(1)
Statement of Purpose; Outline
of Topics; Effective Date
(a)
Statement of Purpose. The purpose of 830 CMR 63.38.7
is to explain the allocation and apportionment of income from mutual fund sales
of mutual fund service corporations, as provided in M.G.L. c. 63, §
38(m).
(b)
Outline of
Topics. 830 CMR 63.38.7, is organized as follows:
1. Statement of Purpose; Outline of Topics;
Effective Date
2.
Definitions
3. General
4. Apportionment of Income from Mutual Fund
Sales
5. Job Growth
Requirements
6. Reporting
Requirements
(c)
Effective Date. The provisions of 830 CMR 63.38.7
shall take effect upon promulgation.
(2)
Definitions. For
the purposes of 830 CMR 63.38.7, the following terms shall have the following
meanings, unless the context requires otherwise:
Affiliate, the meaning as set forth in
15 U.S.C. § 80a-2(a)(3)(c),
as may be amended from time to time.
Affiliated Regulated Investment Company (or
Affiliated RIC), a regulated investment company that is a
shareholder in another regulated investment company; and in common with such
other regulated investment company, obtains management or distribution
services, as described in 830 CMR 63.38.7(3)(d), from the same provider of such
services or a related provider.
Commissioner, the Commissioner of
Revenue, or the Commissioner's duly authorized representative.
Corporate Trust, any partnership,
association or trust, organized by the execution and delivery of a declaration
of trust, the beneficial interest of which is divided into transferable units
or shares.
Limited Liability Company, an
unincorporated organization formed under M.G.L. c. 156C, and having two or more
members or a limited liability company formed under the laws of any other state
or foreign country. See M.G.L. c. 156C, § 2.
Mutual Fund Sales, taxable net income
derived within the taxable year, directly or indirectly, from the rendering of
management, distribution, or administration services to a regulated investment
company, including net income received directly or indirectly from trustees,
sponsors, and participants of employee benefit plans which have accounts in a
regulated investment company. See830 CMR 63.38.7(3)(d).
Mutual Fund Service Corporation, any
domestic or foreign corporation, corporate trust, or limited liability company
doing business in Massachusetts, which derives more than 50% of its gross
income from providing, directly or indirectly, management, distribution or
administration services to or on behalf of a regulated investment company, and
from trustees, sponsors and participants of employee benefit plans which have
accounts in a regulated investment company.
Qualified Employee in Massachusetts,
an individual who (i) is employed by a mutual fund service corporation; (ii)
works on a full-time basis with a normal work week of 30 or more hours; (iii)
at the start of his or her employment does not have a predetermined or
specified termination date; (iv) is eligible to receive employee benefits,
including, but not limited to, paid holidays, vacation and unemployment
benefits; and (v) is subject to Massachusetts income tax withholding. Three or
fewer individuals who between them fulfill the requirement of (ii) and who each
meet the requirements of (i), (iii), (iv), and (v) shall be counted as one
qualified employee.
Qualified Employee Worldwide, an
individual who meets the criteria in 830 CMR 63.38.7(2): Qualified
Employee in Massachusetts (i) through (iv). Three or fewer
individuals who between them fulfill the requirement of 830 CMR 63.38.7(2):
Qualified Employee in Massachusetts (ii) and who each
meet the requirements of 830 CMR 63.38.7(2): Qualified Employee
in
Massachusetts (i), (iii), (iv) and (v)
shall be counted as one qualified employee.
Regulated Investment Company (RIC),
the meaning as set forth in Section 851 of the Internal Revenue Code, as
amended and in effect for the taxable year.
Taxable Net Income, gross income less
deductions under M.G.L. c. 63, § 30, adjusted as provided in M.G.L. c. 63,
§ 38(a).
(3)
General.
(a)
Application of Regulation. 830 CMR 63.38.7 applies
only to taxable net income that is (i) derived from mutual fund sales and (ii)
received by mutual fund service corporations. Any taxable net income received
by mutual fund service corporations that is not derived from mutual fund sales
must be apportioned according to the provisions of M.G.L. c. 63, § 38(c).
See
830 CMR
63.38.1.
