General Mills, Inc. and Subsidiaries v. Commissioner of Revenue (June 29, 2001)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD




GENERAL MILLS, INC.		  v.       COMMISSIONER OF REVENUE
and SUBSIDIARIES			

Docket No. F223398				 Promulgated:
							 June 29, 2001

	
	This is an appeal under the formal procedure pursuant to G.L. c. 62C, § 39, from the refusal of the Commissioner of Revenue to abate corporate excise assessed to General Mills, Inc. for the taxable period ending May 31, 1989.
	Former Chairman Gurge heard the appeal and was joined in the decision for the appellant by current Chairman Burns and Commissioners Scharaffa, Gorton and Egan.
	These findings of fact and report are made pursuant to a request by both parties under G.L. c. 58A, § 13, and 831 CMR 1.32.

	Edward F. Hines, Jr., Esq. and Kathleen King Parker, Esq., for the appellant.

Thomas K. Condon, Esq. and Michael T. Fatale, Esq., for the appellee.







FINDINGS OF FACT AND REPORT

	Based on the testimony and exhibits offered at hearing, the Appellate Tax Board ("Board") made the following findings of fact.  
	The present appeal resulted from the sale by General Mills, Inc. ("General Mills") of its 100% stock interest in The Talbots, Inc. ("Talbots"), a domestic corporation with its headquarters located in Hingham, Massachusetts, and its interest in Eddie Bauer, Inc. ("Eddie Bauer"), a foreign corporation with its headquarters located in Seattle, Washington.
	On June 27, 1988, General Mills sold its stock interest in Talbots.  The purchaser of the stock, Jusco, Ltd. ("Jusco"), elected under § 338(h)(10) of the Internal Revenue Code ("Code") to treat this sale, for federal income tax purposes, as a sale of Talbots' assets.  Because of the election, Talbots recognized a gain on the "deemed sale" of its assets.  Correspondingly, General Mills did not recognize a gain on the sale of the Talbots' stock.  Shortly thereafter, on July 2, 1988, General Mills sold its stock interest in Eddie Bauer.  No  § 338(h)(10) election was made.
	Prior to General Mills' disposition of the Talbots stock, Talbots created a wholly-owned subsidiary, TalHC, Inc. ("TalHC") to which Talbots transferred the rights to its trademarks and tradenames.  TalHC then sold these trademarks to Jusco Europe B.V. ("Jusco B.V."), a subsidiary of Jusco.  
On or about February 15, 1990, General Mills filed its fiscal year 1989, period ending May 31, 1989, Combined Foreign Business Corporate Excise Return with its subsidiaries and paid the tax shown due thereon.  On its return, General Mills: (1) excluded from its net income the gain recognized from the sale of both the Talbots and the Eddie Bauer stock; (2) included, in Talbots' income column, the gain recognized from the "deemed sale" of Talbots' assets attributable to the § 338(h)(10) election; (3) excluded from Talbots' net income the gain recognized from the sale of its intangibles; and (4) excluded, in computing Talbots' "sales factor," the proceeds from the sale of its intangibles.   
On February 7, 1992, the Commissioner assessed additional taxes in the amount of $10,926,436, plus statutory additions.  On July 22, 1992, General Mills timely filed its Application for Abatement together with an agreement to extend the time within which the Commissioner could act on the abatement request.  By notice dated August 18, 1994, the Commissioner notified General Mills that it had granted a partial abatement.  On September 22, 1994, General Mills timely filed its appeal with this Board.  On this basis, the Board found that it had jurisdiction over this appeal.
The five issues raised by General Mills' appeal are:  (1) whether the Commissioner's assessment was procedurally correct; (2) whether General Mills' recognized gain, from the sale of its Eddie Bauer and Talbots stock, is includible in General Mills' taxable income subject to apportionment as part of General Mills' unitary business; (3) whether the deemed sale of Talbots' assets, pursuant to Jusco's § 338(h)(10) election, allowed the gain recognized from the deemed sale to be included in Talbots' Massachusetts taxable income; (4) whether the gain recognized on the sale of Talbots' intangibles was properly includible in Talbots' taxable income; and,  if so, (5) whether the recognized gain on the sale of the intangibles was includible in the numerator of Talbots' "sales factor," for purposes of apportioning its income to Massachusetts. 
Assessment
By a Notice of Intention to Assess ("NIA") dated January 7, 1992, the Commissioner notified General Mills that he intended to assess additional taxes, plus interest and penalties, in the total amount of $15,809,545.  The NIA included assessments for calendar years 1988 and 1990, not at issue in the present appeal.  The proposed assessment for fiscal year 1989 was $10,865,588, plus interest and penalties.  On or about February 5, 1992, General Mills submitted two checks to the Commissioner, totaling $15,809,545, the full amount shown due on the NIA including fiscal years 1988 and 1990.  By letter dated February 5, 1992, General Mills acknowledged that the payment was "remitted [for] the additional tax and interest assessed due to a Massachusetts field audit."
On February 7, 1992, more than thirty days after the Commissioner issued the NIA, the Commissioner produced a second NIA with the notation Instruction to Bill, signed by the Commissioner's representative ("Instruction to Bill") which showed the full assessment amount of $15,809,545.  The Instruction to Bill also reflected General Mills' full payment.  Subsequently, on March 6, 1992, the Commissioner issued a Notice of Assessment ("NOA") showing a zero balance due for fiscal year 1989.  The NOA showed an assessment, for the period at issue in this appeal, of only $865,588, in contrast to the $10,865,588 figure shown on the NIA and the Instruction to Bill, and also reflected a payment of only $5,752,491 despite the fact that General Mills had paid more than $15 million.     
On August 5, 1992, General Mills timely filed its Application for Abatement with the Commissioner seeking an abatement of $13,937,671, plus interest.  The abatement application reflected the assessment of $10,865,588, and sought a refund of these taxes in addition to taxes attributable to the deemed sale of Talbot's assets as reported on General Mills' tax return.  On August 8, 1992, the Commissioner issued a second NOA which, like the March 6th NOA, erroneously reflected a tax assessment of only $865,588.
On August 18, 1994, the Commissioner granted General Mills a partial abatement.  Subsequently, on September 21, 1994, General Mills timely filed this appeal with the Board.  In its appeal, General Mills for the first time included a claim that the Commissioner failed to follow  the  proper  procedures in assessing $10,000,000 of 
the adjustments made pursuant to the audit.  Upon notification of the discrepancy between the NOAs and the NIA and Instruction to Bill, the Commissioner issued a corrected NOA for fiscal year 1989 in the full amount of $10,865,588, plus interest when it filed its Answer with the Board.
At the hearing, Edward Lapore testified for the Commissioner to support the Commissioner's contention that the assessment was procedurally correct and that a valid assessment had been made for the full amount of $10,865,588 in tax.  During the period at issue in this appeal, Mr. Lapore worked in the Mass. Tax Bureau.  His primary function was to "peruse all reports, data, and maintain the integrity of the data base."  Mr. Lapore explained that in the fall of 1988, the Department of Revenue ("Department") converted its computer system to the Mass. Tax system and with this transition problems arose.  Among those problems was that NOAs omitted figures in the "tens of millions" column.
Mr. Lapore testified that in the summer of 1996, he examined the Department's records relative to the General Mills assessment.  Mr. Lapore explained that the NOA, which showed a tax assessment of $865,588 and not the $10,865,588 amount proposed to be assessed in the NIA and assessed by the Instruction to Bill, was simply due to the truncation issue explained above.  He further explained that the Instruction to Bill, dated February 7, 1992, showed full payment by General Mills on February 5, 1992 in the amount of 15,809,544.  This same document had the requisite signature of the Commissioner's representative and constituted the Commissioner's deficiency assessment.  Based on these documents together with the Mass. Tax computer records, Mr. Lapore concluded that an audit assessment was in fact made in the amount of $10,865,588, prior to the issuance of the NOAs.
Based on the evidence presented, the Board found that there was substantial credible evidence that an assessment was made in the amount of $10,865,588 on February 7, 1992, as evidenced by the Instruction to Bill.  Accordingly, the Board found that the Commissioner's assessment of additional taxes in the amount of $10,865,588 was procedurally correct.

