Massachusetts SJC Reaffirms Decision Sourcing 100% of Taxpayer’s Loans to Massachusetts — Confirms Opportunity for Out-of-State Financial Institutions

by Reed Smith
Contact

Reed Smith

On August 12, 2016, the Massachusetts Supreme Judicial Court issued its decision in First Marblehead on remand from the U.S. Supreme Court. The decision reaffirms that many taxpayers that (1) file as financial institutions in Massachusetts, and (2) purchase loans from affiliates or third-parties will be able to include those loans in their Massachusetts property factor, while sourcing 0% of the loans to Massachusetts—even if the loans are to borrowers located in Massachusetts.

On August 12, 2016, the Massachusetts Supreme Judicial Court (the “SJC”) reaffirmed its decision in First Marblehead—that a financial institution that is commercially domiciled in Massachusetts can be required to source 100% of its loans to Massachusetts for purposes of computing its property factor numerator.1 While this decision produced a harsh result for the taxpayer in First Marblehead, a financial institution commercially domiciled in Massachusetts, the decision confirms an opportunity for many financial institutions domiciled outside Massachusetts that purchase loans from affiliates and third-parties.

By way of background, First Marblehead involved the sourcing of securitized loans for property factor purposes under Massachusetts’ rules for financial institutions. In contrast to most Massachusetts corporate taxpayers, financial institutions are permitted to include loans in their property factor. For property factor purposes, financial institutions source their loans based on the location of five factors, referred to as the SINAA factors (solicitation, investigation, negotiation, approval and administration). However, in First Marblehead, the Massachusetts Department of Revenue (the “Department”) determined that the taxpayer, which was an entity formed specifically to hold securitized loans, had no SINAA factors because the taxpayer did not originate or service its loans (as is typical of a securitization entity). The Department argued that because the taxpayer had no SINAA factors, the statute required that all of its loans be sourced to the location of the taxpayer’s commercial domicile—Massachusetts. This resulted in a 100% Massachusetts property factor for the taxpayer, even though the overwhelming majority of the borrowers with respect to its loans were located outside Massachusetts.

Last January, the SJC upheld an Appellate Tax Board decision affirming the Department’s assessment.2 The taxpayer requested cert from the United States Supreme Court. Last October, the Supreme Court issued an order3 vacating the SJC’s decision and remanding the case to the SJC for further consideration in light of its decision in Comptroller of Treasury of Md. v. Wynne.4

The SJC has now reconsidered its earlier opinion and reached the same result—upholding the inclusion of 100% of the value of the taxpayer’s loan portfolio in its property factor numerator, despite the fact that most of the borrowers under the loans are located outside Massachusetts and all the loan administration is conducted outside Massachusetts. The SJC’s reasoning in its new decision, however, is arguably consistent with Wynne. In its prior determination, the SJC only looked to see if the Department’s method actually resulted in more than 100% apportionment. Because the taxpayer only filed returns in Massachusetts and Florida, its combined apportionment factors were considerably less than 100%. Wynne, however, made clear that the internal consistency analysis required under the Commerce Clause required considering the outcome if every state were to apply the same sourcing rules as Massachusetts. The SJC found that if every state applied Massachusetts’ rule, all the loans would be sourced to Massachusetts, and no other state, for purposes of the property factor. Thus, the SJC concluded there was no risk of double taxation.

Opportunity for Financial Institutions Commercially Domiciled Outside of Massachusetts Although this decision produced a harsh result for the taxpayer, it confirms a corporate excise tax refund opportunity for other financial institutions that are:

  • Commercially domiciled outside Massachusetts; and
  • Purchasers of loans from affiliates or third-parties

Taxpayers that satisfy these criteria can, in most cases, include their purchased loans in their property factor denominator without including any of the loans in their property factor numerator—even if some or all of the borrowers under the loans are located in Massachusetts. Any taxpayer that satisfies these criteria and that has been including loans it has purchased in its Massachusetts property factor numerator may have a Massachusetts refund opportunity.


  1. The First Marblehead Corp. v. Commissioner, Supreme Judicial Court Docket No. SJC-11609 (August 12, 2016).
  2. The First Marblehead Corp. v. Commissioner, 470 Mass. 497 (2015).
  3. The First Marblehead Corp. v. Mass. Comm'r of Revenue, 136 S. Ct. 317 (2015).
  4. 135 S.Ct. 1787 (2015).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Reed Smith | Attorney Advertising

Written by:

Reed Smith
Contact
more
less

Reed Smith on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.