Opinion
No. 11–P–2108.
2013-04-30
SYSCO CORPORATION v. COMMISSIONER OF REVENUE.
By the Court (MEADE, SIKORA & HANLON, JJ.).
MEMORANDUM AND ORDER PURSUANT TO RULE 1:28
Sysco Corporation (Sysco) appeals from a decision of the Appellate Tax Board (board), holding that certain transfers of funds between Sysco and its wholly-owned subsidiaries did not constitute true indebtedness. Sysco maintains that the transfers, made pursuant to its cash management system, were loans, and that the interest thereon was therefore properly deducted from income for purposes of Sysco's corporate excise tax for fiscal years ending June 30, 1996, through June 30, 2001. In this appeal, Sysco argues that the board erred in applying the law and in failing to accord proper credit and weight to evidence of Sysco's intent to repay. We agree with the board that Sysco failed to sustain its burden of proving that the transfers were loans. See New York Times Sales, Inc. v. Commissioner of Rev., 40 Mass.App.Ct. 749 (1996) ( New York Times Sales ).
For the facts and procedural background, we refer to the board's October 20, 2011, detailed findings of fact and report. 1. Standard of review. As an initial matter, we reject Sysco's assertion that our standard of review is de novo. “A decision of the board will not be reversed or modified if it is based on substantial evidence and on a correct application of the law.” Koch v. Commissioner of Rev., 416 Mass. 540, 555 (1993). Our review of the sufficiency of the evidence “is limited to ‘whether a contrary conclusion is not merely a possible but a necessary inference from the findings.’ “ Kennametal, Inc. v. Commissioner of Rev., 426 Mass. 39, 43 (1997), quoting from Commissioner of Rev. v. Houghton Mifflin Co., 423 Mass. 42, 43 (1996). Moreover, while it is true that the subsidiary facts here are undisputed, the central issue of whether Sysco intended to repay the cash transfers is an issue of fact. New York Times Sales, supra at 752. See Crowley v. Commissioner of Int. Rev., 962 F.2d 1077, 1080 (1st Cir.1992).
2. Correct application of the law. As this court observed in New York Times Sales, supra: “It is well settled that a distribution by a subsidiary corporation to its parent is a loan and not a dividend if, at the time of its payment, the parties intended it to be repaid.” See Overnite Transp. Co. v. Commissioner of Rev., 54 Mass.App.Ct. 180, 186 (2002) (defining debt as “an unqualified obligation to pay a sum certain at a reasonably close fixed maturity date along with a fixed percentage in interest payable regardless of the debtor's income or lack thereof”). By contrast, a cash transfer from the subsidiary to the parent, involving “a distribution of available earnings or profits under a claim of right without any expectation of repayment,” is treated as a distribution taxable as a dividend.” New York Times Sales, 40 Mass.App.Ct. at 753, quoting from Clark v. Commissioner of Int. Rev., 266 F.2d 698, 711 (9th Cir.1959).
The issue of intent is appropriately resolved by employing the multi-factor analysis set out in New York Times Sales, supra at 752 (collectively, the New York Times Sales factors), citing Alterman Foods, Inc. v. United States, 505 F.2d 873, 877 n. 7 (5th Cir.1974), and Alterman Foods, Inc. v. United States, 222 Ct. Cl. 218, 222–223 (1979). “No single factor is determinative; rather, all the factors must be considered to determine whether repayment or indefinite retention of the funds is intended.” New York Times Sales, supra. Here, the board carefully took into account the New York Times Sales factors in concluding that “repayment of excess cash advances to Sysco was neither intended nor expected.”
Those factors include: “(1) the amounts transferred were not limited in any manner; (2) there was no repayment schedule and no fixed dates of maturity; (3) the amounts ‘upstreamed’ to [the parent] were intended to remain with [the parent] for use in fulfilling its various corporate purposes; (4) no interest was charged; (5) no notes or other evidence of indebtedness existed; (6) the transferred cash was not secured in any manner; (7) at no time did [the subsidiary] request repayment; (8) there was no evidence that [the subsidiary] had any expectations of repayment; and (9) at no time did [the parent] make any effort to repay the amounts transferred to it by [the subsidiary].” New York Times Sales, supra at 752.
