830 CMR: DEPARTMENT OF REVENUE
830 CMR 63.00: Taxation of Corporations
830 CMR 63.00 is hereby repealed and replaced with the following:
830 CMR 63.38.7: Apportionment of Income of Mutual Fund Service Corporations

(1) Statement of Purpose; Outline of Topics; Effective Date

(a) Statement of Purpose. The purpose of 830 CMR 63.38.7 is to explain the allocation and apportionment of income from mutual fund sales of mutual fund service corporations, as provided in M.G.L. c. 63, §38(m).

(b) Outline of Topics. 830 CMR 63.38.7, is organized as follows:

(1) Statement of Purpose; Outline of Topics; Effective Date
(2) Definitions
(3) General
(4) Apportionment of Income from Mutual Fund Sales
(5) Job Growth Requirements
(6) Reporting Requirements

(c) Effective Date. The provisions of 830 CMR 63.38.7 shall take effect upon promulgation.

(2) Definitions. For the purposes of 830 CMR 63.38.7, the following terms shall have the following meanings, unless the context requires otherwise:

Affiliate, the meaning as set forth in 15 U.S.C. §80a-2(a)(3)(c), as may be amended from time to time.

Affiliated regulated investment company (or affiliated RIC), a regulated investment company that (i) is a shareholder in another regulated investment company and (ii), in common with such other regulated investment company, obtains management or distribution services, as described in 830 CMR 63.38.7(3)(d), from the same provider of such services or a related provider.

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

Corporate trust, any partnership, association or trust, organized by the execution and delivery of a declaration of trust, the beneficial interest of which is divided into transferable units or shares.

Limited liability company, an unincorporated organization formed under M.G.L. c. 156C, and having two or more members or a limited liability company formed under the laws of any other state or foreign country. See G.L. c. 156C, § 2.

Mutual fund sales, taxable net income derived within the taxable year, directly or indirectly, from the rendering of management, distribution, or administration services to a regulated investment company, including net income received directly or indirectly from trustees, sponsors, and participants of employee benefit plans which have accounts in a regulated investment company. See 830 CMR 63.38.7(3)(d), below.

Mutual fund service corporation, any domestic or foreign corporation, corporate trust, or limited liability company doing business in Massachusetts, which derives more than fifty percent of its gross income from providing, directly or indirectly, management, distribution or administration services to or on behalf of a regulated investment company, and from trustees, sponsors and participants of employee benefit plans which have accounts in a regulated investment company.

Qualified employee in Massachusetts, an individual who (i) is employed by a mutual fund service corporation; (ii) works on a full-time basis with a normal work week of thirty or more hours; (iii) at the start of his or her employment does not have a predetermined or specified termination date; (iv) is eligible to receive employee benefits, including, but not limited to, paid holidays, vacation and unemployment benefits; and (v) is subject to Massachusetts income tax withholding. Three or fewer individuals who between them fulfill the requirement of (ii) and who each meet the requirements of (i), (iii), (iv), and (v) shall be counted as one qualified employee.

Qualified employee worldwide, an individual who meets the criteria of subsections (i) through (iv), of the definition of qualified employee in Massachusetts in 830 CMR 63.38.7(2), above. Three or fewer individuals who between them fulfill the requirement of subsection (ii) of the definition of qualified employee in Massachusetts and who each meet the requirements of subsections (i), (iii), (iv) and (v) of that definition shall be counted as one qualified employee.

Regulated investment company (RIC), the meaning as set forth in Section 851 of the Internal Revenue Code, as amended and in effect for the taxable year.

Taxable net income, gross income less deductions under M.G.L. c. 63, § 30, adjusted as provided in M.G.L. c. 63, § 38(a).

(3) General

(a) Application of Regulation. This regulation, 830 CMR 63.38.7, applies only to taxable net income that is (i) derived from mutual fund sales and (ii) received by mutual fund service corporations. Any taxable net income received by mutual fund service corporations that is not derived from mutual fund sales must be apportioned according to the provisions of M.G.L. c. 63, § 38(c). See 830 CMR 63.38.1.

