Receipts Factor Sourcing for Financial Services
22
© 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP All Rights Reserved. This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Sutherland and the recipient. Receipts Factor Sourcing for Financial Services Marc Simonetti Wally Hellerstein Sutherland SALT Financial Services Roundtable January 21, 2016
Transcript of Receipts Factor Sourcing for Financial Services
PowerPoint Presentation© 2016 SUTHERLAND ASBILL & BRENNAN LLP /
SUTHERLAND (EUROPE) LLP
All Rights Reserved. This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Sutherland and the recipient.
Receipts Factor Sourcing for Financial Services
Marc Simonetti
Wally Hellerstein
2
First Marblehead Corp. v. Commissioner of Revenue
The Massachusetts Supreme Judicial Court Decision (23 N.E.3d 892 (2015))
– Facts • Gate Holdings – subsidiary of First Marblehead • Gate was a pure holding company • No employees, payroll, or tangible assets • All of Gate’s income constituted interest from
securitized student loans held through trusts • Gate was a “financial institution” under MA
Financial Institutions Excise Tax (FIET) • Gate’s commercial domicile was in MA
3
• First Marblehead
First Marblehead
First Marblehead Corp. v. Commissioner of Revenue
MA Financial Institutions Excise Tax (FIET) – Applies to “financial institutions” including
businesses with more than 50% of income from lending activities
– FIET Apportionment Formula Based on MTC (1994, pre-2016) Model Financial Institution Formula
• Three-factor formula of property, payroll, and receipts – Gate had no payroll (undisputed) – Gate’s interest receipts attributed to state of
borrower (MA = 2% MA) (undisputed) – Dispute over property factor (loan portfolios): 100%
(commercial domicile) v. 0% (alleged “contacts”)
6
First Marblehead Corp. v. Commissioner of Revenue
MA FIET (MTC pre-2016) Property Factor – Property factor includes “loans … located within” the state – Loan is located within the state if it is “properly assigned to a
regular place of business within” the state – A loan is properly assigned to a regular place of business “with
which it has the preponderance of substantive contacts” • Assignment to state on taxpayer’s records in regular course of
business – When assigned to other state that is not regular place of
business, presumption is that “preponderance of substantive contacts” are at commercial domicile at the time the loan was made
• Determination made on basis of “facts and circumstances” including
– Solicitation – Investigation – Negotiation – Approval – Administration
7
First Marblehead Corp. v. Commissioner of Revenue
Court Rules Gate Loans Attributable to MA – Failed to rebut presumption that assignment to
other state, other than regular place of business, was commercial domicile
– “Administration” only relevant “fact or circumstance”
• Loan “servicers” were not agents of trusts that held loans or derivatively Gate
• “[O]nly the loan administration of the taxpayer are taken into consideration”
• Court acknowledges that this leads to “conclusion that the loans appear to have had no ‘substantive contacts’”
8
First Marblehead Corp. v. Commissioner of Revenue
Supreme Court of the United States THE FIRST MARBLEHEAD CORP. v.
MASSACHUSETTS COMMISSIONER OF REVENUE. No. 14–1422. Oct. 13, 2015.
Opinion On petition for writ of certiorari to the Supreme Judicial Court of Massachusetts. Petition for writ of certiorari granted. Judgment vacated, and case remanded to the Supreme Judicial Court of Massachusetts for further consideration in the light of Comptroller of the Treasury of Md. v. Wynne, 576 U.S. ___ (2015)
9
First Marblehead Corp. v. Commissioner of Revenue
What does Wynne have to do with First Marblehead?
