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SJC-11609

THE FIRST MARBLEHEAD CORPORATION & another1   vs.   COMMISSIONER OF
                            REVENUE.



         Suffolk.     October 7, 2014. - January 28, 2015.

 Present:   Gants, C.J., Spina, Cordy, Botsford, Duffly, Lenk, &
                            Hines, JJ.


Financial Institution. Taxation, Excise, Apportionment of tax
     burden. Constitutional Law, Taxation. Notice, Tax taking.



    Appeal from a decision of the Appellate Tax Board.

     The Supreme Judicial Court on its own initiative
transferred the case from the Appeals Court.


     John S. Brown (Donald-Bruce Abrams with him) for the
taxpayer.
     Brett M. Goldberg (Daniel J. Hammond, Assistant Attorney
General, with him) for Commissioner of Revenue.
     Helen Hecht, Bruce Fort, Sheldon Laskin, & Lila Disque, of
the District of Columbia, for Multistate Tax Commission, amicus
curiae, submitted a brief.


    BOTSFORD, J.    The taxpayers appeal from a decision of the

Appellate Tax Board (board) issued pursuant to G. L. c. 58A,


    1
        GATE Holdings, Inc. (Gate).
                                                                     2


§ 7, and G. L. c. 62C, § 39 (c); their focus is on the financial

institution excise tax (FIET) liability of the taxpayer GATE

Holdings, Inc. (Gate), that was at all relevant times a wholly

owned subsidiary of the taxpayer The First Marblehead

Corporation (FMC).2    In its decision, the board accepted Gate's

position that it qualified as a "financial institution" under

G. L. c. 63, § 1, and was entitled to apportion its income

pursuant to G. L. c. 63, § 2A (§ 2A).     The board, however,

disagreed with Gate that in applying the apportionment rules of

§ 2A, all of Gate's taxable property, which consisted of

securitized student loans, should be assigned to States outside

the Commonwealth.     Rather, the board determined that all such

property was properly assigned to Massachusetts, resulting in a

greater FIET liability than Gate had calculated.     We affirm the

board's decision.3

     Facts.4   At issue here are the tax years ending June 30,

2004; June 30, 2005; and June 30, 2006 (tax years at issue).

FMC was a publicly traded Delaware corporation with its

     2
       The First Marblehead Corporation (FMC) sold Gate in 2009,
which was after the tax years at issue in this proceeding.
     3
       We acknowledge the amicus brief submitted by the
Multistate Tax Commission (commission).
     4
       The facts are taken from the board's decision, which was
in turn based on the parties' statement of agreed facts and
attached exhibits as well as witness testimony and other
exhibits admitted during the hearing before the board. The
facts are not in dispute.
                                                                    3


principal offices in Boston, and during the tax years at issue

was the principal tax-reporting corporation for itself, Gate,

and a number of other subsidiaries.   FMC was involved in the

growing industry facilitating private loans to students seeking

to finance the cost of their postsecondary education. FMC did

not make any loans directly to student borrowers, but rather

brought together various parties involved in lending, including

postsecondary schools, banks that issued loans to borrowers

(originating banks), loan guarantors, loan servicing entities

(servicers), and underwriters.   In particular, FMC and its

subsidiaries facilitated and coordinated the issuance and

securitization of student loans through a complex process in

which loans were purchased from originating banks with financing

obtained via the issuance of asset-backed securities (ABS).     The

originating banks entered into agreements with FMC through which

the banks issued loans to student borrowers and then sold

portfolios of these loans to a number of different Delaware

statutory trusts (trusts).   To finance the purchases of loan

portfolios, the trusts sold bonds, in the form of ABS, to

underwriters that in turn sold the bonds to investors.   Once the

trusts acquired the loans, the loans became security for

repayment of the bonds.

    Loans require loan servicing, an umbrella term that

includes accounting for accrued interest on the loans, billing,
                                                                      4


receiving and processing payments, and working with borrowers in

various stages of delinquency.    Neither FMC nor any of its

affiliates was directly involved in loan servicing but instead

outsourced these activities to independent entities in that

business (servicers).    A large percentage of the loans

securitized by FMC were serviced by the Pennsylvania Higher

Education Assistance Agency (PHEAA), with a principal office in

Harrisburg, Pennsylvania.     A number of other servicers also

serviced loans securitized by FMC, and, like PHEAA, were located

outside Massachusetts.    The servicers were the custodians of the

loan records and all paper documents relating to the loans.

    Gate played an integral role in the FMC student loan

securitization process.     Gate's purpose within this system was

to hold residual beneficial interests in the trusts, either

directly or through its own wholly owned subsidiary, National

Collegiate Funding LLC.     By the end of the tax years at issue,

Gate held a beneficial interest in each of sixteen trusts that

in turn held all of the student loans that had been securitized

by FMC and its affiliates.    These interests in the trusts

constituted substantially all of Gate's assets.     Income from the

trusts, which consisted of interest on the student loans, passed

through to Gate and comprised substantially all of Gate's gross

income for these years.
                                                                    5


    Gate was essentially a holding company with no employees,

payroll, tangible assets, or office space -- either owned or

leased.    Gate's tax returns indicated that its principal office

was located at the same Boston address as FMC, and Gate's

corporate books and tax returns also were maintained and

prepared in Boston.    Indeed, there is no dispute that Gate's

commercial domicile was in Massachusetts during the tax years at

issue.    Like Gate, the trusts also had no assets other than the

loan portfolios, cash, and other related assets, and they had no

employees, payroll, or offices.