(b) Use of a Weighted Average Apportionment Percentage to Calculate the Non-income Measure of the Excise. Based on the above apportionment rules, a mutual fund service corporation that has taxable net income from mutual fund sales as well as taxable net income from non-mutual fund sales in the same tax year will have two income apportionment percentages for that year. If a mutual fund service corporation is subject to the non-income measure of the corporate excise under M.G.L. c. 63, §§ 32, 39, the mutual fund service corporation must use a weighted average of the two apportionment percentages to calculate the non-income measure of its excise due for that tax year. To determine the weighted average percentage, a mutual fund service corporation must calculate the ratio of its taxable net income from mutual fund sales to its taxable net income from non-mutual fund sales.

Example 1: ABC Company has $900,000 of taxable net income from mutual fund sales and its apportionment percentage for this income is 25%. ABC Company also has $100,000 of taxable net income from non-mutual fund sales and its apportionment percentage for this income is 75%. ABC Company's taxable net income from mutual fund sales represents 90% of its total taxable net income and its taxable net income from non-mutual fund sales represents 10% of its total taxable net income.

To determine ABC Company's weighted average apportionment percentage, calculate as follows:

1. multiply the mutual fund apportionment percentage by its weight
25% x 90% = 22.5%

2. multiply the other income apportionment percentage by its weight
75% x 10% = 7.5%

3. add these two percentages to arrive at the weighted average apportionment percentage
22.5% + 7.5% = 30%

ABC Company would then use this percentage (30%) to calculate the non-income measure of its excise due for that tax year.

The above calculation shall be used when a mutual fund service corporation has taxable net income from mutual fund sales and taxable net income from non-mutual fund sales. When a mutual fund service corporation has a loss from its mutual fund sales business, a loss from its non-mutual fund sales business, or both, the corporation must determine its weighted average apportionment percentage based on the ratio of its gross receipts from its mutual fund sales business to its gross receipts from its non-mutual fund sales business. For purposes of 830 CMR 63.38.7(3)(b), the term "gross receipts" shall mean gross income as defined under M.G.L. c. 63, § 30.

Example 2: XYZ Company has a $70,000 loss from its mutual fund sales business and its apportionment percentage for this income is 25%. XYZ Company also has a $50,000 loss from its non-mutual fund sales business and its apportionment percentage for this income is 75%. Because XYZ Company has a loss from both its mutual fund sales and non-mutual fund sales businesses, its weighted apportionment percentage must be determined by reference to its respective gross receipts from its mutual fund sales and non-mutual fund sales businesses. XYZ Company has $2,200,000 in gross receipts from its mutual fund sales business and $300,000 in gross receipts from its non-mutual fund sales business. Therefore, XYZ Company has gross receipts from its mutual fund sales business that represent 88% of its total gross receipts and gross receipts from its non-mutual fund business that represent 12% of its total gross receipts.

To determine XYZ Company's weighted average apportionment percentage, calculate as follows:

1. multiply the mutual fund apportionment percentage by its weight
25% x 88% = 22%

2. multiply the non-mutual fund apportionment percentage by its weight
75% x 12% = 9%

3. add these two percentages to arrive at the weighted average apportionment percentage
22% +9% = 31%

XYZ Company would then use this percentage (31%) to calculate the non-income measure of its excise due for that tax year.

Example 3: Fund Corporation has a $25,000 loss from its mutual fund sales business and its apportionment percentage for this income is 30%. Fund Corporation also has $75,000 of taxable net income from its non-mutual fund sales business and its apportionment percentage for this income is 70%. Because Fund Corporation has a loss from its mutual fund sales business, its weighted apportionment percentage must be determined by reference to its respective gross receipts from its mutual fund sales and non-mutual fund sales businesses. Fund Corporation has $2,700,000 in gross receipts from its mutual fund sales business and $300,000 in gross receipts from its non-mutual fund sales business. Therefore, Fund Corporation has gross receipts from its mutual fund sales business that represent 90% of its total gross receipts and gross receipts from its non-mutual fund business that represent 10% of its total gross receipts.

To determine Fund Corporation's weighted average apportionment percentage, calculate as follows:

1. multiply the mutual fund apportionment percentage by its weight
30% x 90% = 27%

2. multiply the non-mutual fund apportionment percentage by its weight
70% x 10% = 7%

3. add these two percentages to arrive at the weighted average apportionment percentage
27% + 7% = 34%

Fund Corporation would then use this percentage (34%) to calculate the non-income measure of its excise due for that tax year.