(b)
Use of a Weighted Average
Apportionment Percentage to Calculate the Non-income Measure of the
Excise. Based on the above apportionment rules, a mutual fund
service corporation that has taxable net income from mutual fund sales as well
as taxable net income from non-mutual fund sales in the same tax year will have
two income apportionment percentages for that year. If a mutual fund service
corporation is subject to the non-income measure of the corporate excise under
M.G.L. c. 63, §§ 32, 39, the mutual fund service corporation must use
a weighted average of the two apportionment percentages to calculate the
non-income measure of its excise due for that tax year. To determine the
weighted average percentage, a mutual fund service corporation must calculate
the ratio of its taxable net income from mutual fund sales to its taxable net
income from non-mutual fund sales.
Example 1: ABC Company has $900,000 of
taxable net income from mutual fund sales and its apportionment percentage for
this income is 25%. ABC Company also has $100,000 of taxable net income from
non-mutual fund sales and its apportionment percentage for this income is 75%.
ABC Company's taxable net income from mutual fund sales represents 90% of its
total taxable net income and its taxable net income from non-mutual fund sales
represents 10% of its total taxable net income.
To determine ABC Company's weighted average apportionment
percentage, calculate as follows:
1.
multiply the mutual fund apportionment percentage by its weight 25% x 90% =
22.5%
2. multiply the other income
apportionment percentage by its weight 75% x 10% = 7.5%
3. add these two percentages to arrive at the
weighted average apportionment percentage 22.5% +7.5% = 30%
ABC Company would then use this percentage (30%) to calculate
the non-income measure of its excise due for that tax year.
The above calculation shall be used when a mutual fund service
corporation has taxable net income from mutual fund sales and taxable net
income from non-mutual fund sales. When a mutual fund service corporation has a
loss from its mutual fund sales business, a loss from its non-mutual fund sales
business, or both, the corporation must determine its weighted average
apportionment percentage based on the ratio of its gross receipts from its
mutual fund sales business to its gross receipts from its non-mutual fund sales
business. For purposes of 830 CMR 63.38.7(3)(b), the term "gross receipts"
shall mean gross income as defined under M.G.L. c. 63, § 30.
Example 2: XYZ Company has a $70,000
loss from its mutual fund sales business and its apportionment percentage for
this income is 25%. XYZ Company also has a $50,000 loss from its non-mutual
fund sales business and its apportionment percentage for this income is 75%.
Because XYZ Company has a loss from both its mutual fund sales and non-mutual
fund sales businesses, its weighted apportionment percentage must be determined
by reference to its respective gross receipts from its mutual fund sales and
non-mutual fund sales businesses. XYZ Company has $2,200,000 in gross receipts
from its mutual fund sales business and $300,000 in gross receipts from its
non-mutual fund sales business. Therefore, XYZ Company has gross receipts from
its mutual fund sales business that represent 88% of its total gross receipts
and gross receipts from its non-mutual fund business that represent 12% of its
total gross receipts.
To determine XYZ Company's weighted average apportionment
percentage, calculate as follows:
1. multiply the mutual fund apportionment
percentage by its weight 25% x 88% = 22%
2. multiply the non-mutual fund apportionment
percentage by its weight 75% x 12% = 9%
3. add these two percentages to arrive at the
weighted average apportionment percentage 22% + 9% = 31%
XYZ Company would then use this percentage (31%) to calculate
the non-income measure of its excise due for that tax year.
Example 3: Fund Corporation has a
$25,000 loss from its mutual fund sales business and its apportionment
percentage for this income is 30%. Fund Corporation also has $75,000 of taxable
net income from its non-mutual fund sales business and its apportionment
percentage for this income is 70%. Because Fund Corporation has a loss from its
mutual fund sales business, its weighted apportionment percentage must be
determined by reference to its respective gross receipts from its mutual fund
sales and non-mutual fund sales businesses. Fund Corporation has $2,700,000 in
gross receipts from its mutual fund sales business and $300,000 in gross
receipts from its non-mutual fund sales business. Therefore, Fund Corporation
has gross receipts from its mutual fund sales business that represent 90% of
its total gross receipts and gross receipts from its non-mutual fund business
that represent 10% of its total gross receipts.
To determine Fund Corporation's weighted average apportionment
percentage, calculate as follows:
1. multiply the mutual fund apportionment
percentage by its weight 30% x 90% = 27%
2. multiply the non-mutual fund apportionment
percentage by its weight 70% x 10% = 7%
3. add these two percentages to arrive at the
weighted average apportionment percentage 27% + 7% = 34%
Fund Corporation would then use this percentage (34%) to
calculate the non-income measure of its excise due for that tax
year.
