| Date: | 06/09/2004 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Referenced Sources: | Massachusetts General Laws |
Personal Income Tax
June 9, 2004
You request a letter ruling on behalf of *************** ("Company"), Company's wholly-owned subsidiary, *************** ("Financial"), and *************** ("Trustee"), that for Massachusetts tax purposes:
1. each of the four Company qualified nuclear decommissioning funds ("Qualified NDFs") is classified as a nonresident inter vivos trust, as opposed to a corporation, corporate trust, or partnership, and is taxable, if at all, only to the extent it would be taxable if it were a nonresident individual under G.L. c. 62, § 5A. G.L. c. 62, § 10(d);
2. the investment income of the Qualified NDFs is not derived from or effectively connected with any trade or business carried on in Massachusetts and as such the income is not subject to Massachusetts taxation;
3. the Financial nonqualified nuclear decommissioning fund ("Nonqualified NDF") is classified as a grantor trust, as opposed to a corporation, Massachusetts corporate trust, or partnership; Financial is treated as the owner of it for purposes of G.L. c. 62, § 10(e); and, pursuant to § 10(e), the income of the Nonqualified NDF is taxable, if at all, only to the extent Financial is subject to the taxing jurisdiction of the Commonwealth; and
4. the activities of the Trustee in Massachusetts do not cause Financial to be subject to taxation in Massachusetts.
Facts
Company is a Florida corporation having its principal office in ***************, Florida. Company is a rate-regulated public utility that supplies electric service to approximately four million customers throughout most of the east and lower west coasts of Florida. Company is subject to regulation by the Florida Public Service Commission ("FPSC"), the Federal Energy Regulatory Commission ("FERC"), and the Nuclear Regulatory Commission (NRC").
Financial is a Delaware corporation having its principal office in ***************, Delaware. Financial is a wholly-owned subsidiary of Company.
Trustee is a Massachusetts trust company and a direct, wholly-owned subsidiary of *************** a publicly traded bank holding company. Trustee regularly provides to *************** third parties the same types of services that it provides to the NDFs at issue.
To serve its customers, Company owns and operates approximately 30 generating facilities together with associated transmission and distribution facilities in Florida and one in Georgia. Company's generating facilities include interests in four nuclear power plants (collectively, the "Units"): (1) a 100 percent undivided interest in Unit Three of the *************** Plant, which is located on *************** (2) a 100 percent undivided interest in Unit Four of the *************** Plant; (3) a 100 percent undivided interest in Unit One of the Plant, which is located on *************** and (4) an 85.10 percent undivided interest in Unit Two of the *************** Plant.
In order to satisfy NRC requirements for the funding of nuclear decommissioning costs, Company established the five NDFs through a Decommissioning Trust Agreement dated January 5, 1988 ("Trust Agreement"), between Company and Trustee that is governed by Massachusetts's law. [1] On December 31, 2001, Company assigned all of its interest in the Nonqualified NDF to Financial. As a result of that assignment, the Trust Agreement was amended and restated into two separate agreements, a Qualified Decommissioning Trust Agreement between Company and Trustee ("Qualified Trust Agreement"), which reestablished and governs the four Qualified NDFs, and a Nonqualified Decommissioning Trust Agreement between Financial and Trustee ("Nonqualified Trust Agreement"), which reestablished and governs the Nonqualified NDF. Like the original Trust Agreement, the latter two agreements are governed by Massachusetts law.
Under both the Qualified and Nonqualified Trust Agreements, Trustee is to receive as exclusive compensation for its services only those amounts (including reasonable out-of-pocket expenses) as are specified in a fee schedule as may from time to time be agreed upon in writing by Trustee and Company or Trustee and Financial. § 4.05 of the Qualified Trust Agreement and § 4.04 of the Nonqualified Trust Agreement.
