November 21, 2005

You request a letter ruling on behalf of *************** (hereinafter "Taxpayer") that Taxpayer will not be considered to be doing business in Massachusetts for purposes of the corporate excise if Taxpayer engages in certain activities and transactions, as set forth below.

I. Statement of Facts

The following is a summary of your representation of the facts upon which we base this letter ruling. Taxpayer was organized [outside of the United States] as a segregated portfolio company for the purpose of trading in gold or other precious metals or minerals ("commodities"), commodities-linked contracts and securities. Taxpayer is a wholly-owned subsidiary of *************** (the "Fund"), a regulated investment company within the meaning of Internal Revenue Code ("I.R.C.") § 851, as amended. Taxpayer is treated as a corporation for both federal income tax and Massachusetts corporate excise tax purposes. Taxpayer will purchase and sell commodities, trade in commodity futures over public commodity exchanges, enter into commodity-based derivative contracts, and trade interests in commodity-based exchange traded funds. In addition, Taxpayer will trade securities.

Taxpayer's trading will be conducted on its behalf by *************** ("Advisor") pursuant to an investment advisory agreement. Advisor is a Massachusetts limited liability company with principal offices in *************** , MA. Advisor also serves as investment advisor to the Fund and to certain other widely-held investment funds qualifying as regulated investment companies or partnerships for federal income tax purposes. For purposes of this ruling, Taxpayer represents that, with respect to Advisor's commodity trading on behalf of Taxpayer, Advisor meets the requirements to qualify as an independent contractor to the extent provided by 830 CMR 63.39.1(7)(a) through(d). Taxpayer also represents that with respect to the requirements set out in 830 CMR 63.39.1(7)(e), Advisor is a financial institution that holds itself out to the public as an investment advisor providing investment advice and/or management services, including portfolio accounting or bookkeeping services, custodial services, and related financial services to unrelated third parties.

Taxpayer will not be engaged in a "trade or business within the United States" within the meaning of I.R.C. § 864 because it will qualify under the commodities trading exception of I.R.C. § 864(b)(2)(B)(ii). [1] The requirements for qualification under this exception will be met by Taxpayer, acting through Advisor: it will be trading commodities for its own account; it will not be a dealer in commodities; it will be trading in gold or other precious metals or minerals, which are customarily dealt in on an organized commodity exchange; and its transactions in such commodities will be of a type customarily consummated on such an exchange. Activities performed by Taxpayer in Massachusetts through Advisor and other independent contractors engaged to perform administrative and custodial functions will be limited to the following:

  • communicating with Taxpayer's shareholders,
  • communicating with the general public,
  • soliciting sales of Taxpayer's stock, accepting subscriptions of new shareholders, auditing its books of account,
  • disbursing payments of dividends, legal and accounting fees, and officer's and director's salaries, publishing or furnishing the offering and redemption price of its issued shares,
  • making redemptions of its own stock,
  • executing contracts related to the purchase, sale or management of commodities and securities.

II. Discussion of Law

Massachusetts imposes an excise on every foreign corporation that exercises its charter, is qualified to do business or actually does business in Massachusetts, or owns or uses any part or all of its capital, plant or other taxable property in the state. G.L. c. 63, § 39. The Corporate Nexus Regulation sets forth the circumstances under which a foreign corporation is subject to the tax imposed by G.L. c. 63, § 39. 830 CMR 63.39.1. Under Section (4)(b) of the regulation, the term "doing business" includes the following:

  • the buying, selling or procuring of services or property;
  • the execution of contracts;
  • the exercise or enforcement of contract rights;
  • the maintenance of a place of business;
  • the employment of labor; and
  • each and every other act, power, right, privilege or immunity exercised or enjoyed in Massachusetts as an incident to or by virtue of the powers and privileges acquired through corporate form.

If a foreign corporation's employees, agents or representatives engage in the above-described activities, the activities will be imputed to the corporation, subjecting the corporation to Massachusetts taxation. However, if an independent contractor performs those activities on behalf of the corporation, the activities will not be imputed to the corporation. 830 CMR 63.39.1(7). The criteria for determining whether a person is an independent contractor for this purpose are found at 830 CMR 63.39.1(7):

  1. The person is not an employee of the foreign corporation.

  2. (b) The person is not subject, in the performance of activities on behalf of the foreign corporation, to the supervision or control (whether or not exercised) of the foreign corporation or any of that corporation's representatives. Whether a purported independent contractor is subject to the supervision or control of a foreign corporation or any of its representatives within the meaning of this subsection is a question of fact.

  3. (c) The person holds himself out to the public as an independent contractor in the regular course of its business.

  4. The person must regularly act on behalf of at least one bona fide principal apart from the foreign corporation. Partners, corporate affiliates, or other closely related parties are not separate principals for purposes of this subsection.

