Former Timberland Co. Seeks Summary Judgment in Tax Court Case

TBL LICENSING LLC,
FORMERLY KNOWN AS THE TIMBERLAND COMPANY,
AND SUBSIDIARIES (A CONSOLIDATED GROUP),
Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES TAX COURT

Judge Gustafson

MEMORANDUM IN SUPPORT OF PETITIONER'S MOTION FOR SUMMARY JUDGMENT

Janies P. Fuller
Kenneth B. Clark
Larissa B. Neumann
Julia V. Ushakova-Stein
Fenwick & West
Silicon Valley Center
801 California Street
Mountain View, CA 94041
Telephone: (650) 988-8500

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TABLE OF CONTENTS

GLOSSARY OF TERMS

TABLE OF AUTHORITIES

INTRODUCTION

STATEMENT OF FACTS AND RELATED MATTERS

OVERVIEW OF § 367 AND THE § 367(d) REGULATIONS

STANDARD FOR SUMMARY JUDGMENT

ARGUMENT

CONCLUSION

EXHIBITS

GLOSSARY OF TERMS

This Memorandum uses the following defined terms relating to the applicable law:

Defined Term	Definition
§	All section (“§”) references herein are to the U.S. Internal Revenue Code of 1986, as amended (the “Code”), or to the U.S. Treasury regulations (“Treas. Reg.”) promulgated thereunder, that were in effect throughout the calendar year 2011.
§ 367(d) Regulations	Temp. Treas. Reg. § 1.367(d)-1T that was in effect throughout the calendar year 2011.
Annual § 367(d) Payments	Section 367(d) and Temp. Treas. Reg. § 1.367(d)-1T provide that in an exchange described in §§ 351 or 361 in which a United States person (U.S. transferor) transfers IP to a foreign corporation (transferee foreign corporation) the United States person transferring the IP (the U.S. transferor) will be treated as having sold the IP in exchange for payments that are contingent on the productivity, use, or disposition of the IP. The U.S. person is treated as receiving or having received these amounts (I) annually over the useful life of the property (“Annual § 367(d) Payments”) or, (II) in case of a disposition following such transfer [the temporary regulations define this as “a subsequent transfer during the transferred IP's useful life” to an unrelated person], at the time of the disposition ("Lump-Sum Exception").
Check-the-Box Regulations	Treas. Reg. § 301.7701-3 that was in effect throughout the calendar year 2011.
Check-the-Box Election	TBL elected under the Check-the-Box Regulations to be treated as a disregarded entity for U.S. federal income tax purposes effective September 24, 2011 (the "Check-the-Box Election").
Code	U.S. Internal Revenue Code of 1986, as amended, that was in effect throughout the calendar year 2011.
Lump-Sum Exception	Section 367(d) provides that in an exchange described in §§ 351 or 361 in which a United States person (U.S. transferor) transfers IP to a foreign corporation (transferee foreign corporation) the United States person transferring the IP (the U.S. transferor) will be treated as having sold the IP in exchange for payments that are contingent on the productivity, use, or disposition of the IP. The U.S. person is treated as receiving or having received these amounts (I) annually over the useful life of the property ("Annual § 367(d) Payments") or, (II) in case of a disposition following such transfer [the temporary regulations define this as “a subsequent transfer during the transferred IP's useful life” to an unrelated person], at the time of the disposition ("Lump-Sum Exception").
Notice	Internal Revenue Service Notice 2012-39, 2012-2 C.B. 95.
PLR	Internal Revenue Service Private Letter Ruling.
Temp, Treas. Reg.	Temporary U.S. Treasury regulations promulgated under the Code that were in effect throughout the calendar year 2011.
Treas. Reg.	U.S. Treasury regulations promulgated under the Code that were in effect throughout the calendar year 2011.

For ease of reference this Memorandum also uses these additional defined terms:

Defined Term	Definition
Chart I	VF's relevant legal entity structure immediately prior to the Outbound F Reorganization depicted on page 7.
Chart II	VF's relevant legal entity structure immediately after the Outbound F Reorganization depicted on page 9.
IP	Intangible Property.
Lee Bell	VF is the parent of an affiliated group of domestic corporations, including Lee Bell, Inc. ("Lee Bell"), on behalf of which it files consolidated U.S. federal income tax returns (“VF Consolidated Group").
NYSBA Report	New York State Bar Association Tax Section Report dated October 12, 2010 entitled “Report on Section 367(d).” See First Stipulation of Facts ¶82, Exhibit 62-P.
Outbound F Reorganization	TBL (Petitioner) was reorganized into TBL GmbH, a Swiss controlled foreign corporation within the VF Controlled Group, in an outbound § 368(a)(1)(F) reorganization transaction.
Short Period Return	Petitioner's federal income tax return for its short taxable year ended September 23, 2011.
TBL (Petitioner)	Petitioner (TBL Licensing LLC).
TBL GmbH	TBL Investment Holdings GmbH.
Timberland	The Timberland Company.
Timberland Intangible Assets	The Timberland and SmartWool intangible assets, consisting of trademarks, customer relationships, and foreign workforce, subject to the license of the domestic rights in the intangible assets to Vans, Inc., a member of the VF Consolidated Group.
Treas. Reg. § 1.6038B-1 Statement	Petitioner filed a statement pursuant to Treasury Regulation § § 1.6038B-1(c), 1.6038B-1T(c) and 1.6038B-1T(d) associated with the Outbound F Reorganization with its Short Period Return.
VF	VF Corporation.
VF Consolidated Group	VF is the parent of an affiliated group of domestic corporations on behalf of which it files consolidated U.S. federal income tax returns.
VF Controlled Group	VF is the ultimate U.S. parent company, and the direct or indirect owner, of an affiliated group of global corporations.
VFE	VF Enterprises S.á.r.l.

