| Date: | 05/23/2003 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Referenced Sources: | Massachusetts General Laws |
Corporate
May 23, 2003
This is in reply to your request ("Request") on behalf of (1) *************** (the "Existing Trust"), (2) certain of its portfolio series, *************** and *************** (each, a "Fund," and collectively, the "Funds"), and (3) a Massachusetts common law trust (the "New Trust") that the Funds' investment manager, *************** (the "Investment Manager") plans to form as an investment vehicle for the Funds and other persons and entities, if any, who subsequently invest in New Trust (the "Shareholders"), for rulings that New Trust will be classified as a partnership for Massachusetts tax purposes and that the Shareholders will be taxed as partners in New Trust.
STATEMENT OF FACTS
The Existing Trust is organized as a Massachusetts business trust and is registered as an open-end management investment company under the Investment Company Act of 1940. Each Fund is a portfolio series of the Existing Trust and is treated as a separate corporation for federal income tax purposes pursuant to section 851(g) of the Internal Revenue Code of 1986, as amended (the "Code"). Each Fund qualified as a regulated investment company (a "RIC") under section 851 of the Code in its most recent taxable year and intends to continue to qualify as such in all subsequent years. It is represented that each Fund has transferable shares and, for Massachusetts purposes, has been treated as a corporate trust.
The principal office of the Existing Trust and Funds is located in Massachusetts; each Fund has a *************** taxable year‑end. Each Fund has an investment management agreement with Investment Manager and sub-advisory agreements with affiliated sub‑advisors. []
The Investment Manager plans to form the New Trust as a pooled investment vehicle in which each of the Funds will invest. The New Trust will be organized as a Massachusetts common law trust formed under the terms of a declaration of trust ("Declaration"). The New Trust will be "made in the Commonwealth of Massachusetts, and . . . construed and administered according to the laws of said Commonwealth." Declaration at Art. XIII, § 6. The beneficial interest in the New Trust will be divided into nontransferable shares. Declaration at Art. III, §§ 1 and 4. At least three individuals chosen by the Investment Manager will sign the Declaration as initial trustees and will serve as trustees until such time as trustees are elected by the Shareholders (the "First Election"). Declaration at Art. IV, § 2. At the First Election, which shall occur within 60 days of the date the Declaration is signed, Shareholders will elect at least three trustees. Declaration at Art. IV, § 2, Art. VIII, § 1(a). All trustees will be elected for concurrent 3-year terms. Declaration at Art. IV, § 3. In addition, an election will be called before 3 years have elapsed if, as a result of trustee deaths, resignation or retirements and the corresponding appointment of replacement trustees by the existing trustees, the percentage of Shareholder-elected trustees falls below 75%. Id.
Shareholders owning at least 10% of the outstanding shares may, by written request, require the trustees to call a special meeting of the shareholders. Declaration at Art. VIII, §2. Shareholders representing two-thirds of its outstanding shares can remove a trustee at any time, without cause. Declaration at Art. IV, § 3(d), Art. VIII, § 1(b), Art. XIII, § 10(a). Shareholders have the power to vote on contracts by which the trustees engage an investment advisor. Declaration at Art. VIII, §§ 1 and 5, Art. VIII, § 1(c). Shareholders also have the power to terminate such contracts on 60 days notice. Declaration at Art. VII, § 5.
The New Trust may be terminated by majority Shareholder vote. Declaration at Art. VIII, § 1(d), Art. XIII, § 4.2(a)(ii). Shareholders have the power to vote on several types of amendments to the Declaration, including: any amendment that would affect their right, granted in the Declaration, to vote on specified provisions; on any amendment that would alter the maximum number of trustees permitted under the Declaration; on any amendment to the provision in the Declaration that grants the Shareholders the power to vote on amendments; on any amendment as may be required by law or by the New Trust registration statement filed with the Securities and Exchange Commission; and on any amendments submitted to the Shareholders by the trustees. Declaration at Art. VIII, §§ 1(e) and (g), Art. XIII, § 7.
It is represented that the New Trust will be taxed as a partnership for federal income tax purposes. [1]
RULINGS REQUESTED
The following rulings have been requested: (1) that New Trust will be classified as a partnership for Massachusetts tax purposes; (2) that New Trust will not be subject to tax under Chapter 62 or Chapter 63 of the General Laws; and (3) that the Shareholders will be taxed as partners in New Trust.
