Title: First Marblehead Corp. v. Comm’r of Revenue

State: massachusetts

Issuer: Massachusetts Supreme Court

Document:

NOTICE:  All slip opinions and orders are subject to formal 
revision and are superseded by the advance sheets and bound 
volumes of the Official Reports.  If you find a typographical 
error or other formal error, please notify the Reporter of 
Decisions, Supreme Judicial Court, John Adams Courthouse, 1 
Pemberton Square, Suite 2500, Boston, MA, 02108-1750; (617) 557-
1030; SJCReporter@sjc.state.ma.us 
 
SJC-11609 
 
THE FIRST MARBLEHEAD CORPORATION & another1  vs.  COMMISSIONER OF 
REVENUE. 
 
 
 
Suffolk.     October 7, 2014. - January 28, 2015. 
 
Present:  Gants, C.J., Spina, Cordy, Botsford, Duffly, Lenk, & 
Hines, JJ. 
 
 
Financial Institution.  Taxation, Excise, Apportionment of tax 
burden.  Constitutional Law, Taxation.  Notice, Tax taking. 
 
 
 
 
Appeal from a decision of the Appellate Tax Board. 
 
 
The Supreme Judicial Court on its own initiative 
transferred the case from the Appeals Court. 
 
 
 
John S. Brown (Donald-Bruce Abrams with him) for the 
taxpayer. 
 
Brett M. Goldberg (Daniel J. Hammond, Assistant Attorney 
General, with him) for Commissioner of Revenue. 
 
Helen Hecht, Bruce Fort, Sheldon Laskin, & Lila Disque, of 
the District of Columbia, for Multistate Tax Commission, amicus 
curiae, submitted a brief. 
 
 
 
BOTSFORD, J.  The taxpayers appeal from a decision of the 
Appellate Tax Board (board) issued pursuant to G. L. c. 58A, 
                     
 
1 GATE Holdings, Inc. (Gate). 
2 
 
§ 7, and G. L. c. 62C, § 39 (c); their focus is on the financial 
institution excise tax (FIET) liability of the taxpayer GATE 
Holdings, Inc. (Gate), that was at all relevant times a wholly 
owned subsidiary of the taxpayer The First Marblehead 
Corporation (FMC).2  In its decision, the board accepted Gate's 
position that it qualified as a "financial institution" under 
G. L. c. 63, § 1, and was entitled to apportion its income 
pursuant to G. L. c. 63, § 2A (§ 2A).  The board, however, 
disagreed with Gate that in applying the apportionment rules of 
§ 2A, all of Gate's taxable property, which consisted of 
securitized student loans, should be assigned to States outside 
the Commonwealth.  Rather, the board determined that all such 
property was properly assigned to Massachusetts, resulting in a 
greater FIET liability than Gate had calculated.  We affirm the 
board's decision.3 
 
Facts.4  At issue here are the tax years ending June 30, 
2004; June 30, 2005; and June 30, 2006 (tax years at issue).  
FMC was a publicly traded Delaware corporation with its 
                     
 
2 The First Marblehead Corporation (FMC) sold Gate in 2009, 
which was after the tax years at issue in this proceeding. 
 
 
3 We acknowledge the amicus brief submitted by the 
Multistate Tax Commission (commission). 
 
 
4 The facts are taken from the board's decision, which was 
in turn based on the parties' statement of agreed facts and 
attached exhibits as well as witness testimony and other 
exhibits admitted during the hearing before the board.  The 
facts are not in dispute. 
3 
 
principal offices in Boston, and during the tax years at issue 
was the principal tax-reporting corporation for itself, Gate, 
and a number of other subsidiaries.  FMC was involved in the 
growing industry facilitating private loans to students seeking 
to finance the cost of their postsecondary education. FMC did 
not make any loans directly to student borrowers, but rather 
brought together various parties involved in lending, including 
postsecondary schools, banks that issued loans to borrowers 
(originating banks), loan guarantors, loan servicing entities 
(servicers), and underwriters.  In particular, FMC and its 
subsidiaries facilitated and coordinated the issuance and 
securitization of student loans through a complex process in 
which loans were purchased from originating banks with financing 
obtained via the issuance of asset-backed securities (ABS).  The 
originating banks entered into agreements with FMC through which 
the banks issued loans to student borrowers and then sold 
portfolios of these loans to a number of different Delaware 
statutory trusts (trusts).  To finance the purchases of loan 
portfolios, the trusts sold bonds, in the form of ABS, to 
underwriters that in turn sold the bonds to investors.  Once the 
trusts acquired the loans, the loans became security for 
repayment of the bonds. 
 
Loans require loan servicing, an umbrella term that 
includes accounting for accrued interest on the loans, billing, 
4 
 
receiving and processing payments, and working with borrowers in 
various stages of delinquency.  Neither FMC nor any of its 
affiliates was directly involved in loan servicing but instead 
outsourced these activities to independent entities in that 
business (servicers).  A large percentage of the loans 
securitized by FMC were serviced by the Pennsylvania Higher 
Education Assistance Agency (PHEAA), with a principal office in 
Harrisburg, Pennsylvania.  A number of other servicers also 
serviced loans securitized by FMC, and, like PHEAA, were located 
outside Massachusetts.  The servicers were the custodians of the 
loan records and all paper documents relating to the loans. 
 
