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Bay State Snafu: Trust Me, I'm a Wicked Smaht Financial Institution

By Scott Booth and Timothy Gustafson

The Massachusetts Appellate Tax Board ruled that an out-of-state corporation’s subsidiary qualified a

April 30, 2013

By Scott Booth and Timothy Gustafson

The Massachusetts Appellate Tax Board ruled that an out-of-state corporation’s subsidiary qualified as a financial institution by virtue of the lending activities undertaken by the trusts in which it held beneficial ownership and from which the subsidiary derived more than 50% of its gross income. Under Massachusetts’ statutory “catchall” provision (Mass. G.L. c. 63, § 1(e)), a corporation “in substantial competition with financial institutions. . .[that] derives more than 50 per cent of its gross income. . .from lending activities” qualifies as a financial institution. To support the subsidiary’s claim that it was properly characterized as a financial institution, it established to the Board’s satisfaction that the trusts owned student loan portfolios that had been securitized by its parent and affiliates, and the trusts also engaged in a number of “lending activities” regularly performed by other banks securitizing student loans, within the meaning of the catchall. Further, because the trusts were correctly characterized as partnerships for federal and state purposes, the trusts’ activities were properly attributed to the subsidiary. Therefore, the Board ruled that the subsidiary should be separately taxed as a financial institution because it derived substantially all of its income from the trusts’ lending activities, which were in substantial competition with financial institutions and were attributable to the subsidiary. Based on its ruling, the Board also concluded that the subsidiary was entitled to apportion its income as a financial institution but that all of its property (i.e., the loans) was to be assigned to the subsidiary’s commercial domicile in Massachusetts in the absence of a regular place of business outside of the state. Marblehead Corp. v. Comm’r of Revenue, Dkt. No. C293487 (Mass. App. Tax Bd. Apr. 17, 2013).

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