Six years and eleven months after the First Marblehead litigation began, the matter is now settled and all appeals have been exhausted.¹ On February 21, 2017, the US Supreme Court (USSC) denied First Marblehead Corp's petition for further review of the second decision by the Massachusetts Supreme Judicial Court (MSJC) in the First Marblehead litigation, The First Marblehead Corporation v. Commissioner of Revenue, 475 Mass. 159 (2016) (First Marblehead II).² First Marblehead II was decided following the reversal of the MSJC's prior decision, The First Marblehead Corporation v. Commissioner of Revenue, 470 Mass. 497 (2015) (First Marblehead I), which was vacated and remanded by the USSC.³

As recounted in our previous tax alert (see Tax Alert 2016-1504), in First Marblehead II, on remand from the USSC, the MSJC affirmed its earlier decision in First Marblehead I that the Commissioner of Revenue properly treated the loans of an out-of-state "holding" company as being located wholly in Massachusetts and, therefore, included in the numerator of its property factor, because the company failed to rebut the presumption that the loans should be sourced to its commercial domicile which was Massachusetts. In doing so, the MSJC, following the USSC's remand instructions, found that Massachusetts' statutory provisions, as applied to the company, did not violate the internal consistency test (in light of the USSC's recent ruling in Wynne⁴)under the dormant Commerce Clause of the U.S. Constitution.

The First Marblehead litigation generated significant attention from the state and local tax community because, among other reasons, First Marblehead was the first reported appellate decision in any state interpreting the Recommended Formula for Apportionment and Allocation of Net Income of Financial Institutions of the Multistate Tax Commission (MTC and MTC Model Formula),⁵ which is used by nearly 20 states. In addition, the MSJC's opinion in First Marblehead II marks one of the first applications by a state court of the USSC's watershed Wynne decision on the issue of internal consistency.

Implications

As indicated, the MSJC's two First Marblehead decisions are the first reported appellate level decisions in any state interpreting the MTC Model Formula and, therefore, could be influential or persuasive in tax controversy cases involving apportionment and allocation for financial institutions in many other states. Further, given the facts at issue here, these decisions may be especially relevant for taxpayers that are not registered banking intuitions but conduct some "bank-like" activities. Finally, there could be refund opportunities for non-Massachusetts based financial institutions to the extent they have Massachusetts-sourced loans in their property factor, particularly for taxpayers with purchased loan portfolios and those that outsource the servicing of their loans.

———————————————

———————————————
ENDNOTES

¹ First Marblehead Corp filed a petition for review with the Massachusetts Appellate Tax Board on March 22, 2010.

² Cert. den'd First Marblehead Corp. v. Heffernan, 2017 U.S. LEXIS 1399 (U.S. Feb. 21, 2017).

³ First Marblehead Corp. v. Mass. Comm'r of Revenue, 136 S. Ct. 317 (2015).

⁴ Comptroller of the Treasury of Maryland v. Wynne, 135 S. Ct. 1787 (May 18, 2015).

⁵ See the MTC's Amicus Brief at pp. 4 & 5.