830 CMR: DEPARTMENT OF REVENUE
830 CMR 62.00: INCOME TAX
830 CMR 62.00 is amended by adding the following section:
830 CMR 62.8.2: Corporate Trust Income and Distributions

(1) Purpose, Effective Date.

(a) Purpose. 830 CMR 62.8.2, generally explains the Massachusetts personal income tax treatment of corporate trusts and corporate trust beneficiaries under M.G.L. c. 62, § 8, as amended by St. 2000, c. 159, §§ 122 and 123. 830 CMR 62.8.2, generally does not explain the tax treatment of corporate trusts that are regulated investment companies (RICs), real estate investment trusts (REITs), or real estate mortgage investment conduit (REMICs), nor does it explain the tax treatment of distributions to the beneficiaries of RICs, REITs or REMICs.

(b) Effective Date. 830 CMR 62.8.2, shall take effect upon promulgation.

(2) Definitions. For purposes of 830 CMR 62.8.2, the following terms shall have the following meanings, unless the context requires otherwise.

Code, the Internal Revenue Code of the United States as it applies to the Massachusetts personal income tax under the provisions of M.G.L. c. 62.

Commissioner, the Commissioner of Revenue or the Commissioner's representative duly authorized to perform the duties of the Commissioner.

Distribution, any payment by a corporate trust to its beneficiaries made on account of the beneficiaries' equity investment in the corporate trust or any actual distribution by an S corporation or qualified S corporation subsidiary (QSUB) within the meaning of 830 CMR 62.17A.1(10).

(3) Taxation of Income Earned by Corporate Trusts.

(a) General Rule. A corporate trust that engages in any business, activity or transaction in Massachusetts, whether or not it has an office in Massachusetts, is subject to the Massachusetts personal income tax on its Massachusetts taxable income at the entity level as provided in M.G.L. c. 62, § 8(a). A corporate trust's Massachusetts taxable income equals the portion of its Massachusetts adjusted gross income, determined under M.G.L. c. 62, § 2, that is apportioned to Massachusetts under 830 CMR 62.8.2(3)(d).

(b) Jurisdiction. A corporate trust engaged within the commonwealth in any business, activity or transaction, whether or not it maintains an office or place of business within the commonwealth, is subject to Massachusetts personal income tax jurisdiction. Accordingly, it must file a Massachusetts personal income tax return for any taxable year in which it has Massachusetts gross income in excess of one hundred dollars, as provided in M.G.L. c. 62C, § 6.

(c) Exceptions. A corporate trust is not subject to the personal income tax at the entity level for any taxable year for which it:

1. Is a regulated investment company (RIC) under Code section 851, a real estate investment trust (REIT) under Code section 856, or a real estate mortgage investment conduit (REMIC) under Code section 860D;

2. Is a corporate trust holding company within the meaning of M.G.L. c. 62, § 8(b); or

3. Has a Massachusetts apportionment percentage of less than 10%.

(d) Apportionment. A corporate trust that receives income from business activity which is conducted both within and outside Massachusetts determines its Massachusetts taxable income by apportioning its Massachusetts adjusted gross income to Massachusetts using the apportionment provisions applicable to corporations under M.G.L. c. 63. The manner in which a corporate trust calculates its apportionment percentage is determined under M.G.L. c. 63, § 38 and 830 CMR 63.38.1, as though the corporate trust were a corporation. Thus, a corporate trust that is eligible to apportion its income and is engaged in manufacturing within the meaning of M.G.L. c. 63, § 38(l)(1) must use the single sales factor apportionment percentage required for manufacturing corporations under M.G.L. c. 63, § 38(l) and 830 CMR 63.38.1(10). Likewise, a corporate trust that derives more than 50% of its gross income from the direct or indirect provision of mutual fund services must use the single sales factor apportionment percentage required for mutual fund service corporations under M.G.L. c. 63, §. 38(m) and 830 CMR 63.38.7. A corporate trust that is not eligible to apportion its income under any of these provisions is subject to the personal income tax on the full amount of its Massachusetts adjusted gross income.

