Bracken v. City of Seattle

• Decision Date: 21 September 2009
• Docket Number: 62006-1-I
• Court: Washington Court of Appeals
• Parties: BLISTEX BRACKEN, a Washington limited Partnership, Respondent, v. CITY OF SEATTLE, a municipal corporation, Appellant.

BLISTEX BRACKEN, a Washington limited Partnership, Respondent, v. CITY OF SEATTLE, a municipal corporation, Appellant.

No. 62006-1-I

Court of Appeals of Washington, Division 1

September 21, 2009

UNPUBLISHED OPINION

Schindler C.J.

Since 1947, the Bracken family has licensed the trademarks it owns for lip balm and skin care products to an Illinois corporation, Blistex, Inc. Blistex, Inc. uses the trademarks to develop, market, license, and sell lip balm and skin care products. The question in this case is whether there is a sufficient nexus between the activities of the Bracken's limited partnership and the City of Seattle to justify assessment of the City's business and occupation (B&O) tax on the royalty income the family received from 1996 to 2005. We affirm the trial court's decision that the B&O tax violated due process, and entry of the judgment in favor of the Bracken family's limited partnership.

FACTS

The facts are undisputed. Louis D. Bracken invented a formula for lip balm. In 1947, Louis entered into an agreement giving an Illinois corporation, Blistex, Inc., the exclusive right to use the trademarks he owned, including "BLISTEX, BLISTIK and BLIST-FZE."^[1] In exchange, Blistex, Inc. agreed to pay Louis royalties based on a percentage of sales of the products. Blistex, Inc. uses the trademarks to develop manufacture, and license lip balm and skin care products throughout the United States and worldwide.

After Louis died, his wife Nora H. Bracken and their son Jim L Bracken inherited the trademarks. In 1965, Nora and Jim entered into an agreement giving Blistex, Inc. "the sole and exclusive right and license to use the trademarks BLISTEX, BLISTIK and BLIST-FZE on pharmaceutical and medical products in the United States and worldwide" in exchange for the right to continue to receive royalties.

When Jim died in 1984, the Sharon Bracken Marital Trust and the Bracken Family Trust inherited the trademarks. Jim's spouse, Sharon, was named as the Trustee for both Trusts. To avoid probate and re registering the trademarks each time an heir died, the "Blistex Bracken Limited Partnership" (the BBLP) was formed under the Uniform Limited Partnership Act, chapter 25.20 RCW, to hold the trademarks the family owned and to receive the royalty payments from Blistex, Inc.^[2] John Bracken described the reasons the family formed the BBLP, as follows:

When my grandfather passed away, ownership of the trademarks passed to my father Jim L. Bracken. Because the Blistex trademarks were held in my grandfather's name personally, the process of transferring ownership from my grandfather's name into my father's name was complicated. Blistex trademarks were licensed around the United States and all over the world, and there was a lot of red tape involved in changing the name of the owner in each licensing agreement.

When my father passed away and my mother was to inherit the trademarks estate planning attorneys at the law firm of Short Cressman suggested a device that would prevent the sea of red tape generated by the inheritance process. Instead of passing the trademarks through individuals, we would establish a limited partnership, in the name of which the trademarks would be held. That way, the trademarks would be permanently held in one name for the benefit of all current and future Bracken heirs. The creation of the LP, with my mother as general partner and I and my siblings as limited partners, simplified the inheritance process.

The 1985 "Certificate and Agreement of Limited Partnership of Blistex Bracken Limited Partnership" states that the purpose of the BBLP is to "acquire, own, manage and maintain certain trademarks described on Exhibit A attached hereto (the 'Partnership Property'), together with all business activities related thereto." Sharon, as the Trustee of the Sharon Bracken Marital Trust, is identified as the general partner of the BBLP and the Bracken Family Trust is identified as the limited partners.

The Certificate identifies the attorney's office, Suite 3000 First Interstate Center, or such other places as the General Partner may hereafter determine" as the principle place of business. After moving into a condominium, Sharon rented an office in downtown Seattle to store BBLP records and receive mail. The registration form filed with the Secretary of State identifies the BBLP as a "profit" corporation.