Each of the four Qualified NDFs is a separate fund that relates to a single Unit. Each such NDF holds monies for the decommissioning of its specific Unit and qualifies as a "nuclear decommissioning reserve fund" with respect to that particular Unit under I.R.C. § 468A of the Internal Revenue Code of 1986, as amended ("Code") and Treas. Reg. § 1.468A-5. The Nonqualified NDF is a fifth, separate fund that does not relate to any particular Unit but holds additional monies for the decommissioning of any one or all of the Units. It does not qualify as a Nuclear Decommissioning Reserve Fund under § 468A of the Code.
All five NDFs are funded solely with cash collected from Company's customers in amounts and in accordance with procedures approved by FPSC, FERC, and NRC. In the case of the four Qualified NDFs, such contributions are further limited to amounts that are deductible under § 468A(a) of the Code and Treas. Reg. § 1.468A-2(a).
Neither the Qualified NDFs nor the Nonqualified NDF are permitted or authorized to use contributions for any purpose other than for making investments, satisfying Company's liability for the costs of decommissioning the Units, and paying the administrative costs and other incidental expenses of the NDFs themselves, or to carry on any business unrelated to such purposes. §§ 2.01 and 2.09 of both Agreements. In the case of the four Qualified NDFs, the assets are to be used only as authorized by § 468A of the Code and Treas. Reg. § 1.468A. § 2.11 of the Qualified Trust Agreement. All investments are composed of cash and cash equivalents in accordance with NRC regulations regarding Nuclear Decommissioning Reserve Fund investments. Income earned by the NDFs is investment-related in nature, consisting primarily of interest, dividends, and gains from the sale or other disposition of securities held by the NDFs.
Trustee receives the contributions to the five NDFs from Company or Financial and holds, manages, invests (except to the extent this function is assumed by the investment managers named below) and administers such contributions, plus earnings on them, as directed by Company or Financial and in accordance with the Qualified and Nonqualified Trust Agreements. § 2.03 of both Agreements. Trustee maintains the books and records of each NDF separately and provides detailed separate accounts of all investments, receipts, and disbursements. § 2.05 of both Agreements.
Pursuant to § 7.01 of both the Qualified and Nonqualified Trust Agreements, Company and Financial may appoint or remove related or unrelated investment managers to direct the investments of the assets of their particular NDFs in lieu of Trustee. Currently, three investment managers provide investment services to the NDFs at issue: (1) *************** a Kansas limited liability company having its principal place of business in *************** Missouri; (2) *************** a Georgia corporation; and (3) *************** N.A. *************** (collectively the "Investment Managers"). With the appointment of the Investment Managers, Trustee is released and relieved of all investment duties and responsibilities, statutory or otherwise, and merely acts as a custodian of the investment accounts.
Under the terms of both the Qualified and Nonqualified Trust Agreements, the Investment Managers have the power and authority to issue and place orders for the purchase or sale of portfolio securities directly with qualified brokers or dealers but have no authority to hold or possess any of the NDFs' assets. Settling the transactions in accordance with the appropriate trading authorizations is Trustee's responsibility however. As exclusive payment for their services, the Investment Managers are paid a quarterly fee.
Trustee and Company may alter or amend the Qualified Trust Agreement from time to time to effectuate the purpose of the four Qualified NDFs and to comply with any order, any changes in tax laws, regulations, or rulings of the Internal Revenue Service and any similar state taxing authorities. No amendment or alteration may violate § 468A of the Code or Treas. Reg. § 1.468A, however. All amendments or alterations must be approved by NRC and FERC. They must be in writing and signed by Company and Trustee. § 2.08 of the Agreement. Similarly, Trustee and Financial may alter or amend the Nonqualified Trust Agreement as indicated above to effectuate the purpose of the Nonqualified NDF. § 2.08 of the Agreement.
Company's interest in the four Qualified NDFs is not transferable, whether voluntarily or involuntarily, unless the transfer is in compliance with § 468A of the Code and Treas. Reg. § 1.468A, including § 1.468A-6, and such transfer does not disqualify the NDFs under § 468A. § 2.10 of the Qualified Trust Agreement.