(e) Manufacturing Classification and Credits. In general, a corporate trust is not a corporation for Massachusetts tax purposes. Therefore, a corporate trust is not eligible for

1. manufacturing classification under M.G.L. c. 58, § 2, and 830 CMR 58.2.1,

2. the local property tax exemption for manufacturing equipment under M.G.L. c. 59, § 5(16)(3), or

3. any of the credits allowable under M.G.L. c. 63.

However, a corporate trust is eligible for certain personal income tax credits under M.G.L. c. 62, § 6.

(4) Taxation of Distributions Made by Corporate Trusts.

(a) General. Distributions of cash or property by a corporate trust to beneficiaries that are domiciliaries or residents of Massachusetts are included in the recipient's Massachusetts gross income if they are made out of the corporate trust's tax-free earnings and profits. Such distributions are included in the recipient's Massachusetts gross income regardless of whether they are included in the recipient's federal gross income and regardless of whether they are dividends for federal tax purposes under Code section 316. Corporate trust distributions are not included in Massachusetts gross income unless they are made out of tax-free earnings and profits.

(b) Tax-free Earnings and Profits. A corporate trust's tax-free earnings and profits consist of the following amounts, reduced to account for distributions of such amounts:

1. Earnings and profits accumulated prior to taxable years beginning after December 31, 1970 and during any period during which the corporate trust was not subject to entity-level taxation under M.G. L. c. 62 solely by reason of the fact that it had elected not to be taxed at the entity level but instead to subject distributions to its beneficiaries to tax. The amount of such earnings and profits is determined as of the first day of the first taxable year beginning after December 31, 1970, pursuant to M.G.L. c. 62, § 8(c);

2. Any earnings and profits accumulated for taxable years commencing after December 31, 1970, to the extent that such earnings and profits were not subject to tax under M.G. L. c. 62; and

3. Massachusetts adjusted gross income earned during taxable years beginning on or after July 1, 2000 that is apportioned to another state or foreign country as provided in 830 CMR 62.8.2(3)(d); and

4. adjusted gross income earned during taxable years beginning on or after July 1, 2000, during which the corporate trust has a Massachusetts apportionment percentage of less than 10%.

For purposes of 830 CMR 62.8.2, to the extent that a taxpayer has C corporation earnings and profits derived from prior taxable years, such earnings and profits, while part of the category of tax-free earnings and profits, will be taxed in accordance with the ordering rules of 830 CMR 62.8.2(5)(e)2.d. All other tax-free earnings and profits will be taxed in accordance with the ordering rules of 830 CMR 62.8.2(5)(e)2.b.

For purposes of 830 CMR 62.8.2, the phrase "previously taxed earnings and profits" refers to any of a corporate trust's earnings and profits that are not tax-free earnings and profits . Previously taxed earnings and profits includes any Massachusetts adjusted gross income earned during taxable years beginning before July 1, 2000 that was properly apportioned to another state or foreign country.

(c) Nonresident Recipients. In general, investment income is not considered Massachusetts source income under M.G.L. c. 62, § 5A. Thus, nonresidents are generally not subject to the Massachusetts personal income tax on distributions received on account of their investments in corporate trusts. However, amounts received as compensation for

1. services provided to a corporate trust, including but not limited to services provided as an employee, contractor, agent, representative, director, officer or trustee, or

2. property provided to a corporate trust, will be subject to tax if such amounts are Massachusetts source income under M.G.L. c. 62, § 5A.