– Internal Consistency • Taxpayer claims that it assigned loans to other states that
were not its domicile and if every state adopted the MA rule, the property would be assigned both to those states and to MA because the MA presumed domicile rule applies only when the loans are assigned “to a place without” the state
• State’s response is that taxpayer misapplied rule to create internal inconsistency: There is no basis for the taxpayer to contend that it must locate any of its loans in a state simply because it assigned the loan to that state. The only basis for proper assignment (apart from “facts and circumstances” rule, with commercial domicile presumption) is “regular place of business,” which, by hypothesis, does not apply
10
MTC Model Financial Institutions Apportionment
11
• UDITPA explicitly excludes “financial organizations” from its scope – “Any taxpayer having income from business activity
… other than activity as a financial organization …” UDITPA Section 2
• In 1994, MTC adopted a recommended model statute for the apportionment of net income of financial institutions – Model statute adopted by many states
• In 2015, the MTC adopted an amended version of the model statute effective 2016
12
property, payroll, and sales – Detailed rules (1) defining “financial
institution,” (2) defining various terms related to financial institution activity and their income, and (3) attributing particular types of property and receipts
13
© 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP
MTC’s Revised Model Financial Institutions Apportionment Rule
Key Changes Between 1994 and 2016 Models – Modification of property factor to remove intangibles
“loans and credit card receivables” from the factor (see Marblehead)
– Modification of the receipts factor to increase “market state” orientation and to reflect changes in services provided by the financial industry including
• Mortgage loan and credit card application processing • Credit approval • Account servicing • Use of ATMs
14
1994 v. 2016 MTC Model Receipts Factor – Merchant discount
• 1994 = merchant’s commercial domicile • 2016 = cascading rules based on location of merchant and
ratio for other receipts, generally based on customer location
– ATM fees • 1994 = general (COP) rule of unspecified service receipts • 2016 = location of machines for receipts other than those
charged to cardholder for use of card – Receipts from investment and trading assets and
activities • 1994 = general (COP) rule of unspecified service • 2016 = option to source based on MTC “market based”
sourcing regulations
State Sourcing Developments
California Proposed Regulation 25136-2 • Propose Regulation included examples for Asset Managers
of Non-RICs • Examples made clear that Non-RIC Asset Managers were
to source receipts by – looking through the pension plans, retirement plans, or
investment accounts to the location of the underlying shareholder, beneficial owner, or investor.
– If the location is not known, the Asset Manager is to use an approximation of the location of the underlying shareholder, beneficial owner, or investor.
• December 29, 2015, FTB issued a notice removing the examples “due to concerns raised by some members of the public”
16
California
17
California
California – Receipts Factor For Financials • FTB is concerned with the treatment of
broker/dealer activities • Perceived problem related to the gross v. net
receipts issue • Potential resolution to treat broker/dealers as
financials under sec. 23183 – Broker/Dealers can do all the same things as Financials
after Glass-Steagall repeal
17
18
Financial Institutions Regulations • Adopts regulation related to credit card
• Merchant discount guidance
• Proposes regulation on conforming to the MTC Model Financial Institutions Apportionment
• Single factor receipts apportionment • May not conform to the definition of a financial institution
18
Washington
19
Financial Institutions Regulations • Proposed Financial Organizations Regulation • Proposed rule indicated that receipts from investment or
trading activity would not have included income from the sale of a subsidiary (owned 20% or more)
• COST and Oregon Bankers Association filed written comments, addressing -
• Procedural issues • Constitutional issues
19
Oregon
20
New York
New York State Budget 2016/2017
• Proposal revises the QFI definition to exclude stock that generates “other exempt income”.
• Specifically, stock that generates other exempt income and that is not marked to market under IRC §§ 475 or 1256 would not be considered a QFI with respect to the income from that stock.
• NYC Tax Law also proposed to be changed
20
21
Questions?
Wally Hellerstein [email protected]
22
This communication cannot be used for the purpose of avoiding any penalties that may be imposed under federal, state or local tax law.
22
Connect with us!
Windows Phone Store iTunes App Store Google Play Amazon Appstore for Android
The Sutherland SALT Shaker mobile app is now available. Download today from:
@Sutherland_SALT Sutherland SALT Group
First Marblehead Corp. v. Commissioner of Revenue
AGENDA
MTC Model Financial Institutions Apportionment
MTC’s Revised Model Financial Institutions Apportionment Rule
MTC’s Revised Model Financial Institutions Apportionment Rule
MTC’s Revised Model Financial Institutions Apportionment Rule
MTC’s Revised Model Financial Institutions Apportionment Rule
State Sourcing Developments
All Rights Reserved. This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Sutherland and the recipient.