II.	Gain on sale of Eddie Bauer and Talbots' stock -  Unitary Business Analysis

General Mills is a multi-faceted corporation, incorporated in Delaware, with its headquarters in Minneapolis, Minnesota.  General Mills is primarily engaged in producing and selling packaged food products at the wholesale level.
Mr. Clifford Whitehill-Yarza ("Mr. Whitehill") testified on behalf of General Mills.  Mr. Whitehill was employed by General Mills from 1963 until 1995.  When Mr. Whitehill first started with the company, General Mills was principally engaged in the packaged-foods business, primarily cake mixes and cereals.  Mr. Whitehill explained that in the early 1970s, General Mills began to divest its flour mills and reduce its presence in the commercial flour business while expanding into other lines of business.  
During this time of expansion, Mr. Whitehill was the assistant general counsel and assistant secretary of General Mills.  His primary responsibility was to handle the company's acquisitions.  At its peak, General Mills had five lines of business:  packaged foods, restaurants, toys, fashion and specialty retailing.  The only line of business which was conducted directly by General Mills was the packaged-foods business.  With respect to the remaining lines of business, General Mills considered itself merely a holding company. 
In 1971, General Mills purchased 100% of the stock of Eddie Bauer, a sporting goods and sporting clothing business.  At the time it was purchased, Eddie Bauer operated primarily through mail-order catalogs.  It had only one retail outlet.  In 1973, General Mills purchased a 100% interest in Talbots, a clothing retailer and catalog sales company.  From the time of the acquisitions until the companies were sold in 1988, senior management for Eddie Bauer was located in Seattle, Washington and Talbots' senior management was located in Hingham, Massachusetts.
Each subsidiary had its own employees.  Payroll, employee training and employee benefits were all handled at the local level by each of the subsidiaries' senior management.  Each line of business would determine which benefits were appropriate for that particular industry and then the senior management would devise the appropriate plan.  On occasion, a General Mills employee would transfer to a subsidiary.  Typically, if a subsidiary had a vacancy it would be posted and a General Mills employee, if qualified, would fill the position.  No transfers were forcibly imposed on General Mills' employees.  
Purchasing, inventory, marketing, site selection and research were all also handled at the subsidiary level.  Both Talbots and Eddie Bauer maintained their own administrative offices, warehouses and retail stores, none of which was shared with General Mills or with one another.  Neither Eddie Bauer nor Talbots joined together or with General Mills in making purchases nor were there purchases or sales between the companies.  
Each of the subsidiaries' senior management was responsible for developing and implementing their respective budgets.  Although the budgets were provided to General Mills for review, this submission was done merely to keep General Mills abrest of its investments.  Each subsidiary was responsible for its internal auditing and then passing that information on to General Mills.  Overall, the day-to-day management of the subsidiaries rested with their respective senior management.  
Although Eddie Bauer and Talbots were operated as independent and autonomous businesses, General Mills did provide some services to its subsidiaries.  From time to time, General Mills would provide financing to its subsidiaries, charging interest at a commercial rate.  When required by a prospective landlord, General Mills would guarantee a lease for its subsidiaries.  Also, General Mills would guarantee revenue bonds, which were issued to finance major capital projects undertaken by the subsidiaries. 
General Mills also provided its subsidiaries with legal and tax services.  However, the subsidiaries were charged a fee for the legal services.  The fee was calculated by taking the law department's yearly budget, dividing it by the total number of hours of service provided to the entire corporation, and multiplying by the number of hours dedicated to the specific subsidiary.  
The tax services, for which no fee was charged, were provided for several reasons.  First and foremost, the New York Stock Exchange and the Securities and Exchange Commission required that wholly-owned subsidiaries file their returns on a consolidated basis with the parent corporation.  As such, it was more efficient and practical for a single tax department to determine the tax liabilities of all entities and file the necessary returns.  For the same reasons, General Mills and its subsidiaries used the same auditors.  
Mr. Whitehill noted that it was not uncommon for a General Mills officer or member of the board of directors, to also be a member of the subsidiaries' board of directors.  He further explained, however, that the subsidiaries' board of directors had no involvement in the day-to-day operations of the companies.  Instead, the subsidiaries' senior management handled these functions.  Likewise, the General Mills board of directors had no involvement in the day-to-day operations of the subsidiaries.  Their involvement was limited to those occasions when the subsidiary required major capital expenditures.  In those instances, approval from the General Mills board of directors was required.
During the years that General Mills owned Eddie Bauer and Talbots, both subsidiaries were included in General Mills' Specialty Retailing Group ("SRG").  The SRG maintained a small office in New York, with approximately 15 employees - all on the General Mills payroll.  The purpose of the SRG was to act as a coordinator for the various companies within the group.  As with the officers and directors of General Mills, employees of the SRG were not involved in the day-to-day management of either Eddie Bauer or Talbots.  If necessary, the SRG would assist the subsidiaries in preparing requests for funding from General Mills and in preparing various reports, both financial and operational, that would satisfy the General Mills requirements.  The cost of the SRG was paid, on an allocated basis, by the member subsidiaries.  Neither of the buyers of Eddie Bauer or Talbots offered to purchase the SRG.  Therefore, after the sale of the subsidiaries, the SRG was liquidated.
On the basis of the above facts, the Board concluded that neither Eddie Bauer nor Talbots were integrated with General Mills' food-packaging business.  Both Eddie Bauer and Talbots were run by their own independent management.  Each was responsible for purchasing its own materials and supplies.  There was no shared use of offices, warehouses, or other facilities, no joint training programs for employees, and no joint use of trademarks or trade names.
	Although General Mills provided its subsidiaries with some services, namely legal and tax, it was done primarily to assist General Mills in managing its investments.  Also, even though both Eddie Bauer and Talbots belonged to the SRG, they received minimal benefits from this organization.  Regardless, each was required to make payment to General Mills for membership in the group.  Finally, while General Mills and its subsidiaries shared some officers and directors, these individuals had no involvement in the day-to-day operations of the subsidiaries.
Accordingly, the Board found that there was no functional integration, no centralized management and no economies of scale derived by the appellant and its subsidiaries.  Instead, the Board found that the services and supervision provided by appellant were more akin to that involved in the oversight of an investment which any parent company would give to its investment in a subsidiary. 

§ 338(h)(10) Election 

Initially, Jusco was courted as a prospective purchaser for both Eddie Bauer and Talbots.  Several months into the process, however, Jusco determined that it would not be able to purchase both subsidiaries and focused its attention on Talbots.  On May 18, 1988, General Mills and Jusco entered into a stock-purchase agreement for the sale of Talbots.  Jusco wished to have the transaction treated as a sale of assets whereas General Mills wished to have the transaction take the form of a stock sale.  
General Mills timely filed its 1988 combined corporate excise return including its subsidiary Talbots.  Included in Talbots' taxable income was the gain on the deemed sale of Talbots' assets attributable to the § 338(h)(10) election.  In consideration for General Mills' consent to a § 338(h)(10) election under the Code, Jusco agreed to make a one-time payment of three million dollars to compensate General Mills for the additional tax costs.
For the reasons explained in the following Opinion, the Board found that the gain realized on the § 338 deemed sale of Talbots' assets was properly included in Talbots' Massachusetts taxable income subject to apportionment.  