(d) Characterization of Distributions. Except as provided in 830 CMR 62.8.2(5)(e)2; distributions made by a corporate trust are deemed to be made first out of tax-free earnings and profits, to the extent thereof. In order to trigger the availability of the credit allowed under 830 CMR 62.8.2(4)(e), the corporate trust may treat a distribution of tax-free earnings and profits as being made first out of tax-free earnings and profits described in 830 CMR 62.8.2(4)(b)3. or 4., to the extent thereof. The remainder of the distribution of tax-free earnings and profits will then be deemed to be made out of tax-free earnings and profits described in 830 CMR 62.8.2(4)(b)1. and 2., to the extent thereof. Each recipient of the distribution is treated as receiving a share of the distribution as characterized at the corporate trust level. The amount of tax-free earnings and profits received by each recipient must be determined by multiplying the full amount of tax-free earnings and profits distributed to all recipients by a fraction, the numerator of which is the amount of the distribution received by the recipient and the denominator of which is the aggregate amount of the distribution received by all recipients.

(e) Credit for Resident Beneficiaries for Taxes Paid by the Corporate Trust to Other Jurisdictions. Resident beneficiaries that receive distributions of tax-free earnings and profits from corporate trusts that have tax-free earnings and profits attributable to income apportioned to another state or foreign country as provided in 830 CMR 62.8.2(3)(d) or earnings and profits earned during taxable years when the corporate trust's apportionment percentage is less than ten percent, may be entitled to a credit for taxes paid by the corporate trust to other jurisdictions. The credit described in 830 CMR 62.8.2(4)(e) is not available for any amount of taxes paid to other states or foreign countries directly by the corporate trust's beneficiaries. The credit described in 830 CMR 62.8.2(4)(f), however, is available for taxes paid to other states or foreign countries directly by the corporate trust's beneficiaries. Each resident beneficiary's credit attributable to taxes paid to other jurisdictions by the corporate trust shall be determined for each taxable year at the corporate trust level using the following steps:

1. Determine Cumulative Credit Amount at the Corporate Trust Level. The cumulative credit amount is a running total of credit-eligible income taxes paid by the corporate trust to other jurisdictions. Credit eligible taxes include the amount of income-based taxes due and paid to other jurisdictions (i) excluding interest and penalties and (ii) reduced by any federal tax credit allowable with regard to such tax. As provided in 830 CMR 62.8.2(4)(e)1.a. or b., the running total is increased as income taxes are paid to other jurisdictions and decreased as the credit is claimed by resident beneficiaries.

a. Computation. The cumulative credit amount is zero at the beginning of the corporate trust's first taxable year beginning on or after July 1, 2000. For each taxable year beginning on or after July 1, 2000, the corporate trust must determine an annual credit amount. The annual credit for any taxable year shall be the lesser of (i) the aggregate amount of all credit-eligible taxes paid to other states or foreign countries for the taxable year or (ii) an amount determined by applying the Massachusetts personal income tax rates for the taxable year, as provided in M.G.L. c. 62, § 4, against income apportioned by the corporate trust to another state or foreign country, as provided in 830 CMR 62.8.2(3)(d), for the taxable year. The resulting annual credit amount, determined for each taxable year, is added to the corporate trust's cumulative credit amount.

b. Adjustments. The corporate trust's cumulative credit amount is reduced by the amount of the credit that flows through to resident beneficiaries or that is attributed to nonresident beneficiaries under 830 CMR 62.8.2(4)(e)3.

2. Determine Cumulative Credit Amount Available to Beneficiaries. The cumulative credit amount becomes available to be claimed as a personal income tax credit by the corporate trust's resident beneficiaries as income that has already been subjected to tax at the corporate trust level by other states and/or foreign countries is distributed to the beneficiaries. The total amount of credit available to beneficiaries for distributions made by the corporate trust must be determined at the corporate trust level, using the corporate trust's taxable year. The cumulative credit amount available to beneficiaries is determined by multiplying the corporate trust's cumulative credit by a fraction, (i) the numerator of which is the amount of the corporate trust distribution that consists of previously undistributed Massachusetts adjusted gross income earned during taxable years beginning on or after July 1, 2000 that was apportioned to another state or foreign country pursuant to 830 CMR 62.8.2(3)(d) or earned in a taxable year during which the corporate trust's apportionment percentage was less than 10% ( i.e., tax-free earnings and profits described in 830 CMR 62.8.2(4)(b)4.), and (ii) the denominator of which is the total amount of the corporate trust's previously undistributed Massachusetts adjusted gross income earned during taxable years beginning on or after July 1, 2000 that was apportioned to another state or foreign country pursuant to 830 CMR 62.8.2(3)(d) or earned in a taxable year during which the corporate trust's apportionment percentage was less than 10%. All relevant amounts must be adjusted to take into account distributions to beneficiaries.

