U.S. Supreme Court Vacates Decision in First Marblehead; Remands to Massachusetts Supreme Judicial Court

On October 13, the United States Supreme Court granted a request for review in the case of First Marblehead Corporation v. Massachusetts Commissioner of Revenue, and summarily vacated the decision issued January 28, 2015, by the Supreme Judicial Court of Massachusetts. The case has been remanded to the Supreme Judicial Court for further consideration in light of the U.S. Supreme Court’s decision earlier this year in Comptroller of Treasury of Md. v. Wynne, 576 U. S. ____ (2015).

The U.S. Supreme Court’s decision in Wynne held that Maryland’s personal income tax scheme (which allowed a credit against the state tax, but not the local tax, for taxes paid to another state) violated the Dormant Commerce Clause.  In Wynne, the Court held in a 5-4 decision that the Dormant Commerce Clause precluded Maryland from imposing a tax that discriminates against interstate commerce by favoring intrastate over interstate economic activity, or that might lead to double-taxation of out-of-state income.  The Supreme Court’s decision affirmed the use of the internal consistency test as the measuring stick for Dormant Commerce Clause violations resulting in double-taxation.

The Massachusetts Supreme Judicial Court (“SJC”) is now tasked with applying the internal consistency test to First Marblehead’s facts. First Marblehead involves Massachusetts’ rules for the sourcing of loans by financial institutions for property factor purposes. For property factor purposes, Massachusetts sources loans of financial institutions to the regular place of business of the financial institution where the preponderance of substantive contact with respect to the loan occur.  The location where the preponderance of substantive contacts with respect to a loan occur is determined based on the location of five factors, referred to as the SINAA factors (solicitation, investigation, negotiation, approval and administration).  However, in First Marblehead, the taxpayer purchased loans originated by third-party banks and contracted with an unaffiliated servicing company to handle administration of the loans.  Based on these facts, the Massachusetts Appellate Tax Board (“ATB”) found that the taxpayer had no SINAA factors, and sourced all of the taxpayer’s loans to its commercial domicile in Massachusetts.

In its vacated decision, the SJC affirmed the ATB’s holding, which resulted in a 100% Massachusetts property factor for the taxpayer.  It is that result that now must be scrutinized by the SJC under the internal consistency test.

Massachusetts Denies ‘True Debt’ Treatment for Cash Management Obligations

The Massachusetts Appellate Tax Board (“ATB”) has once again issued a Findings of Fact and Report upholding a Department assessment on the basis that a taxpayer’s intercompany obligations under a cash management system were not bona fide debt.  The most recent decision, issued September 4, 2015, is Staples, Inc. and Staples Contract and Commercial, Inc. v. Commissioner.  (Click here for a copy of the decision).  As with other recent true debt cases, a Department audit resulted in two related assessment issues: (1) a denial of an interest deduction for interest obligations accruing under the cash management system for purposes of the income measure of the corporate excise tax; and (2) the elimination of the liability under the cash management system, resulting in an increase in net worth for purposes of the non-income measure of the corporate excise tax.

Importantly, the ATB’s decision to uphold the assessment for purposes of the non-income measure of the corporate excise means that the “true debt” issue continues to be relevant for companies with cash management systems (and other intercompany obligations), even for years after combined reporting was adopted in Massachusetts.

For more details regarding the Staples case, Legislative efforts to correct this issue, and additional analysis, see our prior quarterly update.

Report from the Boston Bar Association Annual Tax Conference

The Boston Bar Association held its annual tax conference this past Thursday, and as always the BBA pulled together a great lineup of practitioners, legislators, and Department of Revenue officials to discuss the latest in Massachusetts state tax.  The event was broken into four sections; one each on tax policy, litigation, and administrative updates, as well as a key note address by the Commissioner.  Some highlights included:

  • A question and answer session with Commissioner Nunnelly;
  • Spirited discussion on the sourcing of sales of pre-written software under the new market sourcing regulations;
  • Analysis of the limits (if any) of the Department’s sham transaction powers; and
  • Discussion of the Appellate Tax Board’s recent decision in favor of the taxpayer on a true-debt issue in MassMutual and whether the decision has potentially broader applicability.

Congratulations to the BBA’s state tax section and the rest of the BBA for once again putting on a great event.

Appellate Tax Board Case Update: MassMutual Proves Intercompany Debt is True Debt

Today, the Appellate Tax Board (“ATB”) released its Findings of Fact and Report in the related cases of Massachusetts Mutual Life Insurance Company and MassMutual Holding LLC v. Commissioner and MML Investor Services, Inc. v. Commissioner, in which the ATB held that intercompany debt between MassMutual and its affiliates was true debt. As true debt, interest paid on the loan payments was deductible (subject to addback) in computing the net income measure of the corporate excise tax.  MassMutual was also able to prove that the loan payments qualified for an exception to addback because the loan was bona fide debt primarily entered into for a valid business purpose, was supported by economic substance, and reflected fair value or consideration. A copy of the ATB’s decision can be found here: MassMutual v. Commissioner.

Reed Smith will provide more analysis of the MassMutual decision and its implications for other taxpayers in its upcoming quarterly update.

 

First Marblehead Requests U.S. Supreme Court Review In SINAA Sourcing Appeal

In a case of interest for any taxpayer with substantial securitization activities, First Marblehead Corporation and Gate Holdings, Inc. have requested United State Supreme Court review of a recent determination of the Massachusetts Supreme Judicial Court (“SJC”), by way of this petition. The petition for review can be found here.

The case involves the sourcing of securitized loans for property factor purposes under Massachusetts’ rules for financial institutions. For property factor purposes, Massachusetts sources loans of financial institutions based on the location of five factors, referred to as the SINAA factors (solicitation, investigation, negotiation, approval and administration). However, in the case of the taxpayer, which was formed to hold securitized loans, the Court found that it had no SINAA factors because it did not originate or service its loans (as is typical of a securitization entity).

