On Friday, August 12, 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.  See The First Marblehead Corp. v. Commissioner, Supreme Judicial Court Docket No. SJC-11609 (August 12, 2016).  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.  See The First Marblehead Corp. v. Commissioner, 470 Mass. 497 (2015).  The taxpayer requested cert from the United States Supreme Court.  Last October, the Supreme Court issued an order 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, 135 S.Ct. 1787 (2015).  See The First Marblehead Corp. v. Mass. Comm’r of Revenue, 136 S. Ct. 317 (2015).

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 today’s 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.  For questions about the refund opportunities created by the First Marblehead decision, and the impact that further SJC review of that decision could have on other Massachusetts taxpayers, contact the authors of this Alert or another member of the Reed Smith State Tax Group.