Massachusetts Tax Formula Illegal? Company Asks High Court

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By Che Odom

First Marblehead Corp. is again asking the U.S. Supreme Court to review whether Massachusetts erred in taxing 51 percent of its student loan income because its property interest in the loans is located in-state ( First Marblehead Corp. v. Heffernan , U.S., No. 16-777, petition for writ of certiorari 12/15/16 ).

First Marblehead and its California-based subsidiary, Gate Holdings Inc., want the high court to review a Massachusetts Supreme Judicial Court’s decision from August ( First Marblehead Corp. v. Comm’r of Revenue , Mass., No. SJC-11609, 8/12/16 ).

The companies contest the sourcing of loans for the apportionment of income for Massachusetts’ financial institutions excise tax (FIET), seeking a ruling that the apportionment formula the state used wasn’t internally consistent. They say the formula violates the high court’s landmark 2015 opinion in Comptroller of the Treasury of Maryland v. Wynne, which requires that states look at taxation to see “whether its identical application by every State in the Union would place interstate commerce at a disadvantage as compared with commerce intrastate.”

Arbitrary, Unreasonable Calculation

Particularly, the petitioners argue that the Massachusetts apportionment formula fails to reflect a reasonable sense of how income is generated. Massachusetts disregarded the activities and entities that actually generate the income, arbitrarily assigning income to the commercial domicile of an owner of the income-producing entities, the petition argues. In other words, the state erred in holding that a wholly owned out-of-state subsidiary (Gate) is subject to income taxes as an in-state entity because it is essentially a holding company for an in-state entity (First Marblehead)—and the preponderance of substantive contacts regarding the loans being taxed was located in the commonwealth.

The petitioners also say the SJC ignored Supreme Court precedent by assuming other states would apply an apportionment formula different from the formula used in the Massachusetts statute.

First Marblehead’s attorney, John S. Brown, senior counsel at Morgan, Lewis & Bockius LLP in Boston, didn’t immediately respond to requests for comment.

Applying ‘Wynne’ Internal Consistency Test

In the Aug. 12 opinion, the SJC affirmed the state Appellate Tax Board’s finding that all of Gate’s interests in the securitized loans were properly assigned to Massachusetts under the FIET’s apportionment rules, resulting in a greater tax liability than Gate had calculated.

That was the second time the SJC upheld the tax board’s decision. The U.S. Supreme Court vacated its first opinion in the case, issued in January 2015, ordering that the matter be reconsidered in light of the high court’s May 2015 ruling in Wynne, in which the court ruled that Maryland discriminated against interstate commerce by taxing resident individuals on all of their income without a credit for taxes paid to other states, while taxing nonresidents on their income sourced to Maryland ( Comptroller of Treasury of Md. v. Wynne , U.S., No. 13-485, 5/18/15 ).

The SJC held that Massachusetts’ application of the FIET met the “internal consistency” test.

To contact the reporter on this story: Che Odom at

To contact the editor responsible for this story: Ryan C. Tuck at

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