E-Bulletin to Clients Regarding Massachusetts Security Corporations

Many Massachusetts financial institutions hold investment securities in subsidiaries qualified as "security corporations" under Massachusetts tax law.  The Massachusetts Department of Revenue ("DOR") recently issued a draft DOR Directive containing two new directives that may adversely affect the continued eligibility of certain security corporations under the Massachusetts tax laws.  The DOR has invited public comments on or before October 14, 2011.

The first new directive would disqualify security corporations whose capital stock is pledged to secure indebtedness of a parent stockholder unless no more than 50% of the security corporation stock is pledged and there are no negative covenants restricting the permissible assets, liabilities or investments of the security corporation subsidiary. With some limited protection for existing pledges of security corporation stock, this new rule is intended to take effect immediately.

Among other implications, this first directive could disqualify security corporations whose capital stock is pledged by a parent bank or insurance company to secure advances from the Federal Home Loan Bank or the Federal Reserve Bank of Boston.

The second directive would disqualify a security corporation that acquires appreciated securities from an affiliate on other than arms length terms and subsequently sells those securities for gain.  This directive would apply to all open tax years and is based on the "sham transaction" theory.

Questions regarding the draft directives and the opportunity to submit written comments thereon may be directed to Kathleen King Parker at 617-488-8114.