February 4, 2013
You have requested a ruling on behalf of ********************************** (the Taxpayer), a corporation organized under the laws of Massachusetts with its principal place of business in ***************. The Taxpayer is a wholly-owned subsidiary of ************** (the Bank) which is, in turn, a wholly-owned subsidiary of *********************************. Pursuant to G.L. c. 63, § 38B, the Taxpayer was classified as a security corporation for the tax year ending December 31, 2008. The Commissioner has not revoked this classification. The Taxpayer is contemplating a charitable contribution of certain appreciated securities to a donor-advised fund established by a public charity qualified under section 501(c)(3) of the Internal Revenue Code (the Code).
The following is a statement of facts you have provided and upon which this letter ruling is premised. The Taxpayer’s business activities are limited to buying, selling, dealing in and holding securities as defined in Regulation 830 CMR 63.38B.1(4), Massachusetts Taxation of Security Corporations (the Regulation). The Taxpayer is contemplating making a charitable contribution of securities to a donor-advised fund as defined in section 4966(d)(2) of the Code established by a public charity (the "Sponsor") qualified under section 501(c)(3) of the Code (the "Fund"). The Fund will make grants to carefully selected charitable donees that are themselves qualified under section 501(c)(3) of the Code. The Taxpayer, and/or individuals designated by the Taxpayer, will be entitled to advise the Sponsor regarding the Fund's grants and investments but the Sponsor will have the ultimate authority over how the assets in the Fund are invested and distributed. It is expected that the Fund's grants will predominantly be made to Massachusetts-based charitable donees. It is anticipated that the name of the Fund will include the name "**************," e.g., "The ************** Fund" or something similar.
The securities that the Taxpayer will contribute to the Fund (the Securities) consist of mortgage-backed securities and other asset-backed securities (e.g., securities backed by student loans or credit card receivables). All of the Securities constitute "securities" within the meaning of G.L. c. 63, § 38B(b ½), and 830 CMR 63.38B.1(4)(b). The Taxpayer has owned all of the Securities for more than 2 years, and the Securities have appreciated in value since the Taxpayer purchased them.
The Taxpayer further represents that neither the Taxpayer nor any affiliate would be entitled to deduct the contribution for Massachusetts tax purposes and the principal purpose of the contribution is not to obtain any tax benefit for either the Taxpayer or any of its affiliates. In addition, the amount of time involved in advising the Sponsor regarding the Fund's grants and investments will be nominal (involving only a minimal amount of guidance from the Taxpayer and its employees). Finally, the Taxpayer represents that it has not provided the capitalization or “seed money” for the Fund, either in the form of the securities being contributed or otherwise. Cf. Letter Ruling 91-10.
II. RULING REQUESTED
Whether the Taxpayer may make the proposed charitable contribution of appreciated securities and maintain its security corporation classification.
Yes, given that the purpose of the charitable contribution is not to obtain a tax benefit for itself or any of its affiliates and that the amount of time involved in the process of making these charitable contributions and in advising the Sponsor will be nominal, the Taxpayer may make the proposed charitable contribution and maintain its security corporation classification.
A financial institution or business corporation that is engaged exclusively in buying, selling, dealing in, or holding securities on its own behalf and not as a broker may be classified as a security corporation. G.L. c. 63, § 38B. Security corporations are not subject to the corporate excise in the same manner as other business corporations. Rather, they are subject only to a single income measure excise determination and are taxed on their gross income, generally at a rate of 1.32%. G.L. c. 63, § 38B(a), (c).
A security corporation must be exclusively engaged in securities investment activities. 830 CMR 63.38B.1(3). If a security corporation which has been so classified engages in an impermissible business activity, the Commissioner may revoke the classification and assess the corporation for any amounts due under the corporate excise. 830 CMR 63.38B.1(9).
The Regulation provides that “[a] security corporation may engage in ancillary activity that is necessary or typical in the context of its securities investment business.” 830 CMR 63.38B.1(3)(c). The Taxpayer posits that corporations, including corporations engaged in the business of investing in securities, routinely make charitable contributions in connection with their business, and that accordingly the making of such contributions is an “ancillary activity” that is typical in the context of a securities investment business.
The examples in the Regulation reference “owning office furniture or supplies used in operating its business, engaging a payroll services company for payment of its staff, and sponsoring employee benefit programs on behalf of its staff,” as constituting valid “ancillary activities.” 830 CMR 63.38B.1(3)(c). None of these recognized ancillary activities address the circumstances of the Taxpayer’s proposed charitable contributions. However, while making charitable contributions to a donor-advised charitable fund cannot be said to be a necessary part of the securities investment business, neither should it be viewed as atypical or, on the facts presented by this Taxpayer, as an impermissible business activity.
The Taxpayer may make the proposed charitable contribution of appreciated securities and maintain its security corporation classification, given its stated factual representations and the analysis set forth above.
Very truly yours,
Commissioner of Revenue
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