    Procedural history.     On September 15, 2006, FMC and Gate

filed a voluntary disclosure request with the Commissioner of

Revenue (commissioner) reporting their conclusion that Gate was

a "financial institution," not a corporation as they had

previously treated it for Massachusetts excise tax purposes, and

their intent to change Gate's tax filing status accordingly.

Gate then filed a Massachusetts financial institution excise

return (Form 63FI) for each of the tax years at issue, and also

sought an abatement of corporate taxes previously filed for the

tax year ending on June 30, 2004.    The commissioner denied the

application for an abatement in July, 2007, and in September,

2007, FMC appealed to the board.
                                                                     6


     In December, 2009, following audits of the returns filed on

behalf of FMC and Gate for the tax years at issue,5 the

commissioner further assessed FMC and Gate for additional taxes

based on the commissioner's conclusion that Gate was taxable as

a foreign corporation, or in the alternative, that Gate owed

additional taxes as a financial institution.   FMC and Gate

sought abatements of these assessments, which the commissioner

denied in February and March, 2010, respectively.    Later in

March, 2010, both FMC and Gate appealed these denials to the

board.

     The board heard the appeals and issued its findings of fact

and report in April, 2013.    It concluded that Gate was a

financial institution as defined in G. L. c. 63, § 1, due to the

fact that Gate derived more than fifty per cent of its gross

income from "lending activities" in substantial competition with

other financial institutions.    The board further agreed with FMC

and Gate that as a financial institution with loans held by

student borrowers in all fifty States, Gate was entitled to

apportion its income according to the rules established in § 2A,

and that Gate properly had reported its "receipts factor" for




     5
       The audits of   FMC's returns appear to have only been for
the tax years ending   June 30, 2005, and June 30, 2006. However,
the audits of Gate's   returns appear also to have included the
tax year ending June   30, 2004.
                                                                   7


each of the tax years at issue as required under § 2A.6     However,

the board found that Gate's "property factor" was one hundred

per cent for each of the taxable years at issue, not zero as had

been reported on Gate's tax returns, with the result that for

each taxable year, fifty-one per cent of Gate's income was

taxable in Massachusetts.7   The combined outcome of the board's

conclusions was that FMC's taxes were abated in the amount of

$8,134,549, and Gate's taxes were abated in the amount of

$4,382,870.   While these amounts are substantial, Gate's

approved abatement was more than $4 million less than the amount

it originally had sought.8




     6
       As discussed infra, tax apportionment for a financial
institution is based on the average of the institution's
receipts, payroll, and property factors. G. L. c. 63, § 2A (b).
The parties agree that because it had no employees, Gate had no
payroll factor. Accordingly, its tax apportionment formula is
the average of its receipts and property factors.
     7
       This percentage is derived by adding Gate's receipts
factor -- determined to be two per cent -- and its property
factor -- determined to be one hundred per cent -- and then
dividing the total by two: 102%/2 = 51%. See note 6, supra.
     8
       Gate originally had sought a $1,205,002 abatement for the
tax year ending in June, 2004, and $7,646,698 abatement for the
tax years ending in June, 2005, and June, 2006, for a total of
$8,851,700.
                                                                     8


     FMC and Gate timely appealed the board's decision to the

Appeals Court.9   We transferred the case to this court on our own

motion.

     Standard of review.   "A decision by the board will not be

modified or reversed if the decision 'is based on both

substantial evidence and a correct application of the law.'"

Capital One Bank v. Commissioner of Revenue, 453 Mass. 1, 8,

cert. denied, 557 U.S. 919 (2009), quoting Boston Professional

Hockey Ass'n v. Commissioner of Revenue, 443 Mass. 276, 285

(2005).   See Commissioner of Revenue v. Jafra Cosmetics, Inc.,

433 Mass. 255, 259 (2001); Towle v. Commissioner of Revenue, 397

Mass. 599, 601-602 (1986).     "Because the board is authorized to

interpret and administer the tax statutes, its decisions are

entitled to deference. . . .    Ultimately, however, the

interpretation of a statute is a matter for the courts"

(citation omitted).   Onex Communications Corp. v. Commissioner

of Revenue, 457 Mass. 419, 424 (2010).    Finally, in

circumstances where a taxpayer seeks an abatement of a tax,

"[t]he taxpayer has the burden of proving as a matter of law

[its] right to an abatement" (citation omitted).     Boston

Professional Hockey Ass'n, supra at 285.     This burden has been

     9
       Although both FMC and Gate appealed, the appeal solely
concerns Gate's tax liability. The taxpayers have filed one
brief and present a joint argument. For ease of reference, we
refer only to Gate as the appealing party in the remainder of
this opinion.
                                                                    9


found to be particularly heavy in the context of taxpayer

challenges to an apportionment formula, because "the taxpayer

must prove by 'clear and cogent evidence' that the income

attributed to the Commonwealth is in fact 'out of all

appropriate proportion to the business transacted' here or has

'led to a grossly distorted result.'"   See id., quoting Gillette

Co. v. Commissioner of Revenue, 425 Mass. 670, 679 (1997)

(discussing challenges to corporate tax apportionment under

G. L. c. 63, § 38).   See also Container Corp. of Am. v.

Franchise Tax Bd., 463 U.S. 159, 170 (1983).