IV.  Sale of Talbots' Intangibles
Pursuant to the stock-purchase agreement entered into between Jusco and General Mills, General Mills was required to assist with the sale and transfer of Talbots' assets to Jusco and/or its affiliates.  The initial plan developed by Jusco, called for Talbots to sell its trademarks and intangibles to JUSCO BV, Jusco's subsidiary, for a price to be determined.  The funds received by Talbots for the trademarks and intangibles would then be distributed up to General Mills as a dividend.  Lastly, the purchase price paid to General Mills by Jusco for the purchase of Talbots, would be reduced by the amount already paid to Talbots for the purchase of its trademarks.
By letter dated June 7, 1988, General Mills, through its representative Touche Ross, notified Jusco that the proposed plan would result in significant additional state taxes to General Mills.  Touche Ross, General Mills' accounting firm, informed Jusco, and subsequently General Mills, that the way to circumvent the tax burden was to shift the transaction from Massachusetts to Delaware.  Accordingly, a new plan was devised.  Under the new plan, Talbots was to create a Delaware subsidiary, TalHC.  Talbots would transfer all of its intangibles, including tradenames and trademarks, to TalHC which in turn would sell the intangibles to Jusco BV for $100 million.  Finally, Jusco would purchase the Talbots stock from General Mills for $325 million.  At some future date, TalHC would be liquidated.  As stated in correspondence from Touche Ross to Jusco, "the effect of the series of transactions should improve General Mills' state tax liability since the gain by the Delaware subsidiary on the sale of intellectual property will attract no state tax." 
To accommodate this plan, TalHC was incorporated in Delaware on June 16, 1988.  Pursuant to the certificate of incorporation, the nature of the business was to "engage in any lawful act or activity for which corporations may be organized."  TalHC had no employees or office.  Its only assets were the Talbots intangibles and the sum of $10.00 in cash.
Shortly thereafter, on June 21, 1988, Talbots assigned all its rights in its trademarks and tradenames to TalHC.  On the same day, Talbots and TalHC entered into a license agreement authorizing Talbots to continue to use the trademarks and tradenames.  The license agreement did not, however, contain a provision for payment of royalties to TalHC.  Furthermore, no royalties were ever paid to TalHC for Talbots' continued use of the trademarks and trade names. 
On June 26, 1988, less than two weeks after TalHC was created, and only five days after the intangibles were transferred to it, TalHC sold the Talbots trademarks and tradenames to Jusco BV for $100 million.  On the same day, Talbots and Jusco B.V. entered into a license agreement for the continued use of the tradenames and trademarks by Talbots.  Unlike the agreement between TalHC and Talbots, this agreement provided for the payment of royalties based on a percentage of sales.  The next day, June 27, 1988, General Mills sold its shares of Talbots stock to Jusco for $325 million.  Through this transaction, Jusco now owned Talbots and its wholly-owned subsidiary TalHC.  
In its dealings with General Mills, Jusco agreed to indemnify General Mills for any additional federal tax liability as a result of the § 338(h)(10) election.  General Mills acknowledged that the revised plan for the sale of the Talbots intangibles would result in a reduction 
in its state tax liability and agreed that before any claim could be made to Jusco for indemnification with regard to the § 338 election, the state savings must first be netted against the increased federal tax liability. 
Based on the evidence presented, the Board found that the contribution to TalHC and the leaseback by Talbots, of the Talbots intangibles, did not have any practical economic effect other than the creation of tax benefits.  The Board found it compelling that the form of the transaction, as completed, was not devised until after General Mills determined that the original form would have negative state tax implications.  Subsequently, Touche Ross, devised the second plan to "get around the tax burden."  
The Board also found it persuasive that there was no provision for the payment of royalties from Talbots to TalHC for the continued use of the trademarks and tradenames by Talbots.  Lastly, the Board noted that neither TalHC nor Talbots had any involvement in the predetermined arrangements of the transactions.  Accordingly, the Board found that the Commissioner properly disregarded the creation of TalHC and its dealings with Talbots' intangibles, determined the transaction to be a sale of Talbots' intangibles by Talbots, and included the gain in Talbots' net income. 

Inclusion of Gain from Intangibles in Talbots' Sales 
 	Factor

The last issue in the present appeal is whether the Commissioner properly included in the numerator of Talbots' "sales factor," the proceeds from the sale of the intangibled.  The answer depends upon where the intangibles' "income-producing activity," based on costs of performance, occurred.
Talbots was founded in 1946 by George Talbot.  In 1947, George's son, Rudolph Talbot, and Rudolph's wife Nancy,  bought out the franchise from Johnny Appleseed and changed the name to "The Talbots."  The signature "Red Door" and the "Red T" logo were established in the 1950s.  The company's association with high-quality manufacturers created brand awareness for Talbots customers while providing name recognition and appreciation.
When Talbots was acquired by General Mills in 1973, it had five retail stores and a small catalog operation with total annual sales of approximately $8 million.  By the time the trademarks and tradenames and the business, were sold in 1988, Talbots had 119 stores in more than 20 different states and produced 25 catalogs each year which together had projected annual sales of $350 million. 
From the time of its inception until it was sold in 1988, Talbots' headquarters were located in Massachusetts.  Over the years, Talbots expanded its presence in Massachusetts and in 1988 built a state-of-the-art facility in Lakeville, Massachusetts, which housed its warehousing and distribution operations.  All telephone sales operations were conducted at the Hingham headquarters. 
In support of its position that the proceeds from the sale of the intangibles were not attributable to Massachusetts for purposes of determining Talbots' apportionment factor, General Mills offered the testimony of Robert Reilly, an appraiser and economist. Mr. Reilly suggested that the sale activities surrounding the sale of the intangibles were an appropriate measure of income-producing activities.  He further suggested that since General Mills' employees who were located in Minneapolis and Washington, D.C., not Massachusetts, performed the negotiations for and consummation of the sale of the intangibles, the proceeds from the sale of the intangibles could not be attributable to Massachusetts.  The Board, however, found that Mr. Reilly's testimony focused primarily on the methods used in "valuing" intangibles, not an issue in the present appeal.
As an alternative, General Mills argued that the receipts from the sale of the intangibles should be sourced by where the activities that created value in the trademarks were performed, looking to the development costs of the trademarks.  In support of this position, General Mills offered the testimony of Ms. Carol Stone, director of accounting for Talbots.  
Ms. Stone noted that, throughout the years, Talbots relied heavily on its catalogs in promoting its name recognition and merchandise.  Ms. Stone then explained the catalog production process in great detail.  Initially, the catalog development department would meet to discuss what "message" was to be conveyed to the customer and how that was to be accomplished.  As part of the process, Talbots' employees would meet with the merchants to decide which items were to have a larger presentation in the catalog.  
From there, the development team would determine what location was to be used for the catalog pictures.  Although the "shoot" locations were generally outside of the Commonwealth, Talbots' employees were responsible for hiring all personnel involved in the process.  After the pictures were taken, the film was sent back to the Hingham facility where the catalog development group would review it together with the merchants and prepare the catalog for print.  Although Talbots used printers in several states, Ms. Stone testified based on her review of business records that a majority of the printing occurred in Virginia.  
While she noted that many of the physical aspects of producing the catalog, including photography, printing and compilation, occurred outside of the Commonwealth, Ms. Stone conceded that at each step of the process, it was the Talbots' management and employees located in Massachusetts that were responsible for the decision making in preparing and finalizing the catalog.
Based on the foregoing, the Board found that regardless of where the catalog printers were located or where the legal work associated with the sale of the intangibles occurred, a greater portion of the intangibles' income-producing activity was performed in the Commonwealth than in any other state, based on cost of performance.  See Surel v. Commissioner of Revenue, 24 Mass. App. Tax Bd. Rep. 38 (1998).  The Board found that the individuals responsible for making the decisions relative to the production of the catalogs and the overall management of Talbots were located in Massachusetts.  All materials were submitted to Talbots' management for authorization.  Accordingly, the Board found that the Commissioner properly included in the numerator of Talbots' "sales factor" the receipts from the sale of the intangibles.
 
