GLADYS S. MINKIN, trustee, [Note 1] vs. COMMISSIONER OF REVENUE.

LYNCH, J. This appeal raises the question whether, for purposes of Massachusetts income taxation, property owned by a corporate trust is entitled to a "step-up in basis" similar to s. 1014 of the Internal Revenue Code of 1954 (I.R.C.), when transferable shares pass from a decedent shareholder. The trustee of four corporate trusts (trusts) appealed from a decision of the Appellate Tax Board (board) upholding the Commissioner of Revenue's (commissioner's) determination that the trusts were not entitled to an abatement for alleged overpayment of capital gains taxes. The Appeals Court reversed the board's decision on the ground that property held

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in a corporate trust is entitled to a step-up in basis when shares pass from a decedent. See Minkin v. Commissioner of Revenue, 40 Mass. App. Ct. 345 (1996). We granted the commissioner's application for further appellate review. We affirm the decision of the board.

1. Background.

A. Facts. The parties stipulated to the following facts. Isadore Minkin (decedent) and his wife, Gladys S. Minkin, acquired four properties and placed them in separate corporate trusts. See G. L. c. 62, s. 1 (j). [Note 2] The trusts engaged in the business of owning and renting real estate. The decedent and his wife were the sole trustees and each owned one-half of the transferable shares. The trusts were treated as corporations for both Federal and State tax purposes. [Note 3]

On January 14, 1983, the decedent died and his wife inherited his interests. The decedent's estate used the fair market value of the trusts' property to value his shares and paid estate taxes accordingly. In December, 1983, the trustee adopted a complete plan of liquidation and sold the trusts' property. Because the trusts were treated as corporations for Federal tax purposes, no gain or loss was recognized on this sale for Federal tax purposes. I.R.C. s. 337. [Note 4] For State tax purposes, the nonrecognition provision of s. 337 does not ap-

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ply to corporate trusts. See Commissioner of Revenue v. Shafner, 392 Mass. 256, 258 (1984) (s. 337 only applies to corporations). The trusts must recognize a capital gain on the sale of property; the amount depends on whether the trusts' bases in the property should be stepped-up.

B. Section 1014 of the Internal Revenue Code, Basis is the starting point for determining gain or loss on the sale of property. In general, basis reflects the taxpayer's cost, adjusted as required for improvements and depreciation. I.R.C. s. 1012. There is an exception to this rule when the property owner dies. Pursuant to s. 1014, the basis of property "acquir[ed]" or deemed to pass from a decedent is "the fair market value of the property at the date of the decedent's death." I.R.C. s. 1014 (a). [Note 5] The basis of the property in the transferee's hands is "stepped-up" or "down," thereby erasing unrealized capital gains or losses accrued while the decedent held the property.

"The purpose of section 1014 is, in general, to provide a basis for property acquired from a decedent which is equal to the value placed upon such property for purposes of the Federal estate tax." 26 C.F.R. s. 1.1014-1 (1996). Section 1014(b) lists ten specific situations in which a taxpayer is considered to have acquired property from a decedent or in which the property is deemed to have passed from the decedent. The relevant provisions are set out in the margin. [Note 6] Property acquired from a decedent includes, principally, prop-

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erty transferred by bequest, devise, or inheritance, and property required to be included in determining the fair market value of the decedent's gross estate under the relevant provisions of the I.R.C. 26 C.F.R. s. 1.1014-1. Thus, for example, a stepped-up basis is applied to property passing by will or intestacy, revocable or alterable trusts, or transfers under appointment. I.R.C. s. 1014(b). 26 CF.R. s. 1.1014-2 (1996). The property must fit into one of the categories listed in s. 1014(b) to fall within the purview of s. 1014(a).

These well-established principles of Federal tax law were incorporated into the Massachusetts tax statutes under G. L. c. 62, s. 6F. [Note 7] With this background in mind, we turn to the issue on appeal.

2. Discussion. The basis of the shares passed from the decedent to the remaining shareholder was stepped-up to the 1983 fair market value. I.R.C. s. 1014. Had the beneficiary sold her inherited shares in the trusts at the 1983 fair market value, she would not have realized a capital gain on the stepped-up shares. Instead, the trusts were liquidated and the proceeds were distributed to the remaining shareholder.

For State tax purposes, the trusts recognized a gain when their property was liquidated. G. L. c. 62, s. 8. The gain was measured as the difference between the trusts' bases in the property and the fair market value. The commissioner took the position that the trusts' bases were not affected by s. 1014 because the trusts and their shareholders were separate taxable entities. He argues that the trusts should be treated like a corporation. Property owned by a corporation does not "pass"

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from the decedent within the meaning of s. 1014(b), and thus there is no step-up in basis.

The trustee contends that the trusts' bases in one-half of the property should be stepped-up to reflect the fair market value of the deceased shareholder's one-half interest in the trusts. The trustee argues that the decedent owned an interest in the property itself, similar to an interest in an ordinary trust under s. 1014(b) which is deemed to pass from the decedent. Thus, when the shares passed from the decedent, so did the trust property, and s. 1014(a) should apply. [Note 8] We disagree.

