Source: http://masscases.com/cases/sjc/475/475mass159.html
Timestamp: 2019-04-24 23:52:03+00:00

Document:
THE FIRST MARBLEHEAD CORPORATION & another [Note 1] vs. COMMISSIONER OF REVENUE.
Donald-Bruce Abrams (John S. Brown with him) for the taxpayer.
Brett M. Goldberg, Assistant Attorney General (Daniel J. Hammond, Assistant Attorney General, with him) for Commissioner of Revenue.
Margaret Winterkorn Meyers, of New York, David W.T. Daniels, of the District of Columbia, & Emily M. Kelley, for Michael S. Knoll & another.
Helen Hecht, Bruce Fort, Sheldon Laskin, & Lila Disque, of the District of Columbia, for Multistate Tax Commission.
BOTSFORD, J. In The First Marblehead Corp. v. Commissioner of Revenue, 470 Mass. 497 , 498 (2015) (First Marblehead), this court affirmed a decision of the Appellate Tax Board (board) concerning the tax liability of the taxpayer GATE Holdings Inc. (Gate), under the Commonwealth's financial institution excise tax (FIET). Gate was a wholly owned subsidiary of The First Marblehead Corporation (FMC), [Note 3] id. at 497-498, and "played an integral role in the FMC student loan securitization process[,]" as the holder of beneficial interests in all the separate trusts that effectively owned the securitized student loans. Id. at 499. Gate had no employees, no office space, and no tangible assets; it was essentially a holding company. Id. Gate's taxable property consisted of its interests in the securitized student loans held in the trusts. Id. In its decision, the board determined, and this court agreed, that all of Gate's interests in the securitized loans were properly assigned to Massachusetts under the FIET's apportionment rules set forth in G. L. c. 63, § 2A, resulting in a greater tax liability than Gate had calculated. Id. at 498.
Gate filed a petition for a writ of certiorari in the United States Supreme Court. On October 13, 2015, the Court granted Gate's petition, vacated this court's rescript in the case, and remanded the case for further consideration in light of Comptroller of the Treasury of Md. v. Wynne, 135 S. Ct. 1787 (2015) (Wynne), decided approximately four months after First Marblehead. See The First Marblehead Corp. v. Massachusetts Comm'r of Revenue, 136 S. Ct. 317 (2015). In accordance with the Court's directive, and with the benefit of additional briefing and argument by the parties, we have further considered this case. We again affirm the decision of the board.
discriminate against interstate commerce, 'looks to the structure of the tax at issue to see whether its identical application by every State in the Union would place interstate commerce at a disadvantage as compared with commerce intrastate.' . . . By hypothetically assuming that every State has the same tax structure, the internal consistency test allows courts to isolate the effect of a defendant's State tax scheme." Wynne, 135 S. Ct. at 1802, quoting Jefferson Lines, supra. See Container Corp. of Am., supra ("[an] obvious component of fairness in an 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"). In Wynne, the Court concluded that the Maryland income tax scheme failed the internal consistency test, and thereby violated the dormant commerce clause, because it hypothetically resulted in double taxation of the income of Maryland residents that was earned outside the State. [Note 4] Wynne, supra at 1803-1804.
We understand the Supreme Court's order of remand in this case as a directive to consider further whether the Massachusetts FIET, as applied to Gate, fails the internal consistency test discussed and affirmed in Wynne, and thereby contravenes the dormant commerce clause. [Note 5] We have done so, and conclude that the Massachusetts tax scheme, as applied to Gate, satisfies the test.
Here, because Gate had no offices or employees in Massachusetts, or any other State or location, in the relevant tax years, it had no "regular place of business" as the term is defined in the FIET statute (see note 7, supra). As a result, Gate had no regular place of business for purposes of assigning the loans either to the Commonwealth under § 2A (e) (vi) (A) (1) or to a jurisdiction outside the Commonwealth under § 2A (e) (vi) (A) (2). Although Gate assigned loans to Florida in its Massachusetts tax returns, the board rejected this assignment and applied the statutory presumption in § 2A (e) (vi) (B) that the preponderance of substantive contacts regarding those loans was located in the Commonwealth. First Marblehead, 470 Mass. 508 , 513 n.27. The board did so because Gate's commercial domicile is located in the Commonwealth and because the board found as a factual matter that Gate failed to rebut the statutory presumption. Id. at 498, 505. The result was that one hundred per cent of Gate's loans were assigned to the Commonwealth. Id. at 504. We agreed with the board that § 2A (e) (vi) (B)'s presumption applied to Gate, although for somewhat different reasons. See First Marblehead, 470 Mass. at 504-509.