The BBLP entered into an "Amendment to Royalty Agreement" with Blistex, Inc. The purpose of the 1985 Amendment was to identify the BBLP as the current holder of the trademarks and reaffirm the prior agreements with Blistex Inc.^[3] In 2000, the BBLP entered into an "Amended and Restated License Agreement" with Blistex, Inc.^[4]The Agreement states that the BBLP owns the trademarks and that it grants Blistex, Inc. the "sole and exclusive right and license to use the trademarks." In the Agreement, the BBLP also agrees to "do such things as are reasonable to maintain current registrations for the Trademarks. "Upon the written request, of [Blistex, Inc.], [the BBLP] will seek and maintain the registration of the Trademarks in countries" that Blixtex, Inc. "contemplates the sale of Blistex Products." The Agreement includes an amended schedule for the determination and payment of the royalties based on sales of the products.

Sharon and Jim Bracken's three children, John Bracken, Carol Bracken Clemency, and Laura Bracken Clough are the current general partners of the BBLP.^[5]John is the managing partner. The current limited partners of the BBLP are three generation skipping trusts, the John Bracken Generation Skipping Trust, the Laura Bracken Clough Generation Skipping Trust, and the Carol Bracken Clemency Generation Skipping Trust.

John testified that as managing partner of the BBLP, "I do precisely what my mother, father, and grandfather did: I make sure that the trademarks stay current for the benefit of the estate and I make sure that all of the Bracken heirs receive their share of the royalty income from the trademarks."^[6] The royalty payments the BBLP receives from Blistex, Inc. are either mailed or sent by wire transfer to a banking account in Seattle. An accounting firm prepares the federal tax return.

The certified public accountant who prepared the federal income tax returns for the BBLP from 1990 to 2006, testified that from its inception, the royalty income received by the BBLP has been reported as "portfolio income."

In general, the Internal Revenue Service defines 'portfolio income' as gross income that is not derived in the ordinary course of a trade or business and that is derived from royalties, interest, dividends or other types of investments. In the early years of the partnership, there was some investment income in bonds in addition to royalty income, but in later years the only income to the partnership (other than some interest on partnership savings) was from trademark royalties. The primary source of income to the partnership was always trademark royalties.

According to the long-time Bracken family attorney who formed the BBLP, after entering into the original agreement with Blistex, Inc., other than collecting the royalty payments, Louis and his heirs have had little to do with Blistex, Inc.

I started to represent the legal matters concerning Blistex in 1950. The Bracken family has a royalty interest only with a token share of stock. This has existed in the Bracken family since its inception when it was started by the Charles Arch family, an Illinois resident where the Blistex factory is located. . . . When Mr. Bracken was alive, he conducted any minor Blistex matters out of his downtown pharmacy in the Cobb Building at 4th Avenue and University Street, in Seattle, Washington. There wasn't much to do then or now insofar as collecting the royalty payments, some correspondence with the Arch family, and attending an annual meeting in Illinois of the Blistex Company.

In 2006, a City tax auditor noticed the BBLP name and the "BLISTEX" logo on the door of the office rented by the BBLP. In a letter dated June 2, the City tax auditor notified the BBLP of a B&O tax review, stating that "it has come to our attention that Blistex Bracken LP is engaging in business in the City of Seattle without a City of Seattle Business License." After examining the articles of incorporation, the agreements with Blistex, Inc., and various other documents, the City issued an assessment notice. In the January 19, 2007 assessment notice, the City auditor concluded that because the BBLP was "'engaging in business'" as defined by the City of Seattle Municipal Code (SMC), the royalty income was subject to the City's B&O tax. The City assessed the BBLP $131,439.84 in unpaid B&O taxes, interest and penalties from January 1, 1996 through December 31, 2005 based on the BBLP's receipt of royalty income from Blistex, Inc.^[7]

The BBLP paid the assessment and then filed an action in superior court to refund the B&O taxes, interest and penalties it paid. The BBLP and the City filed cross motions for summary judgment. The City argued the BBLP was subject to the B&O tax because it engaged in business activities as defined by the SMC. The City also argued that the tax was related to the services provided by the City that allow the BBLP to own, maintain, and manage the trademarks. The BBLP asserted that Blistex Inc., not the BBLP, engaged in the business activities that generated income. The BBLP argued that it was an estate planning mechanism and the receipt of royalty income, preparing federal income tax returns, and maintenance of an office did not constitute engaging in business under the SMC. The BBLP also argued that imposition of a B&O tax violated due process and the Commerce Clause.

The court granted...