Summary
Based on the evidence presented and to the extent it is a finding of fact, the Board found that the Commissioner's assessment of the full amount of $10,865,588 in additional taxes was procedurally valid.  Regarding the amount of the assessment, however, the Board found that neither Eddie Bauer nor Talbots were part of appellant's unitary business.  They were simply investments of General Mills.  Therefore, the proceeds received by appellant from the sale of its stock interests were not properly includible in General Mills' Massachusetts gross income.  
For the reasons explained in the following Opinion, however, the Board found that the gain recognized on the     § 338 deemed sale of Talbots' assets was properly included in Talbots' Massachusetts net income and correspondingly General Mills' Massachusetts combined corporate excise return.  The Board further found that for purposes of G.L. c. 63, § 38, determining Talbots' "sales factor" used to calculate Massachusetts taxable income, no portion of the gross proceeds or the gain recognized from the sale of the Talbots stock was includible in either the numerator or the denominator.
The Board further found that the creation of TalHC, the contribution to TalHC and the leaseback by Talbots, of the Talbots intangibles, did not have any practical economic effect other than the creation of tax benefits.  Accordingly, the Board found that the Commissioner properly disregarded the form of the transaction and treated it as a sale of Talbots' intangibles by Talbots and, therefore, properly included the proceeds in the numerator of Talbots' "sales factor." 
Lastly, despite the fact that the printing expenses attributable to the catalogs and the legal expenses for the sale of the intangibles were generated out of state, the Board found that a greater portion of the income-producing activities were performed in the Commonwealth than in any other state.  Consequently, pursuant to G.L. c. 63, § 38(f), the Commissioner properly included in the numerator of Talbots' "sales factor," the gain recognized on the sale of the intangibles. 
	Accordingly, based on the parties' computations, pursuant to an Order under Rule 33 of the Rules of Practice and Procedure of the Appellate Tax Board, the Board issued a decision for General Mills in the amount of $634,077, based on the Board's finding that Eddie Bauer was not part of General Mills' unitary business and, therefore, the proceeds from the sale of stock were not properly includible in General Mills' Massachusetts taxable income.

OPINION
The five issues raised by General Mills' appeal are:  (1) whether the Commissioner's assessment was procedurally correct; (2) whether General Mills' gain, recognized from the sale of its Eddie Bauer and Talbots' stock, is includible in General Mills' taxable income subject to apportionment as part of General Mills' unitary business; (3) whether the § 338(h)(10) election, which was treated as a sale of Talbots' assets, allowed the recognized gain to be included in Talbots' Massachusetts taxable income; (4) whether the gain recognized on the sale of Talbots' trademarks was properly includible in Talbots' taxable income; and,  if so, (5) whether the gain recognized on the sale of the trademarks was includible in the numerator of Talbots' "sales factor," for purposes of apportioning its income to Massachusetts. 
Assessment
In its appeal to the Board, General Mills argued that the Commissioner failed to correctly assess $10,000,000 of the adjustments made after audit because two NOAs, dated March 6, 1992 and August 8, 1992, showed an assessment of only $865,588 in tax.  In contrast, the January 7, 1992 NIA and the February 7, 1992 Instruction to Bill showed an assessment of $10,865,588 in tax.  The Board found that the full tax at issue, $10,865,588, was validly assessed prior to the issuance of the March 6, 1992 and August 8, 1992 NOAs.  
G.L. c. 62C, § 26(b) authorizes the Commissioner to assess additional taxes within three years from the date the tax return was filed, or required to be filed, whichever occurs later.  The Commissioner must first give notice of his intention to the person to be assessed, and "after the expiration of thirty days from the date of such notification, the commissioner shall assess the amount of tax remaining."  G.L. c. 62C, § 26(b).  After making an assessment, "the commissioner shall, as soon as may be, give written notice to the taxpayer of the amount of the assessment, [and] the amount of any balance due."  G.L. c. 62C, § 31.    
The act of assessment and the act of notifying taxpayers of the assessment are two separate and distinct acts. See EMC, Corporation v. Commissioner of Revenue, 433 Mass. 568, 569 (2001).  "The assessment is the act by which the Commissioner determines or verifies and records the amount of tax due."  Menard v. Commissioner of Revenue, 12 Mass. App. Tax Bd. Rep. 174, 179 (1990).  Absent evidence proving otherwise, the date on the notice of assessment is the actual assessment date.  See Ricciardi v. Commissioner of Revenue, 9 Mass. App. Tax Bd. Rep. (1987); Wolf v. Commissioner of Revenue, 2 Mass. App. Tax Bd. Rep. 164 (1983).  Such is not the case, however, where there is reliable evidence indicating an earlier assessment date.  Tambrands, Inc. v. Commissioner of Revenue, 19 Mass. App. Tax Bd. Rep. 135 (1996), aff'd 46 Mass. App. Ct. 522 (1999); Jewel Companies v. Commissioner of Revenue, 12 Mass. App. Tax Bd. Rep. 101, 110 (1990).
The Commissioner's regulations provide that an "assessment" is the "determination or verification of the amount of the tax" and that an "instruction to bill" is a "signed and dated statement that a deficiency assessment has been made."  830 CMR 62C.26.1(2).  The regulations further provide that a deficiency assessment occurs "on the date the Commissioner enters the amount of the assessment upon the instruction to bill."  830 CMR 62C.26.1(6)(f).  
	On January 7, 1992, the Commissioner issued a NIA notifying General Mills' of his intent to assess additional taxes for fiscal year 1989 in the amount of $10,865,588, plus interest.  More than thirty days later, on February 7, 1992, the Commissioner generated an Instruction to Bill showing that the Commissioner had in fact assessed, for fiscal year 1989, additional taxes in the amount of $10,865,588, plus interest.  The Instruction to Bill showed a zero balance due, reflecting the fact that General Mills had already made full payment of the amount shown on the NIA.  Subsequently, on March 6, 1992 and August 8,1992, the Commissioner issued NOAs showing an erroneous amount of tax assessment in the amount of $865,588, due to a "truncation" error which only printed the assessment amount through the first six figures, in contrast to the $10,865,588 assessed on February 7, 1992.  Similarly, in reflecting General Mills' payment, the NOA eliminated figures in the tens of millions column.
	On September 24, 1994, after the Commissioner's denial of General Mills' abatement application, General Mills timely filed its appeal with the Board.  In its appeal, for the first time, General Mills claimed that the Commissioner incorrectly assessed additional taxes in the amount of $10,000,000, the discrepancy between the 1992 NIA and Instruction to Bill, and the subsequent NOAs.  Attached to its Answers filed with the Board, the Commissioner issued a revised NOA for the full assessment of $10,865,588. 
Based on the evidence, the Board found that the Commissioner made an assessment in the full amount of $10,865,588, on February 7, 1992, more than thirty days after issuing the NIA.  By letter dated February 5, 1992, General Mills submitted payment in the amount of $15,809, 545, for "the additional tax and interest assessed due to a Massachusetts field audit."  Consequently, the Board found that General Mills was notified of the Commissioner's full assessment of $10,865,588.  Moreover, the Board found that General Mills was in no way prejudiced by the truncated subsequent notice of assessment.  See Tambrands, 46 Mass. App. Ct. at 527 (under a "fluid" time limitation such as whether a notice of assessment was given "as soon as may be," attendant circumstances such as prejudice to a taxpayer "need to be considered.")  General Mills had already paid the full amount of the February 7, 1992 assessment and, on its September 24, 1992, application for abatement, requested a refund of the full amount of $10,865,588.  Accordingly, General Mills was fully aware of the amount of the deficiency assessment.  For all of the foregoing reasons, the Board ruled that the subject assessment was procedurally valid.