[Note 1] GATE Holdings, Inc. (Gate).
[Note 3] Gate and The First Marblehead Corporation are referred to collectively as Gate in this opinion.
[Note 4] The Maryland income tax structure hypothetically would also result in double taxation of nonresidents who earned income in Maryland. See Comptroller of the Treasury of Md. v. Wynne, 135 S. Ct. 1787, 1803-1805 (2015) (Wynne).
[Note 5] In its appeal to this court in The First Marblehead Corp. v. Commissioner of Revenue, 470 Mass. 497 (2015) (First Marblehead), Gate included a claim that the Massachusetts financial institution excise tax (FIET), as the Appellate Tax Board (board) had construed it, violated the due process clause and the commerce clause of the United States Constitution. See id. at 511-512. We rejected Gate's constitutional claims, and in doing so, considered the Supreme Court's internal consistency test in relation to the FIET as applied to Gate. Id. at 512-513. We noted that as applied to an apportionment formula such as set out in the statute at issue here, G. L. c. 63, § 2A (§ 2A), the internal consistency test requires that "the [apportionment] 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" (quotation and citation omitted). Id. at 512. However, we then made an observation about Gate's actual tax liability that, although factually true, may have implied that we understood the internal consistency test to be satisfied if the taxpayer did not suffer double taxation in fact. See id. at 512-513 & n.27. We recognize that, as Wynne reaffirms, 135 S. Ct. at 1802, hypothetical rather than actual tax liability is the relevant consideration under the internal consistency test.
[Note 6] In Gate's case, however, because Gate had no employees, it had no payroll factor. Accordingly, its "apportionment percentage" was derived by dividing Gate's combined receipts factor and property factor by two. See First Marblehead, 470 Mass. at 500 n.6.
[Note 7] "Regular place of business" is defined 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." G. L. c. 63, § 1. "Commercial domicile" is defined in relevant part as the "headquarters of the trade or business, that is, the place from which the trade or business is principally managed and directed." Id.
[Note 8] The apportionment formula in G. L. c. 63, § 2A, is based on a model statute proposed by the Multistate Tax Commission, see First Marblehead, 470 Mass. at 502 & n.12, and we are informed by the Commissioner of Revenue (commissioner) that the formula has been adopted in substantially the same form in thirteen States: Alabama, Arkansas, California, Hawaii, Kansas, Maine, Maryland, Mississippi, New Mexico, Ohio, Oregon, Rhode Island, and Utah.
[Note 9] The factors that are listed and defined in § 2A (e) (vi) (C) are "the solicitation, investigation, negotiation, approval and administration of the loan," see § 2A (e) (vi) (C) (1)(5), often referred to as the "SINAA factors." See First Marblehead, 470 Mass. at 507 & nn.20-21. Gate has agreed that the first four of these factors have no application to it because it was not involved in loan origination. See id. at 507-508. With respect to loan administration, we have interpreted and continue to interpret the definition of this term in § 2A (e) (vi) (C) (5) as not applying to Gate as a factual matter because the factor looks to where the loan is administered by the taxpayer's employees, and Gate did not have any employees: the entities that serviced Gate's loans were separate corporations or public agencies. See id. at 508-509.
The total income subject to tax, therefore, is one hundred per cent.
[Note 11] As for Gate's argument that § 2A (e) (vi) offers no basis on which Florida could properly reassign the loans to Massachusetts, as explained, the statute, properly interpreted, would call for the presumption in § 2A (e) (vi) (B) to apply in the instance of a taxpayer like Gate that has no employees or offices but does have a commercial domicile. As counsel for the commissioner stated in oral argument, this same result would obtain in Massachusetts if we were to assume that Florida were Gate's commercial domicile -- that is, there would be no basis provided by § 2A (e) (vi) to assign any loans to Massachusetts, and Gate's property factor in calculating the Massachusetts FIET would be zero.
[Note 12] Gate's inability to rebut the presumption in § 2A (e) (vi) (B) is principally a consequence of its holding company status. Under the FIET, if Gate believed that application of § 2A (e) (vi) to it was "not reasonably adapted to approximate the net income derived from business carried on within the [C]ommonwealth," Gate was free to request the commissioner "to have its income derived from business carried on within this [C]ommonwealth determined by a method other than set forth in [§ 2A (a)-(f)]." G. L. c. 63, § 2A (g). Gate did not choose to follow that path. See First Marblehead, 470 Mass. at 510.

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