In the case of the Nonqualified NDF, Financial reserves the right to revoke it and to terminate all or a portion of it at any time upon written notice to Trustee. §§ 2.10 and 5.01 of the Nonqualified Trust Agreement. Upon termination, Trustee is to distribute the assets of the fund to Financial provided, however, that such distribution does not violate any FPSC or FERC order. There are no similar revocation or termination provisions in the Qualified Trust Agreement governing the four Qualified NDFs. Rather, each Qualified NDF is to terminate: (1) upon the "substantial completion" (as defined in Treas. Reg. § 1.468A-5) of the nuclear decommissioning of the Unit to which the NDF relates, (2) upon its disqualification from the application of § 468A of the Code, or (3) upon Company's sale or other disposition of all or a portion of its ownership interest in the Unit. §§ 5.01 through 5.03 of the Qualified Trust Agreement. Upon termination, Trustee is to distribute the assets of the NDF to Company provided, however, that such distribution does not violate § 468A of the Code, Treas. Reg. § 1.468A, or any FPSC or FERC order. § 5.04 of the Agreement.
Discussion
A. "Nuclear Decommissioning Reserve Funds" & I.R.C. § 468A - Generally
Each of the four Qualified NDFs is a "qualified nuclear decommissioning reserve fund" under I.R.C. § 468A of the Code and Treas. Reg. § 1.468A-5. A nuclear decommissioning reserve fund is a "qualified" fund if it satisfies the requirements of Treas. Reg. § 1.468A-5. Treas. Reg. § 1.468A-1. The Nonqualified NDF is a "nonqualified nuclear decommissioning reserve fund." A "nonqualified" fund is a fund that does not satisfy these requirements. Id. Nonqualified funds are often used to accumulate annual contributions in excess of the amount that may be paid into a qualified fund.
Under Treas. Reg. § 1.468A-5, a nuclear decommissioning fund must be established and maintained at all times in the United States pursuant to an arrangement that qualifies as a trust under state law. Treas. Reg. § 1.468A-5(a)(1)(i). Such trust must be established for the exclusive purpose of providing funds to satisfy, in whole or in part, any liability of any person contributing to the fund for the decommissioning of one or more nuclear power plants and to pay that fund's administrative and incidental expenses, but a single trust agreement may establish multiple funds for such purpose. Id.at (a)(1)(i) and (a)(3); I.R.C. § 468A(e)(4). The trust agreement must require that fund assets be used in a manner authorized by both § 468A of the Code and Treas. Reg. § 1.468A and the agreement may not be amended in a manner that would violate either provision. Treas. Reg. § 1.468A-5(a)(4).
Under FERC's Nuclear Plant Decommissioning Trust Fund Guidelines, rules setting forth the guidelines for the formation and purpose of a nuclear decommissioning fund, a utility may provide overall investment policy to the trustee or investment manager, but it may do so only in writing, and neither the utility nor its subsidiaries, affiliates, or associates may serve as investment manager or otherwise engage in day-to-day management of the fund or mandate individual investment decisions. 60 FR 34109, § 35.32.
Despite its status as a trust, a nuclear decommissioning fund is considered a corporation for federal income tax procedures and administration. I.R.C. §468A(e). The tax imposed under § 468A(e) is treated as federal corporate income tax.
B. Five NDFs are not Domestic or Foreign Corporations
For Massachusetts tax purposes, a "domestic corporation" is, until July 1, 2004, defined as:
(i) a corporation organized under or subject to chapter 156, chapter 156A, chapter 156B or chapter 180 which has privileges, powers, rights or immunities not possessed by individuals or partnerships; (ii) a mutual holding company subject to chapter 167H 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(1). On and after July 1, 2004, the term "domestic corporation" will substitute "a corporation organized under or subject to chapter . . . 156D" for "a corporation organized under or subject to chapter . . . 156B." St. 2003, c. 127, §§ 22 and 23. The five NDFs at issue are not organized under or subject to the chapters enumerated in § 30(1) and, thus, are not domestic corporations.