II.  Taxation of Gain Recognized from the Sale of the Eddie 
Bauer and Talbots stock

Every domestic and foreign corporation engaged in business in the Commonwealth is required to pay an excise based in part on its net income derived from business activities carried on in Massachusetts.  G.L. c. 63, § 39.  Computation of a corporation's Massachusetts net income generally starts with its federal gross income as defined under the Code, as in effect for the taxable year, with some exceptions not relevant to this appeal.  G.L. c. 63,  § 30. 
The entire amount of a corporation's net income is subject to the Massachusetts corporate excise if the corporation has no income from business activity which is taxable in another state.  G.L. c. 63, § 38(b).  If, however, the corporation has income from business activity taxable both in Massachusetts and elsewhere, as in the present appeal, its taxable net income is apportioned to Massachusetts by means of a three-factor formula based on the ratio of its Massachusetts property, payroll and sales to its property, payroll and sales everywhere.  G.L. c. 63, § 38(c)-(f).  
It is uncontested that General Mills and its subsidiaries Eddie Bauer and Talbots were engaged in business in the Commonwealth and generated income.  In fact, Talbots was a domestic corporation with its headquarters located in Hingham, Massachusetts.  The income from the entities' in-state activities was properly reported on the 1988 combined corporate excise return, and the tax shown due thereon was paid.  The Commissioner maintains, however, that General Mills should have included in its net income the gain realized on the sale of its interests in Eddie Bauer and Talbots.  For the following reasons, the Board disagrees.
"It has long been settled that 'the entire net income of a corporation, generated by interstate as well as intrastate activities, may be fairly apportioned among the States for tax purposes by formulas utilizing in-state aspects of interstate affairs.'"  Exxon Corp. v. Wisconsin Department of Revenue, 447 U.S. 207, 219 (1980) quoting Northwestern States Portland Cement Co. v. Minnesota, 385 U.S. 450, 460 (1959).  However, both the Commerce Clause and the Due Process Clause, of the United States Constitution, require that there be some minimal connection or "nexus" between the corporation's interstate activities and the taxing state.  Exxon, 447 U.S. at 220.  States may not tax income arising out of interstate activities unless there is a "rational relationship between the income attributed to the State and the intrastate values of the enterprise."  Container Corporation of America v. Franchise Tax Board, 463 U.S. 159, 165-166 (1983).
The requisite connection for taxation is believed to exist when the foreign corporation is a member of a unitary business enterprise and the income is derived from the unitary business.  See generally Allied-Signal, Inc. v. Division of Taxation, 504 U.S. 768 (1992).  The unitary business principle is the "linchpin of apportionability" for state income taxation of an interstate enterprise.  See Mobil Oil Corp. v. Comm'r of Taxes of Vt., 445 U.S. 425, 439 (1980).  
If a company is a unitary business, then a State may apply an apportionment formula to the taxpayer's total income . . . . In order to exclude certain income from the apportionment formula, the company must prove that 'the income was earned in the course of activities unrelated to the [taxpayer's activities] in that State.' (Emphasis added.)