Nonetheless, Sysco insists that the board erred in failing to consider, as crucial to its analysis, the valid business purpose of Sysco's cash management system, pursuant to which the transfers were made, or the absence of a tax avoidance motive. While those factors are central to an analysis under the sham transaction doctrine, see, e.g., Sherwin–Williams Co. v. Commissioner of Rev., 438 Mass. 71, 79 (2002), Sysco cites no cases to support its position that they are critical in determining whether Sysco intended to repay the amounts transferred or that those factors affect the weight or credibility of Sysco's evidence on that issue.
Indeed, in Austin Village, Inc. v. United States, 432 F.2d 741, 745 (6th Cir.1970), the trial judge's reliance on a legitimate business purpose as critical in determining the intention of the parties to repay cash advances, while minimizing the importance of objective criteria, constituted reversible error.
3. Substantial evidence. Sysco contends that the board erred in concluding from the evidence that Sysco lacked intent to repay. Much of Sysco's argument, however, is aimed at the board's assessment of witness credibility and the weight it accorded evidence pertaining to the New York Times Sales factors. It is elemental that the credibility of witnesses, the weight of the evidence, and the inferences to be drawn therefrom are matters for the board. Kennametal, Inc. v. Commissioner of Rev., 426 Mass. at 43 n. 6.
As to Sysco's specific arguments, Sysco has not shown that the board erred in rejecting the testimony of Sysco's expert witnesses. Our review of the record confirms that the board explained its rejection of the expert testimony of Dr. Brian J. Cody, Professor Richard D. Pomp, and Jill Weise, with “explicit and objectively adequate reason[s].” New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 470–471 (1981). See Overnite Transp. Co. v. Commissioner of Rev., 54 Mass.App.Ct. at 191. Contrary to Sysco's assertion, the stipulation of the parties to those witnesses' qualifications as experts, in the areas of their respective testimony, did not require the board to give their testimony added weight. See Boston Safe Deposit & Trust Co. v. Commissioner of Rev., 17 Mass.App.Ct. 326, 329 (1983) (board's prerogative not to credit expert witness).
Specifically, the board rejected the opinions of both Cody and Weise, in their respective attempts to liken the cash management system to a customer's checking account with a bank. Neither expert sufficiently identified an intent to repay or a legal obligation to do so, within Sysco's cash management system, that would support the parallel with a bank account. Pomp, for his part, relied primarily on the business purpose and economic substance of Sysco's cash management system, as well as the absence of a tax avoidance motive, to opine that the cash transfers to Sysco were true debt; he acknowledged, however, that Sysco repaid the subsidiaries only to the extent of their needs and expenses and kept the excess as profit. Particularly given that Pomp himself defined debt as an unconditional and legally enforceable obligation to repay, it was clearly within the board's discretion to discount his opinion that Sysco intended to repay the amounts transferred to it.
The board also found that Weise's opinion regarding arm's-length interest rates lacked foundation. In particular, while she testified that the interest rate used in Sysco's cash management system was consistent with an arm's-length transaction, the board noted that the interest rate charged was the same for each subsidiary and that Weise “did not ... provide a foundation for her assumption that each of the operating companies was investment grade. Nor did she examine or take into account the creditworthiness of the individual operating companies.” However, the board principally rejected her testimony for her failure to identify any basis for her opinion that Sysco intended to repay.
In addition, Sysco argues that the board improperly ignored the testimony of David Lee Brown, vice president of finance of Sysco's San Diego subsidiary, indicating that the cash transfers his company made to Sysco were intended to be repaid. However, the board was not required to credit evidence of the subjective intent of Sysco and its subsidiaries. “[M]ere declarations by the parties that they intend a certain transaction to constitute a loan is insufficient if it fails to meet more reliable indicia of debt which indicate the ‘intrinsic economic nature of the transaction.’ “ Alterman Foods, Inc. v. United States, 505 F.2d at 877, quoting from Fin Hay Realty Co. v. United States, 398 F.2d 694, 697 (3d Cir.1968). Moreover, it was not necessary that the board infer an intent to repay from Brown's testimony that he expected the funds his company transferred to Sysco to be available to him when needed. See Alterman Foods, Inc. v. United States, 611 F.2d at 872 (contingent intent to repay that is dependent on subsidiary's need for funds does not qualify as unconditional obligation to repay).