For Massachusetts tax purposes, a "foreign corporation" is, until July 1, 2004, defined as:
[a] corporation, association or organization established, organized or chartered under laws other than those of the commonwealth, for purposes for which domestic corporations may be organized under chapter 156, chapter 156A, chapter 156B or sections 19F to 19W, inclusive, of chapter 175 or chapter 180 which has privileges, powers, rights or immunities not possessed by individuals or partnerships . . . [including] a foreign limited liability company as defined in section 2 of chapter 156C, which has more than 1 member and is not classified for the taxable year as a partnership for federal income tax purposes or which has only 1 member and has elected to be classified as a corporation separate from its member for federal income tax purposes . . . .
G.L. c. 63, § 30(2). On and after July 1, 2004, the term "foreign corporation" will substitute chapter 156D for 156B. St. 2003, c. 127, §§ 22 and 23.
The five NDFs were established by the Trust Agreement dated January 5, 1988, between Company and Trustee. By its terms, the Trust Agreement is governed by Massachusetts law, not by "laws other than those of the commonwealth." On December 31, 2001, Company assigned all of its interest in the Nonqualified NDF to Financial. As a result of that assignment, the Trust Agreement was amended and restated into two separate agreements, the Qualified Trust Agreement between Company and Trustee, which reestablished and governs the four Qualified NDFs, and the Nonqualified Trust Agreement between Financial and Trustee, which reestablished and governs the Nonqualified NDF. The latter two agreements, like the original Trust Agreement, are governed by Massachusetts law, not by "laws other than those of the commonwealth." See Amendment to and Restatement of Decommissioning Trust Agreement dated December 31, 2001. Accordingly, none of the five NDFs at issue is a foreign corporation.
C. Five NDFs are not Corporate Trusts
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). In the instant case, this requirement is not satisfied because the assets of the five NDFs are dedicated exclusively to decommissioning the Units and, thus, the beneficial interest in those assets cannot be transferred to anyone other than the owner of the Units. See § 2.01 of both the Qualified and Nonqualified Trust Agreements.
Moreover, in the case of the four Qualified NDFs, pursuant to § 2.10 of the Qualified Trust Agreement, Company's interest in each of them is not transferable, whether voluntarily or involuntarily, unless the transfer is in compliance with § 468A of the Code and Treas. Reg. § 1.468A, including § 1.468A-6, and such transfer does not disqualify the NDFs under § 468A. Code § 468A is silent on the transfer of an interest in a qualifying nuclear decommissioning fund. However, Treas. Reg. § 1.468A-6 discusses such a transfer, but only in connection with the sale, exchange, or other disposition of all or a portion of the interest in the nuclear power plant to which the fund relates. Section 1.468A-6 requires (1) that immediately before the disposition, the transferor maintained a qualified nuclear decommissioning fund for the interest to be disposed of; and (2) immediately after the disposition (a) the transferee maintains a qualified nuclear decommissioning fund for the acquired interest, (b) the interest acquired is a qualifying interest of the transferee in the nuclear power plant to which the qualified nuclear decommissioning fund relates, (c) the assets of the transferor's qualified nuclear decommissioning fund relating to the transferred interest are transferred to the transferee's qualified nuclear decommissioning fund, and (d) the transferee continues to satisfy the one- fund-per-nuclear-power-plant requirements of Treas. Reg. § 1.468A-5(a)(iii). Treas. Reg. § 1.468A-6(b). Based on the above, it is clear that Company's interest in the Qualified NDFs is not "represented by transferable shares" and, thus, cannot be transferred to just anyone. Rather, Company's interest in each fund can be transferred only in connection with a sale, exchange, or other disposition of all or a portion of Company's interest in the Unit to which the fund relates. Moreover, Company's interest in each fund can be transferred only to a subsequent owner of the Unit to which the fund relates.
