Aug 01, 2016
From KPMG TaxWatch
A Texas ALJ recently addressed whether certain securitization trusts were passive entities excluded from the Texas combined group. A significant component of the taxpayer’s overall student loan business was the acquisition, ownership, and management of a large student loan portfolio. Specifically, one of the unitary entities acquired student loans in repayment status and transferred or sold the student loans to securitization trusts established to hold the loans. After the trusts were funded by the loans, the trusts sold certificates, bonds, or notes to investors who were entitled to a pre-determined rate of return during the payment terms of the loans held in trust. After the certificates were paid in full, the trusts dissolved and the outstanding loans were returns to the beneficiary.
The taxpayer filed its original Texas franchise tax reports including the revenue of all the trust entities in the Texas combined group. Later, however, the taxpayer filed amended reports treating the trusts as exempt passive entities. Under Texas law, to be considered passive, a trust must not be a “business trust” and must have 90 percent or more of its federal gross income attributable to specific passive sources. The Comptroller denied the refunds stemming from the amended reports on the basis that the trusts were business trusts, not passive entities. The Texas definition of “business trust” cites the federal definition, which provides that a business or commercial trust is generally “a device to carry on a profit-making business which normally would have been carried on through business organizations that are classified as corporations or partnerships.” Applying this definition, the ALJ rejected the taxpayer’s position that the trusts were simply financing vehicles and were not formed for the purpose of carrying on some type of business. In the ALJ’s view, the trusts were engaged in a commercial activity in furtherance of the taxpayer’s asset management business. They were used for profit, as well as protecting and preserving the trust property, the student loan assets, for the holders of the bonds and notes and the taxpayer. As such, the ALJ denied the taxpayer’s refund claims. Please contact Doug Maziur at 713-319-3866 with questions on this ALJ decision.
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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.