Gate played an integral role in the FMC student loan 
securitization process.  Gate's purpose within this system was 
to hold residual beneficial interests in the trusts, either 
directly or through its own wholly owned subsidiary, National 
Collegiate Funding LLC.  By the end of the tax years at issue, 
Gate held a beneficial interest in each of sixteen trusts that 
in turn held all of the student loans that had been securitized 
by FMC and its affiliates.  These interests in the trusts 
constituted substantially all of Gate's assets.  Income from the 
trusts, which consisted of interest on the student loans, passed 
through to Gate and comprised substantially all of Gate's gross 
income for these years. 
5 
 
 
Gate was essentially a holding company with no employees, 
payroll, tangible assets, or office space -- either owned or 
leased.  Gate's tax returns indicated that its principal office 
was located at the same Boston address as FMC, and Gate's 
corporate books and tax returns also were maintained and 
prepared in Boston.  Indeed, there is no dispute that Gate's 
commercial domicile was in Massachusetts during the tax years at 
issue.  Like Gate, the trusts also had no assets other than the 
loan portfolios, cash, and other related assets, and they had no 
employees, payroll, or offices. 
 
Procedural history.  On September 15, 2006, FMC and Gate 
filed a voluntary disclosure request with the Commissioner of 
Revenue (commissioner) reporting their conclusion that Gate was 
a "financial institution," not a corporation as they had 
previously treated it for Massachusetts excise tax purposes, and 
their intent to change Gate's tax filing status accordingly.  
Gate then filed a Massachusetts financial institution excise 
return (Form 63FI) for each of the tax years at issue, and also 
sought an abatement of corporate taxes previously filed for the 
tax year ending on June 30, 2004.  The commissioner denied the 
application for an abatement in July, 2007, and in September, 
2007, FMC appealed to the board. 
6 
 
 
In December, 2009, following audits of the returns filed on 
behalf of FMC and Gate for the tax years at issue,5 the 
commissioner further assessed FMC and Gate for additional taxes 
based on the commissioner's conclusion that Gate was taxable as 
a foreign corporation, or in the alternative, that Gate owed 
additional taxes as a financial institution.  FMC and Gate 
sought abatements of these assessments, which the commissioner 
denied in February and March, 2010, respectively.  Later in 
March, 2010, both FMC and Gate appealed these denials to the 
board. 
 
The board heard the appeals and issued its findings of fact 
and report in April, 2013.  It concluded that Gate was a 
financial institution as defined in G. L. c. 63, § 1, due to the 
fact that Gate derived more than fifty per cent of its gross 
income from "lending activities" in substantial competition with 
other financial institutions.  The board further agreed with FMC 
and Gate that as a financial institution with loans held by 
student borrowers in all fifty States, Gate was entitled to 
apportion its income according to the rules established in § 2A, 
and that Gate properly had reported its "receipts factor" for 
                     
 
5 The audits of FMC's returns appear to have only been for 
the tax years ending June 30, 2005, and June 30, 2006.  However, 
the audits of Gate's returns appear also to have included the 
tax year ending June 30, 2004. 
7 
 
each of the tax years at issue as required under § 2A.6  However, 
the board found that Gate's "property factor" was one hundred 
per cent for each of the taxable years at issue, not zero as had 
been reported on Gate's tax returns, with the result that for 
each taxable year, fifty-one per cent of Gate's income was 
taxable in Massachusetts.7  The combined outcome of the board's 
conclusions was that FMC's taxes were abated in the amount of 
$8,134,549, and Gate's taxes were abated in the amount of 
$4,382,870.  While these amounts are substantial, Gate's 
approved abatement was more than $4 million less than the amount 
it originally had sought.8 
                     
 
6 As discussed infra, tax apportionment for a financial 
institution is based on the average of the institution's 
receipts, payroll, and property factors.  G. L. c. 63, § 2A (b).  
The parties agree that because it had no employees, Gate had no 
payroll factor.  Accordingly, its tax apportionment formula is 
the average of its receipts and property factors. 
 
 
7 This percentage is derived by adding Gate's receipts 
factor -- determined to be two per cent -- and its property 
factor -- determined to be one hundred per cent -- and then 
dividing the total by two:  102%/2 = 51%.  See note 6, supra. 
 
 
8 Gate originally had sought a $1,205,002 abatement for the 
tax year ending in June, 2004, and $7,646,698 abatement for the 
tax years ending in June, 2005, and June, 2006, for a total of 
$8,851,700. 
 
8 
 
 
FMC and Gate timely appealed the board's decision to the 
Appeals Court.9  We transferred the case to this court on our own 
motion. 
 
Standard of review.  "A decision by the board will not be 
modified or reversed if the decision 'is based on both 
substantial evidence and a correct application of the law.'"  
Capital One Bank v. Commissioner of Revenue, 453 Mass. 1, 8, 
cert. denied, 557 U.S. 919 (2009), quoting Boston Professional 
Hockey Ass'n v. Commissioner of Revenue, 443 Mass. 276, 285 
(2005).  See Commissioner of Revenue v. Jafra Cosmetics, Inc., 
433 Mass. 255, 259 (2001); Towle v. Commissioner of Revenue, 397 
Mass. 599, 601-602 (1986).  "Because the board is authorized to 
interpret and administer the tax statutes, its decisions are 
entitled to deference. . . .  Ultimately, however, the 
interpretation of a statute is a matter for the courts" 
(citation omitted).  Onex Communications Corp. v. Commissioner 
of Revenue, 457 Mass. 419, 424 (2010).  Finally, in 
circumstances where a taxpayer seeks an abatement of a tax, 
"[t]he taxpayer has the burden of proving as a matter of law 
[its] right to an abatement" (citation omitted).  Boston 
Professional Hockey Ass'n, supra at 285.  This burden has been 
                     
 
9 Although both FMC and Gate appealed, the appeal solely 
concerns Gate's tax liability.  The taxpayers have filed one 
brief and present a joint argument.  For ease of reference, we 
refer only to Gate as the appealing party in the remainder of 
this opinion. 
9 
 
found to be particularly heavy in the context of taxpayer 
challenges to an apportionment formula, because "the taxpayer 
must prove by 'clear and cogent evidence' that the income 
attributed to the Commonwealth is in fact 'out of all 
appropriate proportion to the business transacted' here or has 
'led to a grossly distorted result.'"  See id., quoting Gillette 
Co. v. Commissioner of Revenue, 425 Mass. 670, 679 (1997) 
(discussing challenges to corporate tax apportionment under 
G. L. c. 63, § 38).  See also Container Corp. of Am. v. 
Franchise Tax Bd., 463 U.S. 159, 170 (1983). 
 
