Tax News

CCH (cch.taxgroup.com) reports:

A corporation that formed subsidiaries to hold certain of its trademarks was properly disallowed a deduction from Massachusetts corporate excise (income) tax for the royalties paid to the subsidiaries because the transfer and license-back transactions constituted a sham. The transactions lacked economic substance and had no practical economic effect, other than the creation of tax benefits. The corporation failed to produce sufficient evidence to support a finding that the scheme could accomplish any of the purported business purposes. The subsidiaries had no meaningful control over the trademarks or the income generated from them, and the corporation did not permit the subsidiaries to negotiate the terms of the license agreements. Moreover, the corporation's business operations did not change following the transfer and license-back transactions.
It was also proper for the Commissioner of Revenue to deny a deduction for interest expenses claimed by the corporation. The vast majority of the royalty income generated from the licensing of the trademarks was returned to the corporation in the form of purported loans from the subsidiaries. However, the loans lacked many standard provisions to protect the lender, and the principal was never repaid. Given the circumstances surrounding the loan transactions, it was determined that the parties had no intention that the funds would ever be repaid. Accordingly, the loans were not bona fide indebtedness. Rather, the transferred funds constituted disguised or constructive dividends to the parent corporation.
The corporation was granted a partial abatement with respect to certain specific deductions that were improperly disallowed, but otherwise the Commissioner's actions were upheld.
The TJX Companies, Inc. v. Commissioner of Revenue, Massachusetts Appellate Tax Board, Nos. C262229-31, August 15, 2007, ¶401-098
Other References:
Explanations at ¶10-075