(c) Taxable Net Income From Mutual Fund Sales. To determine taxable net income from mutual fund sales, a mutual fund service corporation must take the following steps.

1. The mutual fund service corporation must separate its gross income into two categories: (i) mutual fund sales and (ii) non-mutual fund sales.

2. The mutual fund service corporation must also separate its allowable deductions into categories: (i) deductions directly traceable to mutual fund sales, (ii) deductions directly traceable to non-mutual fund sales, and (iii) other allowable deductions. The category of other allowable deductions consists of deductions not directly traceable to either type of sale. Taxable net income from mutual fund sales equals gross income derived from mutual fund sales less: (i) any deductions directly traceable to its mutual fund sales and (ii) a portion of other allowable deductions. To determine the portion of other allowable deductions to be subtracted from gross income derived from mutual fund sales, a mutual fund service corporation must multiply the total amount of other allowable deductions by a fraction, the numerator of which is the mutual fund service corporation's gross income derived from mutual fund sales for the taxable year and the denominator of which is the mutual fund service corporation's total gross income for the taxable year.

(d) Mutual Fund Sales. Mutual fund sales include all amounts derived, directly or indirectly, from the performance of the following services:

1. Management services. The term management services includes, but is not limited to, the rendering of investment advice or investment research to or on behalf of a RIC, making determinations as to when sales and purchases of securities are to be made on behalf of the RIC, or the selling or purchasing of securities constituting assets of a RIC. Such activities must be performed:

a. pursuant to a contract with the RIC entered into pursuant to 15 U.S.C. section a-15(a);

b. for a person that has entered into a such a contract with the RIC; or

c. for a person that is affiliated with a person that has entered into such a contract with the RIC.

2. Distribution services. The term distribution services includes, but is not limited to, advertising, servicing, marketing or selling shares of a RIC, including the receipt of contingent deferred sales charges and fees received pursuant to 17 CFR § 270.12b-1.

a. In the case of an open end company, advertising, servicing or marketing shares must be performed by a person who is either engaged in or affiliated with a person that is engaged in the services of selling shares of a RIC. The service of selling shares of a RIC must be performed pursuant to a contract entered into pursuant to 15 U.S.C. section a-15(b).

b. In the case of a closed end company, advertising, servicing or marketing shares must be performed by a person who was either engaged in or affiliated with a person that was engaged in the services of selling shares of a RIC.

3. Administration services. The term administration services includes, but is not limited to, clerical, fund or shareholder accounting, participant record keeping, transfer agency, bookkeeping, data processing, custodial, internal auditing, legal and tax services performed for a RIC. The provider of administration services must also provide or be affiliated with a person that provides management or distribution services to any RIC.

(e) Direct and Indirect Services

1. Direct services. Amounts are derived directly from the performance of management, distribution or administration services when they are received as compensation for providing such services to a RIC or to a RIC's officers, directors or trustees acting on behalf of the RIC. For example, the fee received by a person hired by a RIC's trustees to manage the RIC's assets is derived directly from the performance of management services.

2. Indirect services. Amounts are derived indirectly from the performance of management, distribution or administration services when they are received as compensation for providing such services to a person who is directly responsible for providing management, distribution or administration services to a RIC pursuant to a contract between such person and the RIC or the RIC's officers, directors, or trustees acting on behalf of the RIC . For example, the fee received by a brokerage firm hired by a person that is under contract to provide management services to a RIC is derived indirectly from the performance of management services.

(4) Apportionment of Income From Mutual Fund Sales

(a) Qualifying Mutual Fund Service Corporations. A mutual fund service corporation that meets the job growth criteria under 830 CMR 63.38.7(5), below, must apportion its taxable net income from mutual fund sales to Massachusetts by multiplying its total taxable net income from mutual fund sales for the taxable year by the mutual fund service corporation's sales factor, determined under 830 CMR 63.38.7(4)(c), below.

(b) Non-Qualifying Mutual Fund Service Corporations

1. A mutual fund service corporation that (i) has gross income derived from mutual fund sales to one or more RICs with shareholders domiciled outside Massachusetts and (ii) does not meet the job growth criteria under 830 CMR 63.38.7(5), below, must multiply its total taxable net income from mutual fund sales for the taxable year by a fraction, the numerator of which is the sum of its property and payroll factors, determined under 830 CMR 63.38.1, and twice times its sales factor, determined under 830 CMR 63.38.7(4)(c), below, and the denominator of which is four.

