## Facts

- Syms Corporation, a New Jersey retailer operating two Massachusetts stores, was subject to Massachusetts corporate excise tax.
- In 1986, Syms created a wholly owned Delaware subsidiary, SYL, Inc., and transferred to it Syms’s trade names, trademarks, and service marks.
- Syms leased the marks back from SYL and paid substantial royalties, which Syms deducted on its Massachusetts returns as ordinary and necessary business expenses.
- SYL’s only meaningful asset was the marks; it conducted no independent operating business and had minimal physical presence and activity.
- Syms continued to run the retail business and to maintain and protect the marks’ goodwill as before the transfer.
- Royalties paid to SYL were returned to Syms shortly thereafter as dividends, effectively creating circular cash flows while shifting income to a jurisdiction that did not tax the royalty stream.
- The Commissioner of Revenue disallowed the royalty deductions, assessed additional corporate excise taxes for multiple years, and imposed penalties; the Appellate Tax Board upheld the assessment, finding the arrangement a sham and the royalties nondeductible.

## Issues

1. Whether the transfer of marks to a wholly owned subsidiary and the royalty leaseback lacked economic substance and valid business purpose such that the arrangement could be disregarded for Massachusetts tax purposes.
2. Whether the royalty payments qualified as “ordinary and necessary” business expenses deductible in computing Massachusetts corporate excise tax.
3. Whether disallowing the deductions violated the Due Process Clause or the Commerce Clause of the U.S. Constitution.
4. Whether penalties should be abated based on claimed reliance on professional tax advice.
5. Whether the Commissioner could alternatively adjust income under Mass. Gen. Laws ch. 63, § 39A (and, if so, whether it applied to parent-to-subsidiary payments).

## Decision

- The Supreme Judicial Court affirmed the Appellate Tax Board’s decision upholding the assessments and penalties.
- The court upheld the finding that the transfer-and-leaseback arrangement was a sham lacking economic substance and a genuine non-tax business purpose; Massachusetts could disregard it and deny the deductions.
- The court agreed that the royalties were not deductible as ordinary and necessary business expenses.
- The court rejected Syms’s Due Process and Commerce Clause challenges.
- The court declined to decide whether Mass. Gen. Laws ch. 63, § 39A independently authorized the adjustment because the sham-transaction and expense-deduction grounds were sufficient.
- The court upheld the refusal to abate penalties, finding insufficient proof of reasonable reliance on competent professional advice.

## Legal Principles

- Massachusetts may disregard related-party transactions that lack economic substance and serve no real business purpose apart from generating tax benefits, and may deny deductions claimed from such arrangements.
- A deductible business expense must be “ordinary and necessary” in a real business sense; formal intercompany contracts do not establish deductibility when the payee affiliate adds little or no operational value and the arrangement does not change underlying economic activity.
- Denying deductions for sham transactions does not, by itself, violate the Due Process Clause or the Commerce Clause when the state is measuring tax by true in-state taxable income rather than taxing extraterritorial value or discriminating against interstate commerce.
- Penalty abatement requires a showing of reasonable reliance on competent professional advice; generalized tax-planning involvement does not excuse deductions taken from transactions found to be shams.

## Conclusion

The court treated the trademark transfer to a Delaware intangible-holding subsidiary and the royalty leaseback as a sham that produced tax benefits without meaningful economic change, upheld denial of the royalty deductions as not ordinary and necessary, rejected constitutional objections, and sustained penalties due to inadequate proof of reasonable reliance on professional advice.


Syms Corp. v. Comm'r of Revenue, 436 Mass. 505, 765 N.E.2d 758 (Mass. 2002)