(c)
Taxable Net Income From Mutual Fund Sales. To
determine taxable net income from mutual fund sales, a mutual fund service
corporation must take the following steps.
1.
The mutual fund service corporation must separate its gross income into two
categories:
(i) mutual fund sales and
(ii) non-mutual fund
sales.
2. The mutual fund
service corporation must also separate its allowable deductions into
categories:
(i) deductions directly traceable
to mutual fund sales,
(ii)
deductions directly traceable to non-mutual fund sales, and
(iii) other allowable deductions. The
category of other allowable deductions consists of deductions not directly
traceable to either type of sale. Taxable net income from mutual fund sales
equals gross income derived from mutual fund sales less:
(i) any deductions directly traceable to its
mutual fund sales and
(ii) a
portion of other allowable deductions. To determine the portion of other
allowable deductions to be subtracted from gross income derived from mutual
fund sales, a mutual fund service corporation must multiply the total amount of
other allowable deductions by a fraction, the numerator of which is the mutual
fund service corporation's gross income derived from mutual fund sales for the
taxable year and the denominator of which is the mutual fund service
corporation's total gross income for the taxable year.
(d)
Mutual
Fund Sales. Mutual fund sales include all amounts derived,
directly or indirectly, from the performance of the following services:
1.
Management
services. The term management services includes, but is not
limited to, the rendering of investment advice or investment research to or on
behalf of a RIC, making determinations as to when sales and purchases of
securities are to be made on behalf of the RIC, or the selling or purchasing of
securities constituting assets of a RIC. Such activities must be performed:
a. pursuant to a contract with the RIC
entered into pursuant to 15 U.S.C. section a-15(a);
b. for a person that has entered into a such
a contract with the RIC; or
c. for a
person that is affiliated with a person that has entered into such a contract
with the RIC.
2.
Distribution services. The term distribution services
includes, but is not limited to, advertising, servicing, marketing or selling
shares of a RIC, including the receipt of contingent deferred sales charges and
fees received pursuant to
17
CFR §
270.12b-1.
a. In the case of an open end company,
advertising, servicing or marketing shares must be performed by a person who is
either engaged in or affiliated with a person that is engaged in the services
of selling shares of a RIC. The service of selling shares of a RIC must be
performed pursuant to a contract entered into pursuant to 15 U.S.C. section
a-15(b).
b. In the case of a closed
end company, advertising, servicing or marketing shares must be performed by a
person who was either engaged in or affiliated with a person that was engaged
in the services of selling shares of a RIC.
3.
Administration
services. The term administration services includes, but is not
limited to, clerical, fund or shareholder accounting, participant record
keeping, transfer agency, bookkeeping, data processing, custodial, internal
auditing, legal and tax services performed for a RIC. The provider of
administration services must also provide or be affiliated with a person that
provides management or distribution services to any RIC.
(e)
Direct and Indirect
Services.
1.
Direct
services. Amounts are derived directly from the performance of
management, distribution or administration services when they are received as
compensation for providing such services to a RIC or to a RIC's officers,
directors or trustees acting on behalf of the RIC. For example, the fee
received by a person hired by a RIC's trustees to manage the RIC's assets is
derived directly from the performance of management services.
2.
Indirect
services. Amounts are derived indirectly from the performance of
management, distribution or administration services when they are received as
compensation for providing such services to a person who is directly
responsible for providing management, distribution or administration services
to a RIC pursuant to a contract between such person and the RIC or the RIC's
officers, directors, or trustees acting on behalf of the RIC. For example, the
fee received by a brokerage firm hired by a person that is under contract to
provide management services to a RIC is derived indirectly from the performance
of management services.
(4)
Apportionment of Income from
Mutual Fund Sales.
(a)
Qualifying Mutual Fund Service Corporations. A mutual
fund service corporation that meets the job growth criteria under 830 CMR
63.38.7(5), must apportion its taxable net income from mutual fund sales to
Massachusetts by multiplying its total taxable net income from mutual fund
sales for the taxable year by the mutual fund service corporation's sales
factor, determined under 830 CMR 63.38.7(4)(c).
(b)
Non-qualifying Mutual Fund
Service Corporations.
