The First Marblehead Corp. v. Commissioner of Revenue

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revision and are superseded by the advance sheets and bound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 & another 1 vs. COMMISSIONER OF
REVENUE.
Suffolk. May 3, 2016. - August 12, 2016.
Present: Gants, C.J., Spina, Cordy, Botsford, Duffly, Lenk, &
Hines, JJ. 2
Financial Institution. Taxation, Excise, Apportionment of tax
burden. Constitutional Law, Taxation, Commerce clause,
Interstate commerce. Interstate Commerce.
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.
1
GATE Holdings, Inc. (Gate).
2
Justice Duffly participated in the deliberation on this
case prior to her retirement.
2
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), 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.
3
Gate and The First Marblehead Corporation are referred to
collectively as Gate in this opinion.
3
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
4
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
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).
5
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
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.
6
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 statute creates a
presumption, rebuttable by the taxpayer, that the loan is
properly assigned to the Commonwealth if, at the time the loan
was made, the taxpayer's "commercial domicile" was in
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.
7
Massachusetts. See § 2A (e) (vi) (B). Finally, both "regular
place of business" and "commercial domicile" are defined terms
in the statute. 7,8
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.
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.
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.
8
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.
This result does not contravene the internal consistency
test. An example will illustrate the point. Assume that
another State -- for example, Florida -- is the taxing State and
that Florida has enacted a statute identical to § 2A. As stated
in the previous paragraph, Gate has no regular place of business
in any State, including Florida, and therefore, there is no
statutory basis to assign any loan to Florida as the taxing
State under § 2A (e) (vi) (A) (1), and no statutory basis to
assign any loan to any other State under § 2A (e) (vi) (A)
(2). First Marblehead, supra at 504-505. Turning to subsection
§ 2A (e) (vi) (B), the question is whether, apart from a regular
place of business, there is a State in which "the preponderance
of substantive contacts" relating to the loan occurred, within
the meaning of § 2A (e) (vi) (C). If every State follows the
interpretation of § 2A (e) (vi) (C) that this court adopted
9
in First Marblehead, supra at 508-510 -- a result that seems
required for purposes of considering the internal consistency
test, given that § 2A is a Massachusetts statute -- Gate could
not establish that there is another State in which the
preponderance of substantive loan-related contacts occurred.
This is so because although § 2A (e) (vi) (C) requires "the
facts and circumstances regarding the loan at issue [to] be
reviewed on a case-by-case basis" in determining whether the
preponderance of substantive contacts connect a loan to a
particular State, the statutory factors listed and defined in
that section to be taken into account in conducting the
individual case review do not apply to Gate, with its lack of
employees and office locations. 9 Accordingly, the default
presumption in § 2A (e) (vi) (B) -- that the taxpayer's
commercial domicile defines the place where "the preponderance
of substantive contacts regarding [the] loan occurred" --
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.
10
applies. Because Gate's commercial domicile is Massachusetts,
the numerator of Gate's property factor in Florida would be zero
-- i.e., no loans assigned to Florida -- which means
mathematically that its property factor as a whole would also be
zero. See First Marblehead, supra at 504 & n.15. Assuming that
§ 2A were in effect in every other State, the same analysis
would apply to the property factor calculation for Gate in each
such State. The exception is Massachusetts, Gate's commercial
domicile. 10
Gate contests this conclusion. It argues that if Florida -
- a State to which Gate in fact did assign loans on its
Massachusetts return -- had § 2A (e) (vi) as its tax statute,
and Gate filed a tax return in Florida, Florida would treat the
loans that Gate assigned to that State as properly assigned
10
As the commissioner argues, this result means that in the
hypothetical exercise called for by the internal consistency
test, Gate would not be subject to tax on more than one hundred
per cent of its income. In particular, as explained in First
Marblehead, 470 Mass. at 500 & n.7, Gate's apportionment
percentage in Massachusetts -- given its uncontested receipts
factor of two per cent and its uncontested lack of a payroll
factor -- was fifty-one per cent:
(2% receipts factor + 100% property factor)/2 = 51%
If all other States' hypothetical apportionment percentages are
calculated together, the collective result is a forty-nine per
cent apportionment factor:
(98% receipts factor + 0% property factor)/2 = 49%
The total income subject to tax, therefore, is one hundred per
cent.
11
because § 2A (e) (vi) provides no basis for the reassignment of
the loans to Massachusetts. The difficulty with this argument
is that, as just discussed, there is no proper statutory basis
in § 2A for Gate to assign loans to Florida. We reject a claim
that the Massachusetts apportionment formula, as we have
construed it, violates the internal consistency test when the
claim is premised on the taxpayer's erroneous application of the
formula in the first instance. 11
Gate also contends that § 2A (e) (vi) violates the internal
consistency test because it deprives Gate of any way to rebut
the presumption in § 2A (e) (vi) (B). We disagree. The
internal consistency test examines a tax structure to ensure
that it "would result in no more than all of the unitary
business'[s] income being taxed," Container Corp. of Am., 463
U.S. at 169, and is designed to help identify tax structures
that discriminate against interstate commerce by "look[ing] to
the structure of the tax at issue to see whether its identical
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.
12
application by every State in the Union would place interstate
commerce at a disadvantage as compared with commerce
intrastate." Wynne, 135 S. Ct. at 1802, quoting Jefferson
Lines, 514 U.S. at 185. Here, as just discussed, if § 2A (e)
(vi) were in effect in every State, no more than one hundred per
cent of Gate's income would be subject to tax, and there is no
disadvantage to Gate that derives from operating in interstate
commerce as opposed to wholly in intrastate commerce -- if Gate
operated solely in Massachusetts, there would be no
apportionment of Gate's income available at all. Section 2A (e)
(vi), as applied to Gate, did not violate the internal
consistency test or, more generally, the dormant commerce
clause. 12
Decision of the Appellate
Tax Board affirmed.
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.