2.700 Entity Exempt from Taxation

Entity Exempt from Taxation

2.700

855.4

883.1

929.2

965.2

985.5

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2.701
Exemption of Credit Union Income

Credit unions, which are member-owned financial cooperatives, are considered tax-exempt organizations for both federal and state income tax purposes and therefore are generally exempt from the income measure of the corporate excise. However, like other nonprofit entities, unrelated business income of credit unions is subject to the income measure of the corporate excise. In 1909, the enactment of the Massachusetts Credit Union Act (Chapter 419 of the Acts of 1909) authorized the creation of Massachusetts chartered credit unions as tax-exempt entities. In 1934, the enactment of the Federal Credit Union Act, 12 USC § 1751, et seq., authorized the creation of federally chartered credit unions, which are exempt from federal income tax pursuant to 26 USC § 501(c)(14)(a).

IRC §501(c)(14)(A); M.G.L. c. 63, §30

23.5

2.702
Tax-Exempt Organizations

Internal Revenue Code (IRC) § 501 provides a general exemption from federal income tax for non-profit corporations. As provided in IRC § 512, the exemption does not apply to unrelated business income that such corporations earn from activities outside the scope of their exempt purposes. Massachusetts provides a corporate excise exemption for corporations that qualify for the federal exemption, but subjects unrelated business income to the net income measure of the excise.

IRC § 501; M.G.L. c. 63, § 30, M.G.L. c. 63, §38Y, M.G.L. c. 63, § 39.

445.6

2.703
Exemption for Regulated Investment Companies

Regulated Investment Companies (RICs) are specialized corporations that serve as investment vehicles. RICs hold securities, receive earnings from those securities and pay out virtually all of their earnings to shareholders. They hire service providers for investment advice and administrative services. RICs are typically established by financial services corporations that sponsor the RIC, provide the RIC's corporate management, and market shares of the RIC to the investing public. The RIC's management decides whom to hire to provide investment advice and administrative services to the RIC. The service providers hired are frequently subsidiaries or affiliates of the financial services corporation that established the RIC. The RIC itself has no employees and no property other than the securities it holds and its own books and records. Federal tax and securities law imposes limitations on the type of assets RICs can hold and requires RICs to distribute at least 90% of their income as dividends to shareholders. Federal tax law allows RICs a deduction for dividends paid, which is generally not available to other corporations. See Internal Revenue Code § 852(b). The Massachusetts exemption for RICs is a statutory provision that employs the federal definition of a RIC but is not otherwise tied to the federal deduction. The Massachusetts corporate excise imposes a tax on a corporation's apportioned net income and a tax on the corporation's apportioned net worth or tangible property located in Massachusetts. See MG.L. c. 63, § 39. RICs are exempt from both taxes because they are not taxable corporations pursuant to MG.L. c. 63, § 68C(8). This exclusion constitutes a tax expenditure in Massachusetts because, absent the exclusion, RICs would be subject to the corporate excise.

M.G.L. c. 63, §68C(8); c. 63, §30

516.3

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