1. A
mutual fund service corporation that (i) has gross income derived from mutual
fund sales to one or more RICs with shareholders domiciled outside
Massachusetts and (ii) does not meet the job growth criteria under 830 CMR
63.38.7(5), must multiply its total taxable net income from mutual fund sales
for the taxable year by a fraction, the numerator of which is the sum of its
property and payroll factors, determined under
830 CMR
63.38.1, and twice times its sales factor,
determined under 830 CMR 63.38.7(4)(c), and the denominator of which is
four.
2. A mutual fund service
corporation that does not have gross income derived from mutual fund sales to
one or more RICs with shareholders domiciled outside Massachusetts and does not
meet the job growth criteria under 830 CMR 63.38.7(5), below, must allocate all
of its taxable net income from mutual fund sales to
Massachusetts.
(c)
Sales Factor. A mutual fund service corporation
determines its sales factor as follows:
1.
Mutual fund sales are determined separately for each separate RIC from which
the mutual fund service corporation receives fees for mutual fund
services.
2. Mutual fund sales for
each RIC are then multiplied by a fraction, the numerator of which is the
average number of shares owned by the RIC's shareholders domiciled in
Massachusetts at the beginning and end of the RIC's taxable year that ends with
or within the mutual fund service corporation's taxable year, and the
denominator of which is the average number of shares owned by all of the RIC's
shareholders for the same period. Notwithstanding the above, a mutual fund
service corporation may use the year end of the RIC's fund advisor for this
calculation so long as the mutual fund service corporation consistently uses
this method from year to year. For purposes of this provision, a RIC's fund
advisor is the person that is directly and primarily responsible for providing
investment advice to the RIC under a contract entered into pursuant to 15
U.S.C. § a-15(a).
3. The
resulting amounts for each RIC are then added together. The sum is the amount
of mutual fund sales assigned to Massachusetts.
4. The sales factor is a fraction, the
numerator of which is the amount of mutual fund sales assigned to Massachusetts
and the denominator of which is the mutual fund service corporation's total
amount of mutual fund sales.
For purposes of this calculation, mutual fund sales by a mutual
fund service corporation are assigned to Massachusetts based on the domicile of
the RIC's shareholders of record. The domicile of a shareholder of record is
generally the shareholder's mailing address on the records of the RIC.
Notwithstanding 830 CMR 63.38.7(4)(c):
i. if a shareholder of record is an
affiliated RIC, then for shares held by such affiliated RIC, the mailing
addresses of the shareholders of record of the affiliated RIC shall be presumed
to be the domicile of the shareholder of record, determined proportionately
with respect to the shares of the affiliated RIC held by each such shareholder
of the affiliated RIC.
Example: ABC is a mutual fund service
corporation. ABC provides management services to a number of RICs (the ABC
Funds) that are marketed to the public as being part of an identifiable mutual
fund group sponsored by ABC or related entities. The ABC Funds invest cash in
IFunds, another RIC within the ABC group of funds. IFunds specializes in
investing in various short-term money-market and similar instruments. ABC, or a
related service provider, provides management services to IFunds. The
management fee income received by ABC, or such related provider, that is
attributable to management services rendered to IFunds and that is
characterized as mutual fund sales income shall be assigned to Massachusetts
based on the domicile of IFunds' shareholders of record. Where any such
shareholder of record is an ABC Fund that is an affiliated RIC, then to the
extent of the IFund shares owned by such ABC Fund, the shareholders of record
of such shares shall be presumed to be the shareholders of such ABC Fund, in
proportion to their holdings in such ABC Fund. Thus, if an ABC Fund, qualifying
as an affiliated RIC, held 100,000 shares in IFunds, and if 10% of the shares
of such ABC Fund were held by shareholders having Massachusetts mailing
addresses, then 10,000 shares of IFunds held by such ABC Fund would be assigned
to Massachusetts.
ii. if a
shareholder of record is a company which holds the shares of the RIC as
depositor for the benefit of a separate account, then for all shares held in
such separate account, the mailing address of such company shall be presumed to
be the domicile of the shareholder of record. However, if either the RIC or
mutual fund service corporation has actual knowledge that the company's mailing
address is different than the company's principal place of business, then the
presumption does not apply and the address of the company's principal place of
business shall be considered the domicile of the shareholder of record.