For purposes of computing this fraction, to the extent that some amount of the corporate trust's previously undistributed Massachusetts adjusted gross income earned during taxable years beginning on or after July 1, 2000 that was apportioned to another state or foreign country pursuant to 830 CMR 62.8.2(3)(d) or earned in a taxable year during which the corporate trust's apportionment percentage was less than 10% consists of income taxed in another jurisdiction in which the beneficiary directly pays the taxes, such amount shall be subtracted from the amount of income that would otherwise be included in the numerator.

3. Determine Each Resident Beneficiary's Credit Amount. Each resident beneficiary's credit amount is determined by multiplying the cumulative credit amount available to beneficiaries, determined under 830 CMR 62.8.2(4)(e)2., by a fraction, the numerator of which is the amount of the distribution of that portion of tax-free earnings and profits, as determined under 830 CMR 62.8.2(4)(b)3. and 4., that is received by the resident beneficiary and the denominator of which is the aggregate amount of the distribution of that portion of tax-free earnings and profits, as determined under 830 CMR 62.8.2(4)(b)3. and 4., that is received by all beneficiaries, including non-resident beneficiaries. A resident beneficiary may apply the credit in the taxable year during which he or she receives the corporate trust distribution that triggers the credit. Non-resident beneficiaries are also allocated credit amounts in a similar manner. Non-resident beneficiaries may not apply the credit to reduce their Massachusetts personal income tax. However, the corporate trust's cumulative credit amount must be reduced by the amount of credit allocated to non-resident beneficiaries under 830 CMR 62.8.2.

(f) Credit for Taxes Paid to Other Jurisdictions by Resident Beneficiaries on Income Earned by the Corporate Trust. A resident beneficiary that receives a distribution of tax-free earnings and profits from a corporate trust that has tax-free earnings and profits attributable to income apportioned to another state or foreign country as provided in 830 CMR 62.8.2(3)(d) or earnings and profits earned during taxable years when the corporate trust's apportionment percentage is less that 10%, may be entitled to a credit for taxes paid by a resident beneficiary to other jurisdictions.

The credit described in this 830 CMR 62.8.2(4)(f) is not available for any amount of taxes paid to other states or foreign countries by the corporate trust. The credit described in 830 CMR 62.8.2(4)(e), however, is available for taxes paid to other states or foreign countries by the corporate trust. A resident beneficiary's credit attributable to taxes paid by the beneficiary to other jurisdictions on account of the beneficiary's share of corporate trust income in such other jurisdiction shall be determined for each taxable year as follows:

1. Matching of Taxes Paid by Beneficiary in Other Jurisdiction to Beneficiary's Share of Income Apportioned to Other Jurisdiction. In the year that the beneficiary directly pays taxes to other jurisdictions on the beneficiary's share of corporate trust income, the beneficiary shall match the taxes paid with the related income. The taxes paid will not be considered as matched with the related income unless the beneficiary notifies the corporate trust that such income has been matched. The taxes will be presumed matched if the corporate trust records indicate that the related income is not included for purposes of calculating the credit for taxes paid to other jurisdictions by the corporate trust. In the year the taxes are paid by the beneficiary to the other jurisdiction, the beneficiary must attach to the beneficiary's Massachusetts return a copy of the other jurisdiction's return showing such taxes were payable, together with evidence that the tax shown on the return was paid along with a statement indicating that such taxes will be claimed as taxes paid to other jurisdictions in the year that the related income is distributed by the corporate trust. The Department may require additional documentation to support the beneficiary's claim of the credit in a future year.

