| Commitments and Contingencies | (10) Commitments and Contingencies
(a) Massachusetts Appellate Tax Board Matters
GATE Holdings, Inc. Taxable Years Ended June 30, 2004, 2005
and 2006
We are involved in several matters relating to the Massachusetts
tax treatment of GATE Holdings, Inc. (GATE), a former
subsidiary of FMD. On November 9, 2011, the Massachusetts
Appellate Tax Board (ATB) issued an order (ATB Order) regarding
these proceedings. On January 28, 2015, the Massachusetts
Supreme Judicial Court (SJC) issued its opinion in these
proceedings and affirmed the decision of the ATB. On
October 13, 2015, the Supreme Court of the United States
(Supreme Court) issued an order granting our petition for a writ of
certiorari, summarily vacated the decision issued by the SJC on
January 28, 2015 and remanded the case to the SJC for further
consideration.
Background
We took the position in these cases that GATE was properly taxable
as a financial institution and not as a business corporation and
was entitled to apportion its income under applicable provisions of
Massachusetts tax law. The Massachusetts Commissioner of Revenue
(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, we filed a petition with the ATB seeking a
refund of state taxes paid for our 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 taxes, along with
accrued interest, of approximately $11.9 million for GATE’s
taxable years ended June 30, 2004, 2005 and 2006, and
approximately $8.1 million for our taxable years ended
June 30, 2005 and 2006. For the 2005 and 2006 taxable
years, only one of the two assessments made by the Commissioner
would ultimately be allowed. In March 2010, we filed petitions
with the ATB contesting the additional assessments against GATE and
us.
On November 9, 2011, the ATB issued the ATB Order regarding
these proceedings. The ATB Order reflected the following
rulings and findings:
• GATE was properly taxable as a
financial institution, rather than a business corporation, for each
of the tax years at issue;
• GATE was entitled to apportion its
income under applicable provisions of Massachusetts tax law for
each of the tax years at issue;
• GATE properly calculated one of the
two applicable apportionment factors used to calculate GATE’s
financial institution excise tax;
• GATE incorrectly calculated the other
apportionment factor, which we refer to as the Property Factor, by
excluding all income from trust-owned education loans outside of
Massachusetts rather than including such income for the purposes of
GATE’s Massachusetts state tax returns; and
• All penalties assessed to FMD and
GATE were abated.
In connection with the ATB Order, as well as the expiration of the
statute of limitations applicable to GATE’s taxable year
ended June 30, 2007, we recognized an income tax benefit of
$12.5 million during the second quarter of fiscal 2012. In the
third quarter of fiscal 2012, we made a $5.1 million payment that
satisfied our obligation to the Massachusetts Department of Revenue
for GATE’s taxable years ended June 30, 2004, 2005 and
2006.
On April 17, 2013, the ATB issued its opinion confirming the
rulings and findings included in the ATB Order. On July 22,
2013, we filed an appeal of the ATB’s findings with regard to
the Property Factor in the Massachusetts Appeals Court. On
December 18, 2013, the SJC notified us that it had elected to
hear our appeal of the ATB’s 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, we 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, we 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. The SJC must now reconsider our appeal of the
ATB’s findings with regard to the Property Factor. On
November 30, 2015, we filed our supplemental brief with the
SJC. On December 30, 2015, the Commissioner filed its
supplemental brief with the SJC. On January 13, 2016, we filed
our reply brief with the SJC. The SJC has scheduled oral arguments
for March 7, 2016. If we are unsuccessful in the SJC’s
reconsideration of our appeal of the ATB Order, we could be
required to make additional tax payments, including interest, as
discussed below, for GATE’s taxable years ended June 30,
2008 and 2009, which could materially adversely affect our
liquidity position.