Notwithstanding any other provisions of 830 CMR 63.38.7, the
provisions of 830 CMR 63.38.7(4)(c) shall apply to taxable years beginning on
or after January 1, 2006.
(d) The following example illustrates the
provisions of 830 CMR 63.38.7(4)(a), (c).
XYZ Financial Services ("XYZ") is a mutual fund service
corporation that meets the job growth requirement of 830 CMR 63.38.7(5). For
the 1998 taxable year, XYZ has $400,000 of gross income derived from brokerage
services and $2,000,000 of gross income derived from mutual fund sales. The
gross income derived from mutual fund sales consists of fees received from the
RIC's described in the table below. The table also provides the average number
of shares held by shareholders domiciled in Massachusetts and average number of
total shares for each RIC for the taxable year.
|
Fund |
Fees |
Shares Held By MA
Shareholders |
Total Shares |
|
Growth |
$1,000,000 |
100 |
400 |
|
Income |
$ 500,000 |
100 |
200 |
|
International |
$ 500,000 |
50 |
200 |
XYZ has $1,000,000 in allowable deductions for the taxable
year. $200,000 of these deductions are directly traceable to its brokerage
services. $500,000 are directly traceable to its mutual fund sales. The
remaining $300,000 deductions are not directly traceable to either XYZ's
brokerage services or mutual fund sales and are therefore considered other
allowable deductions.
XYZ must apportion its taxable net income derived from mutual
fund sales to Massachusetts as follows.
Step 1: Determine Taxable Net Income from Mutual
Fund Sales
a. Start with
$2,000,000 of gross income derived from mutual fund sales.
b. Subtract deductions directly traceable to
mutual fund sales:
$2,000,000 - $500,000 = $1,500,000
c. Subtract the portion of other allowable
deductions allocable to mutual fund sales:
Click
here to view image
Click
here to view image
d. The resulting amount of $1,250,000 is
taxable net income derived from mutual fund sales.
Step 2: Determine Sales Factor
.
a. Separate mutual fund sales by
individual RICs.
|
Growth Fund |
= $1,000,000 |
|
Income Fund |
= $ 500,000 |
|
International Fund |
= $ 500,000 |
b.
Multiply the separate amount of mutual fund sales for each RIC by the following
fraction:
Click
here to view image
c. Add the resulting amounts to determine
total mutual fund sales assigned to Massachusetts.
$250,000 + $250,000 + $125,000 = $625,000
d. Calculate sales factor:
Click
here to view image
Step 3: Apportion Taxable Net Income Derived from
Mutual Fund Sales to Massachusetts.
$1,250,000 x 31.25% = $ 390,625
(5)
Job Growth
Requirement.
(a)
Required Employment Levels. A mutual fund service
corporation meets the job growth requirement for a taxable year if it maintains
an employment level equal to or greater than its jobs commitment level. A
mutual fund service corporation's employment level for a taxable year is equal
to the number of qualified employees in Massachusetts on the last day of the
mutual fund service corporation's taxable year. If a mutual fund service
corporation participates with other mutual fund service corporations in the
filing of a combined return, the employment level for a taxable year for the
combined group is equal to the total number of qualified employees of all
combined group members in Massachusetts on the last day of the combined group's
taxable year. A mutual fund service corporation's jobs commitment level is
equal to the following amounts for the following taxable years:
1. For taxable years beginning on or after
January 1, 1997 but before January 1, 1998; 105% of the base period employment
level;
2. For taxable years
beginning on or after January 1, 1998 but before January 1, 1999; 110% of the
base period employment level;
3.
For taxable years beginning on or after January 1, 1999 but before January 1,
2000; 115% of the base period employment level;
4. For taxable years beginning on or after
January 1, 2000 but before January 1, 2001; 120% of the base period employment
level;
5. For taxable years
beginning on or after January 1, 2001 but before January 1, 2003; 125% of the
base period employment level;
6.
For taxable years beginning on or after January 1, 2003, all mutual fund
service corporations are deemed to meet the job growth requirement and are
required to apportion taxable net income from mutual fund sales to
Massachusetts using the single factor apportionment percentage provided in 830
CMR 63.38.7(4)(a).
