United States

Massachusetts: State’s Highest Court Affirms Ruling Addressing Inclusion of Loans in the Property Factor

Feb 02, 2015
From KPMG TaxWatch

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Recently, the Massachusetts Supreme Judicial Court (the Commonwealth’s highest court) affirmed an Appellate Tax Board (Board) decision addressing whether certain loans were included in the taxpayer’s Massachusetts property factor. The taxpayer, a wholly-owned subsidiary of a parent corporation engaged in various aspects of the post-secondary student loan business, owned interests, directly or indirectly, in sixteen trusts that purchased and securitized student loan portfolios. The taxpayer was not engaged in originating any loans. Although the taxpayer had no employees, payroll, or tangible assets and did not own or lease office space, it had a Boston address where its books and records were maintained. Substantially all of the taxpayer’s income was interest income earned from the trusts. Originally, the parent included the taxpayer in its combined corporate excise return for the tax years at issue. Later, the taxpayer filed amended returns taking the position that it was a financial institution subject to the Financial Institution Excise Tax (FIET). The Department disagreed with this classification and the matter eventually went before the Board. The Board held that the taxpayer was a financial institution subject to the FIET, but that the taxpayer had improperly computed its apportionment formula on the amended returns. As a result, the taxpayer’s approved abatement was $4 million less than the amount it had originally sought. The taxpayer subsequently appealed to the appellate court and at some point thereafter, the case was transferred to the Massachusetts Supreme Judicial Court on its own motion.

On appeal the sole issue before the court was the computation of the taxpayer’s Massachusetts property factor, which was reported as zero on its amended returns. Under Massachusetts law, financial institutions use an evenly-weighted-three factor formula consisting of property, payroll, and receipts. Loans are treated as property includable in the formula and are generally assigned to “the regular place of business with which [the loan] has a preponderance of substantive contacts.” Determining the state that has a preponderance of the substantive contacts with the loan requires looking at the facts and circumstances surrounding the loan and consideration is to be given to activities such as solicitation, investigation, negotiation, approval, and administration of the loan (the so-called SINAA factors). If a loan is assigned by a taxpayer to a jurisdiction outside Massachusetts that is not a “regular place of business,” the loan is presumed, subject to rebuttal, to be assigned to Massachusetts if the taxpayer’s commercial domicile is in Massachusetts. Because the taxpayer at issue had no regular place of business within or outside Massachusetts, the Board ruled that for property factor purposes all of the loans should be attributed to Massachusetts, the taxpayer’s conceded commercial domicile. On appeal the taxpayer reiterated its argument that the loans should be assigned to the out of state locations where third party servicers administered the loans. Of the SINAA factors, only “administration” could apply because the taxpayer was not engaged in loan origination. The court, however, agreed with the Board’s decision. In its view, none of the SINAA factors applied to activities performed by third parties. Thus, in the instant case the loans had no “substantive contacts” with any jurisdiction and were therefore properly assigned to the taxpayer’s conceded commercial domicile. The court noted that the taxpayer was unlike “many if not most financial institutions” contemplated under the apportionment statute and that the Commissioner had raised the idea of invoking the state’s alternative apportionment provisions to source the taxpayer’s income. The taxpayer, however, had rejected the Commissioner’s idea to apply alterative apportionment (the Commissioner’s proposed alternative resulted in almost all of the taxpayer’s income being attributed to Massachusetts) asserting that the statutory apportionment formula for financials was appropriate. Please contact George Burns at 617-988-6759 with questions on First Marblehead Corp. v. Commissioner of Revenue (Jan. 28, 2015).

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.