Exxon, 447 U.S. at 223 quoting Mobil Oil Corp. 445 U.S. 425, 439.
In the present appeal, the Commissioner argued that both Eddie Bauer and Talbots were part of General Mills' unitary business and, therefore, the recognized gain from the sale of the stock was includible in General Mills' taxable income.  However, General Mills maintained, and the Board found, that neither Eddie Bauer nor Talbots were part of General Mills' unitary business. 
In Container Corp. of America v. Franchise Tax Board, 463 U.S. 159 (1983), the Supreme Court noted that "the unitary business concept is [] not, so to speak, unitary: there are variations on the theme, and any number of them are consistent with the underlying principles motivating the approach."  Id. at 168.  Generally, the indicia of a unitary business are functional integration, centralization of management and economies of scale.  Id. at 179.  
The Supreme Court has held that a state may "properly treat [a taxpayer's] business as a unitary one" in the presence of "unity of ownership and management" and centralized purchasing. Butler Brothers v. McColgan, 315 U.S. 501, 508 (1942)(emphasis added).  Accordingly, in determining whether a subsidiary is engaged in a unitary business with its parent, among the considerations deemed "noteworthy," is the "managerial role played by the [parent] in its subsidiaries' affairs."  Jacob Licht v. Commissioner of Revenue, 1999 ATB Adv. Sh. 12, 24 quoting Container Corp. of America, 463 U.S. at 180, n. 19. 
In the present appeal, the Commissioner argued that through the overlap of officers and directors and the services of the Specialty Retail Group, there was a centralized management for General Mills and its subsidiaries which supported a conclusion that the subsidiaries were part of General Mills' unitary business.  The Board, however, found that the relationship between General Mills and its subsidiaries did not satisfy the requirements for a unitary business and was more closely analogous to the ones in ASARCO, Inc. v. Idaho State Comm., 458 U.S. 307 (1982) and Woolworth Co. v. Taxation & Revenue Department, 458 U.S. 354 (1982).
In ASARCO, the Supreme Court found that the taxpayer and its subsidiaries were not part of a unitary business.  In that case, Idaho sought to tax dividend income and capital gains, received by the parent from five of its subsidiaries that did no business in that state.  
Based on the evidence, the Court determined that ASARCO's subsidiaries operated independently.  In its decision, the Court emphasized that the actual exercise of control versus the legal right to control is the appropriate test for determining whether or not a unitary business exists.  Applying this standard, the Court found the controlled subsidiaries to be "merely an investment" of the parent.  Id. at 323.
Similarly, in Woolworth, the Supreme Court found a non-unitary business despite the fact that there existed "some managerial links."  Id., at 368.  In that case, New Mexico sought to tax dividends received by Woolworth from four foreign subsidiaries, three wholly-owned and a fourth in which Woolworth owned a majority interest, none of whom did any business in the state.  Through its stock ownership, Woolworth had the ability to elect all of the subsidiaries' directors.  The Court ruled, however, that "the potential to operate a company as part of the unitary business is not dispositive when, looking at 'the underlying economic realties of the unitary business,' the dividend income from the subsidiaries in fact is [derived] from unrelated business activity which constitutes 'a discrete business enterprise.'"  Id. at 363.
The Court held that the proper inquiry looks to 'the underlying unity or diversity of business enterprise,' not to whether the non-domiciliary parent derives "some economic benefit -- as it virtually always will -- from its ownership of stock in another corporation."  Id. at 363-64.  The Court found that decisions about merchandise, inventory, store site selection, advertising and accounting control were made by the subsidiaries "autonomously and independently."  Id. at 364-365.
	In its decision, the Court found that although there existed some managerial links, as evidenced by "irregular in-person and 'frequent' mail, telephone and teletype communication between the upper echelons of management of the parent and the subsidiaries," the fact that "major financial decisions such as the . . . creation of substantial debt had to be approved by the parent," and the fact that Woolworth's "published financial statement such as its annual report, were prepared on a consolidated basis," they were not controlling.  Id. at 368-369.
The Court further noted, that Woolworth "did not provide 'many essential corporate services' for the subsidiaries." Id. at 369.  The Court determined that Woolworth's operations were not "interrelated with those of its subsidiaries so that one's 'stable' operation is important to the other's 'full utilization of capacity.'"  Id.  Consequently, the Court concluded that Woolworth's activities were more in the line of "occasional oversight  -- with respect to capital structure, major debt, and dividends -- that any parent gives to an investment in a subsidiary" and not part of a unitary business.  Id.
Applying the Supreme Court's analysis in Woolworth and ASARCO, the Board in W.R. Grace & Co. v. Commissioner of Revenue, 1999 ATB Adv. Sh. 622 (November 19, 1999) found that unity of ownership did not necessarily result in the "coordination or integration of the disputed businesses."  Grace, 1999 ATB Adv. Sh. at 634.  The Board found, as in the present appeal, that the subsidiaries were run by their respective management teams.  Each did its own advertising; its own purchasing; located and operated their own store sites; and received and distributed their own merchandise.  There was no joint personnel training program; no joint use of trademarks; and no shared use of office space or other facilities.  Id. at 645.
Based on these facts, the Board found that there was "no functional integration, no centralized management and no economies of scale" derived by Grace and its subsidiaries.  Id. at 634 - 635.  As in the present appeal, although the parent in W.R. Grace provided certain financial, administrative, legal and staff functions and services to the subsidiaries, at no cost, the Board found these services to be "more in the nature of a stewardship [] function overseeing investments and one which any parent would give to an investment in a subsidiary."  Id. at 635.  
In the present appeal, the Board found that Eddie Bauer and Talbots were run by their own independent management teams.  Each was responsible for purchasing its owns materials and supplies.  There was no shared use of offices, warehouses, or other facilities, no joint training programs for employees, and no joint use of trademarks or tradenames.
	Although both Eddie Bauer and Talbots belonged to General Mills' Specialty Retailing Group, they received minimal benefits from this organization.  In addition, each was required to make payment to General Mills for membership in this group.  Also, although General Mills and its subsidiaries shared officers and/or directors, the Board found that these individuals had no involvement in the day-to-day operations of the subsidiaries.
The taxpayer is required to demonstrate by clear and cogent evidence that there is no rational relationship between the income attributed to the state and the intrastate values of the enterprise.  Container Corp., 463 U.S. at 180.  In the present appeal, the Board found that there was no significant functional integration, centralized management or economies of scale realized by the appellant and its subsidiaries.  Instead, as in Woolworth, ASARCO and Grace, the Board found in the present appeal that the services and supervision provided by General Mills were more akin to those involved in a parent company's oversight of its investment in a subsidiary.  The Board concluded that Eddie Bauer and Talbots were not part of General Mills' unitary business and that they had no rational relationship to General Mills' Massachusetts business.  Therefore, the Board ruled that taxing General Mills' gain realized from the sale of stock in these entities would result in the taxation of extraterritorial values. 	

III. § 338(h)(10) Election
On its 1988 Massachusetts combined return, General Mills included in Talbots' income column the gain recognized on the § 338 deemed sale of Talbots' assets.  General Mills now argues, however, that this gain cannot properly be taxed by Massachusetts since Talbots was not part of its unitary business.  For the following reasons, the Board found that the gain was properly included in Talbots' Massachusetts net income subject to apportionment. 
If two or more domestic or foreign corporations participate in the filing of a federal consolidated return, they may elect to compute their Massachusetts corporate excise based on their combined "net income."  G.L. c. 63, § 32B.  The corporations' combined net income is ascertained by first separately determining the taxable net income of each corporation apportioned to this Commonwealth and then adding together each corporation's separately determined net income.  G.L. c. 63, § 32B.   
"Net income" is arrived at by taking certain deductions from "gross income," which is "gross income as defined under the provisions of the Federal Internal Revenue Code, as amended and in effect for the taxable year."  G.L. c. 63, § 30.  In the present appeal, for federal tax purposes, General Mills and Jusco elected the treatment available under § 338 of the Code.  
Section 338 provides, in pertinent part:
If a purchasing corporation makes an election under this section . . . then, in the case of any qualified stock purchase, the  target corporation 


Shall be treated as having sold all of its assets at the close of the acquisition date at fair market value in a single transaction, and

Shall be treated as a new corporation which purchased all of the assets . . . at the beginning of the day after the acquisition date.  (Emphasis added.)

Code § 338(a).

	The result of the election is twofold.  First, the target corporation, in this case Talbots, recognizes a gain based on the difference between the basis of its assets and the assets' fair market value. Code §§ 1001 and 1245.  This gain is then included in the target corporation's federal gross income.  Also, the target corporation gets a stepped-up basis in the assets.  Code § 338(b).  Second, if the target corporation and the corporation selling the stock are part of a consolidated group and the target corporation has recognized the gain, then the selling corporation does not recognize gain on the sale of stock in the target corporation when the stock is sold.  Code § 338(h)(10)(A).
In the present appeal, General Mills sold its Talbots stock to Jusco and Jusco made a § 338 election.  As a result, Talbots was treated as if it had sold its assets for fair market value.  The recognized gain was then included in Talbots' federal gross income and, correspondingly, its Massachusetts net income.  G.L. c. 63, § 30.
Accordingly, the Board found that Talbots properly included in its income column of the combined return the gain recognized on the deemed sale of its assets, See Combustion Engineering, Inc. v. Commissioner of Revenue, 2000 ATB Adv. Sh. 207, 212 (March 29, 2000.)
After determining a corporation's net income, the next step is to determine the Massachusetts tax due pursuant to G.L. c. 63, § 38.  Where a corporation, such as Talbots, derives income from business activity taxable both in Massachusetts and elsewhere, its taxable net income is apportioned to Massachusetts by means of a three-factor formula based on the ratio of its Massachusetts property, payroll and sales to its property, payroll and sales everywhere.  G.L. c. 63, § 38(c)-(f).
For purposes of determining a corporation's sales factor, the statute defines the term "sales" as the "gross receipts of the corporation except . . . gross receipts from the . . . disposition of securities."(emphasis added).  G.L. c. 63, 38(f).  In Combustion Engineering, infra, the Board ruled that gain recognized in a § 338(h)(10) election, albeit treated federally as a sale of assets by the target corporation, is not a "sale" for purposes of the apportionment formula because it is in fact a sale of stock.  Combustion Engineering, 2000 ATB adv. Sh. at 214.  In its decision, the Board ruled, 
the federal treatment of the sale -- based on a fictitious recasting of the actual transaction for purposes of federal tax law -- does not determine whether the proceeds of the transaction should be treated as 'sales' for purposes of the Massachusetts apportionment formula.  Whatever the transaction may be 'deemed' to be for federal purposes, it is, in actuality, a sale of stock, the proceeds from which are specifically excluded from the sales factor.

