Reed Smith Client Alerts

Welcome to the latest Reed Smith update on recent developments in Massachusetts tax. In this update, we will provide a year-end roundup on some of the interesting issues in recently filed or decided cases at the Appellate Tax Board (ATB).

Department Treats “Check-the-Box” Election as a “Sham” and Ignores Federal Disregarded Entity Treatment

The Department of Revenue (“Department”) has a long history of asserting the sham transaction doctrine against taxpayers. See our prior coverage on this topic in a Tax Notes article, and our recent webinar (available on demand).1 A recent petition filed with the ATB demonstrates that the Department is now taking the position that it can ignore a federal election made by a foreign entity to be disregarded as a separate entity from its owner, on the basis that the election was a “sham”. The Department is taking this position in Kendall Holding Corp. v. Commissioner.2 If the Department’s position is upheld, it could have sweeping implications for any taxpayers that have structured their business operations in a way that had the effect of reducing their corporate excise tax liability.

The taxpayer, Kendall Holding Corporation (“Kendall”), was a subsidiary of Covidien, and the parent holding company for a group of U.S. and foreign corporations. Kendall was formed in 2006 in connection with Covidien’s spin-off from Tyco International. As part of the spin-off, Kendall elected to treat an entity incorporated and doing business in Portugal (“Covidien Portugal”) as a disregarded entity for U.S. federal income tax purposes.