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63, § 32D, if (1) it has income that would have been taxed to it for federal income tax purposes had it been treated federally as a separate S corporation or (2) it has total receipts for the taxable year, computed under the rules for combining and aggregating total receipts at 830 CMR 62.17A.1(11)(e) and (f), of million or more.

Additionally, as stated in TIR 03-20, which explains St. 4, § 18, any QSUB that is not subject to the financial institution excise under G.

4, § 18, effective March 5, 2003, the QSUB also is required to report on its Form 355S the income measure of the corporate excise under G. Thus, the QSUB must file a final Form 355S (even though, as discussed in Directive 2, the same legal entity survives as a Massachusetts S corporation) to report any corporate excise it may owe for the taxable year in which the reorganization takes place. If the QSUB had obtained a separate federal taxpayer identification number for use in filing its Form 355S such words will serve as notice to the Department that the QSUB's federal taxpayer identification number is no longer applicable. In the event that the reorganization takes place in a subsequent year, the period for which the QSUB must compute its net income will begin on the first day of its taxable year and end on the date it ceases to exist for Massachusetts tax purposes. Computing Massachusetts S Corporation's Net Income Subject to Tax Under G. The Massachusetts S corporation's non-income measure of the excise may not be prorated, because, as discussed in subsection A immediately above, the S corporation's taxable year is not a short taxable year. In completing a Schedule SK-1 for the taxable year in which the reorganization takes place, the Massachusetts S corporation must include thereon not only its own items of income, loss, deduction, and credit for the taxable year, but those of the QSUB and the corporate trust before they ceased to exist for Massachusetts income tax purposes. Determining Massachusetts S Corporation's Apportionment Factors. The Massachusetts S corporation must determine its apportionment factors in the year of the reorganization for purposes of determining its income measure of the corporate excise under c. For purposes of its final Form 355S, the QSUB must compute any net income subject to tax under G. Issue 6: Unwinding of LR 01-9 Reorganizations - Downstream and Upstream Mergers Involving a Financial Institution A LR 01-9 type reorganization, just like a LR 99-17 type reorganization, involves the restructuring of a stand-alone Massachusetts S corporation by converting it into a wholly owned subsidiary, a QSUB, of a corporate trust holding company. Directive 6: Notwithstanding the factual difference, the unwinding of a LR 01-9 type reorganization is generally no different from the unwinding of a LR 99-17 type reorganization. Corporate trusts generally fall outside the definition of financial institution in G. Directive 3, in contrast, which discusses what returns to file and how to report income and other tax attributes as a result of a merger of a corporate trust parent into its QSUB, applies only in part to the unwinding of a LR 01-9 type reorganization, as the Massachusetts S corporation formed as a result of the merger will be taxed as a financial institution under G. Discussion: In unwinding a LR 01-9 reorganization as discussed in Directive 3 (by merging a corporate trust parent into its QSUB), the resulting S corporation which is also a "financial institution" within the meaning of G. Discussion: Federally, the partnership parent is an S corporation and, thus, the merger would be identical to the one set forth in Treas. § 1.1361-5(b)(3), Example 8, discussed in Directive 1 above. SCHNEE, CPA, Ph D, Joe Lane Professor of Accounting, is director, MTA program, Culverhouse School of Accountancy, at the University of Alabama, Tuscaloosa. Corporate spin-offs have become a popular way for companies to release shareholder value and achieve other business purposes. In the corporate world, bigger is not always better. Any corporation formed as a result of the merger of a corporate trust into its QSUB that is classified as a federal S corporation also will be classified as a Massachusetts S corporation as long as it otherwise satisfies the requirements set forth in the definition of "Massachusetts S corporation" under 830 CMR 62.17A.1(2). Moreover, the corporate trust's assets and liabilities, while it still existed for Massachusetts tax purposes, are to be included in determining the S corporation's corporate excise attributable to the non-income measure, assuming such items were acquired by the S corporation as a result of the reorganization and continue to be held by it on the last day of its taxable year. In determining whether and at what rate the Massachusetts S corporation and QSUB are subject to taxation under G. Accordingly, the S corporation's "total receipts," as defined in G. The aggregated total receipts of all such entities must include income taxable at the entity level under G. If the taxable year in which the reorganization takes place includes March 5, 2003, the QSUB must include in its calculation all of its receipts for such taxable year, without regard to the March 5, 2003 date. In determining the non-income measure of the excise for a short taxable year, it may be prorated by multiplying the excise by the number of calendar months (including partial months) in the taxable year and dividing the