Section 2A Financial institutions; determination of net income
Section 2A. The commissioner shall determine the part of the net income of a financial institution derived from business carried on within the commonwealth as follows:
(a) If the financial institution does not have income from business activity which is taxable in another state, the whole of its net income shall be taxable under section two. For purposes of this section, a financial institution is taxable in another state as defined in the definition of “taxable” in section one. Notwithstanding any other provision of this section, the portion of the net income of a financial institution that a nondomiciliary state is prohibited from taxing under the Constitution of the United States shall be allocated in full to the commonwealth if the commercial domicile of the institution is in the commonwealth.
(b) If the financial institution has income from business activity which is taxable both within and without this commonwealth, its net income shall be apportioned to this commonwealth by multiplying its net income by the apportionment percentage. The apportionment percentage is determined by adding the taxpayer’s receipts factor, property factor and payroll factor together and dividing the sum by three. If one of the factors is missing, the two remaining factors are added and the sum is divided by two. If two of the factors are missing, the remaining factor is the apportionment percentage. If all three factors are missing, the whole of the financial institution’s net income shall be taxable under section two. A factor is missing if both its numerator and denominator are zero, but it is not missing merely because its numerator is zero.
(c) Each factor shall be computed according to the method of accounting, cash or accrual basis, used by the taxpayer for federal income tax purposes for the taxable year.
(d) The receipts factor is a fraction, the numerator of which is the receipts of the taxpayer in the commonwealth during the taxable year and the denominator of which is the receipts of the taxpayer within and without the commonwealth during the taxable year. The method of calculating receipts for purposes of the denominator is the same as the method used in determining receipts for purposes of the numerator. As used in this subsection, “receipts” shall mean gross income, including net taxable gain on disposition of assets and money market transactions in the regular course of the financial institution’s trade or business. The numerator of the receipts factor shall include, but not be limited to, the following receipts attributable to the commonwealth:
(i) the numerator of the receipts factor includes receipts from the lease or rental of real property owned by the taxpayer if the property is located within the commonwealth or receipts from the sublease of real property if the property is located within the commonwealth.
(ii)(A) Except as described in subparagraph (B), the numerator of the receipts factor includes receipts from the lease or rental of tangible personal property owned by the taxpayer if the property is located within this commonwealth when it is first placed in service by the lessee.
(B) Receipts from the lease or rental of transportation property owned by the taxpayer are included in the numerator of the receipts factor to the extent that the property is used in the commonwealth. The extent an aircraft will be deemed to be used in the commonwealth and the amount of receipts that is to be included in the numerator of the commonwealth’s receipts factor is determined by multiplying all the receipts from the lease or rental of the aircraft by a fraction, the numerator of which is the number of landings of the aircraft in the commonwealth and the denominator of which is the total number of landings of the aircraft. If the extent of the use of any transportation property within the commonwealth cannot be determined, then the property will be deemed to be used wholly in the state in which the property has its principal base of operations. A motor vehicle will be deemed to be used wholly in the state in which it is registered.
(iii)(A) The numerator of the receipts factor includes interest and fees or penalties in the nature of interest from loans secured by real property if the property is located within the commonwealth. If the property is located both within the commonwealth and one or more other states, the receipts described in this subsection are included in the numerator of the receipts factor if more than fifty percent of the fair market value of the real property is located within the commonwealth. If more than fifty percent of the fair market value of the real property is not located within any one state, then the receipts described in this subsection shall be included in the numerator of the receipts factor if the borrower is located in the commonwealth.
(B) The determination of whether the real property securing a loan is located within the commonwealth shall be made as of the time the original agreement was made and any and all subsequent substitutions of collateral shall be disregarded.
(iv) The numerator of the receipts factor includes interest and fees or penalties in the nature of interest from loans not secured by real property if the borrower is located in the commonwealth.
(v) The numerator of the receipts factor includes net gains from the sale of loans. Net gains from the sale of loans includes income recorded under the coupon stripping rules of section 1286 of the Internal Revenue Code.
(A) The amount of net gains, but not less than zero, from the sale of loans secured by real property included in the numerator is determined by multiplying such net gains by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to paragraph (iii) and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans secured by real property.
(B) The amount of net gains, but not less than zero, from the sale of loans not secured by real property included in the numerator is determined by multiplying such net gains by a fraction the numerator of which is the amount included in the numerator of the receipts factor pursuant to paragraph (iv) and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans not secured by real property.
(vi) The numerator of the receipts factor includes interest and fees or penalties in the nature of interest from credit card receivables and receipts from fees charged to card holders, such as annual fees, if the billing address of the card holder is in the commonwealth.