TABLE OF AUTHORITIES

Cases

ATL & Sons Holdings, Inc. v. Comm'r, 152 T.C. No. 8, 2019 WL 1220942 (Mar. 13, 2019)

Barnette v. Comm'r, T.C. Memo. 1992-371, aff'd sub nom. Allied Mgm't Corp. v. Comm'r, 41 F.3d 667 (11th Cir. 1994)

Celotex Corp. v. Catrett, 477 U.S. 317(1986)

Comm'r v. Chelsea Prods., Inc., 197 F.2d 620 (3d Cir. 1952)

Comm'r v. Clark, 489 U.S. 726 (1989)

Davis v. Mich. Dep't of Treasury, 489 U.S. 803 (1989)

DHL Corp. v. Comm'r, 285 F.3d 1210 (9th Cir. 2002)

Estate of Graves v. Comm'r, 92 T.C. 1294 (1989)

FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000)

FPL Grp., Inc. v. Comm'r, 116 T.C. 73 (2001)

Gen. Dynamics Corp. v. Comm'r, 108 T.C. 107 (1997)

George Whittell & Co. v. Comm'r, 34B.T.A. 1070 (1936)

Gottesman & Co. v. Comm'r, 77 T.C. 1149 (1981)

Hall v. United States, 975 F.2d 722 (10th Cir. 1992)

Halpern v Comm'r, 96 T.C. 895 (1991)

Hanover Bank v. Comm'r, 369 U.S. 672 (1962)

Intel Corp. v. Comm'r 100 TC. 616 (1993), aff'd, 67 F.3d 1445 (9th Cir. 1995), amended and superseded by 76 F.3a 976 (9th Cir. 1996)

King v. Burwell, 135 S. Ct. 2480 (2015)

Koprowski v. Comm'r, 138 T.C. 54 (2012)

Norfolk S. Corp. v. Comm'r, 104 T.C. 13 (1995), aff'd, 140 F.3d 240 (4th Cir. 1998)

Palmolive Bldg Investors, LLC v. Comm'r, 149 T.C. 380 (2017)

Phillips v. Comm'r, 88 T.C. 529 (1987)

Sundstrand v. Comm'r, 98 T.C. 518 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994)

United States v Turkette, 452 U.S. 576 (1981)

Xilinx Inc. v. Comm'r, 125 T.C. 37 (2005), aff'd, 598 F.3d 1191 (9th Cir. 2010)

Code and Regulations

Deficit Reduction Act of 1984 (P.L. 98-369, § 131(b))

I.R.C. § 332

I.R.C. § 351

I.R.C. § 361

I.R.C. § 367

I.R.C. § 367(d)

I.R.C. § 367(d)(1)

I.R.C. § 367(d)(2)(A)(ii)(I)

I.R.C. § 367(d)(2)(A)(ii)(II)

I.R.C. § 368(a)(1)(F)

I.R.C. § 381(c)

I.R.C. § 482

I.R.C. § 936(h)(3)(B)

I.R.C. § 951(a)

I.R.C. § 954

I.R.C. § 954(c)

I.R.C. § 958(a)

I.R.C. § 6110(k)(3)

T.D. 8087, 1986-1 C.B. 175, 51 Fed. Reg. 17936-01

T.D. 8770, 1998-2 C.B. 3, 63 Fed. Reg. 33550-01

T.D. 8844, 1999-2 C.B. 661, 64 FR 66580-01

Temp. Treas. Reg. § 1.367(d)-1T

Temp. Treas. Reg. § 1.367(d)-1T(a)

Temp. Treas. Reg. § 1.367(d)-1T(c)

Temp. Treas. Reg. § 1.367(d)-1T(c)(1)

Temp. Treas. Reg. § 1.367(d)-1T(c)(3)

Temp. Treas. Reg. § 1.367(d)-1T(d)

Temp. Treas. Reg. § 1.367(d)-1T(d)(1)

Temp. Treas. Reg. § 1.367(d)-1T(e)

Temp. Treas. Reg. § 1.367(d)-1T(e)(1)

Temp. Treas. Reg. § 1.367(d)-1T(e)(3)

Temp. Treas. Reg. § 1.367(d)-1T(f)

Temp. Treas. Reg. § 1.367(d)-1T(f)(1)

Temp. Treas. Reg. § 1.367(d)-1T(f)(3)

Temp. Treas. Reg. § 1.6038B-1T(c)

Temp. Treas. Reg. § 1.6038B-1T(d)

Temp. Treas. Reg. § 1.6038-1T(d)(2)

Treas. Reg. § 1.167(a)-3(b)(3)

Treas. Reg. § 1.6038B-1

Treas. Reg. § 1.6038B-1(c)

Treas. Reg. § 1.951-1(g)

Treas. Reg. § 301.7701-3

Treas. Reg. § 301.7701-3(g)

Treas. Reg. § 301.7701-3(g)(2)

Treas. Reg. § 301.7701-3(g)(2)(i)

Treas. Reg. § 301.7701-3(g)(3)(i)

Miscellaneous Authorities

Guidance Related to Section 951A and Certain Guidance Related to Foreign Tax Credits, 84 Fed. Reg. 29288, 29301 (June 21, 2019)

IRS Notice 2012-39, 2012-2 C.B. 95

IRS Private Letter Ruling 9731039 (May 7, 1997)

N.Y. State Bar Ass'n Tax Section Report on Section 367(d) (Oct. 12, 2010)

Tax Court Rule 121

Tax Court Rule 121(b)

Tax Court Rule 121(d)

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INTRODUCTION

Petitioner respectfully submits this Memorandum in Support of its Motion for Summary Judgment. Petitioner respectfully requests that the Court hold that no immediate lump-sum gain recognition pursuant to § 367(d)(2)(A)(ii)(II) or Temp. Treas. Reg. § 1.367(d)-1T is required under the facts of this case for Petitioner's short taxable year ending September 23, 2011.¹

There is no genuine issue of material fact relating to these issues and Petitioner is entitled to summary judgment as a matter of law.

