Fidelity plan fuels tax debate

A move by Fidelity Investments to lower its corporate taxes -- potentially by hundreds of millions of dollars a year -- came under fire yesterday by tax policy advocates and a Massachusetts union official, while a business group defended the Boston mutual fund firm's strategy.

The debate is likely to be rolled into a wider review of Massachusetts taxes initiated by Governor Deval Patrick's vow to close corporate tax loopholes.

A member of a Beacon Hill commission studying the issue, state Representative John J. Binienda , said he plans to raise questions about Fidelity's move at future meetings.

"I would hope that this isn't the wave of the future," said the Worcester Democrat, who also serves as House chairman of the Legislature's Joint Committee on Revenue.

Binienda was reacting to a Globe article that reported closely held Fidelity is reducing its ranks of private shareholders to fewer than 100 and eliminating all but one class of stock so it can qualify as an "S corporation," exempt from federal corporate taxes and eligible for reduced state corporate taxes.

Corporations filing taxes under Subchapter S of Internal Revenue Service rules avoid a system of double taxation by avoiding corporate taxes and taxes on dividends. Instead, profits are passed directly to shareholders, and they are taxed as personal income.

Most S corporations in the United States are smaller companies, but large S corporations like Fidelity with over $1 billion in revenue are not entirely uncommon, according to specialists.

Congress has steadily raised the ceiling of the number of shareholders for private companies to qualify, with passage of the most recent increase, from 75 to 100, in 2004.

There is no income limit.

Yesterday's Globe article quoted former employees who described the strategy. Fidelity has not confirmed its moves, and spokeswoman Anne Crowley declined to comment yesterday.

While varying widely, Fidelity's federal taxes have amounted to hundreds of millions of dollars in past years, while its Massachusetts state corporate taxes have been in the tens of millions.

Citing the Fidelity example as evidence, some fiscal policy analysts said yesterday that federal and state officials should revisit the corporate tax rules.

"There is a general problem that large companies with the resources to do so will consistently look for tax-avoidance techniques," said Noah Berger , executive director of the Massachusetts Budget and Policy Center, a nonprofit advocacy group.

"The idea of S corporations was primarily as a different structure for small corporations, and to the extent that very large companies are able to use that to dramatically reduce their taxes is a significant concern."

Under Massachusetts law, S corporations pay a 4.5 percent state tax, discounted from the usual 9.5 percent corporate tax.

The commission studying corporate tax loopholes recently recommended that businesses file as the same type of corporation for both federal and state filing purposes. State officials have said companies are avoiding state corporate taxes by using subsidiaries out of state and other complex strategies.

Michael Widmer , president of the Massachusetts Taxpayer Foundation , a nonprofit group that follows state fiscal issues, said Fidelity's reported action "highlights the reality that we have a very complicated and dysfunctional corporate tax code.

"If they are doing this, it's perfectly legal, but the larger policy question is there should be some overall rationality in the corporate tax code."

The issue sharply divided labor and business groups.

Massachusetts AFL-CIO President Robert J. Haynes said Fidelity's strategy is "corporate greed at its worst."

But a vice president at the business group Associated Industries of Massachusetts , Brian Gilmore , said Fidelity is good for the state.

"The real value of Fidelity here is 13,000 jobs, its payroll taxes, its purchases of services," he said.

"If the leadership of Fidelity believes that its future is made more secure here by becoming an S corporation, then God bless them."

Christopher Rowland can be reached at crowland@globe.com.