(b)
Base Period Employment Level. The base period
employment level of a mutual fund service corporation is the number of
qualified employees of the mutual fund service corporation in Massachusetts as
of January 1, 1996. In the case of a mutual fund service corporation
participating in the filing of a combined return, the base period employment
level shall be computed for the combined group as a whole, based upon the
number of qualified employees in Massachusetts as of January 1, 1996 of all
members of the combined group. A mutual fund service corporation must retain
its payroll records documenting the number of its employees as of January 1,
1996 to assist the Commissioner in determining whether the mutual fund service
corporation has met its required employment level for each taxable year
beginning on or after January 1, 1997.
(c)
Special Rule For New Mutual
Fund Service Corporations. If a mutual fund service corporation
was not engaged in business in Massachusetts on January 1, 1996, then its base
period employment level shall be its average employment level for the first two
years it is engaged in business in Massachusetts. Such mutual fund service
corporation's jobs commitment level shall be its base period employment level
increased by five percent for every taxable year after the year in which the
base period employment level is established, until January 1, 2003. For taxable
years beginning on or after January 1, 2003, all mutual fund service
corporations are deemed to meet the job growth requirement and are required to
apportion taxable net income from mutual fund sales to Massachusetts using the
single factor apportionment percentage provided in 830 CMR
63.38.7(4)(a).
(d)
Special Rule For Corporate Restructuring.
1. When the acquisition of a business or line
of business or other corporate restructuring results in an increase in the
number of qualified employees of the mutual fund service corporation, the base
period employment level to be applied in the taxable year during which such
restructuring occurs, and in all subsequent taxable years, shall be increased
by the base period employment level of the acquired business or line of
business. If the acquired business or line of business is not a mutual fund
service corporation, it shall determine its base period employment level as
though it were a mutual fund service corporation.
See830 CMR 63.38.7(5)(b).
2. When the divestiture of a line of business
or other corporate restructuring results in a decrease in the number of
qualified employees of a mutual fund service corporation, the base period
employment level to be applied in the taxable year during which such
restructuring occurs, and in all subsequent taxable years, shall be decreased
by the base period employment level of the divested line of business only if
the mutual fund service corporation can demonstrate that the corporate
restructure will not result in any reduction in the number of jobs in
Massachusetts.
(e)
Exception For Adverse Economic Conditions. A mutual
fund service corporation that fails to meet the job growth requirement set
forth in 830 CMR 63.38.7(5)(a), for any taxable year may nevertheless apportion
its taxable net income derived from mutual fund sales using the single sales
factor apportionment formula set forth in 830 CMR 63.38.7(4)(a), for that
taxable year, if it can demonstrate to the Commissioner, in a manner prescribed
by the Commissioner, that its failure to meet the required jobs commitment
level for the taxable year was the direct result of adverse economic
conditions.
1.
Effect on one
taxable year. If a mutual fund service corporation demonstrates
adverse economic conditions for any one taxable year, the mutual fund service
corporation may decrease its jobs commitment level for all subsequent taxable
years beginning before January 1, 2002, by 5% of its base period employment
level.
2.
Effect on
more than one taxable year. If a mutual fund service corporation
demonstrates adverse economic conditions for more than one taxable year, the
mutual fund service corporation may decrease its jobs commitment level for each
taxable year affected by such conditions, and for all subsequent taxable years
beginning before January 1, 2002. The amount of the decrease shall be 5% of the
base period employment level multiplied by the number of taxable years during
which adverse economic conditions are shown to exist. However, notwithstanding
any such decrease, the jobs commitment level for taxable years beginning on or
after January 1, 2002, and before January 1, 2004 shall not be less than the
sum of the jobs commitment level for the most recent taxable year unaffected by
adverse economic conditions and 5% of the base period employment
level.
3.
Adverse
economic conditions defined. Adverse economic conditions shall
exist with respect to any taxable year only where during any 12 month period
ending during the taxable year either:
a. the
Standard and Poor's 500 Stock Index decreases 10% or more compared to its level
at the beginning of the 12 month period;
b. the average daily trading volume on the
New York Stock Exchange decreases 15% or more compared to the average over the
preceding 12 months; or
c. at any
time during the taxable year, the total assets under management of the mutual
funds served by the mutual fund service corporation decreases 12 and 1/2 %
or more compared to such total assets under management 12 months
earlier.
(f)
Combined Returns. When one or more mutual fund service
corporations joins in the filing of a combined return, as provided by
830 CMR
63.32B.1, each mutual fund service
corporation shall determine and apportion its taxable net income separately.