The corporate trust, also known as the "Massachusetts business trust," is an adaptation of the common law trust for the purpose of carrying on a business enterprise originally used to avoid the restrictions against corporate ownership of real property. Annot., 88 A.L.R.3d 704, 711 (1978). The corporate trust is essentially a business organization cast in the trust form. Id. For the most part, it is treated as a partnership or a corporation for Federal tax purposes. "The fact that any organization is technically cast in the trust form . . . will not change the real character of the organization if, the organization more nearly resembles an association or a partnership than a trust." 9 J, Mertens, Federal Income Taxation, s. 36.35 (1996). See 26 C.F.R. s. 301.7701-4(b) (1996).

For Massachusetts tax purposes, a corporate trust is a hybrid between an individual and corporate taxpayer. [Note 9] The corporate trust is taxed as a "resident natural person." G. L.

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c. 62, s. 8 (a). This means that corporate trusts are treated as individuals for purposes of income and capital gains recognition. However, corporate trusts are treated as corporations for purposes of incorporation and reorganization under I.R.C. s.s. 351-368. G. L. c. 62, s. 8 (a). Essentially, the corporate trust is taxed as an "individual" entity which closely resembles a corporation. See Commissioner of Revenue v. Northeast Petroleum Corp., 401 Mass, 44, 47 (1987).

Under Massachusetts tax laws corporate trusts with transferable shares have no relation and little resemblance to ordinary trusts. Ordinary trusts are essentially taxed on the principle of identity between the trust and the beneficiary. For example, one must look through the trust to the domiciliary status of the individual beneficiaries in order to determine the part of the trust's income which is taxable. If the individual is taxable under G. L. c. 62, his allocable share of the trust's income is taxable. See G. L. c. 62, s. 10 (a). On the other hand, if the individual is nontaxable by reason of nonresidence, his allocable share of the trust's income is nontaxable. See G. L. c. 62, s. 10 (a). Furthermore, certain exemptions applicable to the beneficiary may be claimed by the trust to reduce the tax attributable to the individual's share of the trust's income. See G. L. c. 62, s. 12. The trust is viewed as an income collecting and distributing agent for the beneficiary. The barrier interposed between the corporate trust and its shareholder by the Legislature stands in strong contrast to the transparent quality of the ordinary trust where the income and gains recognition depends on the status of the beneficiary. See Barrett & deValpine, Taxation of Business Trusts and Other Unincorporated Massachusetts Entities With Transferable Shares, 40 B.U.L. Rev. 329, 340-341 (1960).

In most significant respects a corporate trust is conceptually treated as a corporation under the Massachusetts tax statutes. "[T]here is no intrinsic difference between a corporate business trust and a corporation." Commissioner of Revenue v. Northeast Petroleum Corp., supra at 47. The corporate trust is taxed as a distinct entity, rather than a pro-

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jection of the individual tax personality of its shareholders. On the corporate trust level, nothing turns on the tax status of the shareholders. Moreover, the corporate trust must recognize capital gains when the trust property is liquidated at a profit. [Note 10] The Legislature expressed a clear intent to treat corporate trusts and their shareholders as separate entities. B. W. Co. v. State Tax Comm'n, 370 Mass. 18, 21 n.4 (1976).

The status of the corporate trust shareholder resembles that of a counterpart in a corporation. See Commissioner of Revenue v. Northeast Petroleum Corp., supra at 47; Goodhue v. State St. Trust Co., 267 Mass. 28, 34 (1929). "A shareholder in a [corporate] trust only has an equitable interest in trust property; he has neither the legal title nor the right to convey such property; he may not demand a partition of trust property." 2 Z. Cavitch, Business Organizations s. 43.23, at 43-102 (1997). But see State Tax Comm'n v. Colbert, 344 Mass. 494, 497 (1962) (shareholder taxpayer had beneficial interest in trust's real property). While there is an identity between the trustee and the shareholder in this case, this identity is not required. Depending on the terms of the trust agreement, the shareholder is free to sell his shares. The transferor shareholder recognizes a capital gain or loss on the sale and the transferee shareholder takes shares with a basis equal to the purchase price. See G. L. c. 62, s. 6F. The corporate trust's basis in its property is unaffected. Similarly, where the trust's basis in its property is adjusted for depreciation or additions, there is no corresponding adjustment in the shareholder's basis in his or her shares. The shareholder's basis in his or her shares and the corporate trust's basis in its property are not interrelated.

Because of the similarities in business form, corporate trusts should be treated the same as corporations for the purpose of s. 1014. "If the State income tax law has incorporated Federal income tax provisions, those provisions should be interpreted as they are interpreted for Federal income tax purposes." B. W. Co. v. State Tax Comm'n, supra at 22. Corporate property does not fall within the purview of s. 1014(b) when shares are passed from a decedent. See 26 C.F.R. s.s. 1.1014-1,

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1.1014-2. Thus, we conclude that property owned by a corporate trust falls outside the scope of s. 1014 and is not entitled to a step-up in basis when shares pass from a decedent shareholder. The trusts must recognize a gain on the sale of the trust property without the advantage of s. 1014. [Note 11] We cannot overlook the tax structure imposed by the Legislature. The shareholders organized themselves as corporate trusts and must abide by the consequences of that election.

The decision of the Appellate Tax Board is affirmed.

So ordered.