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Letter Ruling

Letter Ruling Letter Ruling 89-9: Authority Certificates of Participation, 1988 Series

Date: 12/13/1988
Organization: Massachusetts Department of Revenue
Referenced Sources: Massachusetts General Laws

Personal Income Tax

December 13, 1988

You request a ruling on behalf of (the "Authority") concerning the Massachusetts personal income tax (G.L. c. 62) treatment of interest paid on certain Certificates of Participation (the "Certificates"), 1988 Series, Dated December 1, 1988, issued in connection with a purchase of [equipment] and accomplishment of the Authority's statutory purposes under [citation]. The Department has reviewed certain documents in connection with the issuance of the Certificates, including an Equipment Trust Agreement between (the "Trustee") and the authority dated as of December 1, 1988, under which the Certificates are issued; a Lease Agreement, dated as of December 1, 1988, between the Authority, Lessor, and the Trustee, Lessee; and a Sublease Agreement dated as of December 1, 1988, between the Trustee, Sublessor, and the Authority, Sublessee. The Department has also examined the law and such other matters as we deem necessary to issue this ruling.

You represent that, based upon the principles underlying Revenue Ruling 55-540, 1955-2 C.B. 39, for federal income tax purposes the Lease Agreement and the Sublease Agreement taken together constitute a borrowing of the Authority. You represent that the interest component of payments by the Authority under the Sublease Agreement qualifies under Internal Revenue Code § 103 to be excluded from federal gross income. You represent that, for federal income tax purposes, the Trust will be merely a financing arrangement in which the Authority in substance issues a series of debt obligations and the Trustee is agent of holders of the Certificates.

Based on the foregoing, we rule that the interest component of payments to holders of the Certificates are exempt from Massachusetts personal income tax under G.L. c. 62, § 2(a)(1)(A).

The Massachusetts income tax treatment of the interest component of payments to holders of the Certificates is governed by G.L. c. 62, § 2(a)(1)(A). That statute, in effect, excludes from Massachusetts gross income:

interest [excluded under section one hundred and three of the Code] form any [governmental] obligation issued by the commonwealth, any political subdivision thereof, or any agency or instrumentality of either of the foregoing, which is exempt from taxation under clause Twenty-fifth of section five of chapter fifty-nine or any other provision of law.

The Authority is a political subdivision of the Commonwealth.

[citation] The Certificates represent proportionate interests in an obligation of the Authority, within the meaning of § 2(a)(1)(A). The interest component of payments to holders of the Certificates is excluded from federal gross income under Code § 103.

It remains to determine, then, whether the Certificates are exempt from taxation under G.L. c. 59, § 5, clause 25, or any other provision of law. Under St. 1987, c. 758, § 2, clause 25 of G.L. c. 59, § 5, was repealed; and inserted in its place was the following: "Twenty-fourth, all intangible property." Under this clause twenty-fourth, which is the successor to clause twenty-fifth and which is also "any other provision of law," the Certificates qualify. The Certificates meet all the criteria enumerated in G.L. c. 62, § 2(a)(1)(A).

It follows, then, that the interest component of payments to Certificate holders is excluded from Massachusetts gross income for purposes of G.L. c. 62. Our conclusion is supported by the legislative intent clearly expressed in [citation] that the Authority, its property, and its borrowings should not bear the burden of taxation.

You may rely upon and make use of this letter in offering the Certificates, any any purchase of a Certificate may rely upon this letter as though it were addressed to the purchaser.

Very truly yours,
Stephen W. Kidder
Commissioner of Revenue
December 13, 1988
LR 89-9

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