Discussion.  Section 2A was enacted in 1995,10 an important 
component of legislation that appears to have been intended to 
reduce the tax burden on Massachusetts banks by lowering the 
bank excise tax rate and by permitting financial institutions 
that derive income from business activities conducted both 
inside and outside the Commonwealth to apportion their income, 
thereby avoiding double taxation and reducing incentives for 
these businesses to move their operations out of State.11  See 
                     
 
10 See G. L. c. 63, § 2A (§ 2A), inserted by St. 1995, 
c. 81, § 1. 
 
 
11 For purposes of G. L. c. 63, §§ 2 and 2A, the term 
"financial institution" encompasses banks, banking associations, 
trust companies, and Federal and State savings and loan 
associations, as well as other types of businesses, including 
any that "in substantial competition with financial institutions 
derive[] more than [fifty] per cent of [their] gross income . . 
. from loan origination, from lending activities, including 
10 
 
Memorandum from Deputy Chief Legal Counsel Lon F. Povich to 
Governor William F. Weld and Lieutenant Governor Paul Cellucci 
(July 26, 1995) (Povich memorandum) (regarding House Bill No. 
4975, "An Act relative to the equitable taxation of financial 
institutions").  See also Memorandum from Barbara Kessner 
Landau, Assistant General Counsel, Executive Office of Economic 
Affairs, to Governor's Legal Office (July 26, 1995) (same).  
Section 2A sets out income apportionment rules that define how 
"[t]he commissioner shall determine the part of the net income 
of a financial institution derived from business carried on 
within the commonwealth."  See G. L. c. 63, § 2A (b)-(g).  These 
rules incorporate a formula crafted by the Multistate Tax 
Commission (commission),12 see Povich memorandum, supra, and 
                                                                  
discounting obligations, or from credit card activities."  G. L. 
c. 63, § 1. 
 
 
12 The commission was created by the Multistate Tax Compact 
(compact) and serves to promote the compact's goals, including 
"[p]romot[ing] uniformity or compatibility" among State tax 
systems and "[a]void[ing] duplicative taxation."  See The 
Multistate Tax Compact:  Suggested Legislation and Enabling Act, 
art. I, at 1 (effective Aug. 4, 1967), available at   
http://www.mtc.gov/uploadedFiles/Multistate_Tax_Commission/About
_MTC/MTC_Compact/COMPACT(1).pdf [http://perma.cc/3S85-TQR4] 
(last visited Jan. 26, 2015.  The compact is a model law that 
"deals primarily with taxes which affect businesses that operate 
in more than one state."  Id. at preamble.  Massachusetts is 
currently an "Associate member" of the commission, which implies 
participation in commission meetings and projects and 
consultation and cooperation with the commission and its 
members.  Multistate Tax Commission, Member States, at 
http://www.mtc.gov/The-Commission/ Member-States 
[http://perma.cc/DE33-UEZ5] (last visited Jan. 26, 2015). 
11 
 
apply only to financial institutions that are taxable in both 
the Commonwealth and in other States.  They allocate income to 
the Commonwealth for tax purposes by multiplying the taxpayer's 
income by the "apportionment percentage" that is "determined by 
adding the taxpayer's receipts factor, property factor and 
payroll factor together and dividing the sum by three."13  G. L. 
c. 63, § 2A (b).  Each of these listed factors is a fraction, 
the numerator of which reflects the taxpayer's receipts, 
property, or payroll located within the Commonwealth for the 
taxable year in question, and the denominator of which reflects 
the taxpayer's receipts, property, or payroll both within and 
without the Commonwealth.  See G. L. c. 63, §§ 2A (d)-(f).  In 
this way, the apportionment formula attempts to "approximate the 
net income derived from business carried on within the 
commonwealth."  See G. L. c. 63, § 2A (g).  See also Final 
Report of Hearing Officer Regarding Proposed Multistate Tax 
Commission Formula for the Uniform Apportionment of Net Income 
from Financial Institutions 20, 21 (Apr. 28, 1994) available at 
http://www.mtc.gov/uploadedFiles/Multistate_Tax_Commission/Unifo
rmity/Uniformity_Projects/A_-_Z/Final%20HO%20Rpt%20FinInst.pdf 
                                                                  
 
 
13 In other words, the "apportionment percentage" is the 
average of the taxpayer's "receipts factor," "property factor," 
and "payroll factor."  As mentioned, in Gate's case, the 
apportionment percentage is the average of Gate's receipts and 
property factors.  See note 6, supra. 
12 
 
[http://perma.cc/99CH-XSDX] (last visited Jan. 26, 2015) (Final 
Report) (apportionment formula is designed to "fairly represent 
the taxpayer's business activities in the state," i.e., to 
approximate the "income-producing activities of the taxpayer in 
the state"). 
 
