June 9, 2000

I. Introduction

Legislation passed in 1995 changed the taxation of banks and financial institutions by replacing the former tax on Massachusetts banks with an excise on a broader category of entities falling within the new definition of "financial institution" now contained in G. L. c. 63, § 1. See St. 1995, c. 81, An Act Relative to the Equitable Taxation of Financial Institutions. The new law contained a "grandfather" provision that allowed certain pre-existing businesses not previously taxed as banks that fall under the new definition of financial institution to continue filing corporate tax returns (Forms 355A/B), or, as applicable, Forms 3 (partnerships), 3F (corporate trusts), 355S-A or 355S-B (S corporations) for a four-year period. For tax years beginning on or after January 1, 1999, these formerly grandfathered entities became subject to the new filing requirements of the financial institution excise and must file Form 63 FI. See St. 1995, c. 81, § 7, uncodified. This Technical Information Release (TIR) explains what types of pre-existing entities are no longer grandfathered entities and are, as such, subject to the financial institution excise.

II. Definition of Financial Institution

For tax years beginning on or after January 1, 1999, entities formerly filing under G. L. c. 62 or c. 63, §§ 30-42 that fall within the new definition of financial institution are required to file under G. L. c. 63, §§ 1, 2 and 2A. These can include domestic and foreign corporations, S corporations, qualified subchapter S subsidiaries, corporate trusts, partnerships, and Limited Liability Companies.

The new definition applies to a broad range of entities, including the following:

any bank, banking association, trust company, federal or state savings and loan association, including banks for cooperatives organized under the United States Farm Credit Act of 1933, existing by authority of the United States, or any state, or a foreign country, or any law of the commonwealth; any other institution, association or entity which has deposits or accounts insured under the Federal Deposit Insurance Act or by the Federal Deposit Insurance Corporation, or which is a member of a federal Home Loan Bank, or any other bank or thrift institution engaged in the business of receiving deposits, or any corporation organized under the provisions of 12 U.S.C. §§ 611-631 and 12 U.S.C. § 3101;
any corporation that is a bank holding company or a savings and loan holding company, including the following:

  • any subsidiary which participates in the filing of a federal consolidated return;

  • any corporation subject to supervision by the Massachusetts Division of Banks, including but not limited to collection agencies, corporations making small loans, credit card issuers, out-of-state banking associations or corporations transacting business in Massachusetts, check cashing businesses, organizations providing services to financial institutions, corporations purchasing or holding retail installment sales contracts for motor vehicles, insurance premium finance agencies, sales finance companies which purchase retail installment sales agreements or revolving credit agreements from one or more retail sellers, and mortgage lenders and brokers; or

  • any other corporation organized under the laws of the United States, the commonwealth or any other state or a foreign country, in substantial competition with financial institutions described in (a) - (d) which derives more than 50% of its gross income, excluding nonrecurring, extraordinary items, from loan origination, from lending activities (including discounting obligations), or from credit card activities.
    See G. L. c. 63, § 1.
Credit unions as described in G. L. c. 171, § 1 and credit unions organized under comparable laws of other states are excluded from the definition of financial institution. See G. L. c. 63, § 1 para. 10(b). Federally chartered credit unions are exempt from tax under the Federal Credit Union Act, 12 U.S.C. § 1768.

III. Tax Rate

The tax rate applicable to the taxable net income of financial institutions is 10.50% for taxable years beginning in 1999. See G. L. c. 63, § 2. The minimum excise is $456.00. See id. There is no property or net worth measure of the excise.

IV. Business Entities Affected by the Definition of Financial Institution

A. Domestic or Foreign Corporations Previously Taxed Under Chapter 63, Sections 30-42
Beginning in 1999, domestic and foreign corporations, previously taxed under G. L. c. 63, §§ 30-42, that meet the definition of a financial institution as set forth in G. L. c. 63, § 1 are required to file under G. L. c. 63, §§ 1, 2, and 2A. (1) Generally, these entities will meet either section (d) or (e) of the definition.

Upon classification by the Commissioner, however, any corporation that meets the definition of a financial institution that is also classified as a security corporation, will be subject to the excise under G. L. c. 63, § 38B(a) or (b), and not be subject to tax under G. L. c. 63, § 2.

B. S Corporations
Beginning in 1999, S corporations that meet the definition of a financial institution will be subject to tax at the entity level as financial institutions. The shareholders will remain subject to tax on their distributive share income at the shareholder level. Prior to 1999, except for S corporations with total receipts of six million dollars or more, tax was generally only imposed at the shareholder level. (2)

An S corporation is a financial institution for Massachusetts tax purposes if it meets the definition of financial institution as set forth in G. L. c. 63, § 1. Generally, these entities are most likely to fall within either section (d) or (e) of the definition. No exception is made for S corporations (as there is for credit unions, which are explicitly excluded from the definition). Thus, the Massachusetts statutory definition of financial institution encompasses S corporations engaged in a lending or similar business.