D. Five NDFs are Trusts not Partnerships
Because the five NDFs are not classified for Massachusetts tax purposes as a domestic or foreign corporation or as a corporate trust, they must be classified as either a partnership or trust. LR 03-4. The existence of a partnership is a mixed question of fact and law. Nielsen v. Commissioner of Revenue, A.T.B. No. F232365 (2001); Maker v. Bermingham, 32 Mass. App. Ct. 971, 973 (1992). The same can be said of a trust. [2] Under G.L. c. 108A, which generally adopts the Uniform Partnership Act, a "partnership" is defined as "an association of two or more persons to carry on as co-owners a business for profit . . . ." G.L. c. 108A, § 6. To constitute a partnership "[t]here must be a voluntary contract of association for the purpose of sharing the profits and losses, as such, which may arise from the use of capital, labor or skill in a common enterprise, and an intention on the part of the principals to form a partnership for that purpose." Boyer v. Bowles, 310 Mass. 134 (1941 ). In determining whether a partnership exists, "the receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner . . . ." G.L. c. 108A, § 7(4).
A trust, in contrast, is typically created for the purpose of vesting in a trustee responsibility for the protection and conservation of the trust property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associated in a joint enterprise for the conduct of business for profit. See Treas. Reg. § 301.7701-4(a). See also Restatement (Second) of Trusts § 2 (1959).
Based on the above, the five NDFs are not partnerships, for four reasons. First, "the existence of a partnership depends on the intent of the parties to associate as such." Nielsen, supra. The five NDFs, however, were established through trust agreements, not partnership agreements, in accordance with Treas. Reg. § 1.468A-5, which requires that a nuclear decommissioning fund be established and maintained at all times in the United States pursuant to an arrangement that qualifies as a trust under state law, not a partnership. Treas. Reg. § 1.468A-5(a)(1)(i).
Second, although there is an association between Company, Trustee, and the Investment Managers or Financial, Trustee, and the Investment Managers, there is no sharing among them of the profits and losses that may arise from the use of their capital, labor, or skill. Generally, only upon a fund's termination are the assets of a Qualified NDF to be distributed to Company or the assets of the Nonqualified NDF to be distributed to Financial. Trustee receives as exclusive compensation for its services only those amounts (including reasonable out-of-pocket expenses) as are specified in a fee schedule as may from time to time be agreed upon in writing by Trustee and Company or Trustee and Financial. Likewise, as exclusive payment for their services, the Investment Managers are paid a quarterly fee.
Third, none of the five NDFs are carrying on a profit-making business, an essential requirement for classification as a partnership. Rather, in the case of the Qualified NDFs, they were established primarily to provide funds for the decommissioning of one or more nuclear power plants and to pay that fund's administrative and incidental expenses. Similarly, in the case of the Nonqualified NDF, its primary purpose is to hold monies designated by Company for decommissioning the Units which are not deposited in the Qualified NDFs.
Fourth, the powers of Trustee are strictly limited to ones necessary for protecting or conserving the trust property. Trustee is prohibited by § 2.09 of both the Qualified and Nonqualified Trust Agreements from carrying on any business activity unrelated to the purposes stated above.
Having concluded that the five NDFs are not partnerships for the reasons stated above, they are to be classified as trusts for Massachusetts tax purposes.
