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The First Marblehead Corp. v. Commissioner of Revenue

Supreme Judicial Court of Massachusetts, Suffolk

August 12, 2016


          Heard: Date: May 3, 2016.

         Appeal from a decision of the Appellate Tax Board.

         The Supreme Judicial Court on its own initiative transferred the case from the Appeals Court.

          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.

          The following submitted briefs for amici curiae:

          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.

          Present: Gants, C.J., Spina, Cordy, Botsford, Duffly, Lenk, & Hines, JJ. [2]

          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), [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.

         Wynne, 135 S.Ct. at 1793, concerned a challenge to Maryland's personal income tax scheme under the dormant commerce clause of the United States Constitution. See art. I, § 8, cl. 3, of the United States Constitution. The Court's decision reaffirmed the "internal consistency test" articulated in Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 169 (1983), and Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175, 185 (1995) (Jefferson Lines), for determining whether a tax violates the dormant commerce clause. The Court described the test as follows: "This test, which helps courts identify tax schemes that 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.[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.[5] We have done so, and conclude that the Massachusetts tax scheme, as applied to Gate, satisfies the test.

         General Laws c. 63, § 2A (§ 2A), sets out the rules for apportioning the taxable income of financial institutions between or among the States in which the institutions operate. As stated in First Marblehead, the rules "allocate the 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.'" First Marblehead, 470 Mass. at 502, quoting § 2A (b).[6] In Gate's case, the only factor in dispute is the property factor. The rules for determining a financial institution's property factor are set out in § 2A (e), and the rules governing loans in particular are in § 2A (e) (vi) . Under that subsection, the general rule is that a "loan is properly assigned to the regular place of business with which [the loan] has a preponderance of substantive contacts." G. L. c. 63, § 2A (e) (vi) (A) (2) . More specifically, a loan is properly assigned to the Commonwealth "if it is properly assigned to a regular place of business of the taxpayer within the [C]ommonwealth, " G. L. c. 63, § 2A (e) (vi) (A) (1); and a loan is properly assigned to a jurisdiction outside the Commonwealth if it is assigned to a "regular place of business" in that other jurisdiction and the taxpayer's records and tax returns generally reflect the same assignment. See § 2A (e) (vi) (A) (2) . If a loan is assigned by the taxpayer to a place outside the Commonwealth that is not a "regular place of business, " the ...

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