Mass. related-member interest or intangible expenses.

• Author: Koppel, Michael D.

The Massachusetts legislature has raised the bar for corporations claming related-party interest and royalty expense on intangibles. Partly in response to The Sherwin-Williams Co., 438 Mass. 71 (2002), it enacted Chapter 63, [subsection] 311 and 31J, requiring all domestic and foreign corporations to add back to net income otherwise deductible interest and intangible expenses paid to related members, unless the corporation can meet certain exceptions. The legislation is retroactive to tax years beginning after 2001. (For background, see King and Rhines, Tax Clinic, "Sherwin-Williams Can Deduct Intercompany Interest and 1Loyalties," TTA, February 2003, p. 83.)

In September 2003, the Massachusetts department of revenue (DOP,) issued Technical Information Release (TIR) No. 03-19, explaining the legislation and compliance method for exceptions and for returns already filed. In addition, the DOR explained its position for tax years beginning before the legislation's effective date and its response to Sherwin-Williams aim Syms Corp., 436 Mass. 502 (2002).

Background

In both Sherwin-Williams and Syms, the taxpayers formed Delaware subsidiaries to hold intangibles, loaned them cash and paid them royalties and interest. The supreme judicial court found for Sherwin-Williams and against Syms based on the facts and circumstances; Sherwin-Williams proved economic substance and business purpose for its subsidiary and the transactions.

New Law

Economic substance and business purpose are the keystones of Massachusetts' new approach. If, for years beginning after 2001, a corporation has paid interest or intangible expense to a related member, it must either add back these items or use Schedule ABI, Exceptions to the Add Back of Interest Expenses and/or ABIE, Exceptions to the Add Back of Intangible Expenses, to claim an exception.

Section 311(a) defines "related member" as a person that, with respect to the taxpayer during all or any portion of the tax year, is: (1) a related entity; (2) a component member (as defined in Internal Revenue Code (IRC) Sec. 1563(b)); (3) a person to or from whom there is attribution of stock ownership under IR.C Sec. 1563(e); or (4) a person that, not withstanding its form of organization, bears the same relationship to the taxpayer as a person described in (1)-(3) above.

Section 311 (a) defines "related entity" as a (1) a stockholder who is an individual or a member of the stockholder's family, as set forth in IRC Sec. 318, if...