DISCUSSION
A. New Trust will not be a Domestic Corporation.
For Massachusetts tax purposes, a "domestic corporation" is defined as:
(i) a corporation organized under or subject to chapter one hundred and fifty‑six, chapter one hundred and fifty‑six A, chapter one hundred and fifty‑six B or chapter one hundred and eighty which has privileges, powers., rights or immunities not possessed by individuals or partnerships; (ii)a mutual holding company subject to chapter 167 H or sections 19F to 19W, inclusive, of chapter 175; or (iii) a limited liability company formed under chapter 156C which has more than 1 member which limited liability company is not classified for the taxable year as a partnership for federal income tax purposes or which has only 1 member and has elected for the taxable year to be classified for federal income tax purposes as a corporation separate from its member . . . .
G.L. c. 63, § 30(l) ("§ 30(1)"). New Trust will not be organized under or subject to the chapters enumerated in § 30(1) and accordingly will not be a domestic corporation as defined in § 30(1).
B. New Trust will not be a Foreign Corporation.
For Massachusetts tax purposes, a "foreign corporation" is defined as "every corporation, association, or organization established, organized or chartered under laws other than those of the commonwealth . . . which has privileges, powers, rights or immunities not possessed by individuals or partnerships . . . [including] a foreign limited liability company as defined in section two of chapter one hundred and fifty‑six C, which is not classified for the taxable year as a partnership for federal income tax purposes." G.L. c. 63, § 30(2).
New Trust will not be established, organized or chartered "under laws other than those of the commonwealth." New Trust will be formed under common law and the New Trust will be construed and administered according to the laws of the Commonwealth. New Trust will not be a foreign corporation.
C. New Trust will not be a Corporate Trust.
For Massachusetts tax purposes, a "corporate trust" is defined as "any partnership, association or trust, the beneficial interest of which is represented by transferable shares." G.L. c. 62, § 1(j). The beneficial interests of the New Trust will not be transferable. See Declaration at Art. III, § 4. Accordingly, New Trust will not be a corporate trust.
D. New Trust will be Taxed as a Partnership and not as a Trust.
Because New Trust will not be a domestic corporation, a foreign corporation, or a corporate trust, it will be taxed as either a partnership or a trust. Massachusetts taxes partnerships and trusts in different ways. Compare G.L. c. 62, §17 with G.L. c. 62, §10. "Notwithstanding this different treatment, [neither] the term 'partnership' nor 'trust' is defined for purposes of these provisions. To determine the proper tax treatment of the entities in question, we look generally to Massachusetts law." See Letter Rulings 93‑11, 93-12.
The question as to whether an organization formed under a declaration of trust is a partnership or trust was addressed by the Supreme Judicial Court in the cases of Frost v. Thompson, 219 Mass. 360 (1914) (" Frost") and Williams v. Milton, 215 Mass. 1 (1913) (" Williams"). These cases stand for the proposition that the determination of the status of an organization as a trust or a partnership depends upon the manner in which the trustees conduct the affairs of the enterprise. "If [the trustees] act as principals and are free from the control of the certificate holders, a trust is created; but if they are subject to the control of the certificate holders, it is a partnership." Frost, 219 Mass. at 365; Williams, 215 Mass. at 6-9.
The powers given to the Shareholders under the Declaration are sufficient to conclude that the trustees are subject to the control of the Shareholders. Under the Declaration, the Shareholders elect the trustees to concurrent 3-year terms. In addition, an election will be called before three years have elapsed if, as a result of a Trustee vacancy, the percentage of Shareholder-elected trustees falls below 75%. Shareholders representing two-thirds of the outstanding shares can remove a trustee at any time, without cause. Shareholders have the power to vote on contracts by which the trustees engage an investment advisor, and also have the power to terminate such contracts on 60 days notice.
New Trust may be terminated by majority Shareholder vote and Shareholder vote or consent is required to terminate New Trust. The trustees have authority to terminate New Trust without Shareholder vote or consent only if no Shareholders remain in New Trust, which would occur only if 100% of Shareholders redeemed their shares. Shareholders have the power to vote on several types of amendments to the Declaration, including, but not limited to, any amendment affecting the right to vote on specified provisions, any amendment which would alter the maximum number of trustees, and any amendment to the provision that grants the Shareholders the power to vote on amendments.
CONCLUSION
Based upon the facts as stated in the Request and representations made herein, and for the reasons discussed above, we conclude that: (1) New Trust will be classified as a partnership for Massachusetts tax purposes; (2) New Trust will not be subject to tax under chapter 62 or chapter 63 of the General Laws; and (3) the Shareholders will be taxed as partners in New Trust.
Very truly yours,
/s/Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue
AL:LEM:atf
LR 03-4
[1] A ruling from the Internal Revenue Service to confirm that New Trust will be treated as a partnership for federal income tax purposes has not been requested.