In this appeal, no party challenges the board's ruling that 
Gate qualified as a "financial institution," was taxable in both 
the Commonwealth and in other States, and was thus entitled to 
apportion its income according to the rules in § 2A.  There is 
also no challenge to Gate's determination, approved by the 
board, of its receipts factor for each of the years in 
question,14 as well as Gate's position that it had no payroll 
factor.  The only issue presented is how Gate's property factor 
is to be calculated.  Specifically, we must determine whether 
the loan portfolios that represented substantially all of Gate's 
property for the tax years at issue should be treated as having 
been located in whole or in part within the Commonwealth, and 
                     
 
14 With respect to Gate's receipts factor, the board, 
applying the rules set out in § 2A (d), determined that 
"substantially all of Gate's income was interest from the [l]oan 
[p]ortfolios that was passed through to Gate from the [t]rusts," 
and that this income "comprised the whole of Gate's receipts 
factor and was included in its numerator or [only its] 
denominator [of the receipts factor fraction] based on the 
location of the borrowers."  Because "Gate's share of the 
interest from borrowers located in Massachusetts represented 
approximately two percent of Gate's total receipts," the board 
found that Gate's receipts factor had been properly reported on 
Gate's returns. 
13 
 
thus included in the numerator of Gate's property factor 
fraction, or outside the Commonwealth, and therefore excluded 
from the numerator and included only in the denominator of the 
fraction.  The answer to this question has a significant impact 
on Gate's total tax liability for the relevant years:  if all of 
Gate's loans are treated as having been located within the 
Commonwealth, as the board found, then Gate's property factor 
was one hundred per cent.  If, however, as FMC and Gate claim, 
all of the loans were located outside the Commonwealth, then for 
purposes of § 2A, Gate's property factor would be zero.15 
 
The rules for determining a taxpayer's property factor are 
contained in § 2A (e), and property consisting of loans is the 
focus of § 2A (e) (vi).  This section provides in relevant part: 
"(vi) (A) (1) A loan is considered to be located within the 
commonwealth if it is properly assigned to a regular place 
of business of the taxpayer within the commonwealth. 
 
"(2) A loan is properly assigned to the regular place of 
business with which it has a preponderance of substantive 
contacts. . . . 
 
"(B) In the case of a loan which is assigned by the 
taxpayer to a place without the commonwealth which is not a 
regular place of business, it shall be presumed, subject to 
rebuttal by the taxpayer on a showing supported by the 
preponderance of evidence, that the preponderance of 
substantive contacts regarding the loan occurred within the 
commonwealth if, at the time the loan was made the 
                     
 
15 This is so because if all of the loans are deemed located 
outside the Commonwealth, the numerator of Gates's property 
factor fraction is zero, and therefore the entire fraction is 
zero. 
14 
 
taxpayer's commercial domicile, as defined in [G. L. c. 63, 
§ 1], was within the commonwealth. 
 
"(C) To determine the state in which the preponderance of 
substantive contacts relating to a loan have occurred, the 
facts and circumstances regarding the loan at issue shall 
be reviewed on a case-by-case basis and consideration shall 
be given to such activities as the solicitation, 
investigation, negotiation, approval and administration of 
the loan."16 
 
 
General Laws c. 63, § 1, defines "regular place of 
business" as "an office at which the taxpayer carries on its 
business in a regular and systematic manner and which is 
consistently maintained, occupied and used by employees of the 
taxpayer."  The parties agree that Gate, which had no offices or 
employees, had no "regular place of business" either within or 
outside the Commonwealth.  Thus, the loans could not have been 
assigned under § 2A (e) (vi) (A) to a regular place of business 
belonging to Gate.  However, Gate argued before the board and 
continues to argue, essentially, that under § 2A (e) (vi) (B) 
and (C), the loans can and should be assigned to the locations 
of the servicers, because those locations were where the 
"preponderance of substantive contacts" relating to the loans 
                     
 
16 The terms "solicitation," "investigation," "negotiation," 
"approval," and "administration" are defined in § 2A (e) (vi) 
(C) (1)-(5).  The definitions are quoted and discussed infra. 
 
15 
 
occurred.  As next discussed, the board rejected this argument, 
as do we.17 
 
1.  Presumption of commercial domicile.  First, the board 
concluded that § 2A (e) (vi) (B) creates a rebuttable 
presumption that where a taxpayer seeks to assign loans to a 
location that is not a regular place of business of that 
taxpayer, the loans should be assigned to its commercial 
domicile.  We agree.  We view the language of § 2A (e) (vi) (B)18 
to be unambiguous in establishing the rebuttable default 
presumption described by the board.  See Commissioner of Revenue 
v. Cargill, Inc., 429 Mass. 79, 82 (1999) (court follows 
                     
 
17 Before the board, the Commissioner of Revenue 
(commissioner) argued primarily that Gate was not engaged in 
lending activities, and that therefore it should have been 
characterized for taxation purposes as a "foreign corporation" 
rather than as a "financial institution."  At this point, 
however, the commissioner has accepted the board's determination 
that Gate was a "financial institution," and urges that we adopt 
the board's interpretation of § 2A (e). 
 
 
18 The establishment in § 2A (e) (vi) (B) of the taxpayer's 
commercial domicile as the default location of a loan is 
consistent with the reference to commercial domicile as a 
default resolution for other apportionment issues addressed in 
§ 2A.  For example, in the context of the receipts factor 
analysis, § 2A (d) (xiii) provides that "[a]ll receipts which 
would be assigned under this section to a state in which the 
taxpayer is not taxable shall be included in the numerator of 
the receipts factor, if the taxpayer's commercial domicile is in 
the commonwealth."  Section 2A (a), as amended by St. 2004, 
c. 262, § 35, also provides that any portion of the net income 
of a financial institution that cannot be taxed to another State 
under the United States Constitution will be allocated to the 
Commonwealth if the commercial domicile of the institution is in 
the Commonwealth. 
16 
 
language of statute "when its language is plain and unambiguous, 
and its application would not lead to an absurd result, or 
contravene the Legislature's clear intent" [quotations and 
citation omitted]). 
 
