Did a regulated investment company organized as a Massachusetts business trust owe California's minimum franchise tax under section 23153?

Plain-English summary

California Chief Counsel Ruling 2016-01 held that a regulated investment company organized as a Massachusetts business trust was not subject to California's minimum franchise tax under Revenue and Taxation Code section 23153.

California treated business trusts as corporations for the Chapter 3 corporation income tax.

But it did not include business trusts in the corporation definition for the Chapter 2 franchise tax, where the minimum tax was imposed.

Taxpayer structure

The taxpayer was a Massachusetts business trust.

It qualified annually and intended to continue qualifying as a regulated investment company for federal and California tax purposes.

It requested confirmation that it was not a corporation for the section 23153 minimum franchise tax.

Two California corporate-tax chapters

Chapter 2 governed the corporation franchise tax and required covered corporations to pay at least the minimum franchise tax regardless of income.

Chapter 3 imposed the corporation income tax.

Section 24871 stated that regulated investment companies were subject to taxes under both chapters, but the entity still had to fit the relevant chapter's corporation definition.

Why the definitions produced different results

Section 23038(a) supplied the general corporation definition used in both chapters.

Section 23038(b)(2)(A) expressly expanded "corporation" to include business trusts for Chapter 3 income-tax purposes.

No comparable expansion applied to Chapter 2.

The taxpayer therefore could be treated as a corporation for the corporation income tax without being a corporation for the Chapter 2 minimum franchise tax.

Holding

Because the Massachusetts business trust was not a corporation for Chapter 2 purposes, section 23153 did not impose the minimum franchise tax on it.

The ruling did not exempt the taxpayer from every California tax provision; it decided only the minimum-franchise-tax question.

What this means for you

Regulated investment companies

RIC status alone did not answer the minimum-tax question. The legal form and the chapter-specific corporation definition mattered.

Business trusts and investment funds

An entity can be classified as a corporation for one California tax chapter but not another. Review the specific tax imposed rather than relying on a single global label.

Fund tax departments

Document the trust's governing form, RIC qualification, and the precise California chapter and section for each filing or payment obligation.

Common questions

Q: Was the RIC a corporation for the Chapter 3 income tax?

A: Yes, because section 23038 expressly included business trusts for that chapter.

Q: Was it a corporation for the Chapter 2 franchise tax?

A: No.

Q: Did it owe the section 23153 minimum franchise tax?

A: No.

Q: Did the ruling eliminate every California tax obligation?

A: No. It addressed only the minimum franchise tax under section 23153.

Citations and references

• Cal. Rev. & Tax. Code §§ 21012(a)(1), 23038, 23153, 23501, and 24871(a)(2)

Source

• Landing page: California FTB Chief Counsel Rulings
• Official PDF: Chief Counsel Ruling 2016-01

Original ruling text

chair Betty T. Yee| member Jerome E. Horton| member Michael Cohen

Legal Division MS A260
PO Box 1720
Rancho Cordova, CA 95741-1720
tel: 916.845.4324 fax: 916.364.2713
[email protected]

02.17.16
CHIEF COUNSEL RULING 2016-01

* . **

Re: Request for Chief Counsel Ruling

Dear M. ***:

In your letter you requested confirmation that * *** ** ** ("Taxpayer") is not a corporation for purposes of the annual Minimum Franchise Tax imposed under California Revenue and Tax Code (RTC) section 23153.

FACTS

Taxpayer, a Massachusetts Business Trust, qualifies annually, and intends to continue to qualify annually, as a regulated investment company ("RIC") for Federal and California tax purposes.

ISSUE

Whether a RIC organized as a business trust is a “corporation” for purposes of the Minimum Franchise Tax imposed under RTC section 23153.

HOLDING

A RIC organized as a Massachusetts Business Trust is not a “corporation” as that term is used in RTC section 23153 and, accordingly, a RIC organized as a business trust is not liable for the Minimum Franchise Tax imposed under that section.

DISCUSSION

Chapter 2 of the RTC governs the Corporation Franchise Tax ("Chapter 2 Corporation Franchise Tax"). The Chapter 2 Corporation Franchise Tax requires qualifying corporations to pay at least a minimum franchise tax no matter their income

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Chief Counsel Ruling 2016-01
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("Minimum Franchise Tax").1 Chapter 3 imposes the Corporation Income Tax on corporations ("Chapter 3 Corporation Income Tax").2

RTC section 24871, subdivision (a)(2), states: "Every regulated investment company shall be subject to the taxes imposed under Chapter 2 (commencing with Section 23101) and Chapter 3 (commencing with Section 23501). . ."

RTC section 23153, subdivision (a), contained in Chapter 2, states: "Every corporation described in subdivision (b) shall be subject to the minimum franchise tax specified in subdivision (d) . . . ." Further, RTC section 23153, subdivision (b) states:

(b) Unless expressly exempted by this part or the California Constitution, subdivision (a) shall apply to each of the following:
(1) Every corporation that is incorporated under the laws of this state.
(2) Every corporation that is qualified to transact intrastate business in this state pursuant to Chapter 21 (commencing with Section 2100) of Division 1 of Title 1 of the Corporations Code.
(3) Every corporation that is doing business in this state.

The primary question regarding the applicability of the Minimum Franchise Tax to RIC business trusts is whether business trusts are treated as a "corporation" for purposes of the Chapter 2 Corporation Franchise Tax.

RTC section 23038, subdivision (a) states, the term "'[c]orporation' includes every corporation except corporations expressly exempt from the tax by this part or the Constitution of this state." Both Chapter 2 Corporation Franchise Tax and Chapter 3 Corporation Income Tax use the definition of "corporation" contained in RTC section 23038, subdivision (a). However, RTC section 23038, subdivision (b)(2)(A), explicitly expands "corporation" to include business trusts for the Chapter 3 Corporation Income Tax. The definition of "corporation" is not expanded to include business trusts for purposes of Chapter 2 Corporation Franchise Tax. Therefore, although a business trust is considered a "corporation" subject to the Chapter 3 Corporation Income Tax, a business trust is not a "corporation" for purposes of the Minimum Franchise Tax.

Here, the Taxpayer is a business trust that is treated as a RIC for federal and state tax purposes. Because business trusts are not included in the definition of a "corporation" in RTC sections 23038 and 24871 for the Chapter 2 Corporation Franchise Tax, the Taxpayer is not a corporation under Chapter 2 Corporation Franchise Tax and not subject to the Minimum Franchise Tax.

1 RTC section 23153(a).

2 RTC section 23501.

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Please be advised that the tax consequences expressed in this Chief Counsel Ruling are applicable only to the named taxpayer and are based upon and limited to the facts you have submitted. In the event of a change in relevant legislation, or judicial or administrative case law, a change in federal interpretation of federal law in cases where our opinion is based upon such an interpretation, or a change in the material facts or circumstances relating to your request upon which this opinion is based, this opinion may no longer be applicable. It is your responsibility to be aware of these changes, should they occur.

This letter is a legal ruling by the Franchise Tax Board's Chief Counsel within the meaning of paragraph (1) of subdivision (a) of section 21012 of the Revenue and Taxation Code. Please attach a copy of this letter and your request to the appropriate return(s) (if any) when filed or in response to any notices or inquiries which might be issued.

Sincerely,

Michael R. Laisne
Tax Counsel