| Date: | 02/15/2008 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Referenced Sources: | Massachusetts General Laws |
Corporate/Personal Income Tax
February 15, 2008
You request a letter ruling on behalf of the following taxpayers, ************ Trust ("******* Trust"), ************ LLC ("LLC"), a yet to be formed Delaware series limited liability company ("LLC") that will be the successor entity to Trust, and each series of ******* LLC (each "LLC Series"), i.e., each yet to be formed series of LLC that will be the successor to a corresponding portfolio of Trust. You request rulings that: (1) each LLC Series is treated for Massachusetts income tax purposes as a separate entity; (2) each LLC Series and any additional series established by LLC in the future will be classified for Massachusetts income tax purposes as a separate LLC; and consequently, each LLC Series and any additional series established by LLC in the future will be classified for Massachusetts income tax purposes in accordance with its federal classification.
Portfolios of Trust are collectively referred to in this letter ruling as the "Trust Portfolios." Series established under LLC are collectively referred to in this letter as the "LLC Series." Trust, LLC and the LLC Series are collectively referred to in this letter as the "Taxpayers."
You have represented that the pertinent facts relative to the Taxpayers and any interested parties, their business operations, and the proposed transactions, as well as the applicable federal tax law, are as described below in this letter ruling and in the materials you have submitted.
A. STATEMENT OF FACTS
1. Description of Business Operations of the Taxpayers and Any Interested Parties
Trust
Trust is a Massachusetts business trust organized under the laws of the Commonwealth of Massachusetts and is an open-end management investment company, commonly known as a mutual fund, registered under the Investment Company Act of 1940, as amended (the "1940 Act"). The beneficial interest in Trust is divided into transferable shares. Under authority granted in Trust's Declaration of Trust (the "Declaration of Trust"), the Trustees of Trust divide its shares into several portfolios (or series of shares) ("Trust Portfolios"). Each Trust Portfolio is separate from each other Trust Portfolio. Each Trust Portfolio is currently taxed as a separate regulated investment company ("RIC") under Internal Revenue Code (IRC) section 851.
The Trust Portfolios may issue more than one class of shares. Currently, each of the Trust Portfolios issues one or more of the following classes of shares: Series I, Series II, Series III and NAV. Trust currently sells shares of each of its Trust Portfolios only to life insurance companies and other Portfolios of Trust. Trust does not offer its shares directly to the public.
LLC
Trust proposes to reorganize its business operations into LLC, which will be an LLC organized under the laws of Delaware.
Like Trust, LLC will be an open-end management investment company, commonly known as a mutual fund, registered under the 1940 Act. The beneficial interest in LLC will be divided into shares of LLC interests. Under authority granted in LLC's proposed LLC Operating Agreement (the "Operating Agreement"), the managers of LLC will divide the shares into several series of shares (the LLC Series), each with its own investment objective and policies and separate investments. Each LLC Series will be separate from each other LLC Series.
Each LLC Series will consist of a separate pool of assets, liabilities and stream of earnings. The shareholders of an LLC Series may share in the income only of that LLC Series. The ownership interest of the shareholders of an LLC Series will be limited to the assets of that LLC Series upon redemption, liquidation, or termination of such LLC Series. The payment of the expenses, charges, and liabilities of an LLC Series is limited to that LLC Series' assets. The creditors of an LLC Series will be limited to the assets of that LLC Series for recovery of expenses, charges, and liabilities. Each LLC Series will have its own investment objectives, policies and restrictions. Votes of shareholders may be conducted by each LLC Series separately with respect to matters that affect only that particular LLC Series, except to the extent the 1940 Act requires shares to be voted as a single class of shares.
The reorganization of each Trust Portfolio of Trust into its corresponding LLC Series of LLC will be effectuated in the following manner for federal income tax purposes: (1) a transfer by each Trust Portfolio of its assets to a corresponding LLC Series in exchange for the LLC Series' assumption of its liabilities, if any, and the Trust Portfolio's receipt of LLC Series membership interests, followed by (2) a distribution of the LLC Series membership interests to each of the Trust Portfolio's shareholders in complete liquidation of the Trust Portfolio (each a "Reorganization"). [1] After the Reorganizations, the structure of LLC's business operations will be substantially similar to its predecessor, Trust (as described above).