Gate notes the presence of the words "at the time the loan 
was made" in § 2A (e) (vi) (B),19 and contends that this means 
the presumption of commercial domicile applies only in the 
context of an original lender, and that the presumption exists 
specifically to prevent such a taxpayer from "artificially 
assigning" a loan that originated at the taxpayer's actual place 
of business to another State where it has no place of business. 
 
Reading the language of this provision as narrowly as Gate 
proposes, however, renders the statute unworkable for a taxpayer 
like Gate.  This is because § 2A (e) (vi) contemplates only two 
assignment alternatives for a taxpayer's loans:  the loans will 
be assigned to a regular place of business of the taxpayer, 
either within or outside the Commonwealth -- the alternative 
described in § 2A (e) (vi) (A) (1) and (2); or the loan will be 
assigned outside the Commonwealth to a place that is not a 
                     
 
19 For ease of reference, we quote again the relevant 
portion of § 2A (e) (vi) (B):  "In the case of a loan which is 
assigned by the taxpayer to a place without the commonwealth 
which is not a regular place of business, it shall be presumed, 
subject to rebuttal by the taxpayer . . . that the preponderance 
of substantive contacts regarding the loan occurred within the 
commonwealth if, at the time the loan was made the taxpayer's 
commercial domicile . . . was within the commonwealth" (emphasis 
added). 
17 
 
regular place of business of the taxpayer -- the alternative 
described in § 2A (e) (vi) (B).  If the § 2A (e) (vi) (B) 
alternative were to apply only to taxpayers who are original 
lenders, the statute would provide no guidance when the 
taxpayer, like Gate, is not an original lender but has no 
regular place of business.  Such a reading would leave open the 
possibility that loans qualifying as property of the taxpayer 
could exist without being assigned anywhere.  This is clearly an 
unintended and ultimately absurd result.  A more reasonable 
interpretation is that the phrase "at the time the loan was 
made" is present in § 2A (e) (vi) (B) to resolve any ambiguity 
in the case of a taxpayer whose commercial domicile may have 
changed from within to outside the Commonwealth during the life 
of the loan.  No such ambiguity exists here.  Accordingly, the 
board properly ruled that the presumption in § 2A (e) (vi) (B) 
applied to Gate without regard to the sites of origination of 
the loans in question. 
 
2.  Preponderance of substantive contacts of Gate's loans.  
Under § 2A (e) (vi), to determine the proper assignment of a 
loan for apportionment purposes, it is necessary to determine 
whether "the preponderance of substantive contacts regarding the 
loan" was within or outside the Commonwealth.  Because Gate's 
commercial domicile was in the Commonwealth, application of the 
§ 2A (e) (vi) (B) presumption to Gate means that "the 
18 
 
preponderance of substantive contacts regarding the loan 
occurred within the commonwealth" for purposes of calculating 
Gate's property factor, unless the presumption was rebutted.  
And § 2A (e) (vi) (B) places the burden of rebuttal squarely on 
Gate as the taxpayer. 
 
In seeking to rebut the presumption, Gate points to § 2A 
(e) (vi) (C), quoted supra, and specifically its language 
indicating that the "preponderance of substantive contacts of a 
loan" must be determined on a "case-by-case basis."  The section 
goes on to say that the required determination is to include 
consideration of activities such as the "solicitation," 
"investigation," "negotiation," "approval," and "administration" 
of the loan.  G. L. c. 63, § 2A (e) (vi) (C) (1)-(5).20,21  The 
                     
 
20 The terms "solicitation," "investigation," "negotiation," 
"approval," and "administration" are defined in § 2A (e) (vi) 
(C) as follows: 
 
 
"(1) 'Solicitation' is either active or passive.  
Active solicitation occurs when an employee of the taxpayer 
initiates the contact with the customer.  Such activity is 
located at the regular place of business which the 
taxpayer's employee is regularly connected with or working 
out of, regardless of where the services of such employee 
were actually performed.  Passive solicitation occurs when 
the customer initiates contact with the taxpayer.  If the 
customer's initial contact was not at a regular place of 
business of the taxpayer, the regular place of business, if 
any, where the passive solicitation occurred is determined 
by the facts in each case. 
 
 
"(2) 'Investigation' is the procedure whereby 
employees of the taxpayer determine credit-worthiness of 
the customer as well as the degree of risk involved in 
19 
 
board stated, and Gate agrees, that of these five listed 
activities, only "administration" could possibly apply to Gate's 
loans because all the other factors listed relate to the 
origination of loans and Gate played no role in loan 
origination.  The statute defines "administration" as "the 
                                                                  
making a particular agreement.  Such activity is located at 
the regular place of business which the taxpayer's 
employees are regularly connected with or working out of, 
regardless of where the services of such employees were 
actually performed. 
 
 
"(3) 'Negotiation' is the procedure whereby 
employees of the taxpayer and its customer determine the 
terms of the agreement such as the amount, duration, 
interest rate, frequency of repayment, currency 
denomination and security required.  Such activity is 
located at the regular place of business which the 
taxpayer's employees are regularly connected with or 
working out of, regardless of where the services of such 
employees were actually performed. 
 
 
"(4) 'Approval' is the procedure whereby employees or 
the board of directors of the taxpayer make the final 
determination whether to enter into the agreement.  Such 
activity is located at the regular place of business which 
the taxpayer's employees are regularly connected with or 
working out of, regardless of where the services of such 
employees were actually performed.  If the board of 
directors makes the final determination, such activity is 
located at the commercial domicile of the taxpayer. 
 
 
"(5) 'Administration' is the process of managing the 
account.  This process includes bookkeeping, collecting the 
payments, corresponding with the customer, reporting to 
management regarding the status of the agreement and 
proceeding against the borrower or the security interest if 
the borrower is in default.  Such activity is located at 
the regular place of business which oversees this 
activity."  (Emphases added.) 
 