(vii) The numerator of the receipts factor includes net gains, but not less than zero, from the sale of credit card receivables multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to paragraph (vi) and the denominator of which is the taxpayer’s total amount of interest and fees or penalties in the nature of interest from credit card receivables and fees charged to card holders.
(viii) The numerator of the receipts factor includes all credit card issuer’s reimbursement fees multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to paragraph (vi) and the denominator of which is the taxpayer’s total amount of interest and fees or penalties in the nature of interest from credit card receivables and fees charged to card holders.
(ix) The numerator of the receipts factor includes receipts from merchant discount if the commercial domicile of the merchant is in the commonwealth. Such receipts shall be computed net of any card holder charge backs, but shall not be reduced by any interchange transaction fees or by any issuer’s reimbursement fees paid to another for charges made by its card holders.
(x)(A)(1) The numerator of the receipts factor includes loan servicing fees derived from loans secured by real property multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to paragraph (iii) and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans secured by real property.
(2) The numerator of the receipts factor includes loan servicing fees derived from loans not secured by real property multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to paragraph (iv) and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans not secured by real property.
(B) In circumstances in which the taxpayer receives loan servicing fees for servicing either the secured or unsecured loans of another, the numerator of the receipts factor shall include such fees if the borrower is located in the commonwealth.
(xi) The numerator of the receipts factor includes receipts from services not otherwise apportioned under this section if the service is performed in the commonwealth. If the service is performed both within and without the commonwealth, the numerator of the receipts factor includes receipts from services not otherwise apportioned under this section, if a greater proportion of the income-producing activity is performed in the commonwealth, than in any other state, based on costs of performance.
(xii)(A) Interest, dividends, net gains, but not less than zero, and other income from investment assets and activities and from trading assets and activities shall be included in the receipts factor. Investment assets and activities and trading assets and activities include but are not limited to: investment securities; trading account assets; federal funds; securities purchased and sold under agreements to resell or repurchase; options; futures contracts; forward contracts; notional principal contracts such as swaps; equities; and foreign currency transactions. With respect to the investment and trading assets and activities described in clauses (1) and (2), the receipts factor shall include the amounts described in said clauses (1) and (2).
(1) The receipts factor shall include the amount by which interest from federal funds sold and securities purchased under resale agreements exceeds interest expense on federal funds purchased and securities sold under repurchase agreements.
(2) The receipts factor shall include the amount by which interest, dividends, gains and other income from trading assets and activities, including, but not limited to, assets and activities in the matched book, in the arbitrage book and foreign currency transactions, exceed amounts paid in lieu of interest, amounts paid in lieu of dividends, and losses from such assets and activities.
(B) The numerator of the receipts factor includes interest, dividends, net gains, but not less than zero, and other income from investment assets and activities and from trading assets and activities described in subparagraph (A) that are attributable to the commonwealth.
(1) The amount of interest, dividends, net gains, but not less than zero, and other income from investment assets and activities in the investment account to be attributed the commonwealth and included in the numerator is determined by multiplying all such income from such assets and activities by a fraction, the numerator of which is the average value of such assets which are properly assigned to a regular place of business of the taxpayer within the commonwealth and the denominator of which is the average value of all such assets.
(2) The amount of interest from federal funds sold and purchased and from securities purchased under resale agreements and securities sold under repurchase agreements attributable to the commonwealth and included in the numerator is determined by multiplying the amount described in clause (1) of subparagraph (A) from such funds and such securities by a fraction, the numerator of which is the average value of federal funds sold and securities purchased under agreements to resell which are properly assigned to a regular place of business of the taxpayer within the commonwealth and the denominator of which is the average value of all such funds and such securities.
(3) The amount of interest, dividends, gains and other income from trading assets and activities, including but not limited to assets and activities in the matched book, in the arbitrage book and foreign currency transactions, but excluding amounts described in clause (1) or (2) attributable to the commonwealth and included in the denominator is determined by multiplying the amount described in clause (2) of subparagraph (A) by a fraction, the numerator of which is the average value of such trading assets which are properly assigned to a regular place of business of the taxpayer within the commonwealth and the denominator of which is the average value of all such assets.
(4) For purposes of this paragraph, average value shall be determined using the rules for determining the average value of tangible personal property set forth in paragraphs (ii) and (iii) of subsection (e).
(C) In lieu of using the method set forth in subparagraph (B), the taxpayer may elect, or the commissioner may require in order to fairly represent the business activity of the taxpayer in the commonwealth, the use of the method set forth in this subparagraph.
(1) The amount of interest, dividends, net gains, but not less than zero, and other income from investment assets and activities in the investment account to be attributed to the commonwealth and included in the numerator is determined by multiplying all such income from such assets and activities by a fraction, the numerator of which is the gross income from such assets and activities which are properly assigned to a regular place of business of the taxpayer within the commonwealth and the denominator of which is the gross income from all such assets and activities.