2. A mutual fund service corporation that (i) does not have gross income derived from mutual fund sales to one or more RICs with shareholders domiciled outside Massachusetts and (ii) does not meet the job growth criteria under 830 CMR 63.38.7(5), below, must allocate all of its taxable net income from mutual fund sales to Massachusetts.

(c) Sales Factor. A mutual fund service corporation determines its sales factor as follows:

1. Mutual fund sales are determined separately for each separate RIC from which the mutual fund service corporation receives fees for mutual fund services.

2. Mutual fund sales for each RIC are then multiplied by a fraction, the numerator of which is the average number of shares owned by the RIC's shareholders domiciled in Massachusetts at the beginning and end of the RIC's taxable year that ends with or within the mutual fund service corporation's taxable year, and the denominator of which is the average number of shares owned by all of the RIC's shareholders for the same period. Notwithstanding the above, a mutual fund service corporation may use the year end of the RIC's fund advisor for this calculation so long as the mutual fund service corporation consistently uses this method from year to year. For purposes of this provision, a RIC's fund advisor is the person that is directly and primarily responsible for providing investment advice to the RIC under a contract entered into pursuant to 15 U.S.C. §a-15(a).

3. The resulting amounts for each RIC are then added together. The sum is the amount of mutual fund sales assigned to Massachusetts.

4. The sales factor is a fraction, the numerator of which is the amount of mutual fund sales assigned to Massachusetts and the denominator of which is the mutual fund service corporation's total amount of mutual fund sales.

For purposes of this calculation, mutual fund sales by a mutual fund service corporation are assigned to Massachusetts based on the domicile of the RIC's shareholders of record. The domicile of a shareholder of record is generally the shareholder's mailing address on the records of the RIC. Notwithstanding this general rule:

(i) if a shareholder of record is an affiliated RIC, then for shares held by such affiliated RIC, the mailing addresses of the shareholders of record of the affiliated RIC shall be presumed to be the domicile of the shareholder of record, determined proportionately with respect to the shares of the affiliated RIC held by each such shareholder of the affiliated RIC.

Example: ABC is a mutual fund service corporation. ABC provides management services to a number of RICs (the ABC Funds) that are marketed to the public as being part of an identifiable mutual fund group sponsored by ABC or related entities. The ABC Funds invest cash in IFunds, another RIC within the ABC group of funds. IFunds specializes in investing in various short-term money-market and similar instruments. ABC, or a related service provider, provides management services to IFunds. The management fee income received by ABC, or such related provider, that is attributable to management services rendered to IFunds and that is characterized as mutual fund sales income shall be assigned to Massachusetts based on the domicile of IFunds' shareholders of record. Where any such shareholder of record is an ABC Fund that is an affiliated RIC, then to the extent of the IFund shares owned by such ABC Fund, the shareholders of record of such shares shall be presumed to be the shareholders of such ABC Fund, in proportion to their holdings in such ABC Fund. Thus, if an ABC Fund, qualifying as an affiliated RIC, held 100,000 shares in IFunds, and if 10% of the shares of such ABC Fund were held by shareholders having Massachusetts mailing addresses, then 10,000 shares of IFunds held by such ABC Fund would be assigned to Massachusetts.

(ii) if a shareholder of record is a company which holds the shares of the RIC as depositor for the benefit of a separate account, then for all shares held in such separate account, the mailing address of such company shall be presumed to be the domicile of the shareholder of record. However, if either the RIC or mutual fund service corporation has actual knowledge that the company's mailing address is different than the company's principal place of business, then the presumption does not apply and the address of the company's principal place of business shall be considered the domicile of the shareholder of record.

Notwithstanding any other provisions of this regulation, 830 CMR 63.38.7, the provisions of 830 CMR 63.38.7(4)(c), as amended, shall apply to taxable years beginning on or after January 1, 2006.

(d) The following example illustrates the provisions of 830 CMR 63.38.7(4)(a), (c).