     Discussion.   Section 2A was enacted in 1995,10 an important

component of legislation that appears to have been intended to

reduce the tax burden on Massachusetts banks by lowering the

bank excise tax rate and by permitting financial institutions

that derive income from business activities conducted both

inside and outside the Commonwealth to apportion their income,

thereby avoiding double taxation and reducing incentives for

these businesses to move their operations out of State.11    See


     10
       See G. L. c. 63, § 2A (§ 2A), inserted by St. 1995,
c. 81, § 1.
     11
       For purposes of G. L. c. 63, §§ 2 and 2A, the term
"financial institution" encompasses banks, banking associations,
trust companies, and Federal and State savings and loan
associations, as well as other types of businesses, including
any that "in substantial competition with financial institutions
derive[] more than [fifty] per cent of [their] gross income . .
. from loan origination, from lending activities, including
                                                                  10


Memorandum from Deputy Chief Legal Counsel Lon F. Povich to

Governor William F. Weld and Lieutenant Governor Paul Cellucci

(July 26, 1995) (Povich memorandum) (regarding House Bill No.

4975, "An Act relative to the equitable taxation of financial

institutions").   See also Memorandum from Barbara Kessner

Landau, Assistant General Counsel, Executive Office of Economic

Affairs, to Governor's Legal Office (July 26, 1995) (same).

Section 2A sets out income apportionment rules that define how

"[t]he commissioner shall determine the part of the net income

of a financial institution derived from business carried on

within the commonwealth."   See G. L. c. 63, § 2A (b)-(g).    These

rules incorporate a formula crafted by the Multistate Tax

Commission (commission),12 see Povich memorandum, supra, and



discounting obligations, or from credit card activities."     G. L.
c. 63, § 1.
     12
       The commission was created by the Multistate Tax Compact
(compact) and serves to promote the compact's goals, including
"[p]romot[ing] uniformity or compatibility" among State tax
systems and "[a]void[ing] duplicative taxation." See The
Multistate Tax Compact: Suggested Legislation and Enabling Act,
art. I, at 1 (effective Aug. 4, 1967), available at
http://www.mtc.gov/uploadedFiles/Multistate_Tax_Commission/About
_MTC/MTC_Compact/COMPACT(1).pdf [http://perma.cc/3S85-TQR4]
(last visited Jan. 26, 2015. The compact is a model law that
"deals primarily with taxes which affect businesses that operate
in more than one state." Id. at preamble. Massachusetts is
currently an "Associate member" of the commission, which implies
participation in commission meetings and projects and
consultation and cooperation with the commission and its
members. Multistate Tax Commission, Member States, at
http://www.mtc.gov/The-Commission/ Member-States
[http://perma.cc/DE33-UEZ5] (last visited Jan. 26, 2015).
                                                                       11


apply only to financial institutions that are taxable in both

the Commonwealth and in other States.    They allocate income to

the Commonwealth for tax purposes by multiplying the taxpayer's

income by the "apportionment percentage" that is "determined by

adding the taxpayer's receipts factor, property factor and

payroll factor together and dividing the sum by three."13        G. L.

c. 63, § 2A (b).    Each of these listed factors is a fraction,

the numerator of which reflects the taxpayer's receipts,

property, or payroll located within the Commonwealth for the

taxable year in question, and the denominator of which reflects

the taxpayer's receipts, property, or payroll both within and

without the Commonwealth.    See G. L. c. 63, §§ 2A (d)-(f).      In

this way, the apportionment formula attempts to "approximate the

net income derived from business carried on within the

commonwealth."     See G. L. c. 63, § 2A (g).   See also Final

Report of Hearing Officer Regarding Proposed Multistate Tax

Commission Formula for the Uniform Apportionment of Net Income

from Financial Institutions 20, 21 (Apr. 28, 1994) available at

http://www.mtc.gov/uploadedFiles/Multistate_Tax_Commission/Unifo

rmity/Uniformity_Projects/A_-_Z/Final%20HO%20Rpt%20FinInst.pdf



     13
       In other words, the "apportionment percentage" is the
average of the taxpayer's "receipts factor," "property factor,"
and "payroll factor." As mentioned, in Gate's case, the
apportionment percentage is the average of Gate's receipts and
property factors. See note 6, supra.
                                                                    12


[http://perma.cc/99CH-XSDX] (last visited Jan. 26, 2015) (Final

Report) (apportionment formula is designed to "fairly represent

the taxpayer's business activities in the state," i.e., to

approximate the "income-producing activities of the taxpayer in

the state").

