership, the problem has been phrased as a determination as to whether the limited partnership interest is in fact a "security" or rather "a half-interest in a hamburger stand". See LR 91-3.