The supplemental budget signed into law March 5, 2003 contains several provisions addressing tax issues as they relate to the taxation of Real Estate Investment Trusts (REITs). St. 2003, c. 4, §§ 12, 14, 23, 71, 86, 90. This Technical Information Release explains the effect of this legislation. The term REIT has the same meaning in Massachusetts that it has under federal law, as appearing in I.R.C. (Code) §§ 856 - 859, inclusive.
A. Clarification of the dividends received deduction.
The Legislature has stated its intention to clarify existing statutes with respect to the treatment of REIT distributions in calculating the dividends received deduction available under G.L. c. 63. St. 2003, c. 4, § 71. Those statutes have been interpreted recently by some taxpayers as substantially exempting from taxation REIT distributions received. Id. For those subject to the excises under chapter 63, and in conformity with section 243(d) of the Internal Revenue Code, REIT distributions are not to be treated as dividends; further, they have never been exempt from taxation or partially exempt. Id. This statute has the effect of affirming the principle stated in Departmental Directive 02-12, "Tax treatment of REITs," that REIT distributions are subject to taxation at the recipient level. Cf. St. 2003, c. 4, § 71. This legislation was made effective at least back to tax years ending on or after December 31, 1999. St. 2003, c. 4, § 88.
2. Statutory revisions related to REITs with respect to the dividends received deduction.
a. The financial institutions excise.
The definition of "net income" in G.L. c. 63, § 1 (the financial institutions excise) has been revised to add the following language:
The term 'dividends received' shall be treated in the same manner as under the Code, as amended and in effect for the taxable year. For purposes of this section, any dividend received from a [REIT], for the taxable year of the trust in which the dividend is paid, shall not be treated as a dividend.
St. 2003, c. 4, § 12.
b. The excise on business and other corporations.
The definition of "net income" in G.L. c. 63, § 30.4 (the corporate excise) has been revised to add the following language:
For purposes of this section, a dividend received from a [REIT], for the taxable year of the trust in which the dividend is paid shall not be: (i) treated as a dividend; and (ii) included as part of the dividends received deduction otherwise available to the taxpayer under paragraph (1) of subsection (a) of section 38.
St. 2003, c. 4, § 14.
B. Treatment of REITs in security corporation classification.
1. General Rule.
In general, a corporation may qualify for classification and tax treatment as a security corporation if it is engaged exclusively in buying, selling, dealing in, or holding securities on its own behalf and not as a broker. G.L. c. 63, § 38B. Effective July 1, 2003, in determining whether an entity can be taxed as a security corporation under G.L. c. 63, § 38B, an ownership interest in a REIT that is a related member (as defined below) shall not be considered a qualifying security. St. 2003, c. 4, §§ 23, 90. The effect of this new provision is to exclude a corporation with such an ownership interest in a REIT from taxation as a security corporation.
2. Definition of "related member."
The term "related member" is defined in G.L. c. 63, § 31I, added by St. 2003, c. 4, § 17, effective March 5, 2003. A related member is a person (which includes any entity, notwithstanding its form of organization), that during all or any portion of the taxable year has one of three characteristics:
(1) The person is a related entity, as defined in G.L. c. 63, § 31I. This generally will apply if the taxpayer owns at least fifty percent of the REIT's stock, or if the REIT owns at least fifty percent of the taxpayer's outstanding stock. The attribution rules of the Code apply for purposes of determining whether the ownership requirements of this definition have been met.
(2) The person is a component member under I.R.C. § 1563(b) (relating to controlled groups of corporations under 1986 Code Subtitle A, ch. 6B, Part II); or
(3) The person is one to or from whom there is an attribution of stock ownership in accordance with I.R.C. § 1563(e).
G.L. c. 63, § 31I.
By this statute, the Legislature has clarified its intent with respect to the taxation of distributions that are made to shareholders that are subject to the excises defined in chapter 63 of the General Laws, such as financial institutions and business corporations. This legislation affirms Departmental Directive 02-12, in which the Department advised taxpayers that REIT income is treated generally the same under Massachusetts law as under federal law, with most income subject to single level taxation at the recipient level. Directive 02-12 continues in force without amendment. In addition, the statute changes the definition of security corporation to exclude those entities that have an ownership interest in a related entity that is a REIT.
Commissioner of Revenue
May 30, 2003