     In this appeal, no party challenges the board's ruling that

Gate qualified as a "financial institution," was taxable in both

the Commonwealth and in other States, and was thus entitled to

apportion its income according to the rules in § 2A.     There is

also no challenge to Gate's determination, approved by the

board, of its receipts factor for each of the years in

question,14 as well as Gate's position that it had no payroll

factor.   The only issue presented is how Gate's property factor

is to be calculated.   Specifically, we must determine whether

the loan portfolios that represented substantially all of Gate's

property for the tax years at issue should be treated as having

been located in whole or in part within the Commonwealth, and


     14
       With respect to Gate's receipts factor, the board,
applying the rules set out in § 2A (d), determined that
"substantially all of Gate's income was interest from the [l]oan
[p]ortfolios that was passed through to Gate from the [t]rusts,"
and that this income "comprised the whole of Gate's receipts
factor and was included in its numerator or [only its]
denominator [of the receipts factor fraction] based on the
location of the borrowers." Because "Gate's share of the
interest from borrowers located in Massachusetts represented
approximately two percent of Gate's total receipts," the board
found that Gate's receipts factor had been properly reported on
Gate's returns.
                                                                   13


thus included in the numerator of Gate's property factor

fraction, or outside the Commonwealth, and therefore excluded

from the numerator and included only in the denominator of the

fraction.   The answer to this question has a significant impact

on Gate's total tax liability for the relevant years:   if all of

Gate's loans are treated as having been located within the

Commonwealth, as the board found, then Gate's property factor

was one hundred per cent.   If, however, as FMC and Gate claim,

all of the loans were located outside the Commonwealth, then for

purposes of § 2A, Gate's property factor would be zero.15

     The rules for determining a taxpayer's property factor are

contained in § 2A (e), and property consisting of loans is the

focus of § 2A (e) (vi).   This section provides in relevant part:

     "(vi) (A) (1) A loan is considered to be located within the
     commonwealth if it is properly assigned to a regular place
     of business of the taxpayer within the commonwealth.

     "(2) A loan is properly assigned to the regular place of
     business with which it has a preponderance of substantive
     contacts. . . .

     "(B) In the case of a loan which is assigned by the
     taxpayer to a place without the commonwealth which is not a
     regular place of business, it shall be presumed, subject to
     rebuttal by the taxpayer on a showing supported by the
     preponderance of evidence, that the preponderance of
     substantive contacts regarding the loan occurred within the
     commonwealth if, at the time the loan was made the


     15
       This is so because if all of the loans are deemed located
outside the Commonwealth, the numerator of Gates's property
factor fraction is zero, and therefore the entire fraction is
zero.
                                                                  14


    taxpayer's commercial domicile, as defined in [G. L. c. 63,
    § 1], was within the commonwealth.

    "(C) To determine the state in which the preponderance of
    substantive contacts relating to a loan have occurred, the
    facts and circumstances regarding the loan at issue shall
    be reviewed on a case-by-case basis and consideration shall
    be given to such activities as the solicitation,
    investigation, negotiation, approval and administration of
    the loan."16

    General Laws c. 63, § 1, defines "regular place of

business" as "an office at which the taxpayer carries on its

business in a regular and systematic manner and which is

consistently maintained, occupied and used by employees of the

taxpayer."   The parties agree that Gate, which had no offices or

employees, had no "regular place of business" either within or

outside the Commonwealth.   Thus, the loans could not have been

assigned under § 2A (e) (vi) (A) to a regular place of business

belonging to Gate.   However, Gate argued before the board and

continues to argue, essentially, that under § 2A (e) (vi) (B)

and (C), the loans can and should be assigned to the locations

of the servicers, because those locations were where the

"preponderance of substantive contacts" relating to the loans




    16
       The terms "solicitation," "investigation," "negotiation,"
"approval," and "administration" are defined in § 2A (e) (vi)
(C) (1)-(5). The definitions are quoted and discussed infra.
                                                                     15


occurred.     As next discussed, the board rejected this argument,

as do we.17

     1.   Presumption of commercial domicile.     First, the board

concluded that § 2A (e) (vi) (B) creates a rebuttable

presumption that where a taxpayer seeks to assign loans to a

location that is not a regular place of business of that

taxpayer, the loans should be assigned to its commercial

domicile.     We agree.   We view the language of § 2A (e) (vi) (B)18

to be unambiguous in establishing the rebuttable default

presumption described by the board.      See Commissioner of Revenue

v. Cargill, Inc., 429 Mass. 79, 82 (1999) (court follows


     17
       Before the board, the Commissioner of Revenue
(commissioner) argued primarily that Gate was not engaged in
lending activities, and that therefore it should have been
characterized for taxation purposes as a "foreign corporation"
rather than as a "financial institution." At this point,
however, the commissioner has accepted the board's determination
that Gate was a "financial institution," and urges that we adopt
the board's interpretation of § 2A (e).
     18
       The establishment in § 2A (e) (vi) (B) of the taxpayer's
commercial domicile as the default location of a loan is
consistent with the reference to commercial domicile as a
default resolution for other apportionment issues addressed in
§ 2A. For example, in the context of the receipts factor
analysis, § 2A (d) (xiii) provides that "[a]ll receipts which
would be assigned under this section to a state in which the
taxpayer is not taxable shall be included in the numerator of
the receipts factor, if the taxpayer's commercial domicile is in
the commonwealth." Section 2A (a), as amended by St. 2004,
c. 262, § 35, also provides that any portion of the net income
of a financial institution that cannot be taxed to another State
under the United States Constitution will be allocated to the
Commonwealth if the commercial domicile of the institution is in
the Commonwealth.
                                                                  16


language of statute "when its language is plain and unambiguous,

and its application would not lead to an absurd result, or

contravene the Legislature's clear intent" [quotations and

citation omitted]).

