Massachusetts – Nexus creating transactions disregarded as sham transactions

June 2014


The transfer of Massachusetts employees from an in-state company to its out-of-state parent was disregarded for tax purposes by the Massachusetts Appeals Court. The transfer, which purportedly established Massachusetts nexus for the parent and caused the parent to be included in the ‘nexus combined’ corporate excise tax return, allowed the parent’s losses to offset the income of other members of the nexus combined group. The court affirmed that, pursuant to the sham transaction doctrine, the transfers had no valid business purpose other than tax avoidance and therefore the parent was not included in the nexus combined return.
Massachusetts taxpayers should be aware that expansion of the sham transaction doctrine to nexus determinations could subject a new area of business transactions to state scrutiny.

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