The SJC found that because the taxpayer had no SINAA factors, the statute required that all loans held in its securitization trusts be sourced to the location of the taxpayer’s commercial domicile— Massachusetts. While the determination produced a harsh result for the taxpayer—a 100% Massachusetts property factor—it may create opportunities for taxpayers with substantial securitization activities that are commercially domiciled outside of Massachusetts.

For more on the SJC’s decision in this case and opportunities the decision may create for taxpayers in Massachusetts and other states that have adopted the MTC model statute for financial institutions, see our previous alerts here, here and here.

Update: Massachusetts Supreme Judicial Court Agrees To Hear Regency Transportation Appeal

The Massachusetts Supreme Judicial Court has agreed to accept jurisdiction and hear the taxpayer’s appeal in Regency Transportation, Inc. v. Commissioner, a case in which the Appellate Tax Board, (“ATB”) upheld the Department of Revenue’s assessment of use tax on trucks which, although stored and serviced in Massachusetts, were purchased outside of Massachusetts and used for transportation and distribution services throughout the Eastern United States.

On March 19, 2015, Regency appealed the ATB’s decision with the Massachusetts Appeals Court. Subsequently, Regency filed an application for Direct Appellate Review (“DAR”). The DAR application is a procedural step, whereby a party with an appeal pending at the Appeals Court that involves novel questions of law, questions of constitutionality or questions pertaining to the public interest, can request that those questions be decided by the Supreme Judicial Court, Massachusetts’ highest court, without first having been heard at the Appeals Court.  On May 21, 2015, the Supreme Judicial Court granted the DAR and the case was transferred to the SJC’s jurisdiction.  Regency’s first brief is due June 26, 2015.  For additional coverage, see our prior post.

Washington Department of Revenue takes same position on taxability of early termination fees being challenged in Massachusetts

In a ruling that will be of interest to taxpayers following Massachusetts appeals on the issue, Washington has issued recent guidance (see Washington DOR – Termination Fees) asserting that early termination fees for cancelling cellular phone contracts are subject to retail sales tax as taxable telecommunications services.

This guidance takes the same position that the Massachusetts Department of Revenue allegedly took at audit against a telecommunications provider; a position that the taxpayer challenged at the Appellate Tax Board (“ATB”). For more information on the pending ATB appeal, please see our prior update.

Silver Tsunami Quickly Approaching Department of Revenue Thanks to Early Retirement Incentive Program

On May 4, 2015, Governor Charlie Baker signed into law a bill creating an early retirement incentive program for Massachusetts state employees. Under the incentive plan, employees choosing to retire effective June 30, 2015, will be eligible to add up to five years to either their age or years of service, in order to increase their pensions accordingly. The program would allow up to 5,000 state employees retire on June 30 if their application to the program is accepted. Despite the increased pensions, the move is expected to generate $172 million in budget savings by reducing the state’s payroll.

Hundreds of Department of Revenue employees will be eligible to apply for the retirement incentive program, which should create some concern that the “silver tsunami” facing the Department could arrive sooner than expected.

The Commissioner of Revenue’s Use of the Sham Transaction Doctrine Examined in Tax Analysts Column

In the most recent edition of “The Taxpayers’ Advocate”, a quarterly column published by Tax Analysts focusing on taxpayers’ rights in state and local tax, Michael A. Jacobs, Robert E. Weyman, Brent Beissel, and Jack Trachtenberg of Reed Smith LLP discuss the Massachusetts Commissioner of Revenue’s use of the sham transaction doctrine.  The column, titled “What a Sham: Massachusetts’s Power to Attack Legitimate Tax Planning,” includes a discussion on the lack of clear guidance given to Massachusetts taxpayers for tax planning, and the propensity of state tax officials challenging legitimate tax planning.

To read the full article, visit Tax Analysts. (Subscription required)

Trucking Company Appeals ATB Decision Upholding Use Tax Assessment on Trucks Used in Interstate Commerce

In a case to watch for interstate trucking companies, Regency Transportation, Inc. is appealing a use tax assessment upheld by the Massachusetts Appellate Tax Board (“ATB”). Regency had challenged the Department of Revenue’s assessment of use tax on trucks which, although stored and serviced in Massachusetts, were purchased outside of Massachusetts and used for transportation and distribution services throughout the Eastern United States. Regency did not pay tax at the time of purchase, as the purchases were either made in states that did not impose sales tax (e.g. New Hampshire) or states that provided an exemption for purchases of vehicles used in interstate commerce (e.g. New Jersey, Indiana, and Pennsylvania). Regency asserted that the assessment was invalid on Commerce Clause grounds. The ATB disagreed and upheld the use tax assessment. However, the ATB did grant Regency a waiver of penalties, based on Regency’s reliance on an old ruling that continued to be published by the Department. For a more detailed discussion of this decision, see our prior coverage here.

On March 19, 2015, Regency appealed the ATB’s decision with the Massachusetts Appeals Court. Subsequently, Regency filed an application for Direct Appellate Review (“DAR”). The DAR application is a procedural step, whereby a party with an appeal pending at the Appeals Court that involves novel questions of law, questions of constitutionality or questions pertaining to the public interest, can request that those questions be decided by the Supreme Judicial Court, Massachusetts’ highest court, without first having been heard at the Appeals Court. Regency’s appeal could have implications for any interstate trucking company that has vehicles stored or serviced in Massachusetts.

If you are interested in following developments in this appeal, or wish to obtain a copy of any of the briefs, please email Michael Jacobs at mjacobs@reedsmith.com.

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