A. Introduction

The federal Small Business Job Protection Act of 1996 (the "Act"), amended Internal Revenue Code § 1361 to allow federal S corporations to own qualified S corporation subsidiaries. See I.R.C. § 1361(b)(3). The Department issued Technical Information Release 97-6 to explain how the changes to the federal law affected the Massachusetts tax treatment of S corporations. This Technical Information Release ("TIR") explains the Massachusetts filing requirements for qualified S corporation subsidiaries that are domestic or foreign corporations.

B. Filing Requirements

1. Qualified S Corporation Subsidiaries
Generally, a qualified S corporation subsidiary that is doing business in Massachusetts must file either Form 355S-A, Domestic S Corporation Excise Return, or Form 355S-B, Foreign S Corporation Excise Return. The qualified S corporation subsidiary must report its taxable tangible property or net worth and the minimum corporate excise on Form 355S-A or 355S-B. However, a qualified S corporation subsidiary is not, itself, subject to the net income measure of the corporate excise, since all of its income is treated as that of its parent under I.R.C. § 1361(b)(3). Therefore, the qualified S corporation subsidiary should report zero income taxable in Massachusetts when completing Form 355S-A or Form 355S-B.

The qualified S corporation subsidiary must attach the following items to its corporate excise return:

Completed Schedule F, Income Apportionment, using the subsidiaries' separate apportionment factors;
Statement asserting that no federal return is required to be filed by the qualified S corporation subsidiary and listing the name and federal identification number (FID) of the qualified S corporation subsidiary's parent corporation;
List of all subsidiaries of its parent company and their respective FID numbers; and
Copy of the parent company's U.S. Form 1120S for the taxable year.

2. S Corporation Parents
An S corporation parent must take into account the activities of all of its qualified S corporation subsidiaries if the parent is doing business in Massachusetts or if any of its qualified S corporation subsidiaries are doing business in Massachusetts. See TIR 97-6.The parent must file either Form 355S-A, Domestic S Corporation Excise Return, or Form 355S-B, Foreign S Corporation Excise Return to aggregate its total receipts and determine the net income measure of the corporate excise. Generally, the S corporation parent is liable for the tax on the income measure, but the qualified S corporation subsidiaries, including those carrying on business in Massachusetts, are not.

The parent must complete separate Income Apportionment Schedules (Schedule F) for the net income measure of the excise and the taxable tangible property or net worth measure of the excise. The Schedule F for the net income measure of the excise must take into account the activities of all of the parent's qualified S corporation subsidiaries, including those that are not doing business in Massachusetts. The Schedule F for the taxable tangible property or net worth measure of the excise must take into account only the parent's own activities.

Frederick A. Laskey
Commissioner of Revenue

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TIR 99-10
June 24, 1999