Combustion Engineering, 2000 ATB Adv. Sh. at 216.
	Accordingly, the Board ruled in the present appeal that no portion of the recognized gain was includible in either the numerator or denominator in calculating Talbots' "sales factor." 

The Sale of Talbots' Intangibles
	The Commissioner also included in the subject assessment additional taxes resulting from the gain recognized on the sale of Talbots' intangibles.  The Commissioner determined that, although the sale was structured so that TalHC was the seller of the intangibles, in substance it was a sale by Talbots.  Consequently, the Commissioner determined that the gain recognized by Talbots was properly includible in Talbots' Massachusetts net income.
	The United States Supreme Court has recognized that tax reduction is a legitimate goal of business. Commissioner of Internal Revenue v. Court Holding Co., 324 U.S. 331, 334 (1945).  A taxpayer is entitled to arrange a business transaction so as to minimize the tax due so long as the transaction has a valid business purpose.  Gregory v. Helvering, 293 U.S. 465 (1935).
In evaluating transactions, the Courts invoke a variety of doctrines such as:
lack of business purpose, substance over form, sham-arrangement, economic reality and step transaction to disregard the form of a transaction where the facts show that the form of the transaction is artificial and is entered into for the sole purpose of tax avoidance and there is no independent purpose for the transaction.

(Emphasis added.)  Sherwin-Williams Co v. Commissioner of Revenue, 2000 ATB Adv. Sh. 468, 495 (July 19, 2000) quoting Falcone v. Commissioner of Revenue, 20 Mass. App. Tax Bd. Rep. 61, 64-65 (1996); See also Syms Corp. v. Commissioner of Revenue, 2000 ATB Adv. Sh. 711, 751 (September 14, 2000).    
Where the evidence shows that the transaction lacks economic substance, the transaction must be disallowed.  Sherwin-Williams, 2000 ATB Adv. Sh. at 496.  Whether a transaction lacks economic substance depends upon whether there exists a valid business purpose beyond the creation of tax benefits.  See Gregory v. Helvering, 293 U.S. 465 (1935); Court Holding, 324 U.S. 331.  "Substance and not form is to be regarded in the application of the tax laws."  Anderson v. Commissioner of Corporations & Taxation, 312 Mass. 40, 44 (1942).
Recently, in Sherwin-Williams and Syms, the Board upheld the Commissioner's denial of a deduction for royalty payments by a parent corporation to its wholly-owned subsidiary based on the "sham transaction" and "substance-over-form" analyses.  In each case the taxpayer created one or more wholly-owned subsidiaries to which it transferred its trademarks.  The subsidiary leased the trademarks back to the taxpayer parent corporation which, pursuant to a licensing agreement, made royalty payments to the subsidiary. See generally, Sherwin-Williams, 2000 ATB Adv. Sh. 468; Syms, 2000 ATB Adv. Sh. 711.  The Board found that the taxpayers failed to prove that the transfer and license-back transactions served any business purpose beyond mere tax advantages.  Sherwin-Williams, 2000 ATB Adv. Sh. at 497; Syms, 2000 ATB Adv. Sh. at 753.
The Board found that the non-tax business purposes put forth by Sherwin-Williams either (1) could not be achieved, (2) had already been achieved, or (3) would expose Sherwin-Williams to serious economic risk.  Id. at 498.  Instead, the Board found that the subject transactions were "no more than 'a pure paper shuffle, having no potential consequences for the business in which the corporations engaged.'" Sherwin-Williams, 2000 ATB Adv. Sh. at 498, quoting Yosha v. Commissioner of Internal Revenue, 861 F.2d 494, 497 (7th Cir. 1988).  The Board concluded that the transfer and license-back transactions "lacked business purpose and economic substance beyond the creation of tax deductions."  Sherwin-Williams. 2000 ATB Adv. Sh. at 496; Syms, 2000 ATB at 751.
	The Court has ruled that a series of interrelated transactions may, for tax purposes, be treated as a single integrated event if each step lacks independent economic significance.  Commissioner of Revenue v. Dupee, 423 Mass. 614, 624 (1996).  Using the "step-transaction" theory in Falcone, the Board ruled that the Commissioner properly included in the taxpayer's income proceeds received from the sale of Massachusetts property.  20 Mass. App Tax Bd. Rep. at 63.   
In Falcone, the taxpayer, a non-resident, formed a corporation to which he transferred several properties located in Massachusetts, in exchange for all the stock of the corporation.  Falcone, 20 Mass. App. Tax Bd. Rep. at 62.  Less than two months later, the taxpayer sold the stock of the corporation to the Falcone Family Trust and on the same day liquidated the corporation.  Id.  There was no evidence that the corporation ever conducted any other business.  Id.  
The taxpayer argued that the gain resulted from the sale of stock, not from the sale of real property, and therefore was not subject to the Massachusetts personal income tax.  The Board disagreed.  Notwithstanding that tax reduction is a legitimate goal of business, "[s]ubstance and not form is to be regarded in the application of the tax laws."  Falcone, 20 Mass. App. Tax Bd. Rep. at 63 quoting Anderson v. Commissioner of Corporations & Taxation, 312 Mass. at 44.  
The Board in Falcone noted that if a series of steps do not have independent economic significance, they must be treated as a single step for tax purposes.  Id. at 63.  The Board found that none of the intermediary steps by which the taxpayer transferred the property had economic significance.  The Board concluded that the taxpayer attempted to use the new corporation for the "sole purpose of reducing his taxes.  Its creation and existence served only the function of transferring title to the [p]roperties from [the taxpayer] to the Family Trust in order to escape taxation."  Id. at 65. The Board found that the taxpayer's goal was to sell the properties at a gain and he did so through a circuitous path, all in a period encompassing roughly two months.  Id.  
Similarly, in the present appeal, General Mills' goal was to sell the Talbots' intangibles without incurring additional taxes.  To accomplish this task, TalHC was formed and acted as the intermediary.  TalHC was formed, the intangibles were transferred to it and the sale of the intangibles all occurred within a few weeks period of time.  Consequently, the Board found that, based on the step-transaction doctrine, for tax purposes the transaction should be treated as a sale of Talbots' intangibles by Talbots. 
In the present appeal, the Board found that the creation of TalHC, the transfer of Talbots' intangibles and the subsequent sale by TalHC, lacked economic substance.  In support of its contention that the form of the transaction be given full credence, General Mills argued that the transaction was in furtherance of its overall business purpose to sell the Talbots stock.  General Mills also maintained that it was Jusco, not General Mills, who developed the final plan and that it had nothing to do with the formation of the plan and that, pursuant to the purchase and sale agreement, General Mills was required to accommodate Jusco and carry out the transaction.  
The Board found that TalHC had no office, no employees and no assets other than the Talbots intangibles and $10.00 in a bank account.  There was no evidence presented of any other business activities carried on by TalHC.  Although a licensing agreement was entered into, Talbots did not make royalty payments to TalHC for the continued use of the intangibles.  Lastly, the evidence presented showed that from the beginning, it was intended that TalHC be liquidated after completion of the sale transaction.  
Consequently, regardless of the theory of analysis, the determinitive question is whether the transaction had economic significance beyond the mere creation of tax benefits.  In the present appeal, the Board found that the sole purpose of creating TalHC was to relocate the Talbots intangibles to a Delaware subsidiary, have the sale completed, and thereby escape Massachusetts state tax on the gain.  As in Sherwin-Williams and Syms, the Board in the present appeal found the transfer to be no more than a "'paper shuffle.'"  Sherwin-Williams, 2000 ATB Adv. Sh. at 498 [citation omitted]; Syms, 2000 ATB Adv. Sh. at 753 [citation omitted].  
The transaction as completed lacked economic substance beyond the mere creation of tax benefits.  Notwithstanding the form of the transaction, its substance was the direct sale of the intangibles by Talbots.    

