Trust company qualified as an ‘inhabitant’ of the Commonwealth
On July 11, 2016, the Massachusetts Supreme Judicial Court issued its decision in Bank of America v. Commissioner of Revenue, holding that Bank of America (BOA) is an ‘inhabitant’ for purposes of the Massachusetts fiduciary income tax.
In this appeal, BOA challenged a decision of the Massachusetts Appellate Tax Board (Board) finding the bank qualified as an inhabitant of Massachusetts for purposes of the fiduciary income tax. In its capacity as trustee or co-trustee, BOA paid fiduciary income taxes for 34 inter vivos trusts (trusts established during the trust creator’s lifetime) for tax year 2007, totaling more than $2.2 million. BOA filed almost 3,000 applications for abatement of the tax with the Massachusetts Department of Revenue.
BOA is a national bank domiciled in North Carolina and authorized to act as a fiduciary. Throughout the 2007 tax year, BOA maintained at least 200 branch offices in Massachusetts that were staffed by resident employees, and entered into various banking and commercial relationships in Massachusetts, such as making loans, and otherwise qualified as a ‘financial institution’ engaged in business in the Commonwealth under the tax law. Additionally, the bank performed various trust-related activities in 2007, including operating offices for the purpose of fulfilling its trustee obligations, maintaining relationships with beneficiaries and making distributions from the trusts when appropriate, administering the trusts’ assets, conducting research on issues related to the trusts, and offering various other trust consulting activities. BOA’s employees located outside of Massachusetts also performed various activities for the subject trusts.
Under Massachusetts law, income received by trustees or other fiduciaries is subject to the fiduciary income tax when the following three parties are inhabitants of Massachusetts:
- At least one grantor or settlor of the trust
- At least one or more of the trust beneficiaries (including unborn or unascertained persons)
- At least one trustee
An inhabitant is defined under Massachusetts law as 1) any natural person domiciled in the Commonwealth, or 2) a natural person who maintains a permanent place of abode for more than 183 days during the tax year. While facially the definition does not apply to corporations, Massachusetts General Laws Chapter 62, Section 14 (Section 14) provides that “corporations acting as trustee or in any other fiduciary capacity . . . be subject to this chapter [relating to the taxation of income tax and including the definition of inhabitant above] in the same manner and under the same conditions as individual inhabitants of the Commonwealth acting in similar capacities.”
In 2011, BOA took the position that the trusts that the bank served did not qualify as ‘resident inter vivos trusts,’ and therefore, were not subject to the fiduciary income tax. The instant appeals followed with four trusts selected to represent the class of 34 inter vivos trusts. It is undisputed that each of the four trusts were created by an individual who was an inhabitant of the Commonwealth at the time of the trust’s creation, and, while no identified beneficiary to whom income was payable was an inhabitant of the Commonwealth, income received in relation to the trusts was accumulated for unborn or unascertained persons. Therefore, the issue on appeal was whether BOA, the trustee, was an inhabitant for purposes of the tax.
On appeal, BOA asserted that the statutory definition of inhabitant only considers ‘natural persons,’ and therefore, does not include corporate trustees, and at a minimum, is an ambiguous provision. The Massachusetts Supreme Judicial Court determined the Board’s interpretation of the definition of inhabitant to include corporations based on Section 14 was reasonable. The definition of inhabitant was amended in 1995 to include individuals not domiciled in the state, and therefore, the court determined that in light of Section 14 requiring corporate trustees to be treated the same as individual trustees, the definition of inhabitant cannot be limited to a natural person and must include corporate entities.
BOA further argued that a presence and activities test was created by the Board’s decision in determining whether the bank met the “maintaining a place of abode for more than 183 days” provision of a qualifying inhabitant. The bank contended that the test treats corporate trustees differently than individual trustees, i.e., individual trustee not domiciled in the Commonwealth must spend more than half the tax year in the Commonwealth to qualify as an inhabitant and thus would unlikely also be an inhabitant of more than one state, but under the test applied by the Board, a corporate trustee could be treated as an inhabitant for maintaining a single office in the state. Pointing to BOA’s Massachusetts trust and trustee-related activities, the court disagreed that a formal presence and activities test was created and interpreted the provision as applied to corporations to mean 1) maintaining an established place of business for more than 183 days of a taxable year, and 2) conducting trust administration within the Commonwealth that includes material trust activities relating specifically to the trust or trusts whose tax liability is at issue.
Finally, the court determined it could not hear BOA’s dormant Commerce Clause claim because it was not timely asserted in the proceedings before the Board.
The Bank of America case has significant tax consequences for multistate corporations performing trust activities in Massachusetts and by analogy in other states. The decision conflicts with a decision by the Wisconsin Supreme Court in Pabst v. Department of Tax, 19 Wis 2d 313 (1963). That decision concluded that trusts were deemed to have been administered in Wisconsin only if a majority of the administration of such trust took place in the state. The Massachusetts Supreme Judicial Court held by contrast that it was sufficient if some of the trust administration was conducted in Massachusetts.
Noteworthy, the Massachusetts Supreme Judicial Court granted a rare direct appeal from the Board, usually permitted only when the case involves a matter of first impression, a constitutional issue, or a question of such public interest that justice requires a final decision by the Commonwealth’s highest court. Oddly, there were no constitutional issues raised at the Board level creating an opportunity for potential future litigation to assert such claims, both by individual taxpayers and by other corporate fiduciaries. Businesses acting as trustees that may administer inter vivos trusts with creators and beneficiaries (including unborn and unascertained beneficiaries) connected to Massachusetts should discuss with their tax advisor the impact of the decision on their trust income tax reporting.