  5. The person may not approve orders on behalf of the foreign corporation or otherwise execute contracts on behalf of the foreign corporation, provided that:

1. to the extent permitted by P.L. 86-272, a person may sell or solicit orders for the sale of tangible personal property on behalf of a foreign corporation without losing the status of an independent contractor; and

2. a financial institution that holds itself out to the public as an investment advisor, providing investment advice and/or management services, including portfolio accounting or bookkeeping services, custodial services, and related financial services to unrelated third parties shall not lose the status of an independent contractor by virtue of any authority that it may have to execute contracts related to the purchase, sale, or management of securities on behalf of those third parties.

Under Massachusetts law as set forth in TIR 98-6, an offshore investment company is not considered to be doing business in the Commonwealth if (i) its activities here are limited to the following activities and (ii) those activities are conducted through an independent contractor:

a. communicating with its shareholders,

b. communicating with the general public,

c. soliciting sales of its own stock,

d. accepting subscriptions of new shareholders,

e. auditing its books of account,

f. disbursing payments of dividends, legal and accounting fees, and officers' and directors' salaries,

g. publishing or furnishing the offering and redemption price of its issued shares,

h. making redemptions of its own stock, and

i. executing contracts related to the purchase, sale or management of securities.

Other activities conducted in Massachusetts may constitute doing business in the Commonwealth. Specifically, without limitation, the following activities conducted in Massachusetts by an offshore investment company may expose the offshore investment company to Massachusetts tax jurisdiction:

a. maintaining its principal corporate records and books of account,

b. conducting shareholder and board of director meetings,

c. maintaining a place of business, or

d. executing contracts.

TIR 98-6(D).

As presented, the focus of this ruling request is the independent contractor exception relating to financial investment advisors set forth in 830 CMR 63.39.1(7)(e)(2). Specifically, the exception allows an independent contractor to execute contracts related to the purchase, sale or management of securities without causing its client, an offshore investment company, to have nexus with Massachusetts for corporate excise purposes.

Advisor's activities on behalf of Taxpayer will include executing contracts related to the purchase, sale or management of both securities and traded commodities. Neither the Corporate Nexus Regulation nor TIR 98-6 discusses the use of an independent contractor with regard to traded commodities. Nor do other public written statements issued by the Department in this area. [2] As described above, Taxpayer's activities with respect to traded commodities will not cause Taxpayer to be engaged in a "trade or business within the United States" within the meaning of I.R.C. § 864 because they will be limited to those activities that qualify for the exception in I.R.C. § 864(b)(2)(B)(ii).

The independent contractor exception described in the Corporate Nexus Regulation, and subsequently applied in TIR 98-6, is meant to allow some limited connection between a foreign corporation and Massachusetts without subjecting the foreign corporation to the Massachusetts corporate excise. In this case, Taxpayer is contracting with Advisor to provide the kind of investment advisory services contemplated in 830 CMR 63.39.1(7)(e)(2), and the investment vehicles that will be the subject of contracts executed on behalf of Taxpayer include both securities and traded commodities. The purpose of the exception in 830 CMR 63.39.1(7)(e)(2) is to allow a foreign corporation to retain the services of a Massachusetts investment advisor, including the management and investment of its funds in certain passive investment vehicles, without necessarily causing the foreign corporation to have nexus for Massachusetts corporate excise purposes. In this context, and under the facts presented here, it is the Department's opinion that a distinction between securities and traded commodities in which Taxpayer will invest is not necessary. Our conclusion in this respect is expressly conditioned on Advisor satisfying all of the conditions of 830 CMR 63.39.1(7), with the amplification that Advisor will not lose the status of an independent contractor for purposes of this provision by virtue of its authority to execute contracts related to the purchase, sale, or management of traded commodities, provided that such traded commodities and all activities and contracts with respect thereto are of a kind that will cause Taxpayer to qualify for the commodities trading exception under I.R.C. § 864(b)(2)(B)(ii).

III. Nexus Determination

Based on the facts and authorities as discussed above, we rule that the activities of Advisor as set forth in the statement of facts, provided that they meet the conditions set out in the preceding paragraph, will not, of themselves, cause Taxpayer to have nexus with Massachusetts.

Very truly yours,

/s/Alan LeBovidge

Alan LeBovidge
Commissioner of Revenue

AL:LEM:rmh

LR 05-08



[1] In addition, to the extent that Taxpayer trades in securities, it should qualify under the securities trading exception of I.R.C. § 864(b)(2)(A)(ii), which is similar to the commodities trading exception.

[2] The Department has issued two letter rulings on the issue of whether the provision of administrative services by a Massachusetts company to offshore investment funds creates nexus. LR 01-04, LR 03-02. In those rulings, the Commissioner determined that the provision of accounting, custodial, investment management, shareholder and other administrative services as well as the receipt, generation and maintenance of relevant electronic and paper records and reports for various unrelated offshore investment funds by a Massachusetts service provider would not cause the Funds to be subject to Massachusetts taxation, since the service provider was acting as an independent contractor for the funds.