The First Marblehead Corp. v. Commissioner of Revenue

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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.