2. Facts Relative to Transaction
Each Trust Portfolio has elected to be treated as a separate RIC under IRC § 851. Some Trust Portfolios have more than one shareholder, while others have only a single shareholder. After the Reorganization, LLC proposes that certain LLC Series, each of which will have only one shareholder (collectively, the "Type D Series"), will not elect pursuant to Treas. Reg. § 301.7701-3 to be taxed other than as an entity disregarded as an entity separate from its owner for federal income tax purposes. If a Type D Series thereafter sells shares to one or more additional owners, such portfolio will have at least two members and will not elect pursuant to Treas. Reg. § 301.7701-3 to be taxed other than as a partnership and will not be treated as a publicly traded partnership taxable as a corporation under the rules of IRC § 7704 for federal income tax purposes. LLC proposes that certain LLC Series each of which currently has more than one shareholder (collectively, the "Type P Series"), will not elect pursuant to Treas. Reg. § 301.7701-3 to be taxed other than as a partnership and will not be treated as a publicly traded partnership taxable as a corporation under the rules of IRC § 7704 for federal income tax purposes. LLC proposes that certain LLC Series will elect under Treas. Reg. § 301.7701-3 to be treated as an association taxable as a corporation for federal income tax purposes, effective from the date of formation of such LLC Portfolio (collectively, the "Type C Series"). After the Reorganization, each Type C Series will be classified as an association taxable as a RIC for federal income tax purposes. Following the Reorganization, LLC may, in the future, establish and designate one or more additional LLC Series. Any such additional LLC Series will engage in the same business operations and satisfy the same representations of Type P, Type D or Type C Series as described above.
B. RULINGS REQUESTED
The Taxpayers request a ruling that (1) each LLC Series is treated for Massachusetts income and corporate excise tax purposes as a separate entity (or part of a separate entity in the case of a Type D disregarded entity treated as part of its sole owner); (2) each LLC Series and any additional series established by LLC in the future will be classified for Massachusetts income tax purposes as a separate LLC; and consequently, each LLC Series and any additional series established by LLC in the future will be classified for Massachusetts income and corporate excise tax purposes in accordance with its federal classification.
C. ANALYSIS OF LAW
1. Separate Entity Status of Each Series
The LLC and the LLC Series will be organized under the Delaware Limited Liability Company Act ("Del. LLC Act"). The Del. LLC Act includes a provision that deals specifically with series. 6 Del. C. § 18-215. The Del. LLC Act states that an LLC agreement may provide for the establishment of a designated series of members, managers or LLC interests having separate rights, powers or duties with respect to specified property or obligations of the LLC or profits and losses associated with specified property or obligations. 6 Del. C. § 18-215(a). The Del. LLC Act also provides that "any such [LLC] series may have a separate business purpose or investment objective." Id. The Del. LLC Act further provides that the debts, liabilities and obligations and expenses incurred, contracted for or otherwise existing with respect to a particular series can be enforceable against the assets of such series only, and not against the assets of the limited liability company generally or any other series, if notice of this limitation on liability of a series is included in the LLC's certificate of formation. 6 Del. C. § 18-215(b). LLC's certificate of formation will contain such a notice.
There is long standing federal authority that each series in a series trust is a separate entity for federal income tax purposes. The two principal federal authorities are National Securities Series-Industrial Stock Series v. Commissioner, 13 T.C. 884 (1949), acq 1950-1 C.B. 4 (the Tax Court recognized that each series in a single investment trust was a separate entity), and Revenue Ruling 55-416, 1955-1 C.B. 416 (which, in turn, cites the National Securities Series case as base authority and repeats the Tax Court's tacit characterization of each series of a series trust as a separate taxpayer). Moreover, in a private letter ruling issued to the Taxpayers, the IRS ruled that each series of LLC will be treated as a separate entity for federal income tax purposes. It further ruled that for federal income tax purposes: (1) each Type D Series that has a single owner and does not make an election to be treated otherwise will be disregarded as an entity separate from its owner; (2) each Type P Series and each Type D Series, if shares in such Type D Series are sold to one or more additional owners, will be treated as a partnership, provided such series do not make an election to be treated otherwise; (3) each Type C Series that makes an election to be classified as an association taxable as a corporation for federal income tax purposes will taxed as a RIC after the Reorganization if it qualifies to be treated as a RIC under subchapter M of the IRC; (4) any additional series established by LLC in the future, which will engage in the same business operations and satisfy the same representations of the Type D, P or C Series will be properly classified as (i) a disregarded entity if such series has a single owner unless it makes an election to be treated otherwise, (ii) a partnership if such series has 2 or more owners, unless it makes an election to be classified otherwise or (iii) an association taxable as a corporation that will be treated as a RIC if it elects to be so treated unless it thereafter makes an election to be treated otherwise.
Although the DOR has not issued any published guidance on the issue of whether each series of a series LLC is recognized as a separate entity, there is authority that each series in a series trust is a separate entity for Massachusetts income tax purposes. In Letter Ruling 87-19, the DOR ruled that each series of investment portfolios to which a RIC has allocated its assets was a separate entity, a corporate trust, under Massachusetts law. The fund was an open-end management investment company organized under the laws of Massachusetts as a corporate trust and registered under the 1940 Act. It had operated as a single RIC from 1983 until 1987. In 1987, the trust was amended to create separate series of investment portfolios, each of which was intended to be treated as a separate RIC under the Code. Each series was separate with respect to the rights of shareholders and creditors. The original trust itself had no assets, liabilities or income because everything was allocated among the series. The function of the original trust was to make it easier to file amendments and other documents with the SEC. Letter Ruling 87-19 makes a broad reference to IRS private letter rulings issued in 1984 and 1985 and cites IRC § 851(q) which permits separate series of investment funds to be organized as regulated investment companies.
