SYS-CON MEDIA Authors: Liz McMillan, Carmen Gonzalez, Zakia Bouachraoui, Roger Strukhoff, David Linthicum

News Feed Item

Properly Implemented Business Planning Leads to a Sweet Result in Utah State Tax Commission v. See's Candies, Inc.

DALLAS, Nov. 8, 2018 /PRNewswire/ -- Berkshire Hathaway Inc. ("Berkshire") is the parent holding company of a variety of business interests. At its helm is arguably one of the best business minds in the world, Warren Buffett. Berkshire invests in a variety of industries, including freight transportation, finance, utilities, insurance companies, consumer retail, food, building materials, and numerous other interests. Operating decisions for the various Berkshire companies are made by the managers of those businesses, while investment and capital deployment decisions are made at the holding company level. 

In 1997, one of Berkshire's insurance subsidiaries, Columbia Insurance Company ("Columbia") offered to purchase intellectual property (IP) from See's Candies, Inc. ("See's") and other Berkshire-operating companies. The sale was executed as a tax-free exchange of stock for assets under International Revenue Code (IRC) § 351; See's transferred its IP in exchange for preferred stock in Columbia equal to the fair market value of the IP. 

When Columbia decided to embark upon this strategy, it increased its staff levels from one full-time attorney, who spent about 75% of his time on IP, to three full-time IP attorneys. The Columbia IP attorneys kept the trademarks in force and prosecuted infringement. They also visited and trained operating company employees regarding updates in IP law and best practices. They evaluated IP procedures and quality of the branded product to ensure enhancement of the IP. See's and the other operating companies could then focus on their core businesses (e.g., the making of candy). Berkshire would also be able to measure the operating companies on their cost of capital by removing the value of the IP from the operating profit.  

The transfer is one that would be seen between unrelated business entities. The intellectual property of See's would be managed by a company with IP expertise—Columbia, and Columbia would have additional cash reserves that could be used to grow its business. A portion of the increased value of Columbia would inure with See's through its preferred shareholdings in Columbia.

An agreement between See's and Columbia allowed See's to use the IP. The royalty set for the use of the IP was meticulously developed by an independent transfer pricing study. That study was used not only to set the royalty rate, but also the value for which the IP was transferred to Columbia. The pricing set by the study ensured that See's received stock in Columbia equal to the value of the intangibles transferred. The royalty for using the IP was adjusted for expenses incurred by See's to maintain the IP through advertising, managing customer subscription lists, and other activities. In a separate agreement, any additional IP created by See's would be on Columbia's behalf and would be owned by Columbia and licensed to See's. Columbia would reimburse See's for its development expenses on a percentage rate of domestic sales. All financial exchanges between See's and Columbia were set by this independent transfer pricing study and were reevaluated and renewed on a periodic basis. Under the agreement, Columbia did not return to See's any part of the royalties it received as payments, nor did it provide See's loans, dividends, or other compensation. 

This transaction was first audited by the Multistate Tax Commission (MTC), for years 1995 to 1998. MTC ultimately recommended that the royalty be lowered by 10%, which took the royalty down to the bottom end of the acceptable royalty range established by the transfer pricing study. MTC initiated another audit of See's for the years 1999 through 2007. For those years, the Utah State Tax Commission ("the Commission") disallowed the royalty deductions in their entirety under its authority under Utah Code Annotated § 59-7-113. The Commission's position is that the income of See's is not fairly reflective of its taxable income due to the royalty deductions. That audit is the subject of the recently decided Utah Supreme Court case.1 

The Utah District Court, the trial court, noted in its opinion that experts for See's were able to support and maintain the business purpose behind the transaction, while the Commission's experts were not able to rebut the business purpose of the transactions with any credible witness. One of the witnesses for See's confirmed that the IP transfer was common, and both parties benefited from the transaction. That expert testified that he would not have recommended that See's undertake the transaction solely for the tax benefits. 

With the business purpose of the transaction being recognized and sustained by the Court, the gist of the case was whether the Commission had an unlimited ability to reallocate income under Utah Code Ann. § 59-7-113 or whether the Commission was limited to adjustments allowed under IRC § 482. The District Court found that the Commission did not have unfettered discretion, which led to its appeal to the Utah Supreme Court.

The Utah Supreme Court looked at the history of IRC § 482. Its review dates to the Revenue Act of 1921, when Congress adopted the earliest predecessor of § 482. The section was enacted to allow the Commissioner to require companies to file consolidated returns to properly reflect income. In 1928, Congress modified this approach to correcting the distortion that could be created by intercompany transactions in IRC § 45. Congress gave the Internal Revenue Service (IRS) the authority to allocate income and expenses between related entities to clearly reflect its true income. "[T]his history confirms that Congress intended section 45 to provide the IRS with a tool to address transfer pricing manipulation." The IRS had interpreted this authority2 as the ability to recast transactions into those in which unaffiliated parties would enter into at an arm's length.