Furthermore, Mitchell Elmer, a Sysco senior vice president, testified that it was Sysco's intent that proceeds it received from the subsidiaries would continue to outpace disbursements and capital expenditures indefinitely. According to the record, amounts retained by Sysco from the cash transfers, after paying the subsidiaries' expenses, increased in the relevant tax years from approximately $700 million to $1.8 billion. Where, as here, the subsidiaries transferred all their earnings to the parent, and the parent's repayment consisted only of expenditures on the subsidiaries' behalf, the board reasonably could infer that, “so long as the subsidiary's proceeds continued to outpace its costs ... the advances would never be repaid.” Alterman Foods, Inc. v. United States, 505 F.2d at 878 n. 8.
Turning to the objective evidence of intent, as measured by the New York Times Sales factors, Sysco complains that the board gave insufficient weight to Sysco's description of the cash transfers as loans in its internal financial and accounting methods manual. However, the board was not required to accept Sysco's internal methods of accounting for the transfers as proof that Sysco intended to repay; on the contrary, the board appropriately gave scant weight to the labels in Sysco's manual, characterizing the transfers from the subsidiaries as loans and identifying the subsidiaries as lenders. By their plain terms, the portions of the manual upon which Sysco relies were for instruction purposes, and the board was not required to construe them as establishing an enforceable obligation on the part of Sysco to repay. “[T]he method by which two related businesses account for cash transfers on their internal financial records is not deemed to be a controlling factor in determining the nature of the transaction.” New York Times Sales, 40 Mass.App.Ct. at 753. See Overnite Transp. Co. v. Commissioner of Rev., 54 Mass.App.Ct. at 187–188.
Sysco also argues the undisputed fact that interest was charged on the amounts transferred, stressing that this distinguishes this case from the cash transfers in New York Times Sales, supra at 751. Even assuming the interest rate charged was consistent with an arm's-length transaction, Sysco offered no evidence that the interest was actually paid. Rather, the evidence showed that all excess funds received from the subsidiaries, over and above disbursements and capital expenditures, went to Sysco, and that those receipts included interest credited on those funds. While Sysco attempts to minimize the point, courts have made note of the distinction. See, e.g., Overnite Transp. Co. v. Commissioner of Rev., supra at 189 (irregular and erratic payments of interest charged on loan evinced lack of intent to repay); Kimberly–Clark Corp. v. Commissioner of Rev., 83 Mass.App.Ct. 65, 76–77 (2013) (interest rates charged at arm's-length rate did not convert transfers to debt when not repaid). See also Austin Village, Inc. v. United States, 432 F.2d 741, 745 (6th Cir.1970) (maturity dates and interest rate established in alleged loans were illusory, as no payments of interest or principal were ever made); Stinnett's Pontiac Serv., Inc. v. Commissioner of Int. Rev. Serv., 730 F.2d 634, 640 (11th Cir.1984) (though funds advanced on notes required interest payments, none were actually made); Roth Steel Tube Co. v. Commissioner of Int. Rev., 800 F.2d 625, 631 (6th Cir.1986) (corporation that received advances from shareholder recorded accrued interest in its accounting records, but no interest payments were actually made). Compare Hoffman v. Commissioner, 26 T.C.M. 737, 740–742 (CCH 1967) (cash transfers between related entities found to be loans, court specifically noting that interest charged on notes between shareholders and corporation was actually paid).
Nor was an intent to repay a necessary inference from the fact that Sysco on occasion advanced funds to the subsidiaries when they were unprofitable or when they needed money for capital expenditures. As previously noted, transferring funds, in response to the subsidiary's needs, does not equate to an unqualified obligation to repay the amounts advanced by the subsidiary. See, e.g., New York Times Sales, 40 Mass.App.Ct. at 753 n. 4., citing Alterman Foods, Inc. v. United States, 611 F.2d at 872. See also Alterman Foods, Inc. v. United States, 505 F.2d at 878.
As a final note, we reject Sysco's assertion that affirming the board's decision undermines the principles explained in New York Times Sales, supra. The record before us fully supports the board's conclusion that Sysco did not intend to repay the funds it received from its subsidiaries. The decision of the Appellate Tax Board is affirmed.
So ordered.