XYZ Financial Services ("XYZ") is a mutual fund service corporation that meets the job growth requirement of 830 CMR 63.38.7(5), below. For the 1998 taxable year, XYZ has $400,000 of gross income derived from brokerage services and $2,000,000 of gross income derived from mutual fund sales. The gross income derived from mutual fund sales consists of fees received from the RIC's described in the table below. The table also provides the average number of shares held by shareholders domiciled in Massachusetts and average number of total shares for each RIC for the taxable year.




Fund


Fees

Shares Held By
MA Shareholders


Total Shares

Growth

$1,000,000

100

400

Income

$ 500,000

100

200

International

$ 500,000

50

200

XYZ has $1,000,000 in allowable deductions for the taxable year. $200,000 of these deductions are directly traceable to its brokerage services. $500,000 are directly traceable to its mutual fund sales. The remaining $300,000 deductions are not directly traceable to either XYZ's brokerage services or mutual fund sales and are therefore considered other allowable deductions.

XYZ must apportion its taxable net income derived from mutual fund sales to Massachusetts as follows.

Step 1: Determine Taxable Net Income from Mutual Fund Sales

a. Start with $2,000,000 of gross income derived from mutual fund sales.

b. Subtract deductions directly traceable to mutual fund sales:

$2,000,000 - $500,000 = $1,500,000

c. Subtract the portion of other allowable deductions allocable to mutual fund sales:

Allocable Portion = Other Allowable Deductions x Total Mutual Fund Sales
Total Gross Income

Allocable Portion = $300,000 x $2,000,000 = $ 250,000
$2,400,000

$1,500,000 - $ 250,000 = $1,250,000

d. The resulting amount of $1,250,000 is taxable net income derived from mutual fund sales.

Step 2: Determine Sales Factor

a. Separate mutual fund sales by individual RICs.

Growth Fund = $1,000,000
Income Fund = $ 500,000
International Fund = $ 500,000

b. Multiply the separate amount of mutual fund sales for each RIC by the following fraction:

average number of shares held by shareholders domiciled in Massachusetts
average number of total shares

1. Growth Fund: $1,000,000 x 100 = $250,000
400

2. Income Fund: $ 500,000 x 100 = $250,000
200

3. International Fund: $ 500,000 x 50 = $125,000
200

c. Add the resulting amounts to determine total mutual fund sales assigned to Massachusetts.

$250,000 + $250,000 + $125,000 = $625,000

d. Calculate sales factor: total mutual fund sales assigned to MA
total mutual fund sales

$ 625,000 = 31.25%
$2,000,000

Step 3: Apportion Taxable Net Income Derived from Mutual Fund Sales to Massachusetts

$1,250,000 x 31.25% = $ 390,625

(5) Job Growth Requirement

(a) Required Employment Levels. A mutual fund service corporation meets the job growth requirement for a taxable year if it maintains an employment level equal to or greater than its jobs commitment level. A mutual fund service corporation's employment level for a taxable year is equal to the number of qualified employees in Massachusetts on the last day of the mutual fund service corporation's taxable year. If a mutual fund service corporation participates with other mutual fund service corporations in the filing of a combined return, the employment level for a taxable year for the combined group is equal to the total number of qualified employees of all combined group members in Massachusetts on the last day of the combined group's taxable year. A mutual fund service corporation's jobs commitment level is equal to the following amounts for the following taxable years:

1. For taxable years beginning on or after January 1, 1997 but before January 1, 1998; 105% of the base period employment level;

2. For taxable years beginning on or after January 1, 1998 but before January 1, 1999; 110% of the base period employment level;

3. For taxable years beginning on or after January 1, 1999 but before January 1, 2000; 115% of the base period employment level;

4. For taxable years beginning on or after January 1, 2000 but before January 1, 2001; 120% of the base period employment level;

5. For taxable years beginning on or after January 1, 2001 but before January 1, 2003; 125% of the base period employment level;

6. For taxable years beginning on or after January 1, 2003, all mutual fund service corporations are deemed to meet the job growth requirement and are required to apportion taxable net income from mutual fund sales to Massachusetts using the single factor apportionment percentage provided in 830 CMR 63.38.7(4)(a), above.