STATEMENT OF FACTS AND RELATED MATTERS

For ease of reference, below is a narrative statement of proposed facts and related matters. In addition, attached to this memorandum as Exhibit A are Petitioner's Proposed Findings of Fact in numbered paragraphs.

I. THE PARTIES

Petitioner, TBL Licensing LLC ("TBL”), was formerly known as The Timberland Company ("Timberland”). Timberland was acquired by a subsidiary of VF Corporation (“VF”) on September 13, 2011. (First Stipulation of Facts ¶¶ 38 and 39; Petition ¶5(a)(ii), Answer ¶5(a)(ii)). Prior to being acquired, Timberland was the parent of an affiliated group of corporations that designed, developed, manufactured, marketed, and sold footwear, apparel, and accessories under brands such as Timberland and SmartWool. (First Stipulation of Facts ¶¶9 and 10).

Prior to being acquired, the majority of Timberland's revenue was generated outside of the United States and that share of Timberland's revenue was growing. The percentages of Timberland's total revenue generated by its United States, European, Asian, and other foreign reportable segments for 2008 through 2010 were as follows (in thousands):

	2010	2009	2008
United States	$609,484	$575,495	$615,897
	42.6%	44.8%	45.1%
Europe	$561,233	$498,386	$526,137
	39.3%	38.8%	38.6%
Asia	$190,556	$148,214	$160,872
	13.3%	11.5%	11.8%
Other Foreign	$68,211	$63,781	$61,644
	4.8%	5.0%	4.5%
Total Revenue Outside of the U.S.	$820,000	$710,381	$748,653
	57.4%	55.2%	54.9%

(First Stipulation of Facts ¶13, Exhibit 3-J at TBL001942, The Timberland Company's SEC Form 10-K, Annual Report, for fiscal year ended December 31, 2010). Prior to the acquisition, Timberland was a NYSE stock exchange listed company. (First Stipulation of Facts ¶12).

VF is a global manufacturer and seller of apparel products and has a portfolio of apparel brands including The North Face, Nautica, and Wrangler, among others. (First Stipulation of Facts ¶16). VF is the ultimate U.S. parent company, and the direct or indirect owner, of an affiliated group of global corporations (the “VF Controlled Group”). (Petition ¶1(c), Answer ¶1(c)). VF is also the parent of an affiliated group of domestic corporations, including Lee Bell, Inc. (“Lee Bell"), on behalf of which it files consolidated U.S. federal income tax returns (“VF Consolidated Group”). (First Stipulation of Facts ¶¶15 and 18). In 2011, VF was a NYSE stock exchange listed company. (First Stipulation of Facts ¶16).

Lee Bell wholly owns VF Global Investments S.à.r.l. and VF Investments S.à.r.l., which are controlled foreign corporations that were formed in 2009 and that had substantial business operations since their formation. (First Stipulation of Facts ¶19). In 2011 and 2012, VF Global Investments S.à.r.l. and VF Investments S.à.r.l. owned and operated manufacturing and sales businesses through regarded and disregarded entities, including VF Enterprises S.à.r.l. (“VFE”), a Luxembourg controlled foreign corporation, with operations located in a significant number of foreign countries employing thousands of people. (First Stipulation of Facts ¶¶19 and 20). VF Global Investments S.à.r.l. and VFE's gross sales revenue from foreign operations exceeded $3.5 billion in 2011. (See First Stipulation of Facts ¶15, Exhibit 4-J at ADM_ 009296-009303, VF's consolidated Form 1120, for the tax year ending December 31, 2011).

II. TIMBERLAND

On September 13, 2011, VFE acquired Timberland through TBL International Properties LLC, an entity wholly owned by VFE and disregarded for U.S. federal tax purposes. (First Stipulation of Facts ¶26, Exhibits 13-J and 14-J; First Stipulation of Facts ¶¶28, 34-38; First Stipulation of Facts ¶35, Exhibit 20-J; Petition ¶5(a)(ii), Answer ¶5(a)(ii)). VFE was indirectly wholly owned by Lee Bell through VF Global Investments S.à.r.l. and VF Investments S.à.r.l. (First Stipulation of Facts ¶¶19 and 20). Structuring the acquisition in this manner was consistent with the VF Controlled Group's worldwide global growth mission since the majority of Timberland's revenue was generated outside of the United States and that share of Timberland's revenue was growing. (First Stipulation of Facts ¶17, Exhibit 7-J at TBL002104, TBL002105, TBL002107, TBL002129, TBL002133, and TBL002194, VF's SEC Form 10-K, Annual Report, for the fiscal year ended December 31, 2011; First Stipulation of Facts ¶13, Exhibit 3-J at TBL001942, The Timberland Company's SEC Form 10-K, Annual Report, for fiscal year ended December 31, 2010).