2. Taxes Not Available for Credits until the Income with which they are Matched is Distributed. Once the taxes paid to another jurisdiction by the beneficiary are matched with the related income, those taxes shall be considered suspended until a distribution of the related income triggers their availability for use of the beneficiary as a credit against the income distributed from the corporate trust.

3. Amount of Credit that can be Claimed as Attributable to Taxes Directly Paid by a Beneficiary to Another Jurisdiction. In the year of distribution, the amount of the credit that can be claimed as attributable to taxes directly paid by a beneficiary to another jurisdiction on the beneficiary's share of corporate trust income shall be the lesser of

a. the amount of suspended taxes triggered by the distribution or

b. an amount determined by applying the Massachusetts personal income tax rates for the taxable year, as provided in M.G.L. c. 62, § 4, against the beneficiary's share of income apportioned by the corporate trust to another state or foreign country, as provided in 830 CMR 62.8.2(3)(d), that is distributed and which relates to income earned in jurisdictions where the beneficiary directly pays taxes.

(5) Corporate Trust Owner and Qualified S Corporation Subsidiaries.

(a) General. 830 CMR 62.8.2(5) explains the tax computation and filing requirements of a corporate trust and its ownership of qualified S corporation subsidiaries (QSUBs). For purposes of 830 CMR 62.8.2(5), a corporate trust which owns one or more QSUBs ("corporate trust owner") is treated as an S corporation for federal tax purposes and a QSUB has the same meaning as under Code section 1361(b)(3), as amended and in effect for the taxable year.

(b) Corporate Trust Owners. A corporate trust owner is subject to the personal income tax as provided in 830 CMR 62.8.2(3); provided that the corporate trust owner must take into account the activities and tax attributes of its QSUB(s) as provided in 830 CMR 62.8.2(5)(b)1. through 4.

1. Tax Jurisdiction. When determining whether it is subject to Massachusetts personal income tax jurisdiction, the corporate trust owner must treat all of the activities of its QSUB's as its own.

2. Determination of Income. When determining its Massachusetts adjusted gross income and taxable income, the corporate trust owner must include all income that it earns on its own account during the taxable year as well as all income earned by each of its QSUBs.

3. Determination of Apportionment Percentage. When determining its Massachusetts apportionment percentage, the corporate trust owner must treat the sales, property and payroll of its QSUBs as its own sales, property, and payroll; provided that inter-company transactions between the corporate trust owner and its QSUBs or between two or more QSUBs of the same corporate trust owner must be eliminated.

4. Applicability of Single Sales Factor Apportionment. When determining whether it is required to apportion its adjusted gross income using the single sales factor apportionment provisions applicable to mutual fund service corporations or Section 38 manufacturers, a corporate trust owner must take into account the activities of its QSUBs as follows:

a. Mutual Fund Services. For purposes of applying the single sales factor apportionment provisions applicable to mutual fund service corporations under M.G.L. c. 63, § 38(m) and 830 CMR 63.38.1, a corporate trust owner must treat all relevant items of income, all relevant activities, and all relevant attributes of the QSUB as its own.

b. Manufacturing. For purposes of applying the single sales factor apportionment provisions applicable to manufacturing corporations under M.G.L. c. 63, § 38(l) and 830 CMR 63.38.1(10), a corporate trust owner must take into account the gross receipts, payroll, and tangible property of its QSUB in the manner explained below.

(i) Gross receipts. The gross receipts of the QSUB must be characterized as either (i) derived from the sale of goods manufactured by the QSUB or (ii) derived from non-manufacturing sales. The QSUB's gross receipts, characterized in this manner, are attributed to the corporate trust owner for use by the corporate trust owner in determining whether it is engaged in manufacturing within the meaning of M.G.L. c. 63, § 38(l)(1). In applying that definition, gross receipts derived from the sale of goods manufactured by the QSUB are treated as gross receipts derived from the sale of goods manufactured by the corporate trust owner. All other gross receipts of the QSUB are treated as gross receipts derived from non-manufacturing sales by the corporate trust owner.

