October 25, 2001

This is in reply to your request for certain rulings with respect to *************** (the "Corporation").

STATEMENT OF FACTS

The Corporation, a Massachusetts corporation, filed an S election effective ***************, and at all times thereafter has qualified federally as an S corporation. The Corporation currently has two (2) individual shareholders and one class of stock outstanding: no par value common stock.

The Corporation is a full service residential mortgage company. It employs customer service representatives who solicit and review mortgage applications from consumers. If approved, the mortgage loan is presold to various financial institutions. At closing, the mortgage loan is closed in the name of the Corporation, but is funded by and simultaneously assigned to the designated financial institution. The Corporation is paid a fee by the financial institution for the placement and sale of the mortgage loan.

For various reasons, the shareholders propose to reorganize the Corporation by transferring the shares of the Corporation to a newly formed corporate trust. [1] 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 G. L. c. 182, § 1 (the "Trust"). The Trust will be a corporate trust formed as part of a Letter Ruling 99-17 type reorganization for the purpose of acquiring the stock of the Corporation. [2] The trust instrument will be filed with the Secretary of the Commonwealth and the Town Clerk of ***************, Massachusetts. The shareholders will own the beneficial interest in the Trust in the same proportions as they currently own the shares in the Corporation. The Trust will not be a subsidiary of a bank holding company.

In connection with the rulings requested, the Corporation makes the following representations:

1. For federal tax purposes, the Trust will elect to be classified as an association which is taxable as a corporation and to be taxed as an S corporation under § 1361 et seq. of the Internal Revenue Code of 1986, as amended (the "Code").

2. For federal tax purposes, immediately after the transfer of the shares of the Corporation to the Trust, the Trust will elect pursuant to § 1361(b)(3)(B)(ii) of the Code to treat the Corporation as a "qualified subchapter S subsidiary" or "QSUB" (the "QSUB Election") as defined in § 1361(b)(3)(B) of the Code, and the Corporation will then constitute a QSUB of the Trust.

3. The transfer by its shareholders of the shares of the Corporation to the Trust, together with the deemed liquidation of the Corporation pursuant to the QSUB Election will constitute a plan of reorganization within the meaning of Section 368(a)(1)(F) of the Code and a Letter Ruling 99‑17 type reorganization as referred to therein and in Directive 00‑9.

RULINGS REQUESTED

As long as the Trust qualifies as an S corporation for federal income tax purposes and the Corporation is a QSUB of the Trust for federal income tax purposes, the Taxpayer requests the following rulings with respect to the transactions described above:

1. The Corporation's items of income, gain, loss, deduction and credit will be treated as earned directly by the Trust and, therefore, the Corporation will not be subject to the excise tax imposed on financial institutions pursuant to the provisions of G.L. c. 63 § 2;

2. The Trust will not be subject to the excise tax imposed on financial institutions pursuant to the provisions of G.L. c. 63 § 2 on the combined income of itself and the Corporation; and

3. Neither the Trust nor the Corporation will be required to file a financial institution excise tax return.

DISCUSSION

General Laws chapter 63, § 2 states that every financial institution engaged in business in the Commonwealth shall pay, on account of each taxable year, an excise measured by its net income determined to be taxable under section two A ("§ 2"). General Laws chapter 63, § 1 ("§ 1") defines a "financial institution" as one of the following:

(a) any bank, banking association, trust company, federal or state savings and loan association, including all banks for cooperatives organized under the United States Farm Credit Act of nineteen hundred and thirty‑three, whether of issue or not, existing by authority of the United States, or any state, or a foreign country, or any law of the commonwealth;

(b) any other institution, association or entity, the deposits or accounts of which are insured under the Federal Deposit Insurance Act or by the Federal Deposit Insurance Corporation, any institution, association or entity, which is a member of a federal Home Loan Bank, excluding corporations described in section one of chapter one hundred and seventy‑one, any other bank or thrift institution incorporated or organized under the laws of a state which is engaged in the business of receiving deposits, any corporation organized under the provisions of 12 USC 611‑631 and 12 USC 3101;

(c) any corporation subject to chapter one hundred and sixty‑seven A, or registered under the Federal Bank Holding Company Act of nineteen hundred and fifty‑six, or registered as a savings and loan holding company under the Federal National Housing Act, as amended, including any subsidiary which participates in the filing of a consolidated return of income to the federal government;