The acquisition price of $2.3 billion was paid by VFE. (See First Stipulation of Facts ¶39; First Stipulation of Facts ¶39, Exhibit 23-J; First Stipulation of Facts ¶39, Exhibit 24-J, the Contribution and Payment Agreement). VFE funded the acquisition of Timberland from existing sources of cash, collecting receivables, and through related party borrowings. (Third Stipulation of Facts ¶93, Exhibit 69-P at TBL000915-0945; Declaration of Luther Reece Medlin III ¶¶10-17, Exhibits 6-13).

III. POST-ACQUISITION INTEGRATION AND THE OUTBOUND F REORGANIZATION

Following the acquisition, VF integrated the U.S. and foreign business operations of Timberland within the VF Controlled Group. (First Stipulation of Facts ¶40). As part of the post-acquisition integration, Timberland was reorganized into TBL (Petitioner) pursuant to a domestic § 368(a)(1)(F) reorganization. (First Stipulation of Facts ¶43). At that time, TBL (Petitioner) was treated as a corporation for U.S. federal tax purposes and wholly owned by VFE through TBL International Properties LLC, an entity disregarded for U.S. federal tax purposes. (First Stipulation of Facts ¶¶28, 29, and 37).

After the domestic § 368(a)(1)(F) reorganization, TBL (Petitioner) owned Timberland and SmartWool trademarks, customer relationships, foreign workforce, and tangible assets worldwide. (See First Stipulation of Facts ¶ 44; First Stipulation of Facts ¶45, Exhibits 26-J and 27-J, the Assignment and Assumption Agreements; First Stipulation of Facts ¶10). TBL (Petitioner) then sold the domestic tangible assets and licensed the domestic rights in the intangible Timberland and SmartWool assets to two U.S. limited liability companies that were disregarded for U.S. tax purposes and that were wholly owned by Vans, Inc., a U.S. corporation within the VF Consolidated Group. (First Stipulation of Facts ¶¶46 and 47; First Stipulation of Facts ¶46, Exhibits 28-J and 29-J, the License Agreements; First Stipulation of Facts ¶47, Exhibits 30-J, 31-J, and 32-J; see First Stipulation of Facts ¶10).

As a result, TBL (Petitioner) remained the owner of the Timberland and SmartWool foreign tangible assets and the Timberland and SmartWool intangible assets, consisting of trademarks, customer relationships, and foreign workforce, subject to the license of the domestic rights in the intangible assets to Vans, Inc., a member of the VF Consolidated Group (the “Timberland Intangible Assets”). (First Stipulation of Facts ¶¶46 and 47; First Stipulation of Facts ¶46, Exhibits 28-J and 29-J, the License Agreements; First Stipulation of Facts ¶47, Exhibits 30-J, 31-J, and 32-J; see First Stipulation of Facts ¶10).

TBL (Petitioner) was then reorganized into TBL Investment Holdings GmbH (“TBL GmbH), a Swiss controlled foreign corporation within the VF Controlled Group, in an outbound § 368(a)(1)(F) reorganization transaction (the “Outbound F Reorganization"). (Petition ¶5(a)(vi), Answer ¶5(a)(vi); First Stipulation of Facts ¶¶7, 30, and 53).

VF's relevant legal entity structure immediately prior to the Outbound F Reorganization was as follows (“Chart I"):*

* This chart is stipulated. However, three ownership lines were inadvertently omitted, but none materially affects the relevant tax issues. Lee Bell is owned by all three companies on the line above it. VFE is owned by both companies on the line above it. (See First Stipulation of Fact ¶54).

(First Stipulation of Facts ¶54; First Stipulation of Facts ¶55, Exhibit 37-J at TBL002315). TBL Licensing LLC is referred to herein as “TBL (Petitioner)” or “Petitioner.”

To effectuate the Outbound F Reorganization pursuant to § 368(a)(1)(F), on September 22, 2011, VFE contributed TBL International Properties LLC, an entity disregarded for U.S. federal income tax purposes that owned TBL (Petitioner), to TBL GmbH, as a contribution to capital and, effective September 24, 2011, TBL (Petitioner) elected under Treas. Reg. § 301.7701-3 (the "Check-the-Box Regulations") to be treated as a disregarded entity for U.S. federal income tax purposes (the "Check-the-Box Election"). (First Stipulation of Facts ¶¶48, 52, and 53; Petition ¶5(a)(viii), Answer ¶5(a)(viii)). The contribution of TBL International Properties LLC and TBL (Petitioner)'s Check-the-Box Election are evidenced by the Contribution Agreement and Petitioner's Form 8832, Entity Classification Election. (First Stipulation of Facts ¶48, Exhibit 33-J; First Stipulation of Facts ¶52, Exhibit 36-J).

TBL GmbH did not issue any of its shares as part of the contribution to capital. Under the Contribution Agreement no shares of TBL GmbH were to be issued in the contribution. (First Stipulation of Facts ¶48, Exhibit 33-J). Further, the relevant Commercial Registrar of the Canton of Lucerne, which reflects share ownership of a GmbH company under Swiss law, confirms that no shares of TBL GmbH were issued in the contribution. (First Stipulation of Facts ¶30 and 49; First Stipulation of Facts ¶30, Exhibit 17-J). The contribution and the Check-the-Box Election together constituted the Outbound F Reorganization of TBL (Petitioner) into TBL GmbH. (First Stipulation of Facts ¶53).

VF's relevant legal entity structure immediately after the Outbound F Reorganization was as follows ("Chart II”):*

* This chart is stipulated. However, three ownership lines were inadvertently omitted, but none materially affects the relevant tax issues. Lee Bell is owned by all three companies on the line above it. VFE is owned by both companies on the line above it. (See First Stipulation of Fact ¶55).

