Ruling Request No. 2004-02

Request for Ruling Regarding the Qualification of Certain Corporations as Passive Investment Companies

On behalf of your client, Company X, you request a declaratory ruling tow (2) wholly-owned direct and one (1) indirect corporations which will collectively employ more than five (5) full-time equivalent Rhode Island employees and have a Rhode Island based location each will qualify as a Passive Investment Company and will each be exempt from the business corporation tax pursuant to R.I.G.L. 44-11-1(1)(vii). This request is made pursuant to the provisions of Section 42-35-8, R.I.G.L., 1956 (as amended) as well as Regulation DR 94-01 of the Rhode Island Division of Taxation.

Facts

The facts set forth in your request for ruling dated May 4, 2004, and the documents submitted are incorporated herein by reference. Such facts and documents for the basis for this ruing.

Company X proposes to establish three (3) passive investment company subsidiaries ("the PICs" or individually, a "PIC"). Two of these PICs will be wholly owned directly by Company X; a third PIC will be wholly owned by "Company Y", which will be created as a direct subsidiary of Company X and which intends to qualify as a Massachusetts based security corporation pursuant to Massachusetts General Laws, Chapter 63, §39B(a).

The PICs will maintain an office location in Rhode Island and will collectively employ five (5) or more full time equivalent employees as required by the enabling statute. Company X is in the process of finding a suitable location in Rhode Island for itself and the three PICs. Company X proposes to establish three (3) PICs rather than a single PIC in order to satisfy the separate collateral requirements of the Federal Home Loan Bank, the Federal Reserve Bank of Boston, and Company X's own borrowing needs. The separate PICs will provide more effective liability protection and more efficient management of intangible investment operations and collateral requirements.

The PIC employees will confine their activities to the maintenance and management of the intangible investments of the PICs as separate and distinct entities. More specifically, the PIC employees will conduct the following activities related to the maintenance and management of PIC intangible investments: develop third party analytical(sic) tools, develop and recommend specific asset and liability investment strategies, develop interest rate risk simulation models, process the day-to-day transactions for portfolio and collateral assignment for repurchase agreements and other related activities and functions. The PICs will not engage in securities activities requiring them to register as a broker or dealer under state or federal law.

Ruling Requested

The two (2) wholly-owned direct and one (1) indirect corporations which propose to conduct activities as herein set forth and which will collectively employ more than five (5) full-time equivalent Rhode Island employees and have a Rhode Island based location each will qualify as a Passive Investment Company and will each be exempt from the business corporation tax pursuant to R.I.G.L. section 44-11-1(1)(vii).

Discussion

Section 44-11-1 R.I.G.L. provides in pertinent part as follows:

. . . Corporation means every corporation . . . except . . .

(vii)(A) Corporations which together with all corporations under direct or indirect common ownership that satisfies the other requirements of this paragraph employ not less than five (5) full-time equivalent employees in the state;

(B) which maintain an office in the state; and

(C) activities of which within the state are confined to the maintenance and management of their intangible investments or of the intangible investments of corporations or business trusts registered as investment companies under the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq., and the collection and distribution of the income from those investments or from tangible property physically located outside the state. For purposes of this paragraph, "intangible investments" includes, without limitation, investments in stocks, bonds, notes, and other debt obligations, including debt obligations of affiliated corporations, patents, patent applications, trademarks, trade names, copyrights, and similar types of intangible assets.

The facts presented disclose that the PICs that Company X proposes to establish will operate in conformity with R.I.G.L. 44-11-1(1)(vii). They will maintain an office location in Rhode Island; collectively employ five (5) or more full-time equivalent employees; and confine their activities in Rhode Island to the maintenance and management of their intangible investments or of the intangible investments of corporations or business trusts registered as investment companies under the Investment Company Act of 1940 and to the collection and distribution of the income from such investments or from tangible property located outside Rhode Island.

Ruling

The two (2) wholly-owned direct and one (1) indirect corporations which propose to conduct activities as herein set forth and which will collectively employ more than five (5) full-time equivalent Rhode Island employees and have a Rhode Island-based location each will qualify as a Passive Investment Company and will each be exempt from the business corporation tax pursuant to R.I.G.L. § 44-11-1(1)(vii).

This ruling may be relied upon by Company X and shall be valid unless expressly revoked or until the applicable statutory provisions of law are amended in a manner that requires a different result or the underlying facts described herein change.

R. GARY CLARK

TAX ADMINISTRATOR

MARCH 18, 2004