I.  Introduction

On July 11, 2016 the Massachusetts Supreme Judicial Court (“SJC”) affirmed the decision of the Appellate Tax Board[1] (“ATB”) in favor of the Commissioner of Revenue (“Commissioner”) in Bank of America, N.A. v. Commissioner of Revenue, 474 Mass. 702 (2016) (“BOA”). The issue in BOA was whether the Bank of America (“Bank”),[2] acting as a corporate trustee of the inter vivos trusts at issue, was an “inhabitant” of the Commonwealth within the meaning of G.L. c. 62, §§ 1(f)(2), 10(c), and 14, for purposes of determining whether the trusts were subject to the taxing jurisdiction of Massachusetts. The SJC ruled in BOA that the Bank was an “inhabitant” of the Commonwealth within the meaning of those three statutes based on the Bank’s presence in the Commonwealth and its trust-related activities performed generally in the Commonwealth and specifically on behalf of the trusts at issue. This Technical Information Release (“TIR”) explains the Commissioner’s administration of the SJC’s ruling in BOA.

II.  Relevant Facts in BOA

The facts in BOA were stipulated. Each of the trusts at issue in the case was an irrevocable inter vivos trust created by a grantor who was an inhabitant of the Commonwealth at the time of its creation. No beneficiary to whom income was payable was an inhabitant of the Commonwealth and none of the trusts had any Massachusetts source income taxable under G.L. c. 62, § 5A during the tax year at issue. The income at issue was income accumulated for unborn or unascertained persons or persons with uncertain interests, which would be taxable in Massachusetts pursuant to G.L. c. 62, § 10(a) if the Bank were determined to be an inhabitant of the Commonwealth.

The Bank is a national banking association authorized to act as a fiduciary. During the year at issue in BOA it was undisputed that the Bank’s commercial domicile was in North Carolina, [3] with its principal place of business in Charlotte, North Carolina, but that it engaged in three categories of activities in Massachusetts: (1) general commercial activities conducted by the Bank in the Commonwealth; (2) activities performed in the Commonwealth related to the Bank’s trust administration business generally, rather than as they relate to any particular trust; and (3) material trust administration activities conducted by the Bank in the Commonwealth relating specifically to the trusts at issue in the case. More specifically, such activities included the following: the Bank maintained over 200 branch offices staffed by bank employees in Massachusetts, conducted general banking transactions in the Commonwealth, and performed work in the Commonwealth as a corporate trustee generally and for the particular trusts at issue. With respect to its work as a corporate trustee, the Bank operated and staffed offices to fulfill some of its obligations as trustee of the trusts at issue; maintained relationships with the beneficiaries of the trusts; decided when to make distributions of trust assets to beneficiaries; managed the assets of the trusts; provided places for execution of trust documents which named the Bank or U.S. Trust as fiduciary; researched and discussed issues involving the trusts at issue, or trusts in general, and discussed such issues with grantors, beneficiaries and/or their representatives; and consulted with clients and prospective clients of other trusts about the Bank's trust services.

III. Relevant Statutes in BOA

BOA involved the interpretation and interplay of three statutes: G.L. c. 62, §§ 1(f)(2), 10(c), and 14. [4]

Under G.L. c. 62, § 10(c), an inter vivos trust that has at least one trustee who is an inhabitant of the Commonwealth is subject to the taxing jurisdiction of Massachusetts if it also has a grantor that: (1) was a Massachusetts inhabitant when the trust was created; or (2) resided in Massachusetts during any part of the tax year for which the income is computed; or (3) died a Massachusetts inhabitant.

Section 1 of G.L. c. 62 contains general definitions applicable to chapter 62, including the term “inhabitant.” That section in relevant part states:
 

When used in [chapter 62] the following words or terms shall, unless the context indicates otherwise, have the following meanings: 

. . . (f) ‘Resident’ or ‘inhabitant,’ (1) any natural person domiciled in the commonwealth, or (2) any natural person who is not domiciled in the commonwealth but who maintains a permanent place of abode in the commonwealth and spends in the aggregate more than one hundred eighty-three days of the taxable year in the commonwealth, including days spent partially in and partially out of the commonwealth. . . . The word ‘non-resident’ shall mean any natural person who is not a resident or inhabitant.
 

