On August 12, 2016, the Massachusetts Supreme Judicial Court (the SJC)
issued its opinion in the cases relating to the Massachusetts tax treatment of GATE Holdings, Inc. (GATE), a former subsidiary of The First Marblehead Corporation (the Corporation), for GATEs taxable years ended
June 30, 2004, 2005 and 2006. The SJC again affirmed the decision of the Massachusetts Appellate Tax Board (the ATB). In the third quarter of fiscal 2012, the Corporation made a $5.1 million payment that satisfied its obligation to
the Massachusetts Department of Revenue for GATEs taxable years ended June 30, 2004, 2005 and 2006. As such, the Corporation is not required to make any additional payments to the Massachusetts Department of Revenue for GATEs
taxable years ended June 30, 2004, 2005 and 2006.
Background
The Corporation took the position in these cases that GATE was properly taxable as a financial institution and was entitled to apportion its income under
applicable provisions of Massachusetts tax law. The Massachusetts Commissioner of Revenue (the Commissioner) took alternative positions: that GATE was properly taxable as a business corporation, or that GATE was taxable as a financial
institution, but was not entitled to apportionment or was subject to 100% Massachusetts apportionment.
In September 2007, the Corporation filed a petition
with the ATB seeking a refund of state taxes paid for its taxable year ended June 30, 2004, all of which taxes had previously been paid as if GATE were a business corporation. In December 2009, the Commissioner made additional assessments of
tax, along with accrued interest, of approximately $11.9 million for GATEs taxable years ended June 30, 2004, 2005 and 2006, and approximately $8.1 million for the Corporations taxable years ended June 30, 2005 and 2006. For
the 2005 and 2006 taxable years, only one of the two assessments made by the Commission would ultimately be allowed. In March 2010, the Corporation filed petitions with the ATB contesting the additional assessments against GATE and the Corporation.
The assessments against GATE were in the alternative to the assessments against the Corporation.
On November 9, 2011, the ATB issued an order (the
ATB Order) regarding these proceedings. Among other things, the ATB Order reflected the ATBs determination that GATE incorrectly calculated one of the two applicable apportionment factors (the Property Factor) used to
calculate GATEs financial institution excise tax by excluding all income from trust-owned education loans outside of Massachusetts rather than including such income for the purposes of GATEs Massachusetts state tax returns.
On April 17, 2013, the ATB issued its opinion confirming the rulings and findings included in the ATB Order. On July 22, 2013, the Corporation filed
an appeal of the ATBs findings with regard to the Property Factor in the Massachusetts Appeals Court. On December 18, 2013, the SJC notified the Corporation that it had elected to hear its appeal of the ATBs findings and heard
arguments on the appeal on October 7, 2014. On January 28, 2015, the SJC issued its opinion affirming the decision of the ATB.
On
February 11, 2015, the Corporation filed a petition for rehearing on this matter with the SJC, which was denied by the SJC on March 2, 2015. On May 31, 2015, the Corporation filed a petition for a writ of certiorari with the Supreme
Court. On October 13, 2015, the Supreme Court summarily vacated the decision issued by the SJC on January 28, 2015 and remanded the case to the SJC for further consideration. On May 3, 2016, the SJC heard arguments on the appeal. On
August 12, 2016, the SJC issued its opinion again affirming the decision of the ATB.
GATEs Taxable Years Ended June 30, 2008 and 2009
On August 6, 2013, the Massachusetts Department of Revenue delivered a notice of assessment for GATEs taxable years ended June 30,
2008 and 2009, which included an assessment for penalties of $4.1 million. The Corporation has not accrued for the penalties as the Corporation believes that it is more likely than not that the penalties will ultimately be abated, which is
consistent with the Massachusetts Department of Revenues treatment of GATEs taxable years ended June 30, 2004, 2005 and 2006. On August 26, 2013, the Corporation filed an application to have the assessed amounts abated in full.
On March 26, 2014, the Massachusetts Department of Revenue denied the Corporations application. While the Corporation has filed an appeal on this matter with the ATB, it has been on hold pending resolution of the cases
related to GATEs taxable years ended June 30, 2004, 2005 and 2006. The SJCs opinion in the cases related to GATEs taxable years ended June 30, 2004, 2005 and 2006 may
influence the outcome of our appeal for the 2008 and 2009 tax years.
The Corporation plans to vigorously pursue its appeal of the matters related to
GATEs 2008 and 2009 tax years. If the Corporation is unsuccessful in the appeal of the matters related to GATEs 2008 and 2008 tax years, the Corporation could be required to make additional tax payments, including interest for
GATEs taxable years ended June 30, 2008 and 2009, which could materially adversely affect the Corporations liquidity position. As of March 31, 2016, the Corporation had accrued a total income tax liability of $27.1 million,
including interest, related to the 2008 and 2009 tax returns for GATE, which amount was included in income taxes payable on the Corporations consolidated balance sheet. The Corporation cannot predict the outcome of this matter or the timing of
such payments, if any, at this time.
Cautionary Statement
Statements in this Current Report on Form 8-K regarding proceedings related to the Corporations state income tax returns, including the
Corporations appeal of the matters related to GATEs 2008 and 2009 tax years, as well as any other statements that are not purely historical, constitute forward-looking statements for purposes of the safe harbor provisions of The Private
Securities Litigation Reform Act of 1995. These forward-looking statements are based upon the Corporations expectations as of August 12, 2016. The inclusion of this forward-looking information should not be regarded as a representation by
the Corporation or any other person that the future expectations expressed or implied by the Corporation will be achieved. You are cautioned that matters subject to forward-looking statements involve known and unknown risks and uncertainties,
including economic, legislative, regulatory, competitive and other factors, which may cause the Corporations actual financial or operating results, or the timing of events, to be materially different than those expressed or implied by
forward-looking statements. Important factors that could cause or contribute to such differences include the resolution of the Corporations appeal of the matters related to GATEs 2008 and 2009 tax years. The Corporation specifically
disclaims any obligation to update any forward-looking statements as a result of developments occurring after the date of this Current Report on Form 8-K, and you should not rely on those statements as representing the Corporations views as of
any date subsequent to the date of this Current Report on Form 8-K.