| Date: | 07/08/1993 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Referenced Sources: | Massachusetts General Laws |
Corporate Excise/Personal Income Tax
July 8, 1993
You represent *************** (hereinafter "Company"), which will act as an investment advisor to *************** (hereinafter "Hub"), an open-end management investment company to be formed by two, as yet, unidentified entities (hereinafter "Spokes"). On behalf of the Company, acting for itself and Hub, you request a letter ruling that Hub will be a partnership for Massachusetts tax purposes. [1] For the reasons stated below, we rule that Hub will be a partnership subject to taxation under G.L. c. 62, § 17.
I. Represented Facts.
Company is an investment adviser registered under the Investment Advisers Act of 1940 that sponsors the formation of, and renders advisory services to, investment companies registered under the Investment Company Act of 1940. Company will enter into different management contracts with the Hub and the individual Spokes to provide, or arrange for the provision of, administrative, investment advisory and other services. Also, affiliates of Company will enter into different contracts with Hub and individual Spokes for transfer agent, pricing, bookkeeping, shareholder and accounting services. Hub and Spokes will each contract with entities unaffiliated with Company for services, such as custodial, legal and auditing services.
Initially, two entities will invest in Hub. These and any future investors in Hub will be referred to as "Spokes." Spokes will be either separately organized Delaware statutory business trusts or separate series of a single statutory business trust that will be treated as separate corporations under § 851(h) of the Internal Revenue Code of 1986, as amended (hereinafter the "Code"). See 12 Del. C. § 3801 et seq. (Delaware Business Trust Act). Spokes will be registered as open-end management companies under the Investment Company Act of 1940, or series thereof, and will invest more than 90% of their assets into Hub.
Hub will be organized as a Delaware common law business trust. Hub will operate as an open-end management investment company registered under the Investment Company Act of 1940. Hub will not file a Certificate of Trust with the Delaware Secretary of State, and, therefore, will not be a statutory Delaware business trust governed by the Delaware Business Trust Act, 12 Del. C. § 3801 et seq. Hub will invest in money market instruments, and at least 50% of its assets will consist of tax-exempt obligations described under § 103(a) of the Code. Hub's sources of income and assets would make it eligible to be a regulated investment company, as defined by § 851(a) of the Code, were it organized in corporate form.
Hub will be operated by fiduciaries, designated as "Trustees" under the Declaration of Trust. The Trustees will have the power to conduct, operate and carry on the business of an investment company. The Trustees will have legal title over Hub property as joint tenants, and will exercise general control over Hub property and over the business of the Hub, with powers of delegation as permitted by the Declaration of Trust. The Trustees acting within their powers under the Declaration of Trust will not be subject to any personal liability, and will be indemnified by the Hub to the fullest extent permitted by law against all liabilities and expenses reasonably incurred in their capacity as Trustees.
Spokes will have an undivided beneficial interest in all of Hub's property, which will be represented by the ownership of beneficial interests in Hub's property. Spokes will not have legal title to Hub property. Ownership of beneficial interests in Hub will entitle each Spoke to allocable shares of the profit and loss generated by Hub and of the value of Hub property upon liquidation in proportion to the number of beneficial interests held by each Spoke. Spokes will not be able to transfer their beneficial interests in Hub, unless the prospective transferor obtains the prior unanimous consent of all beneficial owners of Hub.
Spokes holding not less than ten percent, in aggregate, of Hub's beneficial interests will have the power to call meetings of all other holders of beneficial interests in Hub. At such meetings, Spokes will have the power to vote for the election of Trustees, for the removal of Trustees, with or without cause, and for the termination of Hub. Also, Spokes will have the power to vote on any investment advisory contract entered into by the Trustees for investment and management of Hub's assets. And, Spokes will have the power to vote on any amendment to the Declaration of Trust that will affect their voting powers under the Declaration of Trust, on any amendment to the Declaration of Trust's amendment procedures, on any amendment to the Declaration of Trust required by law or by Hub's registration with the Securities and Exchange Commission and on any amendment to the Declaration of Trust submitted to Spokes by the Trustees. Finally, Spokes will have the power to vote on any additional matter relating to Hub as may be provided by the Declaration of Trust, the by-laws or any registration of Hub as an investment company under the Investment Company Act of 1940 or as the Trustees may consider necessary or desirable.