 
21 These terms are collectively referred to as the "SINAA" 
factors.  Final Report, supra at 48. 
20 
 
process of managing the account," § 2A (e) (vi) (C) (5), 
including bookkeeping, payment collection, customer 
correspondence, and addressing situations of default -- which 
are essentially the activities performed by the loan servicers 
in the FMC securitization system. 
 
The board rejected Gate's claim that because the servicers 
"administer" the loans owned by the trusts (and therefore Gate), 
the servicers' loan administration activities -- all performed 
in States other than Massachusetts -- were attributable to Gate.  
The board reasoned that, as a factual matter, Gate had not 
proved the servicers were agents of the trusts (or derivatively 
Gate), and that Gate had not offered any other legal basis for 
attributing the activities of the servicers to Gate.  
Accordingly, the board disregarded the activities of the 
servicers in determining whether Gate had any "substantive 
contacts" with the loans outside the Commonwealth, and finding 
none, applied the presumption of commercial domicile in § 2A (e) 
(vi) (B) to all the loans in question. 
 
Gate challenges the board's determination.  It asserts that 
the board unilaterally, and improperly, inserted the concept of 
agency into the analysis of § 2A (e) (vi) (B), and that even if 
agency is the appropriate test, the loan documents make clear 
that the servicers in fact were agents of the trusts and 
therefore of Gate as the holder of a beneficial interest in each 
21 
 
of the trusts.  We conclude, however, that an analysis whether 
the servicers were agents of Gate, and if so, what type of 
agents they were, is unnecessary in order to locate the 
"preponderance of substantive contacts" of the loans.  This is 
because none of the types of "activities" regarding a loan that 
§ 2A (e) (vi) (C) (1)-(5) describes -- the SINAA factors (see 
note 21, supra) -- reasonably can be understood to encompass the 
activities of an entity other than the taxpayer. 
 
We begin with "administration."  After identifying the 
types of actions that collectively comprise the "activity" of 
loan administration, § 2A (e) (vi) (C) (5) states expressly that 
"[s]uch activity is located at the regular place of business 
which oversees this activity."  As previously discussed, 
"regular place of business" is defined specifically in the 
statute as "an office at which the taxpayer carries on its 
business in a regular and systematic manner and which is 
consistently maintained, occupied and used by employees of the 
taxpayer" (emphases added).  G. L. c. 63, § 1.  Thus, the 
language of § 2A (e) (vi) (C) (5) appears to contemplate that 
when loan administration is used to determine the "preponderance 
of substantive contacts" of a taxpayer's loan or loans, only the 
loan administration activities of the taxpayer are taken into 
consideration; work performed by agents or independent 
contractors of the taxpayer, at least where the agents or 
22 
 
contractors are separate businesses with their own places of 
business and their own staff, do not fit within the equation.22  
Accordingly, it is irrelevant whether the servicers were or were 
not agents of Gate, because in either case, their actions were 
not appropriately included within the concept of administration 
as defined in § 2A (e) (vi) (C) (5).23 
 
It is true that this reading of loan administration as 
requiring activity at the regular place of business of the 
taxpayer leads to the conclusion that the loans appear to have 
had no "substantive contacts" as that concept is described in 
§ 2A (e) (vi) (C) (1)-(5).  But § 2A contains within it a 
straightforward solution to this problem, which is application 
of the presumption of commercial domicile as specified in § 2A 
(e) (vi) (B). 
                     
 
22 The principal loan servicer, the Pennsylvania Higher 
Education Assistance Agency, for example, is a governmental 
agency of the Commonwealth of Pennsylvania. 
 
 
23 We agree with the board and Gate that the other four 
types of activities listed in § 2A (e) (vi) (C) -- solicitation, 
investigation, negotiation, and approval, see § 2A (e) (vi) (C) 
(1)-(4) -- do not apply to Gate because they all concern loan 
origination, an activity in which Gate was not involved.  
Nevertheless, each of these subsections indicates that the 
activity described is located at "the regular place of business" 
which the taxpayer's employee is "regularly connected with or 
working out of," or, in the case of some loan approvals, at the 
"commercial domicile of the taxpayer."  Id.  Thus, like 
administration, each of these activities focuses on a regular 
place of business or commercial domicile of the taxpayer itself. 
23 
 
 
Nor does our reading of § 2A create an absurd result when 
viewing the statute as a whole.  The statute expressly 
recognizes that its provisions regarding the receipts, property, 
and payroll factors may not reasonably fit the nature of all 
financial institutions' business models, and it has a separate 
provision to accommodate this circumstance.  Specifically, 
§ 2A (g) provides that "[i]f the provisions of subsections (a) 
to (f), inclusive, are not reasonably adapted to approximate the 
net income derived from business carried on within the 
commonwealth, a financial institution may apply to the 
commissioner, or the commissioner may require the financial 
institution, to have its income derived from business carried on 
within this commonwealth determined by a method other than that 
set forth in subsections (a) to (f), inclusive."  Here, although 
the board found that Gate qualified for taxation purposes as a 
financial institution, Gate is unlike many if not most financial 
institutions contemplated in the statute, in that Gate's narrow 
role within FMC's loan securitization business is very different 
from traditional concepts of banking.24  Given this fact, 
                     