(ii) Payroll. The payroll of the QSUB must be characterized as either (i) paid to employees working in the QSUB's manufacturing operations or (ii) paid to other employees. The QSUB's payroll, characterized in this manner, is attributed to the corporate trust owner for use by the corporate trust owner in determining whether it is engaged in manufacturing within the meaning of M.G.L. c. 63, § 38(l)(1). In applying that definition, payroll paid to employees working in the QSUB's manufacturing operations is treated as payroll paid to employees working in the corporate trust owner's manufacturing operations. All other payroll of the QSUB is treated as paid to non-manufacturing employees of the corporate trust owner.

(iii) Property. The tangible property of the QSUB must be characterized as either (i) used in the QSUB's manufacturing operations or (ii) used in other activities. The tangible property, characterized in this manner, is attributed to the corporate trust owner for use by the corporate trust owner in determining whether it is engaged in manufacturing within the meaning of M.G.L. c. 63, § 38(l)(1). In applying that definition, tangible property used in the QSUB's manufacturing operations is treated as tangible property used in the corporate trust owner's manufacturing operations. All other tangible personal property of the QSUB is treated as tangible property used in non-manufacturing activities of the corporate trust owner.

(c) QSUBs. A QSUB must file a corporate excise return as an S corporation to report the non-income measure of the corporate excise imposed under M.G.L. c. 63, §§ 32(a)(1) (in the case of domestic corporations) or 39(a)(1) (in the case of foreign corporations). The QSUB must pay a corporate excise equal to the greater of (i) the non-income measure of the corporate excise or (ii) the minimum excise imposed under M.G.L. c. 63, §§ 32(b) (in the case of domestic corporations) or 39(b) (in the case of foreign corporations). Where it is necessary for the QSUB to determine its apportionment percentage for purposes of computing the non-income measure of the excise, the QSUB must determine its apportionment factors based on its own, separately determined, property, payroll and sales. A QSUB is not subject to the net income measure of the corporate excise imposed under M.G.L. c. 63, §§ 32(a)(2) (in the case of domestic corporations) or 39(a)(2) (in the case of foreign corporations).

(d) Application of Credits. A corporate trust owner and its QSUBs must determine and apply their credits separately. A corporate trust owner is a personal income tax taxpayer and may claim only those credits allowed under M.G.L. c. 62. A QSUB is a corporate excise taxpayer and may claim only those credits allowed under M.G.L. c. 63. A corporate trust owner may take into account its QSUB's activities when determining its credits under M.G.L. c. 62. Alternatively, the QSUB may determine its credits separately and apply them to reduce the non-income measure of the corporate excise. However, the same activity cannot generate a credit for both the corporate trust and the QSUB. Thus, where the QSUB engages in an activity that can generate a credit under either M.G.L. c. 62 or M.G.L. c. 63 (e.g., the Economic Opportunity Area credit under M.G.L. c. 62, § 6(g) or M.G.L. c. 63, § 38N), the corporate trust owner and the QSUB may take that activity into account in determining the credit for either the corporate trust owner or the QSUB, but not both. In contrast, where the QSUB is engaged in an activity that generates a credit under M.G.L. c. 63 only (e.g., the investment tax credit under M.G.L. c. 63, § 31A), the credit can be claimed only by the QSUB.

(e) Distributions.

1. General. For federal tax purposes, all distributions of the QSUB's earnings will be treated as having been made by the corporate trust owner under Code section 1361(b)(3). However, in general, for Massachusetts purposes, a corporate trust owner and its QSUBs are separate taxable entities. Corporate trust owners and their QSUB(s) retain their separate identities for purposes of characterizing distributions. S corporation accounts for income previously taxed to S corporation shareholders prior to the conversion of the S corporation to the QSUB form (i.e., adjusted basis or accumulated adjustments) will retain their character in the hands of the QSUB. Thus, a QSUB can make tax free distributions up to the amount that it could have distributed free of tax on its last day as an S corporation. Similarly, any predecessor S corporation earnings and profits retain their character in the hands of the QSUB. Such predecessor S corporation earnings and profits are subject to tax when distributed.

