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First Marblehead Corporation v. Commissioner of Revenue

Supreme Judicial Court of Massachusetts, Suffolk

January 28, 2015

The First Marblehead Corporation & another[1]
Commissioner of Revenue

Argued October 7, 2014

[As Modified on February 13, 2015]

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.

Present: Gants, C.J., Spina, Cordy, Botsford, Duffly, Lenk, & Hines, JJ.


[23 N.E.3d 895] Botsford, J.

The taxpayers appeal from a decision of the Appellate Tax Board (board) issued pursuant to G. L. c. 58A, § 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

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(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]


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 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. [23 N.E.3d 896] 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, receiving

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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.

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 [23 N.E.3d 897] 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.

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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 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]

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FMC and Gate timely appealed the board's decision to the Appeals Court.[9] We transferred the case to ...

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