(2) The amount of interest from federal funds sold and purchased and from securities purchased under resale agreements and securities sold under repurchase agreements attributable to the commonwealth and included in the numerator is determined by multiplying the amount described in clause (1) of subparagraph (A) from such funds and such securities by a fraction, the numerator of which is the gross income from such funds and such securities which are properly assigned to a regular place of business of the taxpayer within this commonwealth and the denominator of which is the gross income from all such funds and such securities.
(3) The amount of interest, dividends, gains and other income from trading assets and activities, including but not limited to assets and activities in the matched book, in the arbitrage book and foreign currency transactions, but excluding amounts described in clause (1) or (2), attributable to the commonwealth and included in the numerator is determined by multiplying the amount described in clause (2) of subparagraph (A) by a fraction, the numerator of which is the gross income from such trading assets and activities which are properly assigned to a regular place of business of the taxpayer within the commonwealth and the denominator of which is the gross income from all such assets and activities.
(D) If the taxpayer elects or is required by the commissioner to use the method set forth in subparagraph (C), it shall use this method on all subsequent returns unless the taxpayer receives prior permission from the commissioner to use, or the commissioner requires, a different method.
(E) The taxpayer shall have the burden of proving that an investment asset or activity or trading asset or activity was properly assigned to a regular place of business outside of the commonwealth by demonstrating that the day-to-day decisions regarding the asset or activity occurred at a regular place of business outside the commonwealth. Where the day-to-day decisions regarding an investment asset or activity or trading asset or activity occur at more than one regular place of business and one such regular place of business is in the commonwealth and one such regular place of business is outside the commonwealth, such asset or activity shall be considered to be located at the regular place of business of the taxpayer where the investment or trading policies or guidelines with respect to the asset or activity are established. Unless the taxpayer demonstrates to the contrary, such policies and guidelines shall be presumed to be established at the commercial domicile of the taxpayer.
(xiii) All 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.
(e) The property factor is a fraction, the numerator of which is the average value of real property and tangible personal property rented to the taxpayer that is located or used within the commonwealth during the taxable year, the average value of the taxpayer’s real and tangible personal property owned that is located or used within the commonwealth during the taxable year, and the average value of the taxpayer’s loans and credit card receivables that are located within the commonwealth during the taxable year, and the denominator of which is the average value of all such property located or used within and without the commonwealth during the taxable year.
(i) The property factor shall include only property the income or expenses of which are included, or would have been included if not fully depreciated or expensed, or depreciated or expensed for a nominal amount, in the computation of the apportionable income base of the taxable year.
(ii)(A) The value of real property and tangible personal property owned by the taxpayer is the original cost or other basis of such property for federal income tax purposes without regard to depletion, depreciation or amortization.
(B) Loans are valued at their outstanding principal balance, without regard to any reserve for bad debts. If a loan is charged off in whole or in part for federal income tax purposes, the portion of the loan charged off is not outstanding. A specifically allocated reserve established pursuant to regulatory or financial accounting guidelines which is treated as charged-off for federal income tax purposes shall be treated as charged-off for purposes of this section.
(C) Credit card receivables are valued at their outstanding principal balance, without regard to any reserve for bad debts. If a credit card receivable is charged-off in whole or in part for federal income tax purposes, the portion of the receivable charged-off is not outstanding.
(iii) The average value of property owned by the taxpayer is computed on an annual basis by adding the value of the property on the first day of the taxable year and the value on the last day of the taxable year and dividing the sum by two. If averaging on this basis does not properly reflect average value, the commissioner may require averaging on a more frequent basis. The taxpayer may elect to average on a more frequent basis. When averaging on a more frequent basis is required by the commissioner or is elected by the taxpayer, the same method of valuation must be used consistently by the taxpayer with respect to property within and without the commonwealth and on all subsequent returns unless the taxpayer receives prior permission from the commissioner or the commissioner requires a different method of determining average value.
(iv)(A) The average value of real property and tangible personal property that the taxpayer has rented from another and which is not treated as property owned by the taxpayer for federal income tax purposes, shall be determined annually by multiplying the gross rents payable during the taxable year by eight.
(B) Where the use of the general method described in this subsection results in inaccurate valuations of rented property, any other method which properly reflects the value may be adopted by the commissioner or by the taxpayer when approved in writing by the commissioner. Once approved, such other method of valuation must be used on all subsequent returns unless the taxpayer receives prior approval from the commissioner or the commissioner requires a different method of valuation.
(v)(A) Except as described in subparagraph (B), real property and tangible personal property owned by or rented to the taxpayer is considered to be located within the commonwealth if it is physically located, situated or used within the commonwealth.