Receipts Factor Sourcing for Financial Services
Marc Simonetti
Wally Hellerstein
2
First Marblehead Corp. v. Commissioner of Revenue
The Massachusetts Supreme Judicial Court Decision (23 N.E.3d 892 (2015))
– Facts • Gate Holdings – subsidiary of First Marblehead • Gate was a pure holding company • No employees, payroll, or tangible assets • All of Gate’s income constituted interest from
securitized student loans held through trusts • Gate was a “financial institution” under MA
Financial Institutions Excise Tax (FIET) • Gate’s commercial domicile was in MA
3
• First Marblehead
First Marblehead
First Marblehead Corp. v. Commissioner of Revenue
MA Financial Institutions Excise Tax (FIET) – Applies to “financial institutions” including
businesses with more than 50% of income from lending activities
– FIET Apportionment Formula Based on MTC (1994, pre-2016) Model Financial Institution Formula
• Three-factor formula of property, payroll, and receipts – Gate had no payroll (undisputed) – Gate’s interest receipts attributed to state of
borrower (MA = 2% MA) (undisputed) – Dispute over property factor (loan portfolios): 100%
(commercial domicile) v. 0% (alleged “contacts”)
6
First Marblehead Corp. v. Commissioner of Revenue
MA FIET (MTC pre-2016) Property Factor – Property factor includes “loans … located within” the state – Loan is located within the state if it is “properly assigned to a
regular place of business within” the state – A loan is properly assigned to a regular place of business “with
which it has the preponderance of substantive contacts” • Assignment to state on taxpayer’s records in regular course of
business – When assigned to other state that is not regular place of
business, presumption is that “preponderance of substantive contacts” are at commercial domicile at the time the loan was made
• Determination made on basis of “facts and circumstances” including
– Solicitation – Investigation – Negotiation – Approval – Administration
7
First Marblehead Corp. v. Commissioner of Revenue
Court Rules Gate Loans Attributable to MA – Failed to rebut presumption that assignment to
other state, other than regular place of business, was commercial domicile
– “Administration” only relevant “fact or circumstance”
• Loan “servicers” were not agents of trusts that held loans or derivatively Gate
• “[O]nly the loan administration of the taxpayer are taken into consideration”
• Court acknowledges that this leads to “conclusion that the loans appear to have had no ‘substantive contacts’”
8
First Marblehead Corp. v. Commissioner of Revenue
Supreme Court of the United States THE FIRST MARBLEHEAD CORP. v.
MASSACHUSETTS COMMISSIONER OF REVENUE. No. 14–1422. Oct. 13, 2015.
Opinion On petition for writ of certiorari to the Supreme Judicial Court of Massachusetts. Petition for writ of certiorari granted. Judgment vacated, and case remanded to the Supreme Judicial Court of Massachusetts for further consideration in the light of Comptroller of the Treasury of Md. v. Wynne, 576 U.S. ___ (2015)
9
First Marblehead Corp. v. Commissioner of Revenue
What does Wynne have to do with First Marblehead?
