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    VF Holdings Owes $505 Million Tax Bill

    Lee, Wrangler, Nautica, Vans, and North Face are iconic apparel brands, all owned by VF Holdings through its numerous acquisitions. The company also acquired Timberland Co. in 2011, doubling its global footwear business. That merger, however, has resulted in a $505 million tax bill recently upheld by the Tax Court in TBL Licensing LLC v. Commissioner. The Court found that the outbound transfer of intangible property by the LLC to a foreign holding company resulted in immediately recognizable ordinary income. It was a complicated transaction, and the structure chosen by the parties did not give the intended result.  

    The Transaction and Timing of Income

    Here is a greatly simplified description of the transaction. The deficiency arose from the restructuring carried out after the merger between VF Corp. and Timberland Co. In the restructuring, the Petitioner LLC became the owner of Timberland’s intangible property, including trademarks, foreign workforce, and foreign customer relationships, and then made a constructive transfer of that property to TBL Investment Holdings, a Swiss corporation and subsidiary of VF Enterprises, as part of a Sec. 368(a)(1)(F) reorganization.  

    For the taxable years 2011 through 2017, the LLC included in its income deemed annual payments attributable to the constructive transfer. The IRS argued that, instead, the company should have had an immediate gain taxable as ordinary income upon completion of the transaction.  

    The Court’s Holdings: Pay Up

    The Court examined Code Section 367 and its regulations and concluded that there was no authority for treating the income as earned over time rather than all at once in the year of the transaction. That section was enacted to prevent the avoidance of U.S. taxation on the transfer of property to a controlled foreign corporation and to discourage the removal of appreciated property from the U.S. 

    The Tax Court also rejected the LLC’s argument that the amount of income should be based on a useful life of 20 years, which is allowed in limited circumstances. The Court adopted the IRS view that the constructive transfer was a disposition, and the actual fair market value of the assets and the measure of income should be determined using the property’s entire expected useful life, not limited to 20 years.   

    Conclusion

    This case is interesting because it illustrates the technical traps of the international tax rules under U.S. law. The series of transactions ended up having an unintended impact—a big tax hit—even though the parties had extensive experience in completing mergers and even though the merger used a complicated structure designed to result in a minimization of the tax burden. The Tax Court took a strict view of the reorganization nonrecognition rules when coupled with Congress’s intended limitations on transfers of U.S. assets to related foreign companies. An appeal is expected in the case. 

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