(B) Transportation property is included in the numerator of the property factor to the extent that the property is used in the commonwealth. The extent an aircraft will be deemed to be used in the commonwealth and the amount of value that is to be included in the numerator of the commonwealth’s property factor is determined by multiplying the average value of the aircraft by a fraction, the numerator of which is the number of landings of the aircraft in the commonwealth and the denominator of which is the total number of landings of the aircraft everywhere. If the extent of the use of any transportation property within the commonwealth cannot be determined, then the property will be deemed to be used wholly in the state in which the property has its principal base of operations. A motor vehicle will be deemed to be used wholly in the state in which it is registered.
(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. A loan assigned by the taxpayer to a regular place of business without the commonwealth shall be presumed to have been properly assigned if:
(a) the taxpayer has assigned, in the regular course of its business, such loan on its records to a regular place of business consistent with federal or state regulatory requirements;
(b) such assignment on its records is based upon substantive contacts of the loan to such regular place of business; and
(c) the taxpayer uses said records reflecting assignment of loans for the filing of all state and local tax returns for which an assignment of loans to a regular place of business is required.
(3) The presumption of proper assignment of a loan provided in clause (2) of subparagraph (A) may be rebutted upon a showing by the commissioner, supported by a preponderance of the evidence, that the preponderance of substantive contacts regarding such loan did not occur at the regular place of business to which it was assigned on the taxpayer’s records. When such presumption has been rebutted, the loan shall then be located within the commonwealth if (a) the taxpayer had a regular place of business within the commonwealth at the time the loan was made; and (b) the taxpayer fails to show, by a preponderance of the evidence, that the preponderance of substantive contacts regarding such loan did not occur within the commonwealth.
(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 taxpayer’s commercial domicile, as defined in section one, 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. The terms “solicitation”, “investigation”, “negotiation”, “approval” and “administration” are defined 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 the 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 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.
(vii) For purposes of determining the location of credit card receivables, credit card receivables shall be treated as loans and shall be subject to the provisions of paragraph (vi).
(viii) A loan that has been properly assigned to a state shall, absent any change of material fact, remain assigned to said state for the length of the original term of the loan. Thereafter, said loan may be properly assigned to another state if said loan has a preponderance of substantive contact to a regular place of business there.
(f) The payroll factor is a fraction, the numerator of which is the total amount paid in the commonwealth during the taxable year by the taxpayer for compensation and the denominator of which is the total compensation paid both within and without the commonwealth during the taxable year. The payroll factor shall include only that compensation which is included in the computation of the net income to be apportioned for the taxable year.
(i) Payments made to any independent contractor or any other person not properly classified as an employee shall be excluded from both the numerator and the denominator of the factor.
(ii) Compensation is paid in the commonwealth if any one of the following tests, applied consecutively, is met:
(A) The employee’s services are performed entirely within the commonwealth;
(B) The employee’s services are performed both within and without the commonwealth, but the service performed without the commonwealth is incidental to the employee’s service within the commonwealth. The term “incidental” means any service which is temporary or transitory in nature, or which is rendered in connection with an isolated transaction.
(C) Some of the employee’s services are performed in this commonwealth and:
(1) the employee’s principal base of operations is within the commonwealth; or
(2) there is no principal base of operations in any state in which some part of the services are performed, but the place from which the services are directed or controlled is in the commonwealth; or
(3) the principal base of operations and the place from which the services are directed or controlled are not in any state in which some part of the service is performed but the employee’s residence is in the commonwealth.
(g) If 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. Such application shall be made by attaching to its duly-filed return a statement of the reasons why the financial institution believes that the provisions of this section are not reasonably adapted to approximate its net income derived from business carried on within this commonwealth and a description of the method sought by it. A financial institution which so applies shall, upon receipt of a request therefor from the commissioner, file with the commissioner, under oath of its treasurer, a statement of such additional information as the commissioner may require.
If, after such application by the financial institution, or after the commissioner’s own review, the commissioner determines that the provisions of subsections (a) to (f), inclusive, are not reasonably adapted to approximate the financial institution’s net income derived from business carried on within the commonwealth, the commissioner shall by reasonable methods determine the amount of net income derived from business activity carried on within the commonwealth. The amount thus determined shall be the net income taxable under section two and the foregoing determination shall be in lieu of the determination required by subsections (a) to (f), inclusive. If an alternative method is used by the commissioner hereunder, the commissioner, in his discretion, with respect to the two next succeeding taxable years, may require similar information from such financial institution if it shall appear that the provisions of subsections (a) to (f), inclusive, are not reasonably adapted to approximate for the applicable year the financial institution’s net income derived from business carried on within this commonwealth and may again by reasonable methods determine such income.