I. Dividends received from Regulated Investment Companies (RICs).
The legislature has recently amended Chapter 63, §§ 2 and 30.4 to clarify that dividends received from a Regulated Investment Company (RIC) by a financial institution or a corporation are excluded from the definition of dividends eligible for the dividends received deduction. St. 2003, c. 143, §§ 4-5.

1. The financial institutions excise.
The legislation adds the following sentence to the definition of "net income" as it relates to the financial institutions excise: "Any dividend received directly or indirectly from a regulated investment company, as provided in sections 851 to 855, inclusive, of the [Internal Revenue] Code, shall not be included as part of the dividends received deduction otherwise available under this section." St. 2003, c. 143, § 4. As a practical matter, many dividends received from RICs were already excluded from the dividends received deduction. A financial institution that invests in a publicly traded RIC often owns less than 15% of the voting stock of the RIC, thus making dividends received ineligible for the deduction. G.L. c. 63, § 1 "Net income." The new law clarifies the treatment of dividends from RICs where the financial institution owns fifteen percent or greater of the voting stock of the RIC.

2. The excise on business and other corporations.
The legislation adds the following sentence to the definition of "net income" as it relates to the excise on business and other corporations: "Any dividend received directly or indirectly from a regulated investment company, as provided in sections 851 to 855, inclusive, of the [Internal Revenue] Code, shall not be included as part of the dividends received deduction otherwise available under paragraph (1) of subsection (a) of section 38." St. 2003, c. 143, § 5. As a practical matter, many dividends received from RICs were already excluded from the dividends received deduction. A corporation that invests in a publicly traded RIC often owns less than 15% of the voting stock of the RIC, thus making dividends received ineligible for the deduction. G.L. c. 63, § 38(a)(iii). The new law clarifies the treatment of dividends from RICs where the corporation owns fifteen percent or greater of the voting stock of the RIC.

3. The "directly or indirectly" language.
The "directly or indirectly" language in the statute ensures that if the ultimate source of a dividend is a RIC, whether or not that dividend passes through a subsidiary or affiliate of the taxpayer, the amount of the RIC distribution may not be included in the dividends received deduction at any level.

II. Dividends Received from Real Estate Investment Trusts (REITs).
Under federal and state law, distributions from REITs are ineligible for inclusion in the dividends received deduction for financial institutions and corporations. See St. 2003, c. 4, §§ 12, 14. See also TIR 03-9. The recent statute clarifies this rule by excluding all dividends received by a financial institution or a corporation from a REIT whether received directly or indirectly. St. 2003, c. 143, §§ 4, 5. The "directly or indirectly" language ensures that if the ultimate source of a dividend is a REIT, whether or not that dividend passes through a subsidiary or affiliate of the taxpayer, the amount of the REIT distribution may not be included in the dividends received deduction at any level.

III. Effective date.
This legislation applies to taxable years beginning on or after January 1, 2004. St. 2003, c. 143, § 9.

 

//s/Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue

 

AL:LEM:dt

April 8, 2004

TIR 04-10