Monitoring Massachusetts Business Trust Developments - January 2004

Since 1999, many Massachusetts taxpayers have been operating in corporate structures designed to have all of their income treated as earned by and taxed to a parent organization (i.e. a Massachusetts Business Trust) not subject to entity level taxes imposed on subchapter S corporations with gross receipts in excess of $6million. This additional tax is known as the "sting tax." The benefits of these structures as far as the sting tax is concerned ended on March 4, 2003 when the applicable law was changed. As a result of this change, many taxpayers are re-evaluating these corporate structures.

The major decision is whether to retain the existing structure, change to an alternative structure or unwind structural changes made since 1999.

On December 9, 2003, the Massachusetts Department of Revenue (DOR) requested comments on its draft directive dealing with the consequences of certain reorganizations of Qualified Subchapter S Subsidiaries (QSUB) and other entities. 

As a result, we are in the process of considering more tax efficient corporate structures. As part of this analysis, we are looking at approaches to unwind existing structures. The DOR draft directive addresses the department’s position on two approaches to unwinding existing structures; an upstream merger of the QSUB into its parent and, alternatively, a downstream merger of the parent into the QSUB. Inasmuch as the directive is a draft, and that issues such as preservation of limited liability, satisfaction of various tax-free reorganization provisions and the Alternative Minimum Tax impact on shareholders also need to be examined, we continue to monitor the developments in this area. When more guidance from DOR (in final form) is available, we will bring the appropriate solutions to your attention. 

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