1. The new legislation
The definition of "financial institution" subject to the financial institution excise in G.L. c. 63, § 1 has changed. The term now excludes "a diversified savings and loan holding company unless it satisfies the definition of a financial institution" elsewhere in § 1. St. 2003, c. 143, § 3. The statute is effective December 4, 2003. St. 2003, c. 143.
2. The effect of the new legislation
The definition of "financial institution" in G.L. c. 63, § 1 includes "any corporation . . . registered as a savings and loan holding company under federal law, . . . including any subsidiary which participates in the filing of a consolidated return of income to the federal government." A "savings and loan holding company" is any company that directly or indirectly controls a savings association. See 12 U.S.C. § 1467a(a)(1)(D)(i). Under the former statutory definition, a Massachusetts taxpayer could fall into the category of a savings and loan holding company by a mere investment in a thrift, oftentimes an institution that had no presence in Massachusetts. As a result, a company whose only activity in Massachusetts was that of a business, manufacturing, or other corporation could be subject to the financial institution excise, even though it had no activity in Massachusetts that resembled that of a financial institution.
Federal law creates a subset of the general category of savings and loan holding company, namely a "diversified savings and loan holding company," defined as "any savings and loan holding company whose subsidiary savings association . . . [represents] less than 50% of [the savings and loan holding company's] consolidated net worth at the close of its preceding fiscal year and of its consolidated net earnings for such fiscal year." 12 U.S.C. § 1467a(a)(1)(F). By generally excluding this subset from the definition of financial institution, the new legislation ensures that ordinary business, manufacturing, and other corporations are eligible to invest in thrifts without necessarily subjecting themselves to the financial institution excise.
There will be circumstances where the activities of the parent taxpayer are such that they fall within another section of the definition of financial institution, in which case the parent will be subject to the financial institution excise.
Parent is classified as a manufacturing corporation, and has historically been taxed as a manufacturing corporation. The corporate structure includes a subsidiary, SalesCo, which does not engage in manufacturing. A second subsidiary, ManufacturingCo, is classified as a manufacturing company in its own right. ManufacturingCo acquires an interest in a federal savings bank that has nexus with Massachusetts ("FSB"). As a matter of federal law, the acquisition requires Parent and ManufacturingCo to register with the federal Office of Thrift Supervision as diversified savings and loan holding companies. Parent, ManufacturingCo and SalesCo together file both a federal consolidated return and a combined Massachusetts return.
But for the statutory change Parent and ManufacturingCo would fall under the former definition of financial institution because they are savings and loan holding companies. SalesCo would also fall within the former definition because it is a subsidiary of a savings and loan holding company participating in the filing of a consolidated return. Under the new legislation, Parent and ManufacturingCo are excluded from the definition of financial institution because they are diversified savings and loan holding companies that are not themselves engaged in the activities of a financial institution. Because the parent entities fall outside the definition, subsidiaries participating in the filing of a federal consolidated return are also necessarily excluded unless they themselves are engaged in the activities of a financial institution. Thus SalesCo, which engages in no activities that would render it a financial institution, is also not subject to the financial institution excise. FSB is taxable in Massachusetts as a financial institution.
Commissioner of Revenue
April 8, 2004
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