Court: Publisher deserves no tax abatements on payments to a 'sham' subsidiary

The Massachusetts Appeals Court today rejected a request from Boston-based publisher IDG for abatements on taxes for payments to one subsidiary from other subsidiaries.

IDG, which publishes technology magazines and Web sites around the world, had sought an abatement on excise taxes owed in 1992, 1993 and 1994, arguing that royalties paid by its various subsidiaries for use of the brand's "world" logo (think Computerworld and PC World, both IDG subsidiaries) to an IDG subsidiary called IDG Holdings should not be counted toward IDG's overall corporate income.

The court, however, agreed with the Department of Revenue and the Appellate Tax Board that the transfer of the "world" licensing business from the IDG mothership to the subsidiary "had no economic substance or business purpose other than tax avoidance, and therefore constituted a sham transaction," because IDG Holdings conducted no actual business. IDG produced documents showing IDG Holdings had opened accounts with an investment firm and a bank in Delaware, but the court ruled a bank account by itself does not show actual business operations.

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 Delaware was apt. The record shows that during the years in question, IDG withdrew millions of dollars from IDG Holdings' account that IDG characterizes as loans, but that lacked loan documentation, terms, or interest, and were only sporadically and partially repaid.

The court even rejected IDG's argument that the logo handoff was part of the decentralized structure for which IDG is noted:

On appeal, IDG claims, as its primary purpose for transfers, the regular business policies and decentralization principles of IDG. As detailed in the board's findings, however, the control IDG maintained over IDG Holdings bore none of the hands-off features that typified its relationship with its other subsidiaries, and the board reasonably found from the evidence that the transfers to IDG Holdings were contrary to and not consistent with the asserted goals.

A Revenue Department spokesman this morning was unable to say exactly how much of an abatement IDG had sought.

Complete ruling.