     Gate notes the presence of the words "at the time the loan

was made" in § 2A (e) (vi) (B),19 and contends that this means

the presumption of commercial domicile applies only in the

context of an original lender, and that the presumption exists

specifically to prevent such a taxpayer from "artificially

assigning" a loan that originated at the taxpayer's actual place

of business to another State where it has no place of business.

     Reading the language of this provision as narrowly as Gate

proposes, however, renders the statute unworkable for a taxpayer

like Gate.   This is because § 2A (e) (vi) contemplates only two

assignment alternatives for a taxpayer's loans:   the loans will

be assigned to a regular place of business of the taxpayer,

either within or outside the Commonwealth -- the alternative

described in § 2A (e) (vi) (A) (1) and (2); or the loan will be

assigned outside the Commonwealth to a place that is not a

     19
        For ease of reference, we quote again the relevant
portion of § 2A (e) (vi) (B): "In the case of a loan which is
assigned by the taxpayer to a place without the commonwealth
which is not a regular place of business, it shall be presumed,
subject to rebuttal by the taxpayer . . . that the preponderance
of substantive contacts regarding the loan occurred within the
commonwealth if, at the time the loan was made the taxpayer's
commercial domicile . . . was within the commonwealth" (emphasis
added).
                                                                   17


regular place of business of the taxpayer -- the alternative

described in § 2A (e) (vi) (B).   If the § 2A (e) (vi) (B)

alternative were to apply only to taxpayers who are original

lenders, the statute would provide no guidance when the

taxpayer, like Gate, is not an original lender but has no

regular place of business.   Such a reading would leave open the

possibility that loans qualifying as property of the taxpayer

could exist without being assigned anywhere.    This is clearly an

unintended and ultimately absurd result.   A more reasonable

interpretation is that the phrase "at the time the loan was

made" is present in § 2A (e) (vi) (B) to resolve any ambiguity

in the case of a taxpayer whose commercial domicile may have

changed from within to outside the Commonwealth during the life

of the loan.   No such ambiguity exists here.   Accordingly, the

board properly ruled that the presumption in § 2A (e) (vi) (B)

applied to Gate without regard to the sites of origination of

the loans in question.

    2.   Preponderance of substantive contacts of Gate's loans.

Under § 2A (e) (vi), to determine the proper assignment of a

loan for apportionment purposes, it is necessary to determine

whether "the preponderance of substantive contacts regarding the

loan" was within or outside the Commonwealth.    Because Gate's

commercial domicile was in the Commonwealth, application of the

§ 2A (e) (vi) (B) presumption to Gate means that "the
                                                                    18


preponderance of substantive contacts regarding the loan

occurred within the commonwealth" for purposes of calculating

Gate's property factor, unless the presumption was rebutted.

And § 2A (e) (vi) (B) places the burden of rebuttal squarely on

Gate as the taxpayer.

    In seeking to rebut the presumption, Gate points to § 2A

(e) (vi) (C), quoted supra, and specifically its language

indicating that the "preponderance of substantive contacts of a

loan" must be determined on a "case-by-case basis."    The section

goes on to say that the required determination is to include

consideration of activities such as the "solicitation,"

"investigation," "negotiation," "approval," and "administration"

of the loan.   G. L. c. 63, § 2A (e) (vi) (C) (1)-(5).20,21   The


    20
       The terms "solicitation," "investigation," "negotiation,"
"approval," and "administration" are defined in § 2A (e) (vi)
(C) as follows:

         "(1) 'Solicitation' is either active or passive.
    Active solicitation occurs when an employee of the taxpayer
    initiates the contact with the customer. Such activity is
    located at the regular place of business which the
    taxpayer's employee is regularly connected with or working
    out of, regardless of where the services of such employee
    were actually performed. Passive solicitation occurs when
    the customer initiates contact with the taxpayer. If the
    customer's initial contact was not at a regular place of
    business of the taxpayer, the regular place of business, if
    any, where the passive solicitation occurred is determined
    by the facts in each case.

         "(2) 'Investigation' is the procedure whereby
    employees of the taxpayer determine credit-worthiness of
    the customer as well as the degree of risk involved in
                                                                 19


board stated, and Gate agrees, that of these five listed

activities, only "administration" could possibly apply to Gate's

loans because all the other factors listed relate to the

origination of loans and Gate played no role in loan

origination.   The statute defines "administration" as "the


    making a particular agreement. Such activity is located at
    the regular place of business which the taxpayer's
    employees are regularly connected with or working out of,
    regardless of where the services of such employees were
    actually performed.

         "(3) 'Negotiation' is the procedure whereby
    employees of the taxpayer and its customer determine the
    terms of the agreement such as the amount, duration,
    interest rate, frequency of repayment, currency
    denomination and security required. Such activity is
    located at the regular place of business which the
    taxpayer's employees are regularly connected with or
    working out of, regardless of where the services of such
    employees were actually performed.

         "(4) 'Approval' is the procedure whereby employees or
    the board of directors of the taxpayer make the final
    determination whether to enter into the agreement. Such
    activity is located at the regular place of business which
    the taxpayer's employees are regularly connected with or
    working out of, regardless of where the services of such
    employees were actually performed. If the board of
    directors makes the final determination, such activity is
    located at the commercial domicile of the taxpayer.