(b) Base Period Employment Level. The base period employment level of a mutual fund service corporation is the number of qualified employees of the mutual fund service corporation in Massachusetts as of January 1, 1996. In the case of a mutual fund service corporation participating in the filing of a combined return, the base period employment level shall be computed for the combined group as a whole, based upon the number of qualified employees in Massachusetts as of January 1, 1996 of all members of the combined group. A mutual fund service corporation must retain its payroll records documenting the number of its employees as of January 1, 1996 to assist the Commissioner in determining whether the mutual fund service corporation has met its required employment level for each taxable year beginning on or after January 1, 1997.

(c) Special Rule For New Mutual Fund Service Corporations. If a mutual fund service corporation was not engaged in business in Massachusetts on January 1, 1996, then its base period employment level shall be its average employment level for the first two years it is engaged in business in Massachusetts. Such mutual fund service corporation's jobs commitment level shall be its base period employment level increased by five percent for every taxable year after the year in which the base period employment level is established, until January 1, 2003. For taxable years beginning on or after January 1, 2003, all mutual fund service corporations are deemed to meet the job growth requirement and are required to apportion taxable net income from mutual fund sales to Massachusetts using the single factor apportionment percentage provided in 830 CMR 63.38.7(4)(a), above.

(d) Special Rule For Corporate Restructuring

1. When the acquisition of a business or line of business or other corporate restructuring results in an increase in the number of qualified employees of the mutual fund service corporation, the base period employment level to be applied in the taxable year during which such restructuring occurs, and in all subsequent taxable years, shall be increased by the base period employment level of the acquired business or line of business. If the acquired business or line of business is not a mutual fund service corporation, it shall determine its base period employment level as though it were a mutual fund service corporation. See 830 CMR 63.38.7(5)(b), above.

2. When the divestiture of a line of business or other corporate restructuring results in a decrease in the number of qualified employees of a mutual fund service corporation, the base period employment level to be applied in the taxable year during which such restructuring occurs, and in all subsequent taxable years, shall be decreased by the base period employment level of the divested line of business only if the mutual fund service corporation can demonstrate that the corporate restructure will not result in any reduction in the number of jobs in Massachusetts.

(e) Exception For Adverse Economic Conditions. A mutual fund service corporation that fails to meet the job growth requirement set forth in 830 CMR 63.38.7(5)(a), above, for any taxable year may nevertheless apportion its taxable net income derived from mutual fund sales using the single sales factor apportionment formula set forth in 830 CMR 63.38.7(4)(a), above, for that taxable year, if it can demonstrate to the Commissioner, in a manner prescribed by the Commissioner, that its failure to meet the required jobs commitment level for the taxable year was the direct result of adverse economic conditions.

1. Effect on one taxable year. If a mutual fund service corporation demonstrates adverse economic conditions for any one taxable year, the mutual fund service corporation may decrease its jobs commitment level for all subsequent taxable years beginning before January 1, 2002, by five percent of its base period employment level.

2. Effect on more than one taxable year. If a mutual fund service corporation demonstrates adverse economic conditions for more than one taxable year, the mutual fund service corporation may decrease its jobs commitment level for each taxable year affected by such conditions, and for all subsequent taxable years beginning before January 1, 2002. The amount of the decrease shall be five percent of the base period employment level multiplied by the number of taxable years during which adverse economic conditions are shown to exist. However, notwithstanding any such decrease, the jobs commitment level for taxable years beginning on or after January 1, 2002, and before January 1, 2004 shall not be less than the sum of the jobs commitment level for the most recent taxable year unaffected by adverse economic conditions and five percent of the base period employment level.

3. Adverse economic conditions defined. Adverse economic conditions shall exist with respect to any taxable year only where during any twelve month period ending during the taxable year either:

a. the Standard and Poor's 500 Stock Index decreases ten percent or more compared to its level at the beginning of the twelve month period;

b. the average daily trading volume on the New York Stock Exchange decreases fifteen percent or more compared to the average over the preceding twelve months; or

c. at any time during the taxable year, the total assets under management of the mutual funds served by the mutual fund service corporation decreases twelve and one-half percent or more compared to such total assets under management twelve months earlier.