The Court then addressed the history of Utah's code § 113. The predecessor to the Utah section was enacted in 1931 as § 20 of the Corporation Franchise Tax Act, 1931 Utah Laws 87. Section 20 was enacted verbatim from IRC § 45. The Court found that when the Legislature adopts similar language to a federal statute, "that use…indicates a legislative intent to adopt not just the language of a federal statute, but also its accompanying 'cluster of ideas'…. [W]hen our legislature copies a federal statute, federal interpretations of the statute constitute persuasive authority as to the statute's meaning." The Court found that since Utah § 113 contains the same language as IRC § 45, the federal interpretation of the phrase "necessary to clearly reflect income" in Utah § 113 has the same meaning as IRC § 45, "that allocation is 'necessary' in circumstances when related companies enter into transactions that do not resemble what unrelated companies dealing at arm's length would agree to do." 

The Supreme Court found that the District Court had concluded that the See's-Columbia transaction was at an arm's length, justifying the royalty deduction. The Supreme Court rejected the Commission's arguments that other states have chosen to tax insurance companies differently or that the application of § 482 at the federal level was irrelevant because federal taxes were not affected by the transaction. The Court upheld the transaction as reflecting an arm's length arrangement that unrelated companies would enter into for legitimate business purposes and upheld the District Court's ruling. Sound business planning, accompanied by accurate and meticulously followed execution, wins the day in this "sweet" decision.   

1Utah State Tax Commission v. See's Candies, Inc., 2018 UT 57, October 5, 2018.
2 Pub. L. No. 70-561, 45 Stat. 791, 806 (1928).

About Ryan
Ryan, an award-winning global tax services and software provider, is the largest Firm in the world dedicated exclusively to business taxes. With global headquarters in Dallas, Texas, the Firm provides an integrated suite of federal, state, local, and international tax services on a multi-jurisdictional basis, including tax recovery, consulting, advocacy, compliance, and technology services. Ryan is a six-time recipient of the International Service Excellence Award from the Customer Service Institute of America (CSIA) for its commitment to world-class client service. Empowered by the dynamic myRyan work environment, which is widely recognized as the most innovative in the tax services industry, Ryan's multi-disciplinary team of more than 2,200 professionals and associates serves over 14,000 clients in more than 50 countries, including many of the world's most prominent Global 5000 companies. More information about Ryan can be found at ryan.com. "Ryan" and "Firm" refer to the global organizational network and may refer to one or more of the member firms of Ryan International, each of which is a separate legal entity. 

Ryan is an award-winning global tax services firm, with the largest indirect and property tax practices in North America and the sixth largest corporate tax practice in the United States. (PRNewsFoto/Ryan)

TECHNICAL INFORMATION CONTACT:

Mark Nachbar
Principal
Ryan
213.627.1719
[email protected]

 

Cision View original content to download multimedia:http://www.prnewswire.com/news-releases/properly-implemented-business-planning-leads-to-a-sweet-result-in-utah-state-tax-commission-v-sees-candies-inc-300747031.html

SOURCE Ryan

More Stories By PR Newswire

Copyright © 2007 PR Newswire. All rights reserved. Republication or redistribution of PRNewswire content is expressly prohibited without the prior written consent of PRNewswire. PRNewswire shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.

