On October 23, 2017, the Massachusetts Department of Revenue issued a letter ruling holding that the deduction for investment in subsidiaries in determining net worth does not apply to investments in a subsidiary owned indirectly through an LLC taxed as a partnership.
While the Department has clarified an issue that is often raised by practitioners (i.e., must the investment in the corporate subsidiary be directly held), the letter ruling failed to address regulatory language that suggests an alternative result. Specifically, the Massachusetts Apportionment of Income regulation discusses how a corporate partner’s investment in a general or limited partnership is determined for non-income measure purposes. Where a corporate partner and a partnership are required to be included in the same consolidated financial statement under GAAP, the corporate partner may account for its interest in the partnership by combining its assets and activities with those of the partnership. See 830 CMR 63.38.1(12)(e)3.
In other words, assuming that Parent and LLC discussed in the letter ruling are required to be included in the same consolidated financial statement under GAAP, Parent would report LLC’s investment in Sub 1 corp as a direct investment in Sub 1 corp on its balance sheet. Since Parent’s balance sheet reports a direct investment in a subsidiary corporation that is 80% or more owned, the deduction for investments in subsidiaries should be available.