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In IDC Research, Inc. v. Comm’r of Revenue, No. 09-P-1533 (Nov. 30, 2010), the Appeals Court of Massachusetts held that the transfer of International Data Group’s (IDG) logo licensing business to a Delaware subsidiary was a sham. The court affirmed the Appellate Tax Board’s decision and reallocated the Delaware subsidiary’s royalty income from foreign affiliates to IDG.
The court found that IDG never actually transferred ownership of the logo licensing business because it:
- Failed to adhere to multiple corporate formalities;
- Continued to identify itself as the owner of the logo;
- Continued to treat the logo as its own after the transfer; and
- Retained the benefits and burdens of ownership – as evidenced by its withdrawal of millions of dollars from the Delaware subsidiary’s account.
IDG asserted that the withdrawals were loans; however, there was no loan documentation and minimal repayment to the subsidiary. While IDG claimed that its business purpose for the structure was decentralization, the court held this was inconsistent with IDG’s retention of control over the subsidiary and the logo.
In addition to the lack of business purpose, the court found that the Delaware subsidiary lacked economic substance. Its only activities consisted of the receipt of royalty income, the automatic investment of such income, and the leasing of office space in Delaware for $250 a month. Furthermore, all of the Delaware subsidiary’s licensing agreements were with affiliated entities. Finally, the court agreed with the Appellate Tax Board’s conclusion that the Delaware subsidiary was a “passive vessel” used to divert royalty income from IDG.