Latest Stories
The platform combines the strengths of Singtel's extensive, intelligent network capabilities with Microsoft's cloud expertise to create a unique solution that sets new standards for IoT applications," said Mr Diomedes Kastanis, Head of IoT at Singtel. "Our solution provides speed, transparency and flexibility, paving the way for a more pervasive use of IoT to accelerate enterprises' digitalisation efforts. AI-powered intelligent connectivity over Microsoft Azure will be the fastest connected pat...
There are many examples of disruption in consumer space – Uber disrupting the cab industry, Airbnb disrupting the hospitality industry and so on; but have you wondered who is disrupting support and operations? AISERA helps make businesses and customers successful by offering consumer-like user experience for support and operations. We have built the world’s first AI-driven IT / HR / Cloud / Customer Support and Operations solution.
ScaleMP is presenting at CloudEXPO 2019, held June 24-26 in Santa Clara, and we’d love to see you there. At the conference, we’ll demonstrate how ScaleMP is solving one of the most vexing challenges for cloud — memory cost and limit of scale — and how our innovative vSMP MemoryONE solution provides affordable larger server memory for the private and public cloud. Please visit us at Booth No. 519 to connect with our experts and learn more about vSMP MemoryONE and how it is already serving some of...
Darktrace is the world's leading AI company for cyber security. Created by mathematicians from the University of Cambridge, Darktrace's Enterprise Immune System is the first non-consumer application of machine learning to work at scale, across all network types, from physical, virtualized, and cloud, through to IoT and industrial control systems. Installed as a self-configuring cyber defense platform, Darktrace continuously learns what is ‘normal' for all devices and users, updating its understa...
Codete accelerates their clients growth through technological expertise and experience. Codite team works with organizations to meet the challenges that digitalization presents. Their clients include digital start-ups as well as established enterprises in the IT industry. To stay competitive in a highly innovative IT industry, strong R&D departments and bold spin-off initiatives is a must. Codete Data Science and Software Architects teams help corporate clients to stay up to date with the mod...
As you know, enterprise IT conversation over the past year have often centered upon the open-source Kubernetes container orchestration system. In fact, Kubernetes has emerged as the key technology -- and even primary platform -- of cloud migrations for a wide variety of organizations. Kubernetes is critical to forward-looking enterprises that continue to push their IT infrastructures toward maximum functionality, scalability, and flexibility. As they do so, IT professionals are also embr...
Platform9, the leader in SaaS-managed hybrid cloud, has announced it will present five sessions at four upcoming industry conferences in June: BCS in London, DevOpsCon in Berlin, HPE Discover and Cloud Computing Expo 2019.
At CloudEXPO Silicon Valley, June 24-26, 2019, Digital Transformation (DX) is a major focus with expanded DevOpsSUMMIT and FinTechEXPO programs within the DXWorldEXPO agenda. Successful transformation requires a laser focus on being data-driven and on using all the tools available that enable transformation if they plan to survive over the long term. A total of 88% of Fortune 500 companies from a generation ago are now out of business. Only 12% still survive. Similar percentages are found throug...
When you're operating multiple services in production, building out forensics tools such as monitoring and observability becomes essential. Unfortunately, it is a real challenge balancing priorities between building new features and tools to help pinpoint root causes. Linkerd provides many of the tools you need to tame the chaos of operating microservices in a cloud native world. Because Linkerd is a transparent proxy that runs alongside your application, there are no code changes required. I...
In his general session at 21st Cloud Expo, Greg Dumas, Calligo’s Vice President and G.M. of US operations, discussed the new Global Data Protection Regulation and how Calligo can help business stay compliant in digitally globalized world. Greg Dumas is Calligo's Vice President and G.M. of US operations. Calligo is an established service provider that provides an innovative platform for trusted cloud solutions. Calligo’s customers are typically most concerned about GDPR compliance, application p...
Modern software design has fundamentally changed how we manage applications, causing many to turn to containers as the new virtual machine for resource management. As container adoption grows beyond stateless applications to stateful workloads, the need for persistent storage is foundational - something customers routinely cite as a top pain point. In his session at @DevOpsSummit at 21st Cloud Expo, Bill Borsari, Head of Systems Engineering at Datera, explored how organizations can reap the bene...
"NetApp's vision is how we help organizations manage data - delivering the right data in the right place, in the right time, to the people who need it, and doing it agnostic to what the platform is," explained Josh Atwell, Developer Advocate for NetApp, in this SYS-CON.tv interview at 20th Cloud Expo, held June 6-8, 2017, at the Javits Center in New York City, NY.
Druva is the global leader in Cloud Data Protection and Management, delivering the industry's first data management-as-a-service solution that aggregates data from endpoints, servers and cloud applications and leverages the public cloud to offer a single pane of glass to enable data protection, governance and intelligence-dramatically increasing the availability and visibility of business critical information, while reducing the risk, cost and complexity of managing and protecting it. Druva's...
Kubernetes as a Container Platform is becoming a de facto for every enterprise. In my interactions with enterprises adopting container platform, I come across common questions: - How does application security work on this platform? What all do I need to secure? - How do I implement security in pipelines? - What about vulnerabilities discovered at a later point in time? - What are newer technologies like Istio Service Mesh bring to table?In this session, I will be addressing these commonly asked ...
BMC has unmatched experience in IT management, supporting 92 of the Forbes Global 100, and earning recognition as an ITSM Gartner Magic Quadrant Leader for five years running. Our solutions offer speed, agility, and efficiency to tackle business challenges in the areas of service management, automation, operations, and the mainframe.