The Tax Court in Brief | TBL Licensing LLC v. Commissioner

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The Tax Court in Brief February 7 – February 11, 2022

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Tax Litigation: The Week of February 7 – February 11, 2022

TBL Licensing LLC v. Comm’r, Corrected 158 T.C. 1 | February 8, 2022 | Filed January 31, 2022 | Halpern, J. | Dkt. No. 21146-15

Opinion

Short Summary: This 92-page opinion case involves a $504,691,690 tax deficiency determination resulting from a business merger combination of VF Corp. (VF) and the Timberland Co. (Timberland) at the near-end of tax year 2011. The combination involved foreign and domestic entities, including corporations, a holding company, and wholly-owned subsidiaries (collectively, the Timberland Entities or Petitioner, for simplicity’s sake, except where noted otherwise herein). The transaction is summarized as follow:

The primary tax-event underlying the deficiency regarded (A) the transfer and acquisition of Timberland’s intangible property – trademarks, foreign workforce, and foreign customer relationships – valued at $1,274,100,000 and (B) generally speaking, how the direct and indirect distribution and acquisition of that intangible property should be characterized for tax purposes under, primarily, 26 U.S.C. § 367(d) (Section 367(d)). The target Timberland Entity (TBL Licensing LLC) was treated as a corporation per election made pursuant to Treas. Reg. § 301.7701-3(c)(1)(i). The Timberland Entities and the Commissioner agreed that, because Timberland – at the relevant time in question was treated as a U.S. corporation – constructively transferred intangible property to a foreign corporation (TBL Licensing LLC) in a transaction that would otherwise qualify for nonrecognition treatment under Section 361(a), Section 367(d) applied to the transfer. However, the parties disagreed on the consequences of Section 367(d)’s application.

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Insights: This opinion, while complex and unique, provides key insight as to how the value of intangible property must be recognized in an “outbound” transaction involving U.S. and foreign corporations, some of which are treated as disregarded entities for purposes of U.S. federal income tax purposes. In TBL, the transaction qualified as a “disposition” within the meaning of Section 367(d)(2)(A)(ii)(II), being one which requires a transfer of property in exchange, at least in part, for stock of the recipient entity. A key strategic business decision in the TBL fact pattern, and one that the court circled back to time and again, regarded the timing of when Petitioner elected to be treated as a disregarded entity. Whether or not a different election, or different timing would have benefited the Timberland Entities from a federal income tax perspective is unknown to this writer, but likely one issue of many that is under review by Timberland.