Syms Corporation v. Commissioner of Revenue

Syms Corporation (defendant) was a New Jersey corporation engaged in off-price retailing, meaning it sold brand-name clothing at discounted prices. Syms operated two stores in Massachusetts. Syms created a Delaware-based subsidiary called SYL to reduce its income taxes. SYL’s only asset was Syms’s trademarks. Syms and SYL executed a license agreement under which Syms paid a large royalty to SYL each year to continue to use the Syms trademarks. SYL subsequently repaid the royalty to Syms a few weeks later, with interest, as a tax-free dividend. Syms deducted its royalty payment from its Massachusetts tax filings, and SYL avoided income tax entirely because Delaware law did not impose tax on companies holding only intangible assets. Syms completely owned and controlled SYL, and SYL’s board of directors included members of the Syms family. SYL conducted no business of its own and rented office space from an accounting firm to which it paid a nominal annual fee. Syms continued to operate its business as usual, including undertaking all efforts to preserve and maintain the goodwill of Syms’s trademarks. The commissioner of revenue (commissioner) (defendant) of Massachusetts’s Tax Board brought an action against Syms, ultimately finding that Syms had engaged in a sham transaction by setting up its subsidiary solely to avoid tax liability. Syms argued that it had legitimate business reasons for creating SYL, including that the SYL would protect the marks from creditor claims and that SYL’s existence would lead to better management of the marks. Syms appealed to the Supreme Judicial Court of Massachusetts, asserting that the tax board erred by finding that Syms and SYL’s arrangement constituted a sham transaction.