However, for purposes of determining whether the job growth requirement and any
adverse economic conditions apply, as provided above, such determinations are
to be made based on a combined group basis, and not on a corporation by
corporation basis. If the job growth requirement is met by the combined group,
all of the mutual fund service corporations participating in the combined
return will be eligible to apportion taxable net income from mutual fund sales
to Massachusetts using the single factor apportionment percentage provided in
830 CMR 63.38.7(4)(a). If the job growth requirement is not met by the combined
group, and the adverse economic conditions exception does not apply, none of
the mutual fund service corporations participating in the combined return will
be eligible to apportion taxable net income from mutual fund sales to
Massachusetts using the single factor apportionment percentage provided in 830
CMR 63.38.7(4)(a). Instead, such corporations, as part of the combined group,
must follow the rules under 830 CMR 63.38.7(4)(b).
(g) The following example illustrates the
provisions of 830 CMR 63.38.7(5).
Example. Mutual Funds, Inc. is a
calendar year taxpayer. It is the parent corporation of three subsidiary
corporations, Global Securities, Investments USA, and Investments
International, all of which participate in the filing of a Massachusetts
combined return ("the MFI Group"). Because these corporations participate in
the filing of a combined return, they compute their base period employment
level on a combined group basis. The MFI Group has 1000 qualified employees on
January 1, 1996. This number is the MFI Group's base period employment level.
On December 31, 1997, the MFI Group has 1070 qualified employees. The MFI Group
meets the job growth requirement for the 1997 taxable year because its
employment level exceeds its jobs commitment level of 1050 (105% of
1000).
On June 30, 1998, Mutual Funds, Inc. sells Investments
International, whose base period employment level is 100, to an unrelated
mutual fund service corporation based in New York, which has no plans to layoff
or relocate any employees and does not do so. The MFI Group adjusts its base
period employment level due to this corporate restructure to 900. On December
31, 1998, the MFI Group has 1001 employees. The MFI Group meets the job growth
requirement for the 1998 taxable year because its employment level exceeds its
job commitment level of 990 (110% of 900).
On September 15, 1998, Standard and Poor's 500 Stock Index is
865.27. On September 15, 1999, Standard and Poor's 500 Stock Index is 626.65, a
27.57% decrease. An adverse economic condition exists with respect to the MFI
Group for its 1999 taxable year because the decrease in the Index exceeds 10%.
On December 31, 1999, the MFI Group has only 1010 qualified employees. The MFI
Group fails to meet its jobs commitment level of 1035 for 1999 (115% of 900).
The MFI Group may nevertheless use the single sales factor apportionment
formula set forth in 830 CMR 63.38.7(4)(a) because it can demonstrate that its
failure to meet its jobs commitment level was a direct result of an adverse
economic condition that occurred that year.
On December 31, 2000, the MFI Group has 1047 qualified
employees. Because the MFI Group demonstrated adverse economic conditions in
its 1999 taxable year, it may reduce its jobs commitment level for the 2000
taxable year by 5% of its base period employment level. Thus the MFI Group's
job commitment level for the 2000 taxable year is 1035 (115% of 900) and not
1080 (120% of 900), as would be the case in the absence of adverse economic
conditions. The MFI Group meets the job growth requirement for the 2000 taxable
year because its employment level exceeds its job commitment
level.
(6)
Reporting Requirements.
(a)
Annual Reporting
Requirement. A mutual fund service corporation that is required to
apportion its taxable net income derived from mutual fund sales to
Massachusetts using the single factor apportionment percentage prescribed by
830 CMR 63.38.7(4)(a), must report certain information relating to its business
operations to the Commissioner on an annual basis. Such information must be
reported to the Commissioner, on a schedule prescribed by the Commissioner, and
the schedule must be included in the mutual fund service corporation's annual
tax return on which income derived from mutual fund sales is reported. All
information supplied will be confidential under M.G.L. c. 62C, §
21.
(b)
Record
Retention. For each tax year in which a mutual fund service
corporation uses the single factor apportionment percentage prescribed by 830
CMR 63.38.7(4)(a), the mutual fund service corporation must maintain general
ledger trial balances or other suitable records that identify its income
producing activities and the costs associated with them.
830 CMR 63.38.7: M.G.L. c. 14, § 16(1); M.G.L. c. 62C,
§ 3; M.G.L. c. 63, § 38(m)