At the shareholder level, S corporation shareholders will continue to be taxed on their distributive share of S corporation income pursuant to G. L. c. 62, § 17A(a). Section 17A(a) provides:

An inhabitant of the commonwealth who is a shareholder of an S corporation, as defined under section thirteen hundred and sixty-one of the Code and whether or not such S corporation is subject to tax under chapter sixty-three, shall be subject to the taxes imposed by this chapter on his distributive share of the corporation's items of income, loss or deduction, as provided under subchapter S of the Code . . . .

A non-resident shareholder of any previously grandfathered S corporation taxable under G. L. c. 63 is subject to tax under G. L. c. 62 on his distributive share of the S corporation's Massachusetts source income. See G. L. c. 62, § 17A(b).

Massachusetts S corporations that meet the definition of financial institution should file Schedules S and SK-1 when filing Form 63 FI. In this instance, information included on Schedules S and SK-1 will come from Form 63 FI, and not from Form 355S-A or B.

C. Qualified Subchapter S Subsidiaries ("QSUBs")
A QSUB is not treated as a separate corporation for federal income tax purposes. Rather, all of the QSUB's assets, liabilities, and items of income, deduction and credit are treated as those of the parent entity. If more than 50% of the combined gross income, excluding non-recurring extraordinary items, of the parent and QSUB is derived from loan origination, from lending activities (including discounting obligations), or from credit card activities, the parent will be subject to tax as a financial institution. (3) See G. L. c. 63, § 1.

If the 50% test is met, the parent is a financial institution and must file Form 63 FI. (4) The minimum financial institution excise is $456.00. There is no non-income measure for the financial institution excise. See G. L. c. 63, § 2. If the 50% test is not met, the parent must file for Massachusetts tax purposes as an S corporation or as a corporate trust, as the case may be. The QSUB, regardless of whether its parent is a financial institution, must file its own return because it is a separate corporate entity for Massachusetts purposes. See TIR 97-6. It must either file Form 63 FI under G. L. c. 63, § 2 and pay the minimum corporate excise as a financial institution, or file, as applicable, Form 355-A or B under G.L. c. 63, §§ 32 or 39 and pay the greater of the excise due under the non-income measure or the minimum excise.

D. Corporate Trusts
Beginning in 1999, certain corporate trusts that are bank subsidiaries will be taxed as financial institutions under G. L. c. 63. Prior to 1999, these entities were generally not subject to tax as they fell under the exemption from the trust level tax available to corporate trusts pursuant to G. L. c. 62, § 8(b).

Generally, corporate trusts engaged in business in Massachusetts are subject to tax under G. L. c. 62, § 8(a) unless exempted by G. L. c. 62, § 8(b) which provides, in part, that the general provisions contained in G. L. c. 62, § 8(a) do not apply to regulated investment companies, real estate investment trusts, holding companies, and REMICs (real estate mortgage investment conduits). "Holding company" is defined as any corporate trust in which ninety per cent of the book value of its assets, at the end of the taxable year, are securities and at least seventy-five percent of such securities are issued by affiliates and at least ninety percent of its Massachusetts gross income is Part A gross income and Part C gross income. See G. L. c. 62, § 8(b).

A corporate trust is a financial institution for Massachusetts tax purposes if it meets the definition of financial institution as set forth in G. L. c. 63, § 1. Corporate trusts that are subsidiaries of bank holding companies that participate in the filing of a consolidated return of income to the federal government meet section (c) of the definition. Consequently, a corporate trust, which is a subsidiary of a bank holding company that participates in the filing of a consolidated return of income to the federal government, is required to file Form 63 FI.

E. Partnerships
Beginning in 1999, with the exception set out below, partnerships that meet the definition of financial institution will be subject to tax as financial institutions. The partners will remain subject to tax on their distributive share income under G. L. c. 62 or G. L. c. 63, as applicable. Prior to 1999, no tax was imposed at the partnership level; the partners were individually subject to tax.

A partnership is a financial institution for Massachusetts tax purposes if it meets the definition of financial institution as set forth in G. L. c. 63, § 1. Generally, these entities may meet either section (a) or (b) of the definition. Partnerships that meet the definition are taxed at both the individual partner level pursuant either to G. L. c. 62, § 17 or G. L. c. 63 and 830 CMR 63.38.1(13), as applicable, and the partnership level pursuant to G. L. c. 63, §§ 1-2A. Partnerships that do not qualify as banks and that do not take insured deposits will not meet the definition of financial institution.