(f) Combined Returns. When one or more mutual fund service corporations joins in the filing of a combined return, as provided by 830 CMR 63.32B.1, each mutual fund service corporation shall determine and apportion its taxable net income separately. However, for purposes of determining whether the job growth requirement and any adverse economic conditions apply, as provided above, such determinations are to be made based on a combined group basis, and not on a corporation by corporation basis. If the job growth requirement is met by the combined group, all of the mutual fund service corporations participating in the combined return will be eligible to apportion taxable net income from mutual fund sales to Massachusetts using the single factor apportionment percentage provided in 830 CMR 63.38.7(4)(a), above. If the job growth requirement is not met by the combined group, and the adverse economic conditions exception does not apply, none of the mutual fund service corporations participating in the combined return will be eligible to apportion taxable net income from mutual fund sales to Massachusetts using the single factor apportionment percentage provided in 830 CMR 63.38.7(4)(a), above. Instead, such corporations, as part of the combined group, must follow the rules under 830 CMR 63.38.7(4)(b), above.

(g) The following example illustrates the provisions of 830 CMR 63.38.7(5).

Example. Mutual Funds, Inc. is a calendar year taxpayer. It is the parent corporation of three subsidiary corporations, Global Securities, Investments USA, and Investments International, all of which participate in the filing of a Massachusetts combined return ("the MFI Group"). Because these corporations participate in the filing of a combined return, they compute their base period employment level on a combined group basis. The MFI Group has 1000 qualified employees on January 1, 1996. This number is the MFI Group's base period employment level. On December 31, 1997, the MFI Group has 1070 qualified employees. The MFI Group meets the job growth requirement for the 1997 taxable year because its employment level exceeds its jobs commitment level of 1050 (105% of 1000).

On June 30, 1998, Mutual Funds, Inc. sells Investments International, whose base period employment level is 100, to an unrelated mutual fund service corporation based in New York, which has no plans to layoff or relocate any employees and does not do so. The MFI Group adjusts its base period employment level due to this corporate restructure to 900. On December 31, 1998, the MFI Group has 1001 employees. The MFI Group meets the job growth requirement for the 1998 taxable year because its employment level exceeds its job commitment level of 990 (110% of 900).

On September 15, 1998, Standard and Poor's 500 Stock Index is 865.27. On September 15, 1999, Standard and Poor's 500 Stock Index is 626.65, a 27.57% decrease. An adverse economic condition exists with respect to the MFI Group for its 1999 taxable year because the decrease in the Index exceeds 10%. On December 31, 1999, the MFI Group has only 1010 qualified employees. The MFI Group fails to meet its jobs commitment level of 1035 for 1999 (115% of 900). The MFI Group may nevertheless use the single sales factor apportionment formula set forth in 830 CMR 63.38.7(4)(a) because it can demonstrate that its failure to meet its jobs commitment level was a direct result of an adverse economic condition that occurred that year.

On December 31, 2000, the MFI Group has 1047 qualified employees. Because the MFI Group demonstrated adverse economic conditions in its 1999 taxable year, it may reduce its jobs commitment level for the 2000 taxable year by five percent of its base period employment level. Thus the MFI Group's job commitment level for the 2000 taxable year is 1035 (115% of 900) and not 1080 (120% of 900), as would be the case in the absence of adverse economic conditions. The MFI Group meets the job growth requirement for the 2000 taxable year because its employment level exceeds its job commitment level.

(6) Reporting Requirements

(a) Annual Reporting Requirement. A mutual fund service corporation that is required to apportion its taxable net income derived from mutual fund sales to Massachusetts using the single factor apportionment percentage prescribed by 830 CMR 63.38.7(4)(a), must report certain information relating to its business operations to the Commissioner on an annual basis. Such information must be reported to the Commissioner, on a schedule prescribed by the Commissioner, and the schedule must be included in the mutual fund service corporation's annual tax return on which income derived from mutual fund sales is reported. All information supplied will be confidential under M.G.L. c. 62C, § 21.

(b) Record Retention. For each tax year in which a mutual fund service corporation uses the single factor apportionment percentage prescribed by 830 CMR 63.38.7(4)(a), the mutual fund service corporation must maintain general ledger trial balances or other suitable records that identify its income producing activities and the costs associated with them.

REGULATORY AUTHORITY
830 CMR 63.38.7: M.G.L. c. 14, § 16(1); M.G.L. c. 62C, § 3; M.G.L. c. 63, § 38(m)

REGULATORY HISTORY
Date of Promulgation: 3/31/00
Amended: 10/6/2006 (Sections 2, 4)
Amended: 11/28/08 (Sections (3)(a) and (3)(b))