E. Qualified NDFs are Grantor Trusts, not Nonresident Inter Vivos Trusts, and Company is Their Owner
The Massachusetts tax treatment of grantor trusts is governed by G.L. c. 62, § 10(e). Under § 10(e), if the grantor or another person is treated as the owner of any portion of a trust by reason of the provisions of §§ 671 to 678, inclusive, of the Code, the trust is a grantor trust and its income is taxable to the grantor or such other person, not to the trust. Under § 677, the grantor is treated "as the owner of any portion of a trust, whether or not he is treated as such owner under § 674 [because of any power to control beneficial enjoyment of the income or corpus of the trust], whose income without the approval or consent of any adverse party [3] is, or, in the discretion of the grantor or a nonadverse party, [4] or both, may be distributed to the grantor or . . . held or accumulated for future distribution to the grantor. . . ." I.R.C. § 677(a)(1)and (2) (footnotes added).
The regulations under § 677 provide that a grantor is, in general, treated as the owner of a portion of a trust whose income is, or in the discretion of the grantor or a nonadverse party, or both, may be applied in discharge of a legal obligation of the grantor (other than his obligation of support or maintenance of a beneficiary whom the grantor is legally obligated to support). Treas. Reg. § 1.677(a)-1(d).
In the instant case, each of the four Qualified NDFs is a "qualified nuclear decommissioning reserve fund" under § 468A of the Code and Treas. Reg. § 1.468A-5. Accordingly, as required under those two provisions, each such NDF would have had to have been established for the exclusive purpose of providing funds to satisfy, in whole or in part, the liability of Company for the decommissioning of a nuclear power plant owned by Company and to pay that fund's administrative and incidental expenses. That is, in fact, the case. Pursuant to the Qualified Trust Agreement which governs the four qualified NDFs, the legal obligation of Company to pay for the decommissioning of Company's Units is to be paid by the Qualified NDFs. §§ 2.01 and 2.09 of the Agreement. Each Qualified NDF, was established exclusively to provide funds for the decommissioning of the Unit to which it relates and to pay that fund's administrative and incidental expenses. Id. As expressly stated in § 2.09 of the Agreement, no Qualified NDF may carry on any business unrelated to such purposes. Any amounts that are not used for such purposes are to be returned to Company. § 5.04 of the Agreement. Accordingly, each Qualified NDF is a grantor trust and Company is treated as the owner of each for purposes of § 677 of the Code and G.L. c. 62, § 10(e). Additionally, pursuant to § 10(e), the income of each NDF is taxable, if at all, only to the extent Company, a Florida corporation, is subject to the taxing jurisdiction of the Commonwealth.
Having determined that the Qualified NDFs are grantor trusts, they cannot be classified as nonresident inter vivos trusts for Massachusetts tax purposes, as you have requested, as grantor trusts and nonresident inter vivos trusts are subject to tax under different provisions of the Massachusetts General Laws. As discussed above, the Massachusetts tax treatment of grantor trusts is governed by G.L. c. 62, § 10(e). The tax treatment of nonresident inter vivos trusts, in contrast, is governed by G.L. c. 62, § 10(d). Pursuant to § 10(d), the income of a nonresident inter vivos trust is subject to the taxing jurisdiction of Massachusetts only to the extent it would be taxable if received by a nonresident individual under G.L. c. 62, § 5A.
F. Nonqualified NDF also is a Grantor Trust and Financial is the Owner of It
Like the Qualified NDFs, the Nonqualified NDF also is a grantor trust because it too was established exclusively to provide funds for the decommissioning of the Unit(s) to which it relates and to pay that fund's administrative and incidental expenses. §§ 2.01 and 2.09 of the Nonqualified Trust Agreement. As expressly stated in § 2.09 of the Agreement, the Nonqualified NDF may carry on no business unrelated to such purposes. Additionally, the Nonqualified NDF qualifies as a grantor trust under § 676 of the Code. Under that section the grantor is treated as the owner of any portion of a trust if he retains the power to revoke the trust.