G.L. c. 62, § 1(f).

By its terms the definition of inhabitant in § 1(f) refers solely to a “natural person,” a term that does not include a corporation such as a bank. However, G.L. c. 62, § 14, the third relevant statute in the case, effectively addresses this by stating in relevant part:
 

Corporations acting as trustee or in any other fiduciary capacity shall, with respect to the income received by them in that capacity, be subject to this chapter in the same manner and under the same conditions as individual inhabitants of the commonwealth acting in similar capacities. . . .


In construing the language in § 14 quoted above, the SJC concluded in BOA that § 14 explicitly directs that corporate trustees be treated the same as individual trustees for fiduciary income tax purposes. Accordingly, the SJC concluded that the definition of “inhabitant” in § 1(f) applies equally to corporate and individual trustees. Moreover, regarding the requirement of § 10(c) – that at least one trustee of a trust be an inhabitant of the Commonwealth – the SJC concluded that that requirement provides a context in which the definition of “inhabitant” cannot be limited to a natural person, but must be expanded to include a corporate entity.

lV.  SJC’s Ruling in BOA 

In construing the definitional elements of G.L. c. 62, § 1(f) as they relate to corporate trustees, the SJC in BOA focused solely on the terms of § 1(f)(2). Section 1(f)(1), with its reference to Massachusetts domicile, was not at issue in the case as the Bank’s commercial domicile is North Carolina.

Under § 1(f)(2), a natural person who is not a Massachusetts domiciliary qualifies as an “inhabitant” of the Commonwealth if that individual maintains a permanent place of abode and spends more than 183 days in Massachusetts. Construing that definition, the SJC in BOA ruled that a corporate trustee domiciled outside of Massachusetts will qualify as an “inhabitant” of the Commonwealth within the meaning and for the purposes of G.L. c 62, §§ 1(f)(2), 10(c), and 14 if it:
 

(1) maintains an established place of business in the Commonwealth at which it abides, i.e., where it conducts its business in the aggregate for more than 183 days of a taxable year; and (2) conducts trust administration activities within the Commonwealth that include, in particular, material trust activities relating specifically to the trust or trusts whose tax liability is at issue.
 

BOA, 474 Mass. at 712.

With respect to its first general requirement, the SJC held that for a corporate trustee such as a bank to be an “inhabitant” of the Commonwealth within the meaning of the three interrelated statutes at issue,
 

there must be proof that the corporation has an established presence in the Commonwealth through, e.g., maintaining a permanent office or offices in Massachusetts and engaging in regular business activities here, for more than one-half of the tax year at issue. Such a presence corresponds to the presence of an individual inhabitant at a permanent place of abode for more than 183 days in a year.

Id.

With respect to its second trust-related activities requirement, the SJC held that the corporation, acting in its capacity as corporate trustee, must also conduct trust administration activities in Massachusetts, including activities that are centered on the trust or trusts whose tax liability is at issue. Id.

The Bank suggested a narrow test be applied for determining whether a corporate trustee domiciled outside Massachusetts is an inhabitant of the Commonwealth, “one that turns on whether there is a predominant corporate presence in Massachusetts, which might be measured by the location of employees, or the location of assets, or the source of corporate revenue.” Id. at 711. The SJC rejected that test. Rather, the SJC held that there must be “a focus on the actions within the Commonwealth of a corporation acting as a corporate trustee, including specifically acting as trustee of the trust or trusts potentially subject to fiduciary income tax liability. . . .” Id. at 712.

V.  Administration of SJC’s Ruling in BOA

In applying the SJC’s ruling in BOA to determine whether a corporate trustee is an “inhabitant” of the Commonwealth for purposes of G.L. c 62, §§ 1(f)(2), 10(c), and 14, and, thus, for purposes of determining whether a particular inter vivos trust is subject to the taxing jurisdiction of Massachusetts, the Commissioner will consider a corporate trustee to be an inhabitant of the Commonwealth, if, upon evaluating the specific facts in each case the corporate trustee (1) maintains an established presence or place of business in the Commonwealth for more than 183 days in the taxable year at issue and (2) engages in material trust activities in the Commonwealth related specifically to the trust or trusts whose tax liability is at issue.