resulting amount by twelve. For purposes of determining a non-resident shareholder's distributive share of income, loss, deduction, and credit taxable in Massachusetts under G. Issue 4: Unwinding of LR 99-17 Reorganizations - Upstream Merger of QSUB into its Corporate Trust Parent Will the unwinding of a LR 99-17 type reorganization by merging a QSUB into its corporate trust parent trigger the recognition of any taxable gain or loss to either entity? The unwinding of a LR 99-17 type reorganization by merging a QSUB into its corporate trust parent will not trigger the recognition of any taxable gain or loss to either entity. However, the deemed liquidation of the QSUB did not affect its taxation under the non-income measure of the corporate excise. Furthermore, there is no prior authority in Massachusetts for the proposition that a partnership will be treated as a corporation for purposes of the Commonwealth's recognition of a federal "F" reorganization. Nonetheless, for purposes of this Directive, no taxable income will be recognized by the partners/shareholders for Massachusetts income tax purposes upon the merger of a partnership parent into its QSUB. The partnership is not required to file a final return in the taxable year in which the reorganization takes place. 63, § 32D, non-income measures of the corporate excise, Schedule SK-1s, and apportionment factors, as appropriate, are to be computed for the taxable year in which the reorganization takes place as specified in Directive 3 above. Rather, its items of income, loss, deduction, and credit, together with those of its QSUB, attributable to the period before they cease to exist for Massachusetts tax purposes are to be included on the Schedule SK-1 prepared by the Massachusetts S corporation. 63, § 32D(a)(ii) for the taxable year in which the reorganization takes place, their aggregated total receipts for such year are to be computed as stated in section II of TIR 03-20. 63, § 32D(b)(2)(a) and 830 CMR 62.17A.1(2), from the date of the conversion to the end of its taxable year are to be combined with those of the corporate trust (which would include the receipts of the QSUB) from the first day of its taxable year until the date of conversion. In computing the QSUB's total receipts, the annualization rule at 830 CMR 62.17A.1(11)(c) will apply, assuming the QUBS's taxable year is less then twelve months, which depends upon when the reorganization takes place. In completing its final Form 355S, the QSUB must compute any non-income measure of the corporate excise it may owe based entirely on its own assets and liabilities. The QSUB must determine its apportionment factors for purposes of its final Form 355S as specified in section V. For purposes of determining its non-income measure, the S corporation must determine its apportionment factors based not only on its own property, payroll, and sales but on those of the QSUB and corporate trust prior to reorganization, assuming that such items were acquired by the S corporation as a result of the reorganization and continue to be held by it on the last day of its taxable year. 62, § 17A and 830 CMR 62.17A.1(6) in the year of the reorganization for purposes of Schedule SK-1, the S corporation must determine its apportionment factors by including the property, payroll, and sales of the QSUB and corporate trust before they ceased to exist for Massachusetts tax purposes. Directive 4: The answer to the first question is no. Discussion: Although the non-recognition of gain or loss and basis rules set forth in this Directive are identical to those that would have applied had the federal provisions under I. The tax-free nature of the unwinding of the QSUB into the corporate trust arises because there is now no liquidation to be taxed. At the same time, for Massachusetts income tax purposes, the QSUB was deemed liquidated into the corporate trust. Directive 5, which discusses what returns to file and how to report income and other tax attributes as a result of a merger of a QSUB into its corporate trust parent, also will apply to the unwinding of a LR 01-9 type reorganization, as the surviving corporate trust will be taxed under G. For Massachusetts income tax purposes, the parent entity is not treated as a corporation as it is for federal income tax purposes.

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Computing QSUB's Net Income Subject to Tax Under G. Alternatively, an actual accounting of the QSUB's net income for the period may be made. 63, § 32D (a)(i) and (ii) of the corporate excise in the year of the reorganization based solely on its own items of income, loss, deduction, and credit. Directive 5 to report its income for the taxable year in which the reorganization takes place. "Final return" should be clearly noted on the return. 63, § 32D(a)(ii) for the taxable year in which the reorganization takes place, its total receipts are to be computed as specified in section II of TIR 03-20. In computing the aggregated total receipts, each entity must first compute its total receipts separately for the taxable year in which the reorganization takes place. This was the case for the corporate trust in LR 01-9. 63, § 32(b) or § 39(b); or to the entity level tax under G. For Massachusetts income tax purposes, the only factual difference between LR 99-17 and the three rulings at issue is that in LR 99-17 the parent is a corporate trust, whereas, in the other three rulings the parent is a partnership.

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