In the instant case, under §§ 2.10 and 5.01 of the Nonqualified Trust Agreement, Financial reserves the right to revoke the Nonqualified NDF and to terminate all or a portion of it at any time upon written notice to Trustee. Upon termination, Trustee is to distribute the assets of the fund to Financial provided, however, that such distribution does not violate any FPSC or FERC order. Accordingly, the Nonqualified NDF is a grantor trust; Financial is treated as the owner of it for purposes of §§ 676 and 677 of the Code and G.L. c. 62, § 10(e); and, pursuant to § 10(e), the income of the Nonqualified NDF is taxable, if at all, only to the extent Financial, a Delaware corporation, is subject to the taxing jurisdiction of the Commonwealth.
G. Activities of Trustee Do Not Subject Company or Financial to Massachusetts Taxation
Under the Massachusetts Corporate Nexus Regulation, 830 CMR 63.39.1(6)(e), (the "Regulation"), a foreign corporation is not subject to the taxing jurisdiction of Massachusetts under G.L. c. 63, § 39, if its contacts with Massachusetts are limited exclusively to " . . . depositing of funds or maintenance of securities brokerage accounts with financial institutions, unrelated to the foreign corporation, that do business in Massachusetts." "Financial institution," as that term is used in c. 63, includes trust companies. G.L. c. 63, § 1(a).
In the instant case, both Company's and Financial's contacts with Massachusetts are limited to the depositing of funds and maintenance of securities brokerage accounts with Trustee, a Massachusetts trust company that is unrelated to Company or Financial. Under subsection (6)(e) of the Regulation, such limited contacts do not, in themselves, subject company or Financial to the taxing jurisdiction of Massachusetts under G.L. c. 63, § 39.
The above notwithstanding, for purposes of determining whether a foreign corporation is subject to the excise under § 39, the activities of employees, agents, or representatives of the foreign corporation will be imputed to the corporation, whereas, the activities of an independent contractor will not be imputed to it. 830 CMR 63.39.1(7). A person is an independent contractor for purposes of §(7) only if all of the following conditions are met:
(a) the person is not an employee of the foreign corporation;
(b) the person is not subject, in the performance of activities on behalf of the foreign corporation, to the supervision or control of the foreign corporation or any of its representatives. Whether a purported independent contractor is subject to the supervision or control of the foreign corporation or any of its representatives is a question of fact;
(c) the person holds himself out to the public as an independent contractor in the regular course of his business;
(d) the person must regularly act on behalf of at least one bona fide principal apart from the foreign corporation; and
(e) the person may not approve orders on behalf of the foreign corporation or otherwise execute contracts on behalf of the foreign corporation, provided that a financial institution that holds itself out to the public as an investment advisor, providing investment advice and/or management services, including portfolio accounting or bookkeeping services, custodial services, and related financial services to unrelated third parties shall not lose the status of an independent contractor by virtue of any authority that it may have to execute contracts related to the purchase, sale, or management of securities on behalf of those third parties.
Applying the above criteria to the facts at hand, the activities of Trustee are those of an independent contractor. Trustee is not an employee of Company or Financial; it is not paid a regular wage or salary or employee benefits, and it does not operate in a workspace provided by Company or Financial. See generally Marx v. South Shore Publishing Co. Inc., 1980 Mass. Comm. Discrim. LEXIS 12. Trustee is a trust company and, thus, a financial institution that regularly provides to third parties the same types of services that it provides to Company's and Financial's NDFs ( e.g., investment advice and/or management services, including portfolio accounting or bookkeeping services, custodial services, and related financial services). Under subsection 7(e) of the Regulation, Trustee does not lose its status as an independent contractor merely because it executes contracts related to the purchase, sale, or management of securities on behalf of the NDFs. Finally, although Trustee holds, manages, invests (except to the extent this function is assumed by the Investment Managers) and administers contributions to the Qualified and Nonqualified NDFs, plus earnings on them, as directed by Company or Financial and in accordance with § 2.03 of the Qualified and Nonqualified Trust Agreements, Trustee is not subject to the "control" or "supervision" of Company or Financial, as those terms are used in subsection 7(b) of the Regulation, as Company and Financial are forbidden under FERC guidelines from engaging in day-to-day management of the NDF or mandating individual investment decisions.