 
24 As noted supra, the term "financial institution" 
encompasses first and foremost banks, banking associations, 
trust companies, and Federal and State savings and loan 
associations.  G. L. c. 63, § 1.  Other businesses subject to 
Federal or State banking and related laws are also incorporated.  
Id.  Thus, although the statute is constructed in such a way as 
to include other types of businesses, including those that 
"[derive] more than 50 per cent of [their] gross income . . . 
24 
 
application of an alternative apportionment approach as 
permitted under § 2A (g) may well have offered a reasonable 
option in this case, avoiding what might appear as an exercise 
of fitting a square peg into a round hole.  In fact, the record 
indicates that the commissioner raised the idea of applying an 
alternative approach under § 2A (g) to determine the proper 
apportionment of Gate's income, albeit using an approach that 
resulted in all or substantially all of Gate's income being 
apportioned to Massachusetts.  Ultimately, however, Gate 
rejected the proposal to apply § 2A (g), asserting instead -- 
incorrectly, we conclude -- that the FIET was specifically 
designed for taxpayers such as Gate.  In these circumstances, 
Gate's complaints regarding what may seem like an awkward result 
arising from application of the provisions of § 2A (e) (vi) to 
the loans in this case ring somewhat hollow. 
 
As has been discussed, the rules set out in § 2A seek to 
produce a reasonable approximation of a financial institution's 
net income related to the business it carries on in the 
Commonwealth.  Gate's business was to assist in the FMC 
securitization program through participating in the formation of 
the trusts and holding residual beneficial interests in those 
                                                                  
from lending activities," id. -- the basis of the board's 
determination that Gate qualified as a financial institution -- 
many if not most of the businesses that fall within the 
statute's definition are banks or closely related to banks. 
25 
 
trusts.  It was a holding company, with no employees of its own.  
Gate appears to have had no direct relationship with the loan 
servicers, whose actual contracts were with FMC, and thus no 
ability to control the work that they did in servicing the 
student loans.  In these circumstances, it is appropriate that 
the servicers' activities in administering the student loans not 
be attributed to Gate for the purpose of determining the 
"preponderance of substantive contacts" regarding the loans 
under § 2A (e) (vi) (C). 
 
In sum, we agree with the board that the presumption 
established in § 2A (e) (vi) (B) has not been rebutted, and all 
of the loans were properly located at Gate's commercial domicile 
in Massachusetts. 
 
3.  Constitutional considerations.  In support of its 
argument that the servicers' loan administration activities 
should have been attributed to Gate, Gate invokes decisions of 
the United States Supreme Court and this court concerning 
constitutional standards for attributing activities of a 
taxpayer's representative to the taxpayer for taxation-related 
purposes.  While the Supreme Court and this court have 
identified constitutional issues bearing upon tax apportionment 
(as we discuss below), all of the cases that Gate cites relate 
to a State's capacity to assert jurisdiction over an out-of-
State taxpayer for purposes of imposing a tax.  See Scripto, 
26 
 
Inc. v. Carson, 362 U.S. 207, 208 (1960) (considering whether 
out-of-State taxpayer had "sufficient jurisdictional contacts" 
with Florida to justify imposition of Florida tax).  See also 
Tyler Pipe Indus., Inc. v. Washington State Dep't of Revenue, 
483 U.S. 232, 249, 251 (1987) (activities of taxpayer's in-State 
representatives adequately supported Washington's jurisdiction 
to tax out-of-State taxpayer);25 Commissioner of Revenue v. Jafra 
Cosmetics, Inc., 433 Mass. at 255-256, 261-263 (in-State 
activities of sales representatives justified sales and use 
taxation of out-of-State taxpayer).  The issue of State 
jurisdiction to tax in this case is different.  The 
jurisdictional question here is whether any State besides the 
Commonwealth could theoretically impose a tax on Gate.  It is a 
threshold question that relates only to whether Gate was allowed 
to apportion its income in accordance with the formula laid out 
in § 2A; if a "financial institution" like Gate does not have 
income that is taxable in another State, all of its income is 
taxable in the Commonwealth.  See G. L. c. 63, § 2A (a).  As 
noted earlier, the board found that Gate was taxable in all 
fifty States, and thus was entitled to apportion its income.  
Neither party has appealed this issue. 
                     
 
25 Tyler Pipe Indus., Inc. v. Washington State Dep't of 
Revenue, 483 U.S. 232, 251 (1987), also raised an issue of 
apportionment, but that was not the basis for which Gate cited 
it. 
27 
 
 
With respect to apportionment, both the United States 
Supreme Court and this court have found that the due process 
clause and the commerce clause require fairness in apportioning 
the income of a business that may be taxed in multiple States.  
See Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. at 
169; Exxon Corp. v. Department of Revenue, 447 U.S. 207, 219, 
227-228 (1980); Gillette Co. v. Commissioner of Revenue, 425 
Mass. at 680.  While the Federal Constitution "imposes no single 
[apportionment] formula on the States," apportionment must 
produce at least a "'rough approximation' of the corporate 
income that is 'reasonably related to the activities conducted 
within the taxing State.'"  Gillette Co., supra at 680-681, 
quoting Exxon Corp., supra at 223.  However, if a taxpayer seeks 
to challenge the appropriateness of an apportionment formula on 
this basis, it is incumbent upon the taxpayer to show by "'clear 
and cogent evidence' that the income attributed to the State is 
in fact 'out of all appropriate proportions to the business 
transacted . . . in that State.'"  Container Corp. of Am., supra 
at 170, quoting Hans Rees' Sons v. North Carolina ex rel. 
Maxwell, 283 U.S. 123, 135 (1931).  See Boston Professional 
Hockey Ass'n, 443 Mass. at 285; Gillette Co., supra at 679-680. 
 