         "(5) 'Administration' is the process of managing the
    account. This process includes bookkeeping, collecting the
    payments, corresponding with the customer, reporting to
    management regarding the status of the agreement and
    proceeding against the borrower or the security interest if
    the borrower is in default. Such activity is located at
    the regular place of business which oversees this
    activity." (Emphases added.)
    21
       These terms are collectively referred to as the "SINAA"
factors. Final Report, supra at 48.
                                                                  20


process of managing the account," § 2A (e) (vi) (C) (5),

including bookkeeping, payment collection, customer

correspondence, and addressing situations of default -- which

are essentially the activities performed by the loan servicers

in the FMC securitization system.

    The board rejected Gate's claim that because the servicers

"administer" the loans owned by the trusts (and therefore Gate),

the servicers' loan administration activities -- all performed

in States other than Massachusetts -- were attributable to Gate.

The board reasoned that, as a factual matter, Gate had not

proved the servicers were agents of the trusts (or derivatively

Gate), and that Gate had not offered any other legal basis for

attributing the activities of the servicers to Gate.

Accordingly, the board disregarded the activities of the

servicers in determining whether Gate had any "substantive

contacts" with the loans outside the Commonwealth, and finding

none, applied the presumption of commercial domicile in § 2A (e)

(vi) (B) to all the loans in question.

    Gate challenges the board's determination.   It asserts that

the board unilaterally, and improperly, inserted the concept of

agency into the analysis of § 2A (e) (vi) (B), and that even if

agency is the appropriate test, the loan documents make clear

that the servicers in fact were agents of the trusts and

therefore of Gate as the holder of a beneficial interest in each
                                                                    21


of the trusts.   We conclude, however, that an analysis whether

the servicers were agents of Gate, and if so, what type of

agents they were, is unnecessary in order to locate the

"preponderance of substantive contacts" of the loans.     This is

because none of the types of "activities" regarding a loan that

§ 2A (e) (vi) (C) (1)-(5) describes -- the SINAA factors (see

note 21, supra) -- reasonably can be understood to encompass the

activities of an entity other than the taxpayer.

    We begin with "administration."    After identifying the

types of actions that collectively comprise the "activity" of

loan administration, § 2A (e) (vi) (C) (5) states expressly that

"[s]uch activity is located at the regular place of business

which oversees this activity."   As previously discussed,

"regular place of business" is defined specifically in the

statute as "an office at which the taxpayer carries on its

business in a regular and systematic manner and which is

consistently maintained, occupied and used by employees of the

taxpayer" (emphases added).   G. L. c. 63, § 1.    Thus, the

language of § 2A (e) (vi) (C) (5) appears to contemplate that

when loan administration is used to determine the "preponderance

of substantive contacts" of a taxpayer's loan or loans, only the

loan administration activities of the taxpayer are taken into

consideration; work performed by agents or independent

contractors of the taxpayer, at least where the agents or
                                                                  22


contractors are separate businesses with their own places of

business and their own staff, do not fit within the equation.22

Accordingly, it is irrelevant whether the servicers were or were

not agents of Gate, because in either case, their actions were

not appropriately included within the concept of administration

as defined in § 2A (e) (vi) (C) (5).23

     It is true that this reading of loan administration as

requiring activity at the regular place of business of the

taxpayer leads to the conclusion that the loans appear to have

had no "substantive contacts" as that concept is described in

§ 2A (e) (vi) (C) (1)-(5).   But § 2A contains within it a

straightforward solution to this problem, which is application

of the presumption of commercial domicile as specified in § 2A

(e) (vi) (B).




     22
       The principal loan servicer, the Pennsylvania Higher
Education Assistance Agency, for example, is a governmental
agency of the Commonwealth of Pennsylvania.
     23
       We agree with the board and Gate that the other four
types of activities listed in § 2A (e) (vi) (C) -- solicitation,
investigation, negotiation, and approval, see § 2A (e) (vi) (C)
(1)-(4) -- do not apply to Gate because they all concern loan
origination, an activity in which Gate was not involved.
Nevertheless, each of these subsections indicates that the
activity described is located at "the regular place of business"
which the taxpayer's employee is "regularly connected with or
working out of," or, in the case of some loan approvals, at the
"commercial domicile of the taxpayer." Id. Thus, like
administration, each of these activities focuses on a regular
place of business or commercial domicile of the taxpayer itself.
                                                                  23


     Nor does our reading of § 2A create an absurd result when

viewing the statute as a whole.   The statute expressly

recognizes that its provisions regarding the receipts, property,

and payroll factors may not reasonably fit the nature of all

financial institutions' business models, and it has a separate

provision to accommodate this circumstance.   Specifically,

§ 2A (g) provides that "[i]f the provisions of subsections (a)

to (f), inclusive, are not reasonably adapted to approximate the

net income derived from business carried on within the

commonwealth, a financial institution may apply to the

commissioner, or the commissioner may require the financial

institution, to have its income derived from business carried on

within this commonwealth determined by a method other than that

set forth in subsections (a) to (f), inclusive."   Here, although

the board found that Gate qualified for taxation purposes as a

financial institution, Gate is unlike many if not most financial

institutions contemplated in the statute, in that Gate's narrow

role within FMC's loan securitization business is very different

from traditional concepts of banking.24   Given this fact,


     24
       As noted supra, the term "financial institution"
encompasses first and foremost banks, banking associations,
trust companies, and Federal and State savings and loan
associations. G. L. c. 63, § 1. Other businesses subject to
Federal or State banking and related laws are also incorporated.
Id. Thus, although the statute is constructed in such a way as
to include other types of businesses, including those that
"[derive] more than 50 per cent of [their] gross income . . .
                                                                   24


