TBL Licensing LLC v. Comm'r of Internal Revenue
| Decision Date | 31 January 2022 |
| Docket Number | 21146-15 |
| Parties | TBL LICENSING LLC f.k.a. THE TIMBERLAND COMPANY, AND SUBSIDIARIES (A CONSOLIDATED GROUP), Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
F1, a foreign corporation, transferred to F2, its foreign subsidiary, the sole member interest in DE, an entity disregarded for Federal tax purposes. DE owned P, a domestic limited liability company then treated as a corporation for Federal tax purposes. P owned intangible property, within the meaning of I.R.C. § 936(h)(3)(B). P then elected to be disregarded as a separate entity for Federal tax purposes. P and R agree that F1's transfer of DE to F2 and P's election to be disregarded constituted a "reorganization" within the meaning of I.R.C § 368(a)(1)(F) and that, as part of that reorganization P constructively transferred intangible property to F2. For the taxable years 2011 through 2017, US1, a domestic corporation and indirect parent of F1 and F2, included in its income deemed annual payments under I.R.C. § 367(d)(2)(A)(ii)(I) attributable to that constructive transfer.
Held In order for the operative nonrecognition rules of I.R.C §§ 354, 356, and 361 to apply to a reorganization described in I.R.C. § 368(a)(1)(F), the transaction--however actually effected--should be treated as involving (1) a transfer of the old corporation's assets to the new corporation, in exchange for stock of the new corporation and the new corporation's assumption of any liabilities of the old corporation, and (2) the old corporation's distribution to its shareholders of the stock of the new corporation in cancellation of their stock in the old corporation.
Held, further, the constructive distribution by P to F1 of F2 stock that occurred as part of the reorganization by which F2 acquired P was a "disposition" within the meaning of I.R.C. § 367(d)(2)(A)(ii)(II).
Held, further, P's constructive distribution of F2 stock to F1 necessarily followed the constructive transfer of intangible property by P to F2 that occurred as part of the reorganization; consequently, in the absence of a provision in the regulations to the contrary, P is required to recognize gain in the intangible property under I.R.C. § 367(d)(2)(A)(ii)(II).
Held, further, no provision in the regulations allows reporting of deemed annual payments under I.R.C. § 367(d)(2)(A)(ii)(I) rather than immediate gain recognition under I.R.C. § 367(d)(2)(A)(ii)(II) by reason of P's constructive transfer of intangible property. Because P was no longer recognized as a separate entity for Federal tax purposes after the reorganization, it could not report the deemed annual payments described in I.R.C. § 367(d)(2)(A)(ii)(I), and US1 was neither the U.S. transferor of the intangible property nor the recipient of the FS2 stock.
Held, further, the fair market value of transferred intangible property, for the purpose of determining gain that must be recognized under I.R.C. § 367(d)(2)(A)(ii)(II), should be determined on the basis of the property's entire expected useful life, without regard to the 20-year limit imposed, for some purposes, by Temp. Treas. Reg. § 1.367(d)-1T(c)(3).
James P. Fuller, Kenneth B. Clark, Larissa B. Neumann, Julia V. Ushakova-Stein, and Sean P. McElroy, for petitioner.
John E. Budde, Gretchen A. Kindel, Kimberly B. Tyson, and James M. Cascino, for respondent.
In a notice dated May 11, 2015, respondent advised petitioner that he had determined a deficiency of $504, 691, 690 in the income tax of the affiliated group of corporations of which petitioner had been the common parent for the group's taxable year ended September 23, 2011. We must decide whether petitioner is required to recognize ordinary income under section 367(d)(2)(A)(ii)(II)[1] as a result of a constructive transfer of intangible property to TBL Investment Holdings GmbH (TBL GmbH), a Swiss corporation, and, if so, whether, in determining the amount of that income, the property should be treated, as a matter of law, as having a useful life limited to 20 years. Each party has moved for summary judgment. In addition, respondent has submitted a motion in limine seeking to exclude stipulations set forth in the parties' stipulations of fact and exhibits offered by petitioner. Respondent has also submitted a motion to strike material included in the memorandum petitioner submitted in support of its motion for summary judgment. For the reasons explained below, we will grant respondent's motion for summary judgment and deny petitioner's motion for summary judgment. Because we conclude that the materials subject to respondent's motion in limine or motion to strike neither demonstrate petitioner's entitlement to summary judgment nor call into question respondent's entitlement to summary judgment, we will deny as moot respondent's motion in limine and motion to strike.
