October 22, 2002

You have requested a ruling on behalf of your client, *************** ("the Company"). The Company has acquired the rights to receive Massachusetts Lottery [1] ("Lottery") prize annuity payment streams from the original winners. The Company maintains that the insurance premiums tax does not apply to the assigned Lottery payments and also that it is not subject to Massachusetts corporate excise or personal income tax. The Company argues, further, that the Massachusetts Lottery Commission should not withhold income tax from the Lottery payments paid to the Company.

FACTS

The Company is a life and annuity insurance corporation, incorporated and domiciled in a state other than Massachusetts, that is licensed to write insurance contracts in Massachusetts and is subject to regulation by the Massachusetts Department of Insurance. The Company writes insurance business in Massachusetts and has filed Massachusetts premium excise returns as a foreign life insurance company for tax years 1997 through 2001. Since 1996, the Company has acquired the rights to receive approximately 20 Lottery prize annuity payment streams from the original winners pursuant, in each case, to an "appropriate judicial order" as required under M.G.L. c. 10, § 28. [2] The Massachusetts Lottery Commission has withheld Massachusetts individual income taxes from the payments made to the Company. The personal income tax liability associated with each Lottery prize was satisfied in the tax year in which the Company acquired the prize from the original winner. [3]

DISCUSSION

1. Insurance Premiums Tax

The Massachusetts insurance excise provisions, G.L. c. 63, §§ 20 through 29E, do not impose a tax on foreign insurers' income from sources other than premiums. The insurance excise provisions impose an excise of 2% upon new and renewal premiums allocable to Massachusetts that are received during the preceding year. [4] See G.L. c. 63, § 20. Premiums, for life insurance companies, are defined as "amounts received as consideration for life insurance policies." G.L. c. 63, § 20. Lottery payment proceeds are not premiums. LR 99-4. Domestic insurance companies are subject, as part of the insurance excise, to an additional tax that is equal to one percent of gross investment income. G.L. c. 63, § 22A, 22B. No analogous tax on foreign insurance companies is imposed under the insurance excise provisions. Accordingly, income accruing to the Company from the Lottery revenue streams is not taxable under the insurance premiums tax.

2. Corporate Excise

For purposes of the Massachusetts corporate excise, the phrase "foreign corporations" includes corporations chartered under laws other that those of Massachusetts "for purposes for which domestic corporations may be organized under . . . chapter [156B] or sections 19F to 19W, inclusive, of chapter 175 . . . ." G.L. c. 63, § 30.2. General Laws chapter 156B, § 3 specifically excludes "corporations organized for the purpose of carrying on within the commonwealth the business of an insurance company . . . ." Moreover, the Supreme Judicial Court has recognized that corporate excise provisions do not apply to companies subject to the insurance premiums tax:

Insurance companies are classified as separate and apart from business corporations for the purpose of assessment of corporate excise taxes. The former are assessed in accordance with G.L. (Ter. Ed) c. 63, §§ 20-29, inclusive, as amended, while the latter are assessed in accordance with said chapter 63, §§ 30-52, inclusive, as amended. The taxes of each group are assessed upon an entirely different basis. It would be inconsistent with this taxing system to treat an insurance company as a business corporation and taxable as such.

New England Mutual Life Insurance Company v. City of Boston, 321 Mass. 683, at 689-90 (1947)(citations omitted). Accordingly, the Company will not be subject to the Massachusetts corporate excise on Lottery revenue.

3. Personal Income Tax

The personal income tax applies to residents, nonresidents, and corporate trusts. G.L. c. 62, § 4. Residents and nonresidents must be "natural persons" and corporate trusts are defined as "any partnership, association or trust, the beneficial interest of which is represented by transferable shares." G.L. c. 62, § 1(f), (j). Since the Company is neither a natural person nor a corporate trust, it is not subject to tax under the chapter 62 personal income tax. LR 99-4. This case bears factual similarities to LR 99-4, in that both letter rulings involve out-of-state insurance companies receiving Lottery proceeds. The facts of this case differ from those presented in LR 99-4 because in this case the Company is a foreign insurance company with nexus, whereas in LR 99-4 the insurance company did not write insurance business in Massachusetts, was treated as a foreign corporation subject to the corporate excise provisions of G.L. c. 63, § 30, but was found not to have nexus under that statute. Nonetheless, both cases involve corporations, and chapter 62 does not apply to corporations.

4. Withholding

Letter Ruling 99-4 ruled that, because chapter 62B requires withholding only on income that is subject to the personal income tax under chapter 62, Lottery payments made to a company are not subject to withholding. See G.L. c. 62B, § 2. As discussed above, the Lottery payments made to the Company are not subject to tax under chapter 62; accordingly, they should not be withheld upon under chapter 62B.

CONCLUSIONS

We rule that the Lottery prize annuity payment streams acquired by the Company are not subject to tax under the insurance premiums tax, corporate excise, or personal income tax. In this situation, the Lottery payment streams are not subject to withholding under chapter 62B.

Very truly yours,

/s/Alan LeBovidge

Alan LeBovidge
Commissioner of Revenue

AL:DMS:lab

LR 02-9



[1] The Massachusetts State Lottery was established by St. 1971 c. 813, which also created the State Lottery Commission in the Office of the State Treasurer. The "state lottery law" is found at G.L. c. 10, §§ 22 to 35, 37 to 40, and 56 to 58.

[2] We rely on your representation that the Company has acquired each of these Lottery revenue streams pursuant to an appropriate judicial order. We note that Lottery prizes are not freely assignable; involuntary transfers of payments by judicial order may be made in situations where a court must determine property rights in a winner's prize. Singer Friedlander Corporation v. State Lottery Commission, 423 Mass. 562 (1996).

[3] Lottery proceeds received by the winners or their representatives prior to the Company's acquisition are subject to tax under chapter 62. DD 86-24. Proceeds that the original winners received in exchange for the assignment to the Company of their rights to receive future Lottery payments are subject to personal income tax as taxable ordinary income. See Davis v. Commissioner of Internal Revenue, 119 T.C. 1 (2002).

[4] In addition to the 2% excise on premiums, foreign insurance companies pay a retaliatory tax, measured as the amount by which the tax imposed on an insurance company incorporated in Massachusetts and operating in the foreign company's home state exceeds the amount of tax that would be imposed in Massachusetts on the foreign insurance company for the same amount of business in the same year. G.L. c. 63, §§ 21, 23.