application of an alternative apportionment approach as

permitted under § 2A (g) may well have offered a reasonable

option in this case, avoiding what might appear as an exercise

of fitting a square peg into a round hole.   In fact, the record

indicates that the commissioner raised the idea of applying an

alternative approach under § 2A (g) to determine the proper

apportionment of Gate's income, albeit using an approach that

resulted in all or substantially all of Gate's income being

apportioned to Massachusetts.   Ultimately, however, Gate

rejected the proposal to apply § 2A (g), asserting instead --

incorrectly, we conclude -- that the FIET was specifically

designed for taxpayers such as Gate.   In these circumstances,

Gate's complaints regarding what may seem like an awkward result

arising from application of the provisions of § 2A (e) (vi) to

the loans in this case ring somewhat hollow.

    As has been discussed, the rules set out in § 2A seek to

produce a reasonable approximation of a financial institution's

net income related to the business it carries on in the

Commonwealth.   Gate's business was to assist in the FMC

securitization program through participating in the formation of

the trusts and holding residual beneficial interests in those



from lending activities," id. -- the basis of the board's
determination that Gate qualified as a financial institution --
many if not most of the businesses that fall within the
statute's definition are banks or closely related to banks.
                                                                  25


trusts.   It was a holding company, with no employees of its own.

Gate appears to have had no direct relationship with the loan

servicers, whose actual contracts were with FMC, and thus no

ability to control the work that they did in servicing the

student loans.   In these circumstances, it is appropriate that

the servicers' activities in administering the student loans not

be attributed to Gate for the purpose of determining the

"preponderance of substantive contacts" regarding the loans

under § 2A (e) (vi) (C).

    In sum, we agree with the board that the presumption

established in § 2A (e) (vi) (B) has not been rebutted, and all

of the loans were properly located at Gate's commercial domicile

in Massachusetts.

    3.    Constitutional considerations.   In support of its

argument that the servicers' loan administration activities

should have been attributed to Gate, Gate invokes decisions of

the United States Supreme Court and this court concerning

constitutional standards for attributing activities of a

taxpayer's representative to the taxpayer for taxation-related

purposes.   While the Supreme Court and this court have

identified constitutional issues bearing upon tax apportionment

(as we discuss below), all of the cases that Gate cites relate

to a State's capacity to assert jurisdiction over an out-of-

State taxpayer for purposes of imposing a tax.   See Scripto,
                                                                     26


Inc. v. Carson, 362 U.S. 207, 208 (1960) (considering whether

out-of-State taxpayer had "sufficient jurisdictional contacts"

with Florida to justify imposition of Florida tax).    See also

Tyler Pipe Indus., Inc. v. Washington State Dep't of Revenue,

483 U.S. 232, 249, 251 (1987) (activities of taxpayer's in-State

representatives adequately supported Washington's jurisdiction

to tax out-of-State taxpayer);25 Commissioner of Revenue v. Jafra

Cosmetics, Inc., 433 Mass. at 255-256, 261-263 (in-State

activities of sales representatives justified sales and use

taxation of out-of-State taxpayer).   The issue of State

jurisdiction to tax in this case is different.   The

jurisdictional question here is whether any State besides the

Commonwealth could theoretically impose a tax on Gate.     It is a

threshold question that relates only to whether Gate was allowed

to apportion its income in accordance with the formula laid out

in § 2A; if a "financial institution" like Gate does not have

income that is taxable in another State, all of its income is

taxable in the Commonwealth.   See G. L. c. 63, § 2A (a).    As

noted earlier, the board found that Gate was taxable in all

fifty States, and thus was entitled to apportion its income.

Neither party has appealed this issue.


     25
       Tyler Pipe Indus., Inc. v. Washington State Dep't of
Revenue, 483 U.S. 232, 251 (1987), also raised an issue of
apportionment, but that was not the basis for which Gate cited
it.
                                                                  27


    With respect to apportionment, both the United States

Supreme Court and this court have found that the due process

clause and the commerce clause require fairness in apportioning

the income of a business that may be taxed in multiple States.

See Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. at

169; Exxon Corp. v. Department of Revenue, 447 U.S. 207, 219,

227-228 (1980); Gillette Co. v. Commissioner of Revenue, 425

Mass. at 680.   While the Federal Constitution "imposes no single

[apportionment] formula on the States," apportionment must

produce at least a "'rough approximation' of the corporate

income that is 'reasonably related to the activities conducted

within the taxing State.'"   Gillette Co., supra at 680-681,

quoting Exxon Corp., supra at 223.   However, if a taxpayer seeks

to challenge the appropriateness of an apportionment formula on

this basis, it is incumbent upon the taxpayer to show by "'clear

and cogent evidence' that the income attributed to the State is

in fact 'out of all appropriate proportions to the business

transacted . . . in that State.'"    Container Corp. of Am., supra

at 170, quoting Hans Rees' Sons v. North Carolina ex rel.

Maxwell, 283 U.S. 123, 135 (1931).   See Boston Professional

Hockey Ass'n, 443 Mass. at 285; Gillette Co., supra at 679-680.