II. Ruling.
For Massachusetts tax purposes, Hub will be a partnership subject to taxation under G.L. c. 62, § 17.
The only issue presented by this letter ruling request is the proper classification of Hub for Massachusetts tax purposes. We rule that Hub will be a partnership for Massachusetts tax purposes. Initially, though, we note that the Hub will not be a "foreign corporation" or a "corporate trust," as defined by statute. Also, under the facts as represented, Hub will not be a "trust."
A. Hub 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 ...." G.L. c. 63, § 30(2). Hub will be organized as a Delaware common law business trust. It will not file a certificate of trust with the Delaware Secretary of State, and, as a result, it will not be "organized or chartered under laws other than those of the commonwealth." G.L. c. 63,§ 30(2); cf. Letter Ruling 91-2 (Business trust organized and operated under Delaware Business Trust Act, 12 Del. C. § 3801 et seq., is a "foreign corporation" for Massachusetts tax purposes.). Therefore, Hub will not be a "foreign corporation" for Massachusetts tax purposes.
B. Hub will not be a "corporate trust."
Hub will not come within the definition of 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) (emphasis added). The beneficial interests in Hub will be transferable only if the prospective transferor obtains the prior unanimous consent of the beneficial owners in Hub. As a result, the beneficial interests in Hub will not "transferable" within the meaning of G.L. c. 62, § 1(j). See State Street Trust Co. v. Hall, 311 Mass. 299, 302 (1942). Therefore, Hub will not be a "corporate trust" for Massachusetts tax purposes.
C. Hub will be a "partnership" and not a "trust."
Hub will be organized as a Delaware common law business trust and operated under a Declaration of Trust. Under Massachusetts common law, entities organized and operated under a declaration of trust have been classified either as partnerships or trusts, depending upon the manner in which the trustees conduct the affairs of the enterprise. Massachusetts applies different tax treatment to a partnership on the one hand, and a trust on the other. Notwithstanding such different treatment, neither the term "partnership" nor "trust" is defined for purposes of Massachusetts tax law. Therefore, in the absence of any statutory guidance, we look to Massachusetts common law principles to determine whether Hub is a partnership or a trust for Massachusetts tax purposes. [2]
The Supreme Judicial Court has addressed the issue as to whether an organization formed under a declaration of trust is a partnership or a trust. See Frost v. Thompson, 219 Mass. 360 (1914); Williams v. Milton, 215 Mass. 1 (1913). Under the Court's criteria, such a determination 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 v. Thompson, 219 Mass. at 365; see also Williams v. Milton, 215 Mass. 6-9. We note that this test is similar to that used by the Internal Revenue Service to differentiate trusts and partnerships and other organizations. See Treas. Reg § 301.7701-4.
We conclude that the Trustees will be subject to the control of Spokes in the conduct and operation of Hub's investment business, and, therefore, Hub will be a partnership for Massachusetts tax purposes. Under Hub's Declaration of Trust, Spokes will have the power to vote on the Trustees' conduct and operation of Hub's business. Spokes will have the power to call meetings and vote on the termination of Hub and on amendments to the Declaration of Trust. Further, Spokes will have the power to vote on any investment advisory contract and other related business decisions entered into by Trustees, as provided by the Declaration of Trust. These factors, considered as a whole, suggest that the Trustees will be acting as agents of Spokes, and not as principals of Hub. Therefore, Hub will be treated as a partnership for Massachusetts tax purposes, and, as such, it will be subject to taxation under G.L. c. 62, § 17.
Very truly yours,
/s/Mitchell Adams
Mitchell Adams
Commissioner of Revenue
MA:HMP:jd
LR 93-11