The events that gave rise to the dispute before us occurred as part of a postacquisition restructuring carried out after a business combination involving VF Corp. (VF) and the Timberland Co. (Timberland). Through its subsidiaries, VF designs, manufactures, and sells apparel and footwear under brands such as Lee, Wrangler, Nautica, Vans, and the North Face. Timberland's business involved the design, development, manufacture, marketing, and sale of footwear, apparel, and accessories under its own brand and others, such as SmartWool.
The VF and Timberland businesses were combined on September 13, 2011, by means of a merger into Timberland of an acquisition subsidiary of TBL International Properties, LLC (International Properties). In the merger, the former Timberland shareholders received cash in exchange for their Timberland stock.
VF had organized International Properties in August 2011 as a limited liability company under Delaware law. The parties have stipulated that International Properties "has been a disregarded entity from the time of its formation."
Petitioner is also a Delaware limited liability company whose sole member interest was owned, throughout the events in issue, by International Properties. The parties have stipulated that "[p]etitioner was treated as a corporation for U.S. federal income tax purposes at all times during the taxable year at issue."
Before the merger in which International Properties acquired Timberland, VF transferred its membership interest in International Properties to VF Enterprises S.à.r.l. (VF Enterprises), an indirect foreign subsidiary of VF. As part of the postacquisition restructuring, petitioner came to own Timberland's intangible property, including trademarks, foreign workforce, and foreign customer relationships.
On September 22, 2011, after the close of the merger by which International Properties acquired the Timberland stock and after petitioner had acquired Timberland's intangible property, VF Enterprises contributed to TBL GmbH the sole member interest in International Properties.[2] About a week later, petitioner elected under Treasury Regulation § 301.7701-3(c)(1)(i) to be disregarded as an entity separate from its owner, effective September 24, 2011.
On the Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, included with its Federal income tax return for the taxable year ended September 23, 2011, petitioner reported that the trademarks it acquired from Timberland had a fair market value of $1, 274, 100, 000. Respondent assigned the same value to the trademarks in computing the deficiency in issue.
The parties have stipulated that Lee Bell, Inc. (Lee Bell), an indirect domestic subsidiary of VF and indirect parent of VF Enterprises, reported income under section 367(d)(2)(A)(ii)(I) in specified amounts for the taxable years 2011 through 2017. The stipulation does not attribute those amounts to petitioner's constructive transfer of intangible property to TBL GmbH, but the materials the parties have submitted in support of and opposition to the pending motions for summary judgment demonstrate that each accepts that the inclusions in Lee Bell's income relate to that transfer.[3] The parties also stipulated that Lee Bell never owned the intangible property that petitioner constructively transferred to TBL GmbH.
Petitioner and respondent agree that, in the restructuring that followed the acquisition of Timberland by VF Enterprises, through International Properties, [4] petitioner came to own Timberland's intangible property and then made a constructive transfer of that property to TBL GmbH, a subsidiary of VF Enterprises. They agree that petitioner's constructive transfer of intangible property occurred as part of a "reorganization" described in section 368(a)(1)(F). And they agree that, because petitioner--then treated as a U.S. corporation--constructively transferred intangible property to a foreign corporation in a transaction that would otherwise qualify for nonrecognition treatment under section 361(a), section 367(d) applies to the transfer. The parties disagree, however, on the consequences of section 367(d)'s application.
The rules of section 367 provide an overlay to the corporate nonrecognition provisions found in subchapter C of subtitle A, chapter 1 of the Code. When one of the parties to a transaction is a foreign corporation, affording the transaction the same nonrecognition treatment it would receive if the parties were domestic could lead to inappropriate results. When foreign corporations are involved, property can move in and out of the U.S. tax jurisdiction. Reflecting those changes in status requires adjustments to the normal nonrecognition rules. In particular, a U.S. person who makes an "outbound" transfer of property to a foreign...
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