Because Trustee satisfies all of the conditions in subsections 7(a) through (e) of the Regulation, the activities of Trustee are those of an independent contractor. Accordingly, pursuant to § 7, the activities of Trustee in Massachusetts are not sufficient to cause Company or Financial to be subject to taxation in Massachusetts. See also LR 01-4. (That ruling addressed the application of the Regulation to the activities of a Massachusetts trust company that provided accounting, custodial, investment management, shareholder and other administrative services to various unrelated offshore investment funds. That ruling concluded the Massachusetts trust company was acting as an independent contractor and that its activities on behalf of the funds were not enough, standing alone, to cause the funds to be doing business in Massachusetts.)
Conclusions
Based upon the facts as stated in your request and for the reasons discussed above, we conclude that:
1. each of the Qualified NDFs is a grantor trust, as opposed to a nonresident inter vivos trust, corporation, corporate trust, or partnership; Company is treated as the grantor and owner of each for purposes of G.L. c. 62, § 10(e); and, pursuant to § 10(e), the income of each Qualified NDF is taxable, if at all, only to the extent Company, a Florida corporation, is subject to the taxing jurisdiction of the Commonwealth;
2. in ruling that each of the four qualified NDFs is a grantor trust, not a nonresident inter vivos trust, as you have requested, we decline to rule on whether the investment income of the Qualified NDFs is derived from or effectively connected with any trade or business carried on in Massachusetts or whether such income is subject to Massachusetts taxation - your second ruling request. Such determinations would be relevant only if the Qualified NDFs were nonresident inter vivos trusts;
3. the Nonqualified NDF also is a grantor trust, as opposed to a corporation, corporate trust, or partnership; Financial is treated as the grantor and owner of it for purposes of G.L. c. 62, § 10(e); and, pursuant to § 10(e), the income of the Nonqualified NDF is taxable, if at all, only to the extent Financial, a Delaware corporation, is subject to the taxing jurisdiction of the Commonwealth; and
4. the activities of the Trustee in Massachusetts do not cause Company or Financial, as foreign corporations, to be subject to taxation in Massachusetts.
Very truly yours,
/s/Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue
AL:LEM:ps
LR 04-2
[1] Since its initial creation, the Trust Agreement was amended on December 31, 1994, and October 10, 1996, and amended and restated on December 31, 2001.
[2] We are not applying the "control test" set forth in a line of cases that includes Williams v. Milton, 215 Mass. 1 (1913) and Frost v. Thompson, 219 Mass. 360 (1914) discussed in LRs 93-11, 93-12, and 03-4 to determine whether the five NDFs are to be classified as a partnership or a trust, as the Supreme Judicial Court and other courts have subsequently made clear, that test does not answer the question in every case. See e.g., State Street Trust Co. v. Hall, 311 Mass. 299 (1942); In re Heritage North Dunlap Trust, 120 B.R. 252 (1990); and Commissioner of Corporations and Taxation v. City of Springfield, 321 Mass. 31 (1947). To the extent that the earlier cited letter rulings may have implied otherwise, we hereby note that the "control test" does not always govern.
[3] An "adverse party" is a person having a substantial beneficial interest in the trust which would be adversely affected by the exercise or nonexercise of his or her power with respect to the trust. I.R.C. § 672(a). For example, a person having a general power of appointment over the trust property is deemed to have a beneficial interest in the trust. Id. Also, the interest of a beneficiary is, as a general rule, substantial and adverse, and, thus, a beneficiary is generally an adverse party. Treas. Reg. § 1.672(a)-(1)(b). A trustee, in contrast, is not an adverse party merely because of his or her interest as trustee. Treas. Reg. § 1.672(a)-(1)(a).
[4] A "nonadverse party" is any person who is not an "adverse party." I.R.C. § 672(b).