This post was originally published on Forbes Oct 20, 2015
Staples has a sophisticated cash management system. Cash is stripped from subsidiaries and all bills are paid from a central account. I could see that there must be all sorts of operational advantages to that sort of system, but some bright bulbs in the Staples tax department or perhaps a consultant dreamed up another advantage of the cash management system (CMS). Instead of looking at it as the parent taking the money from the subsidiaries, let's look at it as the subsidiaries loaning to the parent. The interest income and expense going back and forth will wash out for federal income tax and GAAP financial statement purposes, but if it breaks right it will save state income tax - unless state revenue departments catch on.
Ms. Courchesne testified that Staples held cash on behalf of the CMS subsidiaries and credited interest as a bookkeeping entry owed to those subsidiaries that had cash on deposit. Ms. Courchesne did not know the rate of interest credited to the subsidiaries and whether the rate was competitive with what a bank would have paid on deposit.
Q: Here in the CMS system was there a ceiling on the amount that any of the subsidiaries put into the system?
A: I'm not aware — I'm not certain. Our treasury and legal department would have coordinated that. We're just doing the accounting behind the underlying transactions.
Q: Was there a ceiling with respect to the amount of money that the subsidiaries could take out of the cash management system?A: Again, that would be something that our treasury and legal department would handle.
[BOARD'S PRESIDING COMMISSIONER]: Is your answer to both those questions, “I don't know”?
A: I do not know.
However, despite these provisions, the appellants offered no evidence of any payments on these Promissory Notes. The evidence offered — standalone balance sheets — showed bookkeeping entries of amounts generally characterized as due to or due from Staples pursuant to the CMS. If interest accrued to a subsidiary, it was merely credited as a bookkeeping entry.
...there were no repayment schedules, no history of repayments, and no other evidence indicating that there was any actual repayment or intent to repay the excess cash retained by Staples. This perpetual and unlimited stream of cash flowing up to Staples led to the net accounts-payable balances growing well beyond the original Promissory Note amounts.
Taxpayers should take care that their debt instruments satisfy state requirements for bona fide debt.