The LLC and the LLC Series will be set up similarly to the trust and the separate series in Letter Ruling 87-19. The LLC will have no assets, liabilities or income because everything will be allocated among the series and the function of the LLC is to make it easier to file amendments and other documents with the SEC. Each series will be separate with respect to the rights of shareholders and creditors. Under Section 5.ll(c) of the Operating Agreement, each LLC Series will consist of a separate pool of assets, liabilities and stream of earnings; the shareholders of an LLC Series may share in the income only of that LLC Series; the ownership interest of the shareholders in an LLC Series will be limited to the assets of that LLC Series upon redemption, liquidation, or termination of such LLC Series; the payment of the expenses, charges, and liabilities of an LLC Series is limited to that LLC Series' assets; and votes of shareholders may be conducted by each LLC Series separately with respect to matters that affect only that particular LLC Series, except to the extent the 1940 Act requires shares to be voted as a single class of shares. Under Section 4.1 of the Operating Agreement, the creditors of each LLC Series are limited to the assets of that LLC Series for recovery of expenses, charges, and liabilities. Under Section 5.11(b) of the Operating Agreement, each LLC Series will have its own investment objectives, policies and restrictions.
Therefore, based on Letter Ruling 87-19, the federal guidance of National Securities, Revenue Ruling 55-416 and the IRS private letter ruling issued to the Taxpayers, each LLC Series should be classified as a separate entity for Massachusetts income tax purposes.
2. Classification of Each LLC Series; Adoption of the Federal Classification for Each LLC Series.
In 1995, the Massachusetts legislature provided for the formation of LLCs under state law, and also provided for the state income and corporate excise taxation of LLCs when formed under state law or the laws of another jurisdiction. See St. 1995, c 281, amending G.L. c. 62, § 17, and c. 63 §§ 30.1, 30.2. In TIR 97-8, the Department announced that in determining the Massachusetts income tax treatment of LLCs, the Commissioner of Revenue will adopt the entity's federal income tax classification, as determined under entity classification rules under Treasury Regulation § 301.7701, commonly referred to as "check the box rules." Thus, an LLC that elects federally to be treated as a partnership is treated for Massachusetts tax purposes as a partnership. See G.L. c. 62, § 17. Also, an LLC with more than one member that does not elect to be treated as a partnership is taxed under the corporate excise provisions of G.L. c. 63. See G.L. c. 63, §§ 30.1, 30.2. A non-Massachusetts single-member LLC is disregarded as an entity separate from its owner for Massachusetts income tax purposes if it is so disregarded for federal income tax purposes. See G.L. c. 62, § 17. Otherwise a single member LLC will be treated as a corporation for corporate excise tax purposes if it is classified as such for federal income tax purposes. See G.L. c. 63, §§ 30.1, 30.2.
The Department will interpret the rules for classifying an LLC for Massachusetts income and corporate excise tax purposes to extend to an LLC series that is established within an LLC and is organized and governed pursuant to a limited liability company statute. Given that the LLC Series are established within LLC and are authorized, organized, and governed pursuant to the Del. LLC Act the Commissioner will adopt the federal classification of each series.
Because we conclude that the Massachusetts rules for classifying an LLC extend to a series established and governed pursuant to the Delaware LLC statute, we find it unnecessary to rule on your request that we find that each series of the LLC is itself a separate LLC.
D. CONCLUSION
1. Separate Entity Status of Each Series.
Bases on the foregoing, it is ruled that each LLC Series will be classified as a separate entity for Massachusetts income and corporate excise tax purposes.
2. Classification of Each Series; Adoption of the Federal Classification for Each LLC Series.
Based on the foregoing, and subject to any future changes in the facts or in state or federal law, it is ruled that each LLC Series and any additional series established by LLC in the future will be classified for Massachusetts income and corporate excise tax purposes in accordance with its federal classification. We do not rule on whether each series of an LLC is a separate LLC.
It is a condition to these rulings that all actions and all tax filings, reports, etc. of the Taxpayers and all related parties are performed in a manner fully consistent with the treatment provided by these rulings and the underlying facts and law as represented and described above.
Very truly yours,
/s/Navjeet K. Bal
Navjeet K. Bal
Commissioner of Revenue
NKB:MTF:lbr
LR 08-2
[1] Trust is also considering effectuating the Reorganization through a statutory conversion under Delaware law. You have represented that the method of effectuating the Reorganization does not alter the substance of the tax analysis underlying the rulings requested in this letter.