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Bank of America, N.A. v. Commissioner of Revenue

Supreme Judicial Court of Massachusetts, Suffolk

July 11, 2016

BANK OF AMERICA, N.A., trustee, [1]

          Heard: March 7, 2016.

         Appeal from a decision of the Appellate Tax Board. The Supreme Judicial Court granted an application for direct appellate review.

         Kevin P. Martin (Joshua M. Daniels with him) for the taxpayer.

         Kirk G. Hanson, Assistant Attorney General, for Commissioner of Revenue.

          Phoebe A. Papageorgiou, of the District of Columbia, & Brad S. Papalardo, for Massachusetts Bankers Association & another, amici curiae, submitted a brief.


          BOTSFORD, J.

         In this case, we consider whether Bank of America, N.A. (bank), in its capacity as a corporate trustee of several inter vivos trusts, qualifies as an "inhabitant" and accordingly is subject to the fiduciary income tax under G. L. c. 62, § 10, even though the bank is not domiciled in Massachusetts. Considering the bank's appeal from a decision of the Appellate Tax Board (board) in which the board determined that the bank did qualify as an inhabitant, we affirm the board's decision on the record of this case, but on somewhat different grounds.[2]

         1. Background.[3]

         The bank is a national banking association authorized to act as a fiduciary. At all relevant times, the bank's commercial domicil was in North Carolina, with its principal place of business in Charlotte, North Carolina.

         This case concerns appeals by the bank from the denials, by the Commissioner of Revenue (commissioner), of applications for abatement of fiduciary income taxes paid by thirty-four inter vivos trusts. The taxes were paid by the bank in its capacity as trustee or co-trustee of each of the thirty-four trusts;[4] the taxes paid related to the tax year ended December 31, 2007 (tax year at issue). In 2011, the bank took the position that these thirty-four and similar inter vivos trusts of which the bank served as trustee or co-trustee did not qualify as "resident inter vivos trusts, " as described in 830 Code Mass. Regs. § 62.10.1(1) (b) (2016), [5] and therefore were not subject to fiduciary income tax under G. L. c. 62, § 10 (§ 10). Accordingly, the bank filed with the commissioner 2, 987 applications for abatement of the tax and refund of all taxes paid in the tax year at issue; applications for abatement on behalf of the thirty-four trusts involved in the present appeal were included. After six months passed without a decision from the commissioner, the bank withdrew its consent to extend the time for the commissioner to act with regard to these thirty- four applications for abatement. As a result, the thirty-four applications were deemed denied pursuant to G. L. c. 58A, § 6.[6]

         In November, 2011, the bank filed petitions with the board under G. L. c. 58A, § 7, appealing the denial of the thirty-four abatement applications; the abatements sought totaled $2, 287, 707. The parties chose four of the thirty-four trusts (subject trusts) to serve as representative trusts for the purposes of the appeal, and agreed that the same dispositive question of law applied to the remaining thirty trusts. The board issued its findings of fact and report on June 10, 2015, and concluded that the bank, in its capacity as trustee, was an inhabitant of the Commonwealth within the meaning of G. L. c. 62, §§ 1 (f) and 10 (c0, during the tax year at issue and that the subject trusts were resident inter vivos trusts subject to the fiduciary income tax under G. L. c. 62, § 10 (a.) . The bank filed a notice of appeal from the board's decision and this court granted the bank's application for direct appellate review.

         The agreed-to facts, which are set out in the board's decision, include the following. The four representative trusts that were the subject of the board's decision are the R.K. Elliot Trust, the Hovey Trust, the Gordon Trust, and the J.M. Elliot Trust.[7] Each of these trusts is an inter vivos trust created by an individual who was an inhabitant of the Commonwealth at the time of the trust's creation, and each trust had become irrevocable prior to the tax year at issue. During that year, none of the subject trusts had any Massachusetts source income that was taxable under G. L. c. 62, § 5A, and no identified beneficiary to whom income was payable from these trusts was an inhabitant of the Commonwealth. However, it is undisputed that income received in relation to each of the subject trusts was "accumulated for unborn or unascertained persons, or persons with uncertain interests" within the meaning of G. L. c. 62, § 10 (a).

         Throughout the tax year at issue, the bank sought out and entered into banking and other commercial relationships, including making loans, with residents and with business entities in the Commonwealth; conducted business in no fewer than 200 branch offices located in the Commonwealth that were staffed by Commonwealth residents who were the bank's employees; and qualified as a "financial institution" that was "engaged in business within the Commonwealth" within the meaning of G. L. c. 63, §§ 1, 2, 2A.[8]'[9]

         Specifically with respect to trust activities relating to the subject trusts, the bank performed the following activities in the Commonwealth during the tax year at issue: operated and staffed offices for the purpose of fulfilling some of the bank's obligations as a trustee of those trusts; maintained relationships with the trusts' beneficiaries, and decided when to make distributions to the beneficiaries pursuant to the trust documents; administered the trusts' assets and retained certain records relating to trust administration; and conducted research on issues relating to the trusts and discussed such issues with the trusts' grantors, beneficiaries, and their representatives. The bank also performed certain trust-related activities in the Commonwealth that related to trust administration more generally, including consulting with clients and prospective clients about the bank's trust services; discussing accounts with grantors and beneficiaries of other trusts for which the bank served as trustee; reviewing proposed trust instruments with clients; and providing a place for persons to execute trusts that named the bank as fiduciary. However, bank personnel located outside the Commonwealth also performed trust-related activities in relation to the subject trusts, and "policy and procedures related to administrative and investment components of trusts generally were formulated by [bank] personnel located outside the Commonwealth."[10]

         2. Discussion.

         a. 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). "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) .

         b. Relevant statutes.

         General Laws c. 62 generally concerns the taxation of income within the Commonwealth. Section 10, which relates to ...

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