United States

Massachusetts: On Remand, Court Holds Inclusion of Loans in Massachusetts’ Property Factor does not Violate Internal Consistency Test

Aug 22, 2016
From KPMG TaxWatch

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Recently, the Massachusetts Supreme Judicial Court (the Commonwealth’s highest court) held—once again— that a taxpayer was required to include certain loans in its Massachusetts property factor. The same court had previously reached the same conclusion in a decision that was later vacated by the U.S. Supreme Court and remanded for reconsideration in light of the high court’s decision in Wynne. Specifically, the issue upon remand was whether the Massachusetts apportionment scheme violated the internal consistency test as articulated in Wynne.

The substantive issue before the court addressed the computation of the taxpayer’s Massachusetts property factor.  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 court had held that the loans had no “substantive contacts” with any jurisdiction and were therefore properly assigned to the taxpayer’s conceded commercial domicile— Massachusetts.

The Massachusetts Supreme Judicial Court noted that the internal consistency test, as articulated in Wynne “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.” Applying this test to the facts at issue, the Massachusetts court concluded that if Massachusetts’ rule for situsing loans to the property factor was applied by every state, no more than one hundred percent of the taxpayer’s income would be subject to tax. This is because a taxpayer has one commercial domicile and, in every state that had adopted an identical provision to Massachusetts’, any loan assigned to a state where the taxpayer did not have a regular place of business using the same criteria, would be assigned to the taxpayer’s commercial domicile. The court concluded that there was no “disadvantage” to the taxpayer from operating in interstate commerce as opposed to wholly in intrastate commerce. Please contact George Burns at 617-988-6759 with questions on First Marblehead Corp. v. Commissioner of Revenue

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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.