(First Stipulation of Facts ¶55; First Stipulation of Facts ¶55, Exhibit 37-J at TBL002316).

As a result of the Outbound F Reorganization, for U.S. federal income tax purposes, Petitioner (TBL) became a disregarded entity and its tax year closed on September 23, 2011. (Petition ¶5(a)(ix), Answer ¶5(a)(ix); Petition ¶1(d), Answer ¶1(d)).

As shown in the stipulated Charts I and II, VFE did not dispose of and continued to own all of the stock of TBL GmbH. (See Respondent's Response to Petitioner's Third Request for Admissions ¶20, Dkt. 28). The Timberland Intangible Assets were owned by TBL (Petitioner) before the Outbound F Reorganization and continued to be owned by TBL (Petitioner) after the Outbound F Reorganization. (See First Stipulation of Facts ¶61; First Stipulation of Facts ¶57, Exhibit 38-P; Respondent's Response to Petitioner's Fourth Request for Admissions ¶¶1 and 2, Dkt. 34). The VF Controlled Group continues to own and operate the Timberland business and use the Timberland Intangible Assets in that business. (See Third Stipulation of Facts ¶101, Exhibit 77-J, VF's SEC Form 10-K, Annual Report, for the fiscal year ended December 30, 2017; First Stipulation of Facts ¶61; First Stipulation of Facts ¶57, Exhibit 38-P; First Stipulation of Facts ¶17, Exhibit 7-J; Respondent's Response to Petitioner's Fourth Request for Admissions ¶¶3 and 4, Dkt. 34; Respondent's Response to Petitioner's Fifth Request for Admissions ¶4, Dkt. 37).

IV. PETITIONER'S REPORTING

Petitioner filed a Form 926 and a statement pursuant to Treasury Regulations §§ 1.6038B-1(c), 1.6038B-1T(c) and 1.6038B-1T(d) ("Treas. Reg. § 1.6038B-1 Statement") associated with the Outbound F Reorganization with its federal income tax return for its short taxable year ended September 23, 2011 (“Short Period Return"). (Petition ¶1(d), Answer ¶1(d); First Stipulation of Facts ¶3, Exhibit 2-J at TBL001420-1423 and TBL001801-1803). Petitioner correctly reported that the transfer of the Timberland Intangible Assets pursuant to the Outbound F Reorganization under § 367(d) resulted in annual payments contingent on the productivity or use of the property pursuant to § 367(d)(2)(A)(ii)(I) and Temp. Treas. Reg. § 1.367(d)-1T (“Annual § 367(d) Payments"). Petitioner correctly did not include in its income any immediate lump-sum gain under § 367(d)(2)(A)(ii)(II). (Petition ¶5(a)(xxxix), Answer ¶5(a)(xxxix); First Stipulation of Facts ¶59; see Petition ¶5(a)(lxxxvi), Answer ¶5(a)(lxxxvi)).

Petitioner stated on its Treas. Reg. § 1.6038B-1 Statement attached to its Short Period Return that the Annual § 367(d) Payments would be annually included in income and reported by Lee Bell on the VF consolidated returns. (First Stipulation of Facts ¶3 Exhibit 2-J at TBL001803, Petitioner's Short Period Return). Lee Bell was, and continues to be, the first U.S. person in the chain of ownership that included Petitioner and TBL GmbH, and it has been required to include in income any Subpart F income earned by Petitioner and TBL GmbH.²

A portion of Petitioner's Treas. Reg. § 1.6038B-1 Statement entitled “(2) Subsequent Transfers” attached to Petitioner's Short Period Return was erroneously completed. (See First Stipulation of Facts ¶3, Exhibit 2-J at TBL001803). The statement erroneously implied that TBL (Petitioner) subsequently transferred TBL GmbH stock to VFE. Petitioner advised Respondent on April 3, 2017 that this portion of the statement was erroneously completed. (Respondent's Response to Petitioner's Third Request for Admissions ¶16, Dkt. 28; Respondent's Response to Petitioner's Fifth Request for Admissions ¶5, Dkt. 37).³ There was no subsequent transfer of the stock of TBL GmbH, deemed or actual. As shown in the stipulated Charts I and II, VFE (VF Enterprises S.à.r.l.) did not dispose of any, and continued to own all, of the stock of TBL GmbH at all times relevant to this case. (See Respondent's Response to Petitioner's Third Request for Admissions ¶20, Dkt. 28).

Lee Bell, accordingly, has included in income the Annual § 367(d) Payments as a result of the Outbound F Reorganization. This income has been annually reported on the VF Consolidated Group federal income tax returns. For the period commencing with the 2011 taxable year through to, and including, the 2017 taxable year, the Annual § 367(d) Payments have totaled $479,064,153 (see table below). Thus, Petitioner's erroneous completion of a portion of the form did not affect Petitioner's and Lee Bell's reporting of income from the transaction.

Year	Reported Amount
2011:	$9,426,185
2012:	$74,425,190
2013:	$80,740,963
2014:	$80,310,914
2015:	$83,881,997
2016:	$71,399,243
2017:	$78,879,661
Total:	$479,064,1534

(First Stipulation of Facts ¶60).

Respondent has not made any adjustments to these Annual § 367(d) Payments. (First Stipulation of Facts ¶63).

