The Massachusetts Supreme Judicial Court (SJC) recently held that a corporate trustee, in this case a national bank, is subject to Massachusetts fiduciary income tax as an "inhabitant" trustee if it: (1) maintains an established place of business in the Commonwealth at which it abides (i.e., where it conducts its business in the aggregate for more than 183 days of a tax year); and (2) conducts trust administration activities within the Commonwealth that include, in particular, material trust activities relating specifically to the trust or trusts whose tax liability is at issue.¹

Background

The Massachusetts Commissioner of Revenue (Commissioner) denied² Bank of America's (bank) applications for abatement of fiduciary income taxes paid in its capacity as trustee of a number of trusts. The bank argued that these trusts did not qualify as "resident inter vivos trusts" as defined in 830 Code Mass. Regs. Section 62.10.1(1)(b). The bank appealed the deemed denial of its refund claims to the Massachusetts Appellate Tax Board (ATB). The taxability of the bank as trustee hinged on whether the bank was considered an "inhabitant" of the Commonwealth. The ATB ruled in favor of the Commissioner, reasoning that the bank should be considered an "inhabitant" of the Commonwealth within the meaning of M.G.L.A. ch. 62, Section 1(f).

Under the Massachusetts law, an "inhabitant" is defined as: "(1) any natural person domiciled in the commonwealth, or (2) any natural person who is not domiciled in the commonwealth but who maintains a permanent place of abode in the Commonwealth and spends in the aggregate more than [183] days of the taxable year in the Commonwealth, including days spent partially in and partially out of the Commonwealth … "³

A separate section⁴ of the law provides, in relevant part, that: "Corporations acting as trustee or in any other fiduciary capacity shall, with respect to the income received by them in that capacity, be subject to this chapter in the same manner and under the same conditions as individual inhabitants of the commonwealth acting in similar capacities … "

SJC finds bank an inhabitant trustee

The SJC affirmed the ATB's ruling, writing that a corporate trustee will be considered an "inhabitant" of the Commonwealth if it: "(1) maintains an established place of business in the Commonwealth at which it abides … and (2) conducts trust administration activities within the Commonwealth that include, in particular, material trust activities relating specifically to the trust or trusts whose tax liability is at issue."

The bank argued that these terms were meant to apply to natural persons acting as trustees and the instant application was unreasonable in this case. The bank also argued, among other things, that the statute was ambiguous and as such was entitled to a more favorable interpretation. It pointed out that the Commissioner had conceded in the underlying proceedings that a "corporation does not occupy a dwelling or a habitation" as does a natural person and, therefore, that Section 1(f)(2) only can apply to a corporation if a "broader formulation" of that term is employed for corporations than for individuals. The bank argued such a reading was unreasonable because a natural person acting as trustee could be an inhabitant of at most two states, whereas "a national bank could be deemed an inhabitant of every state," under this standard.⁵ The Massachusetts Bankers Association also filed an amicus brief with the SJC and argued, among other things, that no other state had such a broad nexus standard as that formulated by the ATB (and subsequently upheld by the SJC) in this case, that this standard would unnecessarily complicate tax compliance for corporate trustees and finally, that it would "chill the trust management industry in the state."⁶

Despite the arguments put forth by both the bank and the Bankers Association, the SJC held that the ATB "did not err" and that its decision was a "reasonable" interpretation of the relevant statutes.

Implications

For fiduciary income tax purposes, the nexus standard as defined by the SJC would apply to future as well as past tax periods. Corporate trustees should evaluate their relevant trust business, past tax filings and contacts with Massachusetts in light of this decision.

———————————————

———————————————
ENDNOTES

¹ Bank of America, N.A. v. Commissioner of Revenue, 474 Mass. 702, 712 (2016).

² They were deemed denied by the passage of time since the application was filed.

³ M.G.L.A. ch. 62, Section 1(f).

⁴ M.G.L.A. ch. 62, Section 14.

⁵ Appellant's Brief, Bank of America, at 16 and 35 (emphasis in original).

⁶ Amicus Brief, Massachusetts Bankers Association, at 2 and 12.