Inclusion of Proceeds From the Sale of Intangibles in Talbots' "sales factor"

Having determined that the sale of the Talbots intangibles was in fact a sale by Talbots, and includible in Talbots' Massachusetts net income, the Commissioner also assessed additional taxes based on the re-computing of Talbots' "sales factor" for purposes of apportioning its net income to Massachusetts.  Specifically, the Commissioner included in the numerator of Talbots' "sales factor" the proceeds received from the sale of the trademarks, tradenames and other intangibles.
	In determining a corporation's sales factor, sales of intangible property are deemed to be Massachusetts sales if:
the income-producing activity is performed in this commonwealth; or

the income-producing activity is performed both in and outside this commonwealth and a greater proportion of this income-producing activity is  performed in this commonwealth than in any other state, based on costs of performance.


G.L. c. 63, § 38(f) (emphasis added).  Surel, 24 Mass. App. Tax Bd. Rep. At 42.  
General Mills suggested that the income-producing activity of Talbots' intangibles be allocated based on one of two methods.  First, General Mills argued that the income-producing activity be attributed solely to the state where the sale and the activities leading up to the sale occurred -- Minnesota or New York.    
In the alternative, General Mills suggested that the income-producing activity be allocated based on the intangibles' "development costs," which are their creation and commercialization costs.  General Mills focused on (1) where the trademarks were registered, and (2) where the advertising costs were incurred.  Noting that Talbots relied primarily on its catalog for advertising, General Mills relied on where the costs of producing the catalogs occurred. 
Similarly, the Board looked to the intangibles' development costs.  Aware that the catalogs were an important factor in generating value for Talbots' intangibles, the Board, nevertheless, found that in determining where the intangibles' income-producing activity occurred, the proper analysis was not to focus solely on the catalogs' printing costs.  Instead, the Board found that the proper analysis was to look to the overall business activities of Talbots in promoting its name recognition, awareness and customer satisfaction, all of which imparted value to the intangibles.  
The Board recently addressed the issue of an "income-producing activity" in its decision Interface Group-Nevada v. Commissioner of Revenue, 2000 ATB Adv. Sh. 324 (May 25, 2000).  Ihe taxpayer, Interface Group, was comprised of three divisions, one of which was the Travel Unit.  The Travel Unit organized and operated group travel tours in the form of package vacation tours, which included hotel accommodations, air fare and ground transfers.  Id. at 325. 
The taxpayer sought to exclude from "the numerator of its "sales factor" revenues generated by its Travel Unit on the ground that the income-producing activity was generated more in other states than in Massachusetts.  The Board found that it was the Product Development Department, located in Needham, Massachusetts, that developed the vacation packages and which did the contracting with the hotels and airlines.  Id. at 330-1.  The Board also found that the Massachusetts employees were responsible for developing and distributing brochures to the independent travel agents.  Id.  at 331.  
The final products, the travel packages, were sold by independent travel agents not by the taxpayers' employees.  Id.  It was this last point upon which the taxpayer argued in Interface that the receipts were not "Massachusetts sales."  The Board, however, found that the taxpayer "carried on significant income-producing activity in the Commonwealth."  Id. at 333.  Although the Travel Unit's employees did not directly sell the travel packages, "many of the activities necessary to package a vacation tour were performed in [the Commonwealth]."  Id. at 357.  The Board found that the taxpayer's activities in Massachusetts were "necessary steps in creating the ultimate vacation tour product" and, therefore, were the relevant income-producing activities.  Id. at 359.  It is the costs associated with these activities that were determinative.  Id. at 360.  
In the present appeal, although the Massachusetts employees did not physically produce the catalogs, they were the individuals responsible for their creation, development and distribution.  These employees were also responsible for contracting with the printers and all others involved in the catalog.  Furthermore, the Board found that production of the catalogs was not the sole item that generated value for the intangibles.  Instead, the Board found that it was the business operations and management which increased the intangibles' value.  Talbots' headquarters, and consequently, the individuals with all aspects of decision-making authority, were always located in Massachusetts.  All billing and customer relations were performed by Massachusetts employees.  Orders for goods were sent to and filled from Talbots' distribution centers located in Massachusetts.  
Accordingly, the Board found that many of the necessary activities in creating the Talbots' catalogs and expanding Talbots' name recognition were performed in the Commonwealth.  Therefore, the Board found and ruled that the income-producing activities which gave rise to the intangibles' value through name recognition and customer appreciation were conducted more in the Commonwealth than in any other state.  Therefore, the Board found that the proceeds generated from the sale of the intangibles were properly includible in the numerator of Talbots' sales factor. See generally Clipper Express Company v. Commissioner of Revenue, 7 Mass. App. Tax Bd. Rep. 175 (1986)(although taxpayer performed physical activities, associated with its freight transportation business, in the Commonwealth, the location of taxpayer's administrative headquarters was more controlling.)

Conclusion
	In conclusion, the Board found and ruled that neither Eddie Bauer nor Talbots were part of General Mills' unitary business.  Therefore, the proceeds generated from appellant's sale of its Eddie Bauer stock were not subject to the Massachusetts corporate excise.  With respect to the sale of the Talbots stock, however, appellant's § 338 election, which treated the transaction as a "deemed sale" of assets by Talbots, resulted in recognized gain for Talbots that was properly includible in Talbots' Massachusetts gross income, and consequently, Talbots' net income.  
	The Board further found that the sale of the Talbots' intangibles lacked economic significance and served no valid business purpose.  Therefore, the Board found that the sale transaction was properly reclassified as a sale by Talbots, the proceeds of which were includible in Talbots' Massachusetts net income.  Lastly, the Board found that the intangibles' "income-producing activity" occurred more in the Commonwealth than in any other state and, therefore, the income generated from their sale was correctly included in the numerator of Talbots' "sales factor."








Accordingly, the Board issued a decision for General Mills and granted an abatement with respect to the tax on the sale of the Eddie Bauer stock, pursuant to a Rule 33 Order, in the amount of $634,077.


					   APPELLATE TAX BOARD

					By:		_______			
					   Abigail A. Burns, Chairman




A true copy,


Attest:					
    Clerk of the Board
	

 General Mills filed the combined return with its subsidiaries Eddie Bauer, York Steak House, General Mills Restaurants, General Mills Finance and Talbots, for the period ending May 31, 1989.    
 Although appellant included, in Talbots' income column, the gain recognized on the deemed sale of Talbots' assets, the appellant now argues that no portion of the gain should have been included in either Talbots' or General Mills' Massachusetts taxable income.
 Mr. Whitehill noted that on occasion an incidental number of items may have been sold by Eddie Bauer to General Mills to be used by General Mills for promotional purposes.
 The royalties paid to Jusco B.V. for the first year the agreement was in place, July 1, 1988 through June 31, 1989, totaled nearly $8.7 million, averaging out to approximately $23,800 per day.  Therefore, TalHC's foregone revenue for the period June 21 through June 26, by not charging Talbots royalties for the five day use of the trademarks, amounted to more than $119,000.

1


ATB 2001 - 530