The determination of whether a corporate trustee engages in material trust activities in Massachusetts with respect to a particular trust is a question of fact and may be established even if the majority of the trust-related activity performed on behalf of the trust occurs outside the Commonwealth. Additionally, the location in Massachusetts of the trust officer or portfolio manager assigned to a particular trust indicates material trust activity in the Commonwealth, but depending upon the particular facts, material trust activity may occur in Massachusetts even if those individuals are located elsewhere.

In administering the material trust activity requirement, the Commissioner will look to whether there are “material” trust activities conducted in Massachusetts by the corporate trustee on behalf of a particular trust at issue in making a determination as to whether a corporate trustee is an inhabitant of Massachusetts. In making this determination the Commissioner will construe the term “material” according to the ordinary and approved usage[5] of that term to mean important, or pertinent to the matter at issue.[6]  Accordingly, “material trust activities” performed in the Commonwealth that the Commissioner may consider include, but are not limited to, those considered by the SJC in BOA, any one of which, alone or in any combination, the Commissioner may consider determinative, depending on the facts in each case. Material trust activities the Commissioner may consider include the following:

  • trust marketing and sales activities (e.g., meeting with prospective and existing clients to discuss fiduciary services offered, creating proper records and other procedures for opening and administering trust accounts, preparing trust agreements and other trust-related or investment documents, and collecting trust assets and transferring them into the trust);
  • client interactions and related activities (e.g., meeting or otherwise communicating with a trust creator to understand his or her intentions in establishing the trust; engaging in discussions with trust beneficiaries to become familiar with their needs and circumstances so as to balance the needs of all beneficiaries or for other purposes; and consulting with co-trustees);
  • administration and oversight activities for ongoing trusts (e.g., making required or discretionary distributions to beneficiaries; periodic review and execution of the terms of the trust; evaluating and making decisions on investments, discretionary requests, and clients’ needs; collecting trust assets; and enforcing all rights or claims of the trust);
  • investment and asset management activities (e.g., preserving trust assets, making trust property productive, and investing and managing trust funds to produce income for current beneficiaries and remaindermen);
  • recordkeeping and trust accounting activities (e.g., preparing periodic reports and statements for beneficiaries and other interested parties, and maintaining accurate receipt, distribution, and expenditure records);
  • tax-related activities (e.g., filing tax returns and delivering tax information to beneficiaries; gathering tax information and researching tax related issues; exercising elections that have federal, state, and local tax consequences); and
  • trust termination activities (e.g., exercising powers appropriate to winding up the administration of a trust and distributing the trust property to persons entitled to it).



/s/Michael J. Heffernan
Michael J. Heffernan
Commissioner of Revenue
 

MJH:RHF:pls

November 29, 2016

TIR 16-14



[1]  Bank of America, N.A. v. Commissioner of Revenue, A.T.B. Nos. C314596 thru C314598 and C314606 thru C314636 (2015).
[2]  Although United States Trust Company National Association (“US Trust”) had originally served as trustee or co-trustee of some of the trusts involved in the appeal before the SJC, as a result of a merger between US Trust and the Bank, effective February 22, 2008, the Bank replaced US Trust as successor trustee or co-trustee of those trusts.  
[3]  US Trust is domiciled in New York.
[4] Although the case did not involve the consideration of G.L. c. 62, § 6 (a), under that section, as noted by the SJC in BOA in footnote 19, “an inter vivos trust subject to the fiduciary income tax in Massachusetts would be entitled to a credit for any taxes paid with respect to that income to another State. . . .”
[5] The SJC in BOA did not define the term “material.”
[6] See, e.g., Webster’s Deluxe Unabridged Dictionary (Second Edition) where “material” is defined in relevant part to mean “of or pertaining to matter,” and “important, essential, or pertinent (to the matter under discussion).”