U.S. Supreme Court Vacates And Remands Massachusetts Case For Further Consideration Based On Wynne

On October 13, 2015, the U.S. Supreme Court issued a summary disposition for First Marblehead Corp. v. Commissioner of Revenue1 that granted the taxpayer's petition for certiorari, vacated the judgment, and remanded the case to the Massachusetts Supreme Judicial Court (MSJC) for further consideration in light of the U.S. Supreme Court's recent decision in Comptroller of the Treasury v. Wynne.2 In First Marblehead, the MSJC held that the fair apportionment requirement of the dormant Commerce Clause was not violated. The MSJC reached this conclusion after determining that the internal consistency test was met because the application of the apportionment statute did not actually subject the taxpayer to double taxation. Several months after First Marblehead was decided, the U.S. Supreme Court held in Wynne that the Maryland personal income tax statutes violated the internal consistency test because there hypothetically would be double taxation if each state imposed the same tax structure. In its petition for certiorari, the taxpayer in First Marblehead contended, based on Wynne, the MSJC did not correctly apply the internal consistency test.3

First Marblehead Decision

On January 28, 2015, the MSJC held, for purposes of the Massachusetts financial institution excise tax, the apportionment of income of a taxpayer that facilitated student loans did not violate the internal or external consistency tests. The taxpayer, which had its commercial domicile in Massachusetts, was essentially a holding company without employees or tangible assets that outsourced the servicing of the student loans. To apportion its income, the taxpayer used an equally-weighted formula based on property, payroll and sales factors. The loan portfolio represented substantially all of the taxpayer's property. For the 2004 through 2006 tax years at issue, the taxpayer filed a Massachusetts return reporting an apportionment percentage of one percent, which was the average of a two percent sales factor and zero percent property factor.4 For purposes of the property factor, the taxpayer assigned the loans to the location of the servicers. After the Massachusetts Appellate Tax Board determined that all of the loans should be assigned to the taxpayer's commercial domicile in Massachusetts, the taxpayer's apportionment factor rose from one percent to 51 percent, which was the average of its two percent sales factor and 100 percent property factor. The main issue of the case focused on how the taxpayer's property factor should be calculated. Specifically, the MSJC was required to determine whether the loan portfolios should be treated as being located completely or partially within Massachusetts.

The MSJC clarified that with respect to apportionment, both the U.S. Supreme Court and the MSJC have found that the Due Process and Commerce Clauses require fairness in apportioning the income of a multistate business.5 As explained by the MSJC, "[t]he first . . . component of fairness in an apportionment formula is what might be called internal consistency - that is, the formula must be such that, if applied by every jurisdiction, it would result in no more than all of the unitary business'[s] income being taxed. The second and more difficult requirement is what might be called external consistency - the factor or factors used in the apportionment formula must actually reflect a reasonable sense of how income is generated."6

In considering the internal consistency test, the MSJC summarily determined that "we have no reason to conclude that application of the apportionment statute as we have interpreted it produces duplicative taxation of [the taxpayer's] income, given that [the taxpayer's] Massachusetts apportionment percentage for the tax year at issue was approximately fifty-one per cent, and the record reflects that [the taxpayer] filed tax returns only in Massachusetts and Florida for the...