An active bench at the Supreme Judicial Court heard oral argument in First Marblehead Corp. & Gate Holdings, Inc. v. Commissioner, Docket No. 2013-P-0935 this morning; posing pointed questions to both parties.

At issue is whether Gate Holdings (“Gate”) is entitled to look to the activities of third-party loan services for purposes of sourcing its loans under Massachusetts SINAA sourcing rules for the financial institution excise tax.   With respect to loans, SINAA activities refer to solicitation, investigation, negotiation, approval, and administration. See G.L. c. 63, §2A(e)(vi)(3)(C). 

At the Massachusetts Appellate Tax Board, Gate conceded that it did not have any SINAA activities of its own.  Instead, it argued that it could look to the activities of third-party loan servicers for purposes of its SINAA sourcing analysis for its property factor.  Since those loan servicers were all located outside of Massachusetts, it argued that all loans should be sourced outside Massachusetts and excluded from its property factor numerator.  The ATB rejected this argument because it did not consider the loan servicers to be agents of Gate.  Since Gate had no other activities, the ATB concluded that Gate did not have a regular place of business, either inside or outside of Massachusetts.  Thus, the ATB sourced the sourced the loans entirely to Gate’s commercial domicile in Massachusetts under G.L. c. 63, §2A(d)(xiii).

At oral argument, Gate continued to argue that the loan servicers were independent contractors whose activities should be imputed to Gate under agency principles for purposes of determining in which states SINAA activities occurred; arguing that the ATB had misapplied agency principles in making its determination.

In response, the Commissioner argued that the ATB properly applied the presumption and that the activities of third-party loan servicers could not be imputed to Gate based on a plain reading of the statute.  The Department argued that the statue only looks to the SINAA factors when those activities are done by employees of the taxpayer.  Thus, even an agency relationship is not considered and therefore, the commercial domicile presumption applies.

Overall, several justices seemed troubled by the idea that a taxpayer’s loans could be 100% sourced to Massachusetts for property factor purposes, when the loans were made to borrowers located throughout the country.  However, with difficult questions posed to both sides from a very active bench we’ll be waiting for the Court’s decision with anticipation.

The Department’s all or nothing approach in this case should also create sourcing opportunities for taxpayers that can analogize their facts to Gate’s and would benefit from sourcing property under a commercial domicile rule.  Taxpayers in a position to benefit from a Department victory should consider filing protective refund claims if they have not already.

For updates on this case, please contact the authors of this post.  For more information on the facts of this case and the Appellate Tax Board decision, click here.