Since Petitioner did not make a direct or indirect transfer of the Timberland Intangible Assets to an unrelated person as part of or after the Outbound F Reorganization, Petitioner did not include in its income any immediate lump-sum gain under § 367(d)(2)(A)(ii)(II) or Temp. Treas. Reg. §§ 1.367(d)-1T(d) and (f)(1). (Petition ¶5(a)(lxxxvi), Answer ¶5(a)(lxxxvi); see Petition ¶5(a)(xxxix), Answer ¶5(a)(xxxix)). The Timberland Intangible Assets and the TBL GmbH stock continue to be owned within the VF Controlled Group. (See First Stipulation of Facts ¶61; First Stipulation of Facts ¶57, Exhibit 38-P; First Stipulation of Facts ¶17, Exhibit 7-J; Respondent's Response to Petitioner's Third Request for Admissions ¶20, Dkt. 28; Respondent's Response to Petitioner's Fourth Request for Admissions ¶¶3 and 4, Dkt. 34; Respondent's Response to Petitioner's Fifth Request for Admissions ¶4, Dkt. 37). As noted above, the VF Controlled Group also continues to own and operate the Timberland business and use the Timberland Intangible Assets in that business. (Third Stipulation of Facts ¶101, Exhibit 77-J, VF's SEC Form 10-K, Annual Report, for the fiscal year ended December 30, 2017; First Stipulation of Facts ¶61; First Stipulation of Facts ¶57, Exhibit 38-P; First Stipulation of Facts ¶17, Exhibit 7-J; Respondent's Response to Petitioner's Fourth Request for Admissions ¶¶3 and 4, Dkt. 34; Respondent's Response to Petitioner's Fifth Request for Admissions ¶4, Dkt. 37).

Petitioner showed the fair market values of the Timberland Intangible Assets on its Form 926 that was part of its Short Period Return for its short taxable year ended September 23, 2011. (First Stipulation of Facts ¶3, Exhibit 2-J at TBL001420-1423; Second Stipulation of Facts ¶¶88 and 90; see Second Stipulation of Facts ¶90, Exhibit 68-J). These values were obtained from a valuation report prepared by Ernst & Young, LLP dated January 25, 2012 and were as follows: Trademarks $1,274,100,000; Foreign workforce $23,400,000; and Customer Relationships $174,400,000. (First Stipulation of Facts ¶3, Exhibit 2-J at TBL001420-1423; First Stipulation of Facts ¶59; Second Stipulation of Facts ¶¶88 and 90). This valuation did not apply any useful life limitation. (Second Stipulation of Facts ¶91; see Second Stipulation of Facts ¶90, Exhibit 68-J). It, thus, assumed that the Trademarks would be used indefinitely. Form 926 requires that the full fair market value be stated on the form. (First Stipulation of Facts ¶3, Exhibit 2-J at TBL001421).

Temp. Treas. Reg. § 1.367(d)-1T requires that a 20-year useful life limit be used when calculating amounts under § 367(d). At Respondent's request, Petitioner provided to Respondent on November 5, 2018, a document prepared by Ernst & Young, LLP, showing that the value of the Trademarks was $1,029,200,000, which amount was extracted from its valuation analysis dated January 25, 2012 applying the 20-year limited useful life rule in Treas. Reg. § 1.367(d)-1T. (Petitioner's First Amendment to Petition, Dkt. 33, Exhibit B; Second Stipulation of Facts ¶91; see Second Stipulation of Facts ¶90, Exhibit 68-J).

OVERVIEW OF § 367 AND THE § 367(D) REGULATIONS

Section 367 subjects certain outbound transfers of property to U.S. federal income tax, with § 367(d)⁵ specifically applying to an outbound transfer of intangible property (“IP")⁶ in an exchange described in § 351 or § 361.⁷ Section 367(a) applies to outbound transfers of all other property.

A § 351 exchange generally results in the nonrecognition of gain or loss to persons on their contribution of property to a controlled corporation in exchange for stock of that corporation.

A § 361 exchange generally results in the nonrecognition of gain or loss to the transferor corporation in a reorganization transaction where property is exchanged or deemed exchanged by a transferor corporation solely for stock in another corporation that is distributed or deemed distributed to the transferor corporations' shareholders pursuant to a plan of reorganization.

Even though §§ 351 and 361 both generally provide for nonrecognition treatment, if the transfer is of IP by a United States person (the U.S. transferor) to a foreign corporation (the transferee foreign corporation) in an exchange described in § 351 or § 361, the United States person transferring the IP (the U.S. transferor) will be treated under § 367(d) as having sold the IP in exchange for payments that are contingent on the productivity, use, or disposition of the IP. The U.S. person is treated under the statute as receiving or having received these amounts (I) annually over the useful life of the property (i.e., Annual § 367(d) Payments) or, (II) “in case of a disposition following such transfer,” at the time of the disposition (“Lump-Sum Exception”).⁸

Temp. Treas. Reg. § 1.367(d)-1T (the “§ 367(d) Regulations”) contains the operative rules under § 367(d).⁹ Temp. Treas. Reg. § 1.367(d)-1T(a) states “[t]his section provides rules under section 367(d) concerning transfers of intangible property by U.S. persons to foreign corporations pursuant to § 351 or 361.” The Treasury Decision that adopted the § 367(d) Regulations states that “[Temp. Treas. Reg. § 1.367(d)-1T(c)] provides rules concerning the consequences of such a transfer.”¹⁰

The general rule in the § 367(d) Regulations is that Annual § 367(d) Payments are required if a U.S. person transfers IP to a foreign person in an exchange described in § 351 or § 361.¹¹ Specifically, Temp. Treas. Reg. § 1.367(d)-1T(a) states that including Annual § 367(d) Payments in income is “the general useful life-contingent payment rule.”