Two elements of fairness arising under the due process 
clause have been identified in this context and relate to the 
present case.  "The first . . . component of fairness in an 
28 
 
apportionment formula is what might be called internal 
consistency -- that is, the formula must be such that, if 
applied by every jurisdiction, it would result in no more than 
all of the unitary business'[s] income being taxed.  The second 
and more difficult requirement is what might be called external 
consistency -- the factor or factors used in the apportionment 
formula must actually reflect a reasonable sense of how income 
is generated."  Gillette Co., 425 Mass. at 680, quoting 
Container Corp. of Am., 463 U.S. at 169.26 
 
Considering the first factor, we have no reason to conclude 
that application of the apportionment statute as we have 
interpreted it produces duplicative taxation of Gate's income, 
given that Gate's Massachusetts apportionment percentage for the 
tax year at issue was approximately fifty-one per cent, and the 
record reflects that Gate filed tax returns only in 
Massachusetts and Florida for the relevant years.27 
                     
 
26 A third element of fairness, that "an apportionment 
formula must . . . not result in discrimination against 
interstate or foreign commerce," has been identified under the 
commerce clause.  Gillette Co. v. Commissioner of Revenue, 425 
Mass. 670, 682 (1997), quoting Container Corp. of Am. v. 
Franchise Tax Bd., 463 U.S. 159, 170 (1983).  However, "[i]n the 
interstate context, the antidiscrimination principle has not in 
practice required much in addition to the due process fairness 
requirement."  Id. at 682-683.  Moreover, Gate has advanced no 
argument that the board's interpretation of the apportionment 
statute here discriminates against interstate commerce. 
 
27 Based on Gate's Florida tax returns, it appears that 
Gate's apportionment percentage in Florida was less than five 
per cent for each of the tax years at issue. 
29 
 
 
With respect to the second factor -- whether the 
apportionment scheme reasonably reflects how a business 
generates income -- as previously mentioned, the underlying 
economic activity giving rise to Gate's income was FMC's loan 
securitization program.  As the board's findings reflect, the 
purpose of Gate's existence was to hold interests in trusts 
containing loans as part of FMC's securitization process.  
Furthermore, because Gate had no offices or employees of its 
own, and because it was a wholly owned subsidiary of FMC, it 
makes more sense to view the income-producing activity of Gate 
as connected to FMC, its parent company, rather than as 
connected to the servicers, which were independent and unrelated 
entities.  Viewed this way, we think an outcome that locates all 
of the loans at Gate's and FMC's commercial domicile, rather 
than at the place of business of the servicers, results in the 
most appropriate approximation of how Gate generated income.28 
 
Gate argues that it was unreasonable to allow Gate's 
property factor to increase its over-all apportionment 
percentage from approximately two per cent to more than fifty 
per cent, given that the loans did not appear to have any 
"substantive contacts" with Massachusetts in the sense described 
by the SINAA factors.  In addition, they argue that Department 
                                                                  
 
 
28 The commission, as amicus curiae, advances a similar 
analysis. 
30 
 
of Revenue Letter Ruling 87-9 (Sept. 18, 1987) permitted a trust 
consisting of thousands of loans, only a small percentage of 
which had connections to Massachusetts, to apportion its income 
based solely on the percentage of income received from interest 
on the Massachusetts loans, and that Gate should be entitled to 
do the same.  We disagree.  The first point assumes a particular 
interpretation of § 2A (e) (vi) -- specifically that loans must 
have some "substantive contacts" of the kind described in 
§ 2A (e) (vi) (C) -- that we have concluded is incorrect for the 
reasons previously discussed.  The analogy to the trust 
described in Letter Ruling 87-9 is also unpersuasive, because 
the income of that trust was to be apportioned using the formula 
that applied to corporations, which involved three factors 
(property, payroll, and sales), of which the trust claimed to 
have none.  Letter Ruling 87-9.  Thus, the trust proposed a 
unique method of apportionment that would apply only to the 
"special circumstances" of that case.  Id.  Again, as noted 
above, FMC and Gate have not requested alternative apportionment 
under § 2A (g), and instead have argued that the general 
apportionment formula under § 2A (b) applies. 
 
In short, Gate has not met its burden to show that 
apportionment as applied in this case was unfair or 
unreasonable; we discern no violation of the due process or 
commerce clause as a result of the decision we reach here. 
31 
 
 
4.  Notice.  Finally, Gate argues that the board improperly 
resolved this case in favor of the commissioner based on a legal 
theory that the commissioner did not raise before the board, 
specifically, that an agency relationship was required between 
Gate and the servicers in order to attribute the servicers' 
activities to Gate.  Gate claims that this action by the board 
violates G. L. c. 58A, § 7, which states in pertinent part:  
"the board shall not consider, unless equity and good conscience 
so require, any issue of fact or contention of law not 
specifically set out in the petition upon appeal or raised in 
the answer." 
 
In this case, it was Gate that put forward the theory that 
Gate had "substantive contacts" with the loans through the 
activities of the servicers.  While Gate clearly did not argue 
that an agency relationship was required in order to attribute 
the servicers' activities to Gate, the board was within its 
authority to consider Gate's argument concerning the servicers 
and to determine whether it fit within an appropriate 
interpretation of § 2A (e) (vi).  The quoted limitation in G. L. 
c. 58A, § 7, has been interpreted to prohibit more surprising or 
unexpected legal turnabouts, such that one party could not have 
been expected to adequately advance their position under the 
circumstances.  See, e.g., Deveau v. Commissioner of Revenue, 51 
Mass. App. Ct. 420, 420-421, 426-428 (2001) (board decided 
32 
 
taxpayers' appeals based on new theory first advanced by 
commissioner on morning of hearing; court suggested, without 
needing to decide, that this approach would violate G. L. 
c. 58A, § 7).  We conclude that Gate had sufficient notice of 
the basis of the board's decision pursuant to G. L. c. 58A, § 7. 
 
 
 
 
 
 
 
Decision of the Appellate Tax 
 
 
 
 
 
 
 
  Board affirmed.