2. Ordering Rules. The amount of any distribution from either the corporate trust owner or any of its QSUBs to the corporate trust owner's beneficiaries should be characterized in the order set forth in 830 CMR 62.8.2(5)(e)2.a. through d. The following ordering rules should be applied to the aggregate amount of any distribution from the corporate trust owner and all of its QSUBs, without regard to the specific entity that earned or otherwise provided the funds that are distributed.

a. The distribution first should be characterized as a tax-free distribution of the QSUB's predecessor S corporation income that was previously taxed to the predecessor S corporation shareholders. Thus, each QSUB may make a tax-free distribution up to the amount that it could have distributed free of tax as an S corporation under:

(i) 830 CMR 62.17A.1(10)(d)1. (applicable to S corporations with no Massachusetts earnings and profits) or

(ii) 830 CMR 62.17A.1(10)(d)2. (applicable to S corporations with Massachusetts earnings and profits).

Such amount must be determined as of the end of the last day on which the QSUB's predecessor operated as an S corporation. Each relevant account of previously taxed S corporation income (i.e., S corporation shareholders adjusted stock basis and S corporation's accumulated adjustments account) must be reduced by the amount of the distribution and cannot be replenished by any of the QSUB's earnings while it is a QSUB.

b. Any remaining portion of the distribution should next be characterized as a taxable distribution of tax-free earnings and profits of the corporate trust owner, up to the amount of such tax-free earnings and profits determined under 830 CMR 62.8.2(4)(b). The corporate trust owner may treat this portion of the distribution as being made first out of tax-free earnings and profits attributable to:

(i) adjusted gross income earned during taxable years for which the corporate trust's apportionment percentage was less than ten percent, as described in 830 CMR 62.8.2(4)(b)4. or

(ii) adjusted gross income apportioned to other jurisdictions as described in 830 CMR 62.8.2(4)(b)3., to the extent thereof.

Tax-free earnings and profits must be reduced by the amount that is distributed. A corporate trust's tax-free earnings and profits are increased as a result of the corporate trust owner's own operations and as a result of QSUB income attributed to the corporate trust owner.

c. Any remaining portion of the distribution should next be characterized as a distribution of previously taxed earnings and profits of the corporate trust owner, up to the amount of such previously taxed earnings and profits. Previously taxed earnings and profits generally represent income that was taxed at the corporate trust level. The distribution of previously taxed earnings and profits is not subject to tax at the beneficiary level. The amount of previously taxed earnings and profits must be reduced by the amount of those earnings and profits that is distributed. A corporate trust owner's earnings and profits are increased as a result of the corporate trust owner's own operations and as a result of QSUB income attributed to the corporate trust owner.

d. Any remaining portion of the distribution is characterized as a distribution by the QSUB's predecessor S corporation of an amount in excess of the amount that that it could have distributed free of tax as an S corporation under:

(i) 830 CMR 62.17A.1(10)(d)1 (applicable to S corporations with no Massachusetts earnings and profits) or

(ii) 830 CMR 62.17A.1(10)(d)2 (applicable to S corporations with Massachusetts earnings and profits). These amounts are characterized

i. as taxable gain under 830 CMR 62.17A.1(10)(d)1.b (in the case of an S corporation with no Massachusetts earnings and profits) or

ii. as taxable gain, dividend income, or return of capital under 830 CMR 62.17A.1(10)(d)2.b-e (in the case of an S corporation with Massachusetts earnings and profits).

In this manner, C corporation earnings and profits derived from prior taxable years of the QSUB's predecessor S corporation when it was a C corporation remain taxable when distributed after QSUB treatment has been elected for that S corporation.

REGULATORY AUTHORITY
830 CMR: 62.8.2: M.G.L. c. 14, § 6(1); M.G.L. c. 62C, § 3; M.G.L. c. 62

REGULATORY HISTORY
Date of Promulgation: 12/21/01