IDC Research, Inc. v. Comm'r of Revenue

• Decision Date: 30 November 2010
• Docket Number: No. 09-P-1533.,09-P-1533.
• Parties: IDC RESEARCH, INC. v. COMMISSIONER OF REVENUE.
• Court: Appeals Court of Massachusetts

937 N.E.2d 1266

78 Mass.App.Ct. 352

IDC RESEARCH, INC.

v.COMMISSIONER OF REVENUE.

No. 09-P-1533.

Appeals Court of Massachusetts, Suffolk.

Argued May 12, 2010.

Decided Nov. 30, 2010.

Richard L. Jones (William E. Halmkin with him), Boston, for the taxpayer.

Christopher M. Glionna, for Commissioner of Revenue.

Present: GRASSO, BROWN, & KAFKER, JJ.

BROWN, J.

IDC Research, Inc., appeals from a decision of the Appellate Tax Board (board), upholding the refusal of the Commissioner of Revenue (commissioner) to abate a portion of the corporate excise taxes assessed to its parent corporation, International Data Group (IDG), for the tax years 1992, 1993, and 1994. IDG disputes that it owes taxes on royalty income received by IDG Holdings, Inc. (IDG Holdings), an IDG subsidiary incorporated in Delaware.

For the facts, we refer to the board's April 17, 2009, findings of fact and report. The board concluded that the commissioner properly reallocated royalty income from IDG Holdings to IDG, based on the sham transaction and assignment of income doctrines. We agree with the board that IDG did not sustain itsburden of proving that it was entitled to an abatement of corporate excise taxes on amounts it claimed were earned by IDG Holdings. We address in turn the arguments raised by IDG on appeal.

1. Sham transaction doctrine. The board found that the transfer of the "IDG World" logo (world logo) licensing business from IDG to IDG Holdings had no economic substance or business purpose other than tax avoidance, and therefore constituted a sham transaction. See, e.g., Syms Corp. v. Commissioner of Rev., 436 Mass. 505, 509-510, 765 N.E.2d 758 (2002); Sherwin-Williams Co. v. Commissioner of Rev., 438 Mass. 71, 79-80, 778 N.E.2d 504 (2002). IDG argues that the transfer did not constitute a sham transaction because IDG Holdings was engaged in substantive business activities through owning and managing the world logo, and investing the royalty income, and that the transfer had a valid, nontax purpose in furthering IDG's goal of decentralization.

The standard is well-established. "The question whether or not a transaction is a sham for purposes of the application of the doctrine is, of necessity, primarily a factual one, on which the taxpayer bearsthe burden of proof in the abatement process" (footnote omitted). Syms Corp. v. Commissioner of Rev., 436 Mass. at 511, 765 N.E.2d 758. "We will not disturb the board's decision 'if it is based on substantial evidence and on a correct application of the law.' " Commissioner of Rev. v. Gillette Co., 454 Mass. 72, 75, 907 N.E.2d 629 (2009), quoting from Koch v. Commissioner of Rev., 416 Mass. 540, 555, 624 N.E.2d 91 (1993). We review the board's findings of fact to determine whether, as matter of law, the evidence is sufficient to support them. Ibid. "Our review of the sufficiency of the evidence is limited to 'whether a contrary conclusion is not merely a possible but a necessary inference from the findings.' " Syms Corp. v. Commissioner of Rev., supra at 511, 765 N.E.2d 758, quoting from Olympia & York State St. Co. v. Assessors of Boston, 428 Mass. 236, 240, 700 N.E.2d 533 (1998). The credibility of witnesses, weight of the evidence, and inferences to be drawn therefrom are for the board. Kennametal, Inc. v. Commissioner of Rev., 426 Mass. 39, 43 n. 6, 686 N.E.2d 436 (1997), cert. denied, 523 U.S. 1059, 118 S.Ct. 1386, 140 L.Ed.2d 646 (1998).

The record before us fully supports the board's conclusion that IDG Holdings was not a viable business entity for tax purposes. In the context of the sham transaction doctrine, a viable business entity means "one which is 'formed for a substantial businesspurpose or actually engage[s] in substantive business activity.' " Sherwin-Williams Co. v.Commissioner of Rev., 438 Mass. at 84, 778 N.E.2d 504, quoting from Northern Ind. Pub. Serv. Co. v. Commissioner of Int. Rev., 115 F.3d 506, 511 (7th Cir.1997). The board, methodically distinguishing the transfers in this case from those found to be legitimate in Sherwin-Williams Co. v. Commissioner of Rev., supra at 86, 778 N.E.2d 504, rejected IDG's proof that IDG Holdings was anything more than a tax-free conduit for receipt of royalty payments for IDG's use.¹ Based on substantial evidence demonstrating IDG Holdings' lack of substantive business activity or substantial business purpose, the board found that the transfer of the world logo licensing business from IDG to IDG Holdings was a sham.