GATE’s Taxable Years Ended June 30, 2008 and
2009
On August 6, 2013, the Massachusetts Department of Revenue
delivered a notice of assessment for GATE’s taxable years
ended June 30, 2008 and 2009, which included an assessment for
penalties of $4.1 million. We have not accrued for the penalties as
we believe that it is more likely than not that the penalties will
ultimately be abated, which is consistent with the Massachusetts
Department of Revenue’s treatment of GATE’s taxable
years ended June 30, 2004, 2005 and 2006. On August 26,
2013, we filed an application to have the assessed amounts abated
in full. On March 26, 2014, the Massachusetts Department of
Revenue denied our application. While we have filed an appeal on
this matter with the ATB, it is on hold pending resolution of the
petition for a writ of certiorari we filed with the Supreme Court
on May 31, 2015 related to GATE’s taxable years ended
June 30, 2004, 2005 and 2006. We expect the outcome for the
taxable years ended June 30, 2008 and 2009 to be influenced by
the SJC’s reconsideration of our appeal of the ATB’s
findings related to GATE’s taxable years ended June 30,
2004, 2005 and 2006.
We plan to vigorously pursue the litigation pending before the ATB
in the cases pertaining to GATE’s taxable years ended
June 30, 2008 and 2009. If we are unsuccessful in this
litigation, we could be required to make additional tax payments,
including interest, for GATE’s taxable years ended
June 30, 2008 and 2009, which could materially adversely
affect our liquidity position. As of December 31, 2015, we had
accrued a total income tax liability of $26.9 million, including
interest, related to GATE’s tax returns for the taxable years
ended June 30, 2008 and 2009, which amount was included in
income taxes payable on our consolidated balance sheet. We cannot
predict the outcome of this matter or the timing of such payments,
if any, at this time.
It is reasonably possible that our liability for this uncertain tax
benefit may change within the next 12 months depending on the
SJC’s reconsideration of our appeal of the ATB’s
findings in the cases pertaining to GATE’s taxable years
ended June 30, 2004, 2005 and 2006 as well as the outcome of
the litigation pending before the ATB in the cases pertaining to
GATE’s taxable years ended June 30, 2008 and 2009. As of
December 31, 2015, the range of potential change in our
liability, excluding an assessment for penalties, was zero to $26.9
million.
(b) TMS Guarantee Payments
TMS is subject to guarantee arrangements with certain educational
institutions for a portion of eligible monthly education payment
plans. We record a liability for those guarantee arrangements,
which is included in other liabilities on our consolidated balance
sheets. The liability pertaining to the guarantee arrangements was
zero and $210 thousand at December 31, 2015 and June 30,
2015, respectively. We also record a bad debt expense if it is
probable that a loss will result and the amount of the loss can be
reasonably estimated. For the three and six months ended
December 31, 2015, we recorded approximately $272 thousand in
bad debt expense related to the guarantee arrangements. This
expense was included in general and administrative expenses in our
consolidated statements of operations. Although we believe that our
estimate related to TMS’ guarantee arrangements are
reasonable, we cannot make any assurances with regard to the
accuracy of our estimates, and actual results could differ
materially.
(c) Cology LLC Contingent Liability
Under certain of Cology LLC’s loan origination agreements, it
has agreed to indemnify those lender clients for certain claims and
damages in connection with its performance under such agreements.
As of June 30, 2015, we recorded a liability of $350 thousand,
which was included in other liabilities on our consolidated balance
sheet, with a corresponding contingent loss included in general and
administrative expenses on our consolidated statement of
operations. As of December 31, 2015 we have evaluated the
liability and determined that there was no change to the $350
thousand balance. Based on the information obtained, combined with
management’s judgment regarding all of the facts and
circumstances of the matter, we determined that a contingent loss
is probable and that the amount of such loss can be estimated, as
ranging from approximately $13 thousand to $420 thousand. In
determining the range and amount of the contingent loss, we took
into consideration advice received from our external counsel, which
has extensive experience in the specific matter, as well as other
factors. Should the judgments and estimates made by management be
incorrect, we may need to record additional contingent losses that
could materially adversely impact our results of operations.
Alternatively, if the judgments and estimates made by management
are incorrect and the contingent loss does not occur, the
contingent loss recorded would be reversed thereby favorably
impacting our results of operations. |