– Internal Consistency • Taxpayer claims that it assigned loans to other states that
were not its domicile and if every state adopted the MA rule, the property would be assigned both to those states and to MA because the MA presumed domicile rule applies only when the loans are assigned “to a place without” the state
• State’s response is that taxpayer misapplied rule to create internal inconsistency: There is no basis for the taxpayer to contend that it must locate any of its loans in a state simply because it assigned the loan to that state. The only basis for proper assignment (apart from “facts and circumstances” rule, with commercial domicile presumption) is “regular place of business,” which, by hypothesis, does not apply
10
MTC Model Financial Institutions Apportionment
11
• UDITPA explicitly excludes “financial organizations” from its scope – “Any taxpayer having income from business activity
… other than activity as a financial organization …” UDITPA Section 2
• In 1994, MTC adopted a recommended model statute for the apportionment of net income of financial institutions – Model statute adopted by many states
• In 2015, the MTC adopted an amended version of the model statute effective 2016
12
property, payroll, and sales – Detailed rules (1) defining “financial
institution,” (2) defining various terms related to financial institution activity and their income, and (3) attributing particular types of property and receipts
13
© 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP
MTC’s Revised Model Financial Institutions Apportionment Rule
Key Changes Between 1994 and 2016 Models – Modification of property factor to remove intangibles
“loans and credit card receivables” from the factor (see Marblehead)
– Modification of the receipts factor to increase “market state” orientation and to reflect changes in services provided by the financial industry including
• Mortgage loan and credit card application processing • Credit approval • Account servicing • Use of ATMs
14
1994 v. 2016 MTC Model Receipts Factor – Merchant discount
• 1994 = merchant’s commercial domicile • 2016 = cascading rules based on location of merchant and
ratio for other receipts, generally based on customer location
– ATM fees • 1994 = general (COP) rule of unspecified service receipts • 2016 = location of machines for receipts other than those
charged to cardholder for use of card – Receipts from investment and trading assets and
activities • 1994 = general (COP) rule of unspecified service • 2016 = option to source based on MTC “market based”
sourcing regulations
State Sourcing Developments
California Proposed Regulation 25136-2 • Propose Regulation included examples for Asset Managers
of Non-RICs • Examples made clear that Non-RIC Asset Managers were
to source receipts by – looking through the pension plans, retirement plans, or
investment accounts to the location of the underlying shareholder, beneficial owner, or investor.
– If the location is not known, the Asset Manager is to use an approximation of the location of the underlying shareholder, beneficial owner, or investor.
• December 29, 2015, FTB issued a notice removing the examples “due to concerns raised by some members of the public”
16
California
17
California
California – Receipts Factor For Financials • FTB is concerned with the treatment of
broker/dealer activities • Perceived problem related to the gross v. net
receipts issue • Potential resolution to treat broker/dealers as
financials under sec. 23183 – Broker/Dealers can do all the same things as Financials
after Glass-Steagall repeal
17
18
Financial Institutions Regulations • Adopts regulation related to credit card
• Merchant discount guidance
• Proposes regulation on conforming to the MTC Model Financial Institutions Apportionment
• Single factor receipts apportionment • May not conform to the definition of a financial institution
18
Washington
19
Financial Institutions Regulations • Proposed Financial Organizations Regulation • Proposed rule indicated that receipts from investment or
trading activity would not have included income from the sale of a subsidiary (owned 20% or more)
• COST and Oregon Bankers Association filed written comments, addressing -
• Procedural issues • Constitutional issues
19
Oregon
20
New York
New York State Budget 2016/2017
• Proposal revises the QFI definition to exclude stock that generates “other exempt income”.
• Specifically, stock that generates other exempt income and that is not marked to market under IRC §§ 475 or 1256 would not be considered a QFI with respect to the income from that stock.
• NYC Tax Law also proposed to be changed
20
21
Questions?
Wally Hellerstein [email protected]
22
This communication cannot be used for the purpose of avoiding any penalties that may be imposed under federal, state or local tax law.
22
Connect with us!
Windows Phone Store iTunes App Store Google Play Amazon Appstore for Android
The Sutherland SALT Shaker mobile app is now available. Download today from:
@Sutherland_SALT Sutherland SALT Group
First Marblehead Corp. v. Commissioner of Revenue
AGENDA
MTC Model Financial Institutions Apportionment
MTC’s Revised Model Financial Institutions Apportionment Rule
MTC’s Revised Model Financial Institutions Apportionment Rule
MTC’s Revised Model Financial Institutions Apportionment Rule
MTC’s Revised Model Financial Institutions Apportionment Rule
State Sourcing Developments