Focusing on the indicia of substantive economic activity in Sherwin-Williams Co. v. Commissioner of Rev., 438 Mass. at 86, 778 N.E.2d 504, upon which the board relied here, IDG first challenges the board's finding that IDG did not actually transfer ownership of the world logo to IDG Holdings. IDG argues that the finding was not based on substantial evidence.

To prove the transfer of the world logo, IDG principally relies on the October 1, 1988, "Consent of Executive Committee" (consent), by which IDG's executive committee adopted a vote to transfer the world logo to IDG Holdings. The consent authorized and directed the officers of IDG "to execute and deliver all documents, and take all action, necessary or desirable to carry out said transfer." The consent itself was the sole document offered by IDG to evince the transfer of the world logo toIDG Holdings, and IDG witnesses failed to identify further actions taken by its officers to accomplish the transfer. Experts for both parties gave opinions regarding the effectiveness of the consent to transfer ownership of the world logo, and the board acted within its discretion to reject the testimony ofIDG's expert that nothing more than the consent was needed. See generally Boston Safe Deposit & Trust Co. v. Commissioner of Rev., 17 Mass.App.Ct. 326, 329, 458 N.E.2d 345 (1983) (board's prerogative not to believe expert witness). The board's finding that IDG remained the owner of the world logo throughout the tax years in question was supported by substantial evidence, which included the plain language of the consent, and considerable documentary evidence showing that IDG continued to identify itself as the owner and treat the world logo as its own after October 1, 1988.

Indeed, the board found that even assuming that IDG had transferred the world logo to IDG Holdings, the transactions still lacked economic substance or effect because IDG retained full use and control of the world logo and the benefits and burdens of its ownership. See, e.g., Syms Corp. v. Commissioner of Rev., 436 Mass. at 508-509, 765 N.E.2d 758 (despite transfer of trademark to subsidiary, substantive business activities connected to mark remained with parent). Our review of the record confirms that the board's findings regarding IDG's continued use of the world logo and identification as its owner, coupled with its failure to identify IDG Holdings as the logo owner during the years in question, were amply supported. IDG's various explanations for its conduct did not require a different result. See Kennametal, Inc. v. Commissioner of Rev., 426 Mass. at 46, 686 N.E.2d 436 ("The board might have reached contrary conclusions, but such conclusions are not necessarily inferred from the facts").

IDG also failed to carry its burden of proving that IDG Holdings engaged in substantive business activity during the relevant tax years. From the board's findings, which were fully supported in the record, it appears that IDG Holdings' activities in those years consisted of the receipt of royalty payments in its account at Bank of Delaware, automatic investment with Merrill Lynch when the account reached a certain predetermined level set by IDG Holdings' board of directors,² and, in November 1993, the leasing of an unspecified portion of an office suite atthe Bank of Delaware for $250 per month, which the board found to be a "convenient contrivance." See, e.g., Syms Corp. v. Commissioner of Rev., 436 Mass. at 509, 765 N.E.2d 758. Those activities suggest a business in form only. Compare Sherwin-Williams Co. v. Commissioner of Rev., 438 Mass. at 86, 778 N.E.2d 504 (evidence of "substantive business activity, beyond the creation of tax benefits for Sherwin-Williams was substantial").

Significant on the issue of substantive business activity in Sherwin-Williams Co. v. Commissioner of Rev., 438 Mass. at 81, 778 N.E.2d 504, were the subsidiaries' investments, as well as licensing agreements, with unrelated third parties, earning the subsidiaries substantial additional income for reinvestment in their own businesses. IDG points to IDG Holdings' financial accounts with Bank of Delaware and Merrill Lynch as constituting such third-party activity. While those deposits and investments may represent substantive business activities for the financial institutions thathandled them, we concur with the board that merely opening a bank account cannot be characterized as substantive business activity for IDG Holdings, without rendering the tax statutes ineffectual. See generally Kennametal, Inc. v. Commissioner of Rev., 426 Mass. at 46, 686 N.E.2d 436. Compare Northern Ind. Pub. Serv. Co. v. Commissioner of Int. Rev., 115 F.3d at 514 (substantive business activity, albeit minimal, where subsidiary borrowed and loaned funds at a profit, borrowed funds from unrelated third parties, and reinvested profits, over which its parent had no control); United Parcel Serv. of Am., Inc. v. Commissioner of Int. Rev., 254 F.3d 1014, 1018-1019 (11th Cir.2001) (transfer of parent corporation's business to subsidiary not a sham where it created "genuine obligations enforceable by an unrelated third party" against subsidiary and placed income beyond parent's control).

According to the board's findings, it was IDG, rather than IDG Holdings, that made use of the royalty income received from the foreign subsidiaries. The board's description of IDG Holdings' function as a "passive vessel" through which IDG diverted the royalties paid by its foreign subsidiaries to...