    Two elements of fairness arising under the due process

clause have been identified in this context and relate to the

present case.   "The first . . . component of fairness in an
                                                                   28


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."   Gillette Co., 425 Mass. at 680, quoting

Container Corp. of Am., 463 U.S. at 169.26

     Considering the first factor, we have no reason to conclude

that application of the apportionment statute as we have

interpreted it produces duplicative taxation of Gate's income,

given that Gate's Massachusetts apportionment percentage for the

tax year at issue was approximately fifty-one per cent, and the

record reflects that Gate filed tax returns only in

Massachusetts and Florida for the relevant years.27


     26
        A third element of fairness, that "an apportionment
formula must . . . not result in discrimination against
interstate or foreign commerce," has been identified under the
commerce clause. Gillette Co. v. Commissioner of Revenue, 425
Mass. 670, 682 (1997), quoting Container Corp. of Am. v.
Franchise Tax Bd., 463 U.S. 159, 170 (1983). However, "[i]n the
interstate context, the antidiscrimination principle has not in
practice required much in addition to the due process fairness
requirement." Id. at 682-683. Moreover, Gate has advanced no
argument that the board's interpretation of the apportionment
statute here discriminates against interstate commerce.
     27
        Based on Gate's Florida tax returns, it appears that
Gate's apportionment percentage in Florida was less than five
per cent for each of the tax years at issue.
                                                                  29


     With respect to the second factor -- whether the

apportionment scheme reasonably reflects how a business

generates income -- as previously mentioned, the underlying

economic activity giving rise to Gate's income was FMC's loan

securitization program.   As the board's findings reflect, the

purpose of Gate's existence was to hold interests in trusts

containing loans as part of FMC's securitization process.

Furthermore, because Gate had no offices or employees of its

own, and because it was a wholly owned subsidiary of FMC, it

makes more sense to view the income-producing activity of Gate

as connected to FMC, its parent company, rather than as

connected to the servicers, which were independent and unrelated

entities.   Viewed this way, we think an outcome that locates all

of the loans at Gate's and FMC's commercial domicile, rather

than at the place of business of the servicers, results in the

most appropriate approximation of how Gate generated income.28

     Gate argues that it was unreasonable to allow Gate's

property factor to increase its over-all apportionment

percentage from approximately two per cent to more than fifty

per cent, given that the loans did not appear to have any

"substantive contacts" with Massachusetts in the sense described

by the SINAA factors.   In addition, they argue that Department


     28
       The commission, as amicus curiae, advances a similar
analysis.
                                                                  30


of Revenue Letter Ruling 87-9 (Sept. 18, 1987) permitted a trust

consisting of thousands of loans, only a small percentage of

which had connections to Massachusetts, to apportion its income

based solely on the percentage of income received from interest

on the Massachusetts loans, and that Gate should be entitled to

do the same.   We disagree.   The first point assumes a particular

interpretation of § 2A (e) (vi) -- specifically that loans must

have some "substantive contacts" of the kind described in

§ 2A (e) (vi) (C) -- that we have concluded is incorrect for the

reasons previously discussed.   The analogy to the trust

described in Letter Ruling 87-9 is also unpersuasive, because

the income of that trust was to be apportioned using the formula

that applied to corporations, which involved three factors

(property, payroll, and sales), of which the trust claimed to

have none.   Letter Ruling 87-9.   Thus, the trust proposed a

unique method of apportionment that would apply only to the

"special circumstances" of that case.    Id.   Again, as noted

above, FMC and Gate have not requested alternative apportionment

under § 2A (g), and instead have argued that the general

apportionment formula under § 2A (b) applies.

    In short, Gate has not met its burden to show that

apportionment as applied in this case was unfair or

unreasonable; we discern no violation of the due process or

commerce clause as a result of the decision we reach here.
                                                                    31


    4.   Notice.     Finally, Gate argues that the board improperly

resolved this case in favor of the commissioner based on a legal

theory that the commissioner did not raise before the board,

specifically, that an agency relationship was required between

Gate and the servicers in order to attribute the servicers'

activities to Gate.     Gate claims that this action by the board

violates G. L. c. 58A, § 7, which states in pertinent part:

"the board shall not consider, unless equity and good conscience

so require, any issue of fact or contention of law not

specifically set out in the petition upon appeal or raised in

the answer."

    In this case, it was Gate that put forward the theory that

Gate had "substantive contacts" with the loans through the

activities of the servicers.    While Gate clearly did not argue

that an agency relationship was required in order to attribute

the servicers' activities to Gate, the board was within its

authority to consider Gate's argument concerning the servicers

and to determine whether it fit within an appropriate

interpretation of § 2A (e) (vi).    The quoted limitation in G. L.

c. 58A, § 7, has been interpreted to prohibit more surprising or

unexpected legal turnabouts, such that one party could not have

been expected to adequately advance their position under the

circumstances.     See, e.g., Deveau v. Commissioner of Revenue, 51

Mass. App. Ct. 420, 420-421, 426-428 (2001) (board decided
                                                                 32


taxpayers' appeals based on new theory first advanced by

commissioner on morning of hearing; court suggested, without

needing to decide, that this approach would violate G. L.

c. 58A, § 7).   We conclude that Gate had sufficient notice of

the basis of the board's decision pursuant to G. L. c. 58A, § 7.

                                    Decision of the Appellate Tax
                                      Board affirmed.
