Under recent changes to the Massachusetts corporate excise, certain mutual fund service corporations are required to apportion their taxable net income to Massachusetts using a single sales factor apportionment formula. (1) See G.L. c. 63, § 38(m) as amended by St. 1996, c. 264, § 4. Under Section 8(a) of Chapter 62, corporate trusts are generally subject to the personal income tax, but are required to determine their taxable net income using the apportionment provisions set forth in the corporate excise. This Technical Information Release (TIR) announces that the Department of Revenue will apply Section 38(m) to qualifying corporate trusts. Such corporate trusts are, therefore, required to use the single sales factor apportionment formula provided in Section 38(m) if they meet all of the eligibility requirements of Section 38(m). For purposes of this TIR, a corporate trust is an association organized by the execution and delivery of a declaration of trust under which the beneficial interest in the association is divided into transferable units or shares. See G.L. c. 182, § 1.
A. Corporate Apportionment
Under G.L. c. 63, § 38(c), a corporation, other than a defense corporation, manufacturing corporation or mutual fund service corporation, that has income from business activity that is taxable both within and without Massachusetts is required to apportion its taxable net income to Massachusetts using a three factor apportionment formula. (2) Effective July 1, 1997, a mutual fund service corporation that meets all the requirements of G.L. c. 63, § 38(m) must apportion its taxable income to Massachusetts by multiplying it by 100 percent of the sales factor. (3) A mutual fund service corporation is defined as "any corporation doing business in the commonwealth which derives more than 50% of its gross income from the provision directly or indirectly of 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." G.L. c. 63, § 38(m).
B. Apportionment by Corporate Trusts
Under G.L. c. 62, § 8(a), the Massachusetts adjusted gross income of a corporate trust is determined as if it were a resident natural person. A corporate trust determines its taxable income by apportioning its adjusted gross income to Massachusetts in accordance with the provisions of G.L. c. 63, § 38. Thus, a corporate trust is subject to the personal income tax under G.L. c. 62, but it determines taxable income under Chapter 62 by applying the same apportionment formula that it would if it were a corporation.
G.L. c. 62, § 8(a) does not specify which of the apportionment methods contained in G.L. c. 63, § 38, apply to corporate trusts. It is the position of the Department of Revenue that, effective July 1, 1997, a corporate trust that meets all the requirements of G.L. c. 63, § 38(m) must use the single sales factor apportionment formula set forth in Section 38(m) to determine the amount of its income subject to Massachusetts taxation under Chapter 62.
Commissioner of Revenue
February 13, 1998
1. Except for defense corporations, manufacturing corporations and corporate trusts referred to in this TIR, all other entities that are required to apportion their taxable income to Massachusetts under the formula provided in G.L. c. 63, § 38 must apportion their income according to the three factor receipts, payroll and sales factor formula under G.L. c. 63, § 38(c). (return to text)
2. The formula requires a corporation to multiply its taxable net income by a fraction, the numerator of which is the sum of the property factor, the payroll factor, and two times the sales factor, and the denominator of which is four. The definitions of the terms property factor, payroll factor and sales factor are found in G.L. c. 63, § 38(d), (e), (f). (return to text)
3. A mutual fund service corporation determines its sales factor by multiplying its total sales of mutual fund services from each separate regulated investment company (RIC) from which it receives fees for services 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 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. The sum of these separate computations equals the total sales of the mutual fund service corporation assigned to Massachusetts. See G.L. c. 63, § 38(f). (return to text)