(d) any corporation subject to supervision by the division of banks including but not limited to corporations described in section twenty‑four of chapter ninety‑three; sections ninety‑six to one hundred and four or section one hundred and fourteen C of chapter one hundred and forty; section thirty‑eight of chapter one hundred and sixty‑seven; section five of chapter one hundred and sixty‑seven B; chapter one hundred and sixty‑nine A; chapter two hundred and fifty‑five B; chapter two hundred and fifty‑five C; chapter two hundred and fifty‑five D; and chapter two hundred and fifty‑five E; or

(e) any other corporation organized under the laws of the United States, the commonwealth or any other state or a foreign country which, in substantial competition with financial institutions as defined in any or all of clauses (a) to (d), inclusive, derives more than fifty percent of its gross income, excluding nonrecurring, extraordinary items, from loan origination, from lending activities (including discounting obligations), or from credit card activities; provided, however, that corporations described in section one of chapter one hundred and seventy‑one shall be excluded from the definition of financial institution.

For Massachusetts tax purposes, a QSUB is not treated as a separate corporation. Its assets, liabilities, and items of income, deduction and credit are treated as though they were realized directly by the owner of the QSUB. See Letter Ruling 99-17. The QSUB will have no federal gross income and, thus will have no Massachusetts income and will not be subject to the net income measure of the corporate excise. See Directive 00-9. Additionally, notwithstanding the fact that the corporate trust will be treated as an S corporation for federal tax purposes, for Massachusetts income tax purposes, the corporate trust will be subject to tax pursuant to G. L. c. 62, § 8 on the combined income of itself and the Corporation. See Letter Ruling 99-17.

A QSUB of a corporate trust owner will not be subject to the financial institution excise imposed by § 2 so long as the corporate trust owner is not itself a financial institution. See TIR 00-6. A corporate trust is a financial institution for Massachusetts tax purposes if it meets the definition of a financial institution as set forth in § 1. Id.

The Corporation does not meet any of the definitions contained in sections (a) through (d) of § 1. While the Corporation's business activities fall within the provisions of section (e) of § 1, as it is a corporation in competition with an entity described in sections (a) through (d) and it derives more than fifty percent of its income from loan origination or lending activity, as a QSUB of a corporate trust owner, the Corporation is not subject to taxation under § 2 unless the Trust is itself a financial institution. The Trust does not meet any of the definitions contained in sections (a) through (d) of § 1. In addition, the Trust does not meet the requirements of section (e) which provides that it applies to "any other corporation organized under the laws of the United States, the commonwealth or any other state or a foreign country . . . ." since the Trust is not treated as a corporation for Massachusetts tax purposes. See 830 CMR 62.17A.1(3)(e)2. The Trust, therefore, is not a financial institution as defined under § 1.

The Trust will be subject to the Massachusetts personal income tax on all income earned by the Trust and on all income earned by the Corporation and any other QSUBs which the Trust owns (the "QSUBs") [3] See Letter Ruling 99-17. The Corporation and the QSUBs will not be subject to the income measure of the corporate excise. The Corporation and the QSUBs will, however, each be subject to the non-income measure of the corporate excise in an amount equal to the greater of (i) the non-income measure of the excise imposed under G.L. c. 63, § 32(a)(1) or § 39(a)(1) or (ii) the $456 minimum excise. See Directive 00-9.

CONCLUSION

Based upon the facts as stated in the request, and for the reasons discussed above, we determine that: (1) the Corporation's items of income, gain, loss, deduction and credit will be treated as earned directly by the Trust and, therefore, the Corporation will not be subject to the excise tax imposed on financial institutions pursuant to the provisions of G.L. c. 63 § 2; (2) the Trust will not be subject to the excise tax imposed on financial institutions pursuant to the provisions of G.L. c. 63 § 2 on the combined income of itself and the Corporation; and (3) neither the Trust nor the Corporation will be required to file a financial institution excise tax return.

Very truly yours,

/s/Bernard F. Crowley, Jr.

Bernard F. Crowley, Jr.
Acting Commissioner of Revenue

BFC:DMS:atf

LR 01-9



[1] All of the shares of an affiliated corporation will also be transferred to the newly formed corporate trust. The affiliated corporation is in a business identical to the business of the Corporation; its shareholders, who are also shareholders of the Corporation, hold identical percentage interests in the affiliated corporation as they hold in the Corporation. The affiliated corporation will be reorganized at the same time as the Corporation and will likewise become a QSUB of the corporate trust.

[2] The stock of an affiliated corporation will also be acquired. See infra footnote 1.

[3] The Trust will own at least one other QSUB in addition to the Corporation. See infra footnote 1.