A non-resident individual partner of any partnership taxable under G. L. c. 63, §§ 1-2A is subject to tax under G. L. c. 62 on his distributive share of Massachusetts source income. See G. L. c. 62, § 17(b).

Legislation passed in 1999 provides an exception to the financial institution excise for partnerships under the supervision of the Massachusetts Commissioner of Banks as of January 1, 1995. See St. 1999, c. 127, § 196. A partnership that is otherwise subject to the definition of financial institution, which as of January 1, 1995, was subject to supervision and examination by the Commissioner of Banks and whose partners have been subject to tax with respect to income from the partnership under the provisions of G. L. c. 62 and have been filing in the commonwealth on that basis, will continue to be so taxed and will not be taxed as a financial institution pursuant to G. L. c. 63. The apportionment formula set forth in G. L. c. 63, § 2A applies for purposes of determining a non-resident partner's distributive share of Massachusetts source income of such partnerships. See St. 1999, c. 127, § 196.

Massachusetts partnerships that meet the definition of financial institution and that do not fall within the exception set out above, should file Schedule 3K-1 when filing Form 63 FI. In this instance, information included on Schedule 3K-1 will come from Form 63 FI.

F. Limited Liability Companies (LLCs)
In determining the Massachusetts income tax treatment of (1) a non-Massachusetts single-member LLC (5) and (2) either a Massachusetts or non-Massachusetts LLC with two members or more, the Commissioner of Revenue adopts the LLCs federal income tax classification, as determined under the federal "check-the-box" rules in Treasury Regulation § 301.7701. (6)

Consequently, beginning in 1999, an LLC electing to be taxed as a corporation will be treated as such under the definition of a financial institution contained in G. L. c. 63, § 1. See supra Section IV, A. Likewise, an LLC electing to be taxed as a partnership will also be treated as a partnership for purposes of applying the definition of a financial institution. See supra Section IV, E.

A non-Massachusetts single-member LLC electing to be taxed as a sole proprietorship, or as a branch or division of its owner, will be treated as such under the definition of a financial institution contained in G. L. c. 63, § 1. Because sole proprietorships are not included in the definition of a financial institution, they are not required to file Form 63 FI. A non-Massachusetts single-member LLC electing to be taxed as a branch or division of the owner, however, will be taxed as the owner is taxed. Consequently, if the owner is required to file Form 63 FI, the LLC's income will be includable on the owner's return.

/s/Frederick A. Laskey
Frederick A. Laskey,
Commissioner of Revenue

June 9, 2000
TIR 00-695371

Footnotes:

1. Domestic and foreign corporations that meet the definition of financial institution are no longer required to file Forms 355A or 355B as business corporations. Rather, they are now required to file Form 63 FI as a financial institution.

2. S corporations with total receipts for the taxable year in excess of six million dollars that do not meet the definition of financial institution are subject to an entity level tax pursuant to G. L. c. 63, § 32D. S corporations that meet the definition of financial institution are subject to an entity level tax pursuant to G. L. c. 63, §§ 1, 2 and 2A and are not subject to the entity level tax under G. L. c. 63, § 32D.

3. The parent may also be classified as a financial institution under one of the other tests specified in G. L. c. 63, § 1. A QSUB of a corporate trust parent, however, will avoid the financial institution excise so long as the corporate trust parent is not itself a financial institution as discussed in Section IV, D. See LR 99-17.

4. Nexus with an out-of-state parent of a QSUB exists by virtue of the QSUB's physical presence in Massachusetts. Generally, the out-of-state parent is viewed as being "engaged in business" in Massachusetts within the meaning of G. L. c. 63, § 1 either because it has "(b) . . . representatives . . . conducting business activities on its behalf in the commonwealth," or is "(f) regularly receiving interest income from loans secured by tangible personal or real property located in the commonwealth." G. L. c. 63, § 1 para. 9.

5. LLCs formed under the Massachusetts Limited Liability Company Act, G. L. c. 156C, are required to have two or more members at the time of formation and at all times thereafter.

6. See TIR 97-8. Prior to January 1, 1997, the IRS did not formally recognize single-member LLCs. Effective January 1, 1997, the federal check-the-box rules now allow single member LLCs. This change enables single member LLCs to elect either to be taxed as corporations or to be disregarded as entities separate from their owners, in which case they are treated as a sole proprietorship, branch or division of the owner. LLCs with two members or more may elect to be taxed as partnerships or as corporations. Massachusetts adopts the federal income tax classification of LLCs.