|Organization:||Massachusetts Department of Revenue|
|Referenced Sources:||Massachusetts General Laws|
Personal Income Tax
November 18, 1998
You request a letter ruling allowing the *************** ("the S Corporation") to include its non-resident Electing Small Business Trust ("ESBT") shareholders in the composite tax return that it files as agent for its qualified electing non-resident S shareholders.  In tax year 1997, 16 of the S Corporation's 69 shareholders were ESBTs. The only asset held by the ESBTs is stock in the S Corporation.
Under Massachusetts Regulation 830 CMR 62.5A.1(12)(g), an S corporation may file a composite return as an agent for its qualified electing non-resident shareholders. A shareholder is a qualified electing shareholder only if the shareholder meets several criteria, including a requirement that the shareholder be either a non-resident individual or the estate or trust of a deceased non-resident shareholder. See 830 CMR 62.5A.1(12) (f)(1) and (g).
Although an ESBT is neither an individual nor the estate or trust of a deceased individual, an ESBT shareholder has many of the tax attributes of a individual that owns shares in an S corporation. Like an individual, an ESBT has a separate tax identification number, includes in income its pro rata share of the S corporation income, and pays tax at the trust level on its pro rata share of S corporation income for both Massachusetts and federal purposes. G.L. c. 62, § 10; IRC § 641(d).  Thus, it is appropriate to treat an ESBT shareholder in the same manner as an individual shareholder for purposes of being included in a composite return.
We rule that the S Corporation's shareholders that are ESBTs may be included in a composite return, provided that the ESBT shareholder otherwise falls within the definition of a qualified electing shareholder under 830 CMR 62.5A.1(12)(f)(1) and (g).
Very truly yours,
/s/Bernard F. Crowley, Jr.
Bernard F. Crowley, Jr.
Acting Commissioner of Revenue