The § 367(d) Regulations further provide that if “within the useful life of the transferred [IP]” the U.S. transferor “subsequently transfers,” directly or indirectly, the IP to a related foreign person, then the deemed Annual § 367(d) Payments continue “in the same manner as if the subsequent transfer of stock had not occurred.”¹² However, if the subsequent transfer is to an unrelated person then a lump-sum inclusion is required at that time.¹³

T.D. 8087 also states “Paragraphs (d), (e) and (f) provide rules for cases in which there is a later direct or indirect disposition of the intangible property transferred.”¹⁴ The § 367(d) Regulations use the term “subsequent transfer.” Thus, these are Respondent's operative rules regarding the statutory term “disposition following such transfer.” Three of these rules apply to indirect dispositions of the transferred IP by a transfer of the transferee corporation's stock and one involves a direct disposition of the transferred IP itself. In each, the regulation defines a “subsequent transfer” as one occurring “within the useful life” of the transferred IP.¹⁵

Respondent's reporting requirements for the past 33 years also have used these terms “subsequent transfer” and “within the useful life of the intangible property.”¹⁶

STANDARD FOR SUMMARY JUDGMENT

Pursuant to Rule 121(b) of the Tax Court's Rules of Practice and Procedure and Tax Court case law, summary judgment is warranted when there is no genuine dispute as to any material fact, in which case a decision may be rendered as a matter of law.¹⁷ The Supreme Court has stated that a “[s]ummary judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole.”¹⁸ In light of this standard, this Court uses summary judgment under Tax Court Rule 121 to expedite litigation and avoid unnecessary and expensive trials.¹⁹

The burden is on the moving party to demonstrate that there is no genuine dispute as to any material fact and that he or she is entitled to judgment as a matter of law.²⁰ The nonmoving party may not simply rely on allegations or denials of the pleadings, but instead must set forth specific facts showing that there is a genuine dispute for trial.²¹

There are no genuine issues of material fact in this case. Accordingly, summary judgment is appropriate.

ARGUMENT

I. ANNUAL § 367(D) PAYMENTS HAVE BEEN PROPERLY INCLUDED IN INCOME; THUS, THERE SHOULD BE NO DEFICIENCY

As a result of the Outbound F Reorganization, Annual § 367(d) Payments have been properly included in Lee Bell's income and reported on VF's consolidated income tax returns since 2011 under Temp. Treas. Reg. § 1.367(d)-1T(c)(1).²² Lee Bell is the first U.S. person that indirectly owned TBL (Petitioner) prior to the Outbound F Reorganization and TBL GmbH after the Outbound F Reorganization (see Charts I and II above).²³

The Annual § 367(d) Payments included by Lee Bell have totaled nearly $500 million dollars through and including 2017. These payments cover the first six full years of the inclusion period, creating significant taxable income in the U.S. for the VF Consolidated Group. Lee Bell's inclusions of Annual § 367(d) Payments over the Timberland Intangible Assets' useful lives likely will greatly exceed the amount that Respondent asserts should be included in income in this case.²⁴

Thus, Lee Bell's inclusion of Annual § 367(d) Payments in its income is in accord with the overall construction, purpose and language of § 367(d) and the § 367(d) Regulations. The general rule is that Annual § 367(d) Payments are required when § 367(d) applies to a § 351 or § 361 transaction. This general rule is stated in Temp Treas. Reg. § 1.367(d)-1T(a), which sets forth the purpose and scope of the § 367(d) Regulations. It states, “In general, the U.S. transferor will be treated as receiving annual payments contingent on productivity or use of the transferred property over the useful life of the property. . . ."

Temp Treas. Reg. § 1.367(d)-1T(c)(1), which contains the operative Annual § 367(d) Payment rules consistent with the scope and purpose provision, provides that if a U.S. person transfers IP to a foreign person in an exchange described in § 351 or § 361, the U.S. person transferring the IP is treated as having transferred the IP in exchange for Annual § 367(d) Payments contingent on the productivity or use of the IP and must annually include in gross income the Annual § 367(d) Payments over the useful life of the IP.²⁵

Petitioner's Outbound F Reorganization was a nonrecognition reorganization transaction described in § 368(a)(1)(F). Pursuant to the Outbound F Reorganization, TBL (Petitioner), a U.S. person, was treated as having transferred the Timberland Intangible Assets to TBL GmbH, a foreign corporation.

Petitioner and Respondent do not dispute that the Outbound F Reorganization is subject to § 367(d) as a result of a deemed § 361 exchange.²⁶ It also is not disputed that the Outbound F Reorganization's deemed exchange is described in § 361. Thus, it is undisputed that the Outbound F Reorganization is subject to § 367(d) and Temp. Treas. Reg. § 1.367(d)-1T.

The § 367(d) Regulations require the U.S. person that transferred the IP to include the Annual § 367(d) Payments in income, but they do not require the person to remain a U.S. person for the duration of the Annual § 367(d) Payments inclusion period.²⁷ Here, TBL (Petitioner) became a foreign corporation in the Outbound F Reorganization.

Had TBL (Petitioner) included the Annual § 367(d) Payments in income (as a disregarded entity owned by TBL GmbH after the Outbound F Reorganization), or had TBL GmbH included these payments in its income as the successor to Petitioner, the Annual § 367(d) Payments would have been Subpart F income to TBL GmbH under § 954(c), and Lee Bell would have had to include the Annual § 367(d) Payments in its taxable income as Subpart F income under § 951(a).²⁸ Thus, Lee Bell would have had taxable income in precisely the same amounts under Subpart F had either TBL (Petitioner) or TBL GmbH included the Annual § 367(d) Payment amounts in its income. Petitioner disclosed on its Short Period Return the fact that Lee Bell would be the U.S. person including the Annual § 367(d) Payments and Lee Bell has annually included those amounts in its taxable income.

 

Petitioner reasonably interpreted Temp Treas. Reg. § 1.367(d)-1T(a) and (c) as requiring Lee Bell to include the Annual § 367(d) Payments since TBL (Petitioner) became a foreign corporation in the Outbound F Reorganization. Lee Bell indirectly owned the transferred Timberland Intangible Assets and was a reasonable U.S. person to include the Annual § 367(d) Payments as it was the first U.S. person that owned both TBL (Petitioner) and TBL GmbH.

Respondent's administrative practice of requiring a related U.S. person to include the Annual § 367(d) Payments in income under § 367(d) and the § 367(d) Regulations is illustrated in his Private Letter Ruling (“PLR") 9731039.²⁹ PLR 9731039 holds that the first U.S. person that indirectly transferred the intangible property in the outbound F reorganization should include the Annual § 367(d) Payments.³⁰ This is the approach that Petitioner and Lee Bell took with respect to the Outbound F Reorganization, which was reasonable under Respondent's existing administrative practice.³¹

Consistent with Respondent's administrative practice as evidenced by the PLR, the NYSBA Report states “[The § 367(d) Regulations] imply a preference for continuing the regime of Section 367(d) inclusions while there is a U.S. taxpayer to include the amounts. . . .”³² Respondent received the NYSBA Report³³ and did not seek to refute it.

If Respondent were to argue that a different reporting person was needed, he should have written a regulation so providing. Any issue here “was of the Commissioner's making, and, as such, must be held against him.”³⁴ Respondent has not written a regulation that provides different rules regarding whether a, or which, U.S. person should report and pay tax on the Annual § 367(d) Payments in the situation where the U.S. transferor becomes a foreign corporation in the transaction for U.S. tax purposes. Respondent also has not written a regulation providing that Petitioner's use of Lee Bell was not proper.

Respondent indicated in a 1998 Treasury Decision that regulations addressing whether a U.S. person, and which U.S. person, should include the Annual § 367(d) Payments in income should be written to cover situations where the transferor goes out of existence in the outbound transaction.³⁵ Respondent did not state in his Treasury Decision or otherwise that the § 367(d) Regulations do not apply or need to be rewritten when the transferor becomes a foreign corporation in the transaction, supporting that the existing Annual § 367(d) Payments regulations apply as written.³⁶ Respondent has had over 20 years since the Treasury Decision to write a regulation, if he thinks one is necessary, but has not done so.

In fact, Respondent should not be concerned about which related U.S. person should include the Annual § 367(d) Payments in income given that Respondent has broad authority under §§ 367 and 482 to reallocate the income to a related U.S. person. Temp. Treas. Reg. § 1.367(d)-1T(c) specifically refers to Respondent's authority under § 482. Further, any claim by Respondent that Respondent does not have the ability to ensure that Lee Bell will continue to include the Annual § 367(d) Payments would be disingenuous. Respondent is authorized to examine the Annual § 367(d) Payments that Lee Bell includes in income each year under §§ 367 and 482 to ensure they are in accord with the § 482 arm's length standard, including the commensurate with income rules.³⁷ Thus far, Respondent has chosen not to exercise his authority under § 482.

II. THERE WAS NO “SUBSEQUENT TRANSFER” OF THE TIMBERLAND INTANGIBLE ASSETS TO TRIGGER A LUMP-SUM INCLUSION UNDER THE LUMP-SUM EXCEPTION.

An independent reason that the Court should summarily decide this case for Petitioner is that no subsequent transfer of the Timberland Intangible Assets occurred. A subsequent transfer to an unrelated person is a legal prerequisite to trigger a lump-sum inclusion under the Lump-Sum Exception rules.

The § 367(d) Regulations distinguish between related and unrelated parties. It is undisputed that there was no disposition of the Timberland Intangible Assets to any unrelated party.³⁸ The VF Controlled Group continues to own and operate the Timberland business and to use the Timberland Intangible Assets in that businesses.³⁹

It also is undisputed that there was no subsequent transfer of the Timberland Intangible Assets following the Outbound F Reorganization.⁴⁰

It also should be undisputed that TBL (Petitioner)'s check-box-election that was effective September 24, 2011 could not be the transfer subsequent to the exchange since, if viewed as a transfer, it was itself the outbound transfer of the Timberland Intangible Assets. The Timberland Intangible Assets were first deemed to be transferred to and owned by a foreign corporation as a result of the Check-the-Box Election effective September 24, 2011.⁴¹ Further, the contribution of Petitioner's stock to TBL GmbH on September 22, 2011 could not be an indirect subsequent transfer of the Timberland Intangible Assets since it took place two days before the Check-the-Box Election's effective date.

Nonetheless, Respondent's position is that the Lump-Sum Exception should apply to this case. Respondent's apparent theory is that a deemed disposition of the TBL GmbH stock in the Outbound F Reorganization is itself a subsequent transfer that as matter of law triggers the Lump-Sum Exception rules, even though any such deemed disposition is an indivisible component and an integral part of the Outbound F Reorganization. That is, Respondent's apparent theory is that the Outbound F Reorganization must be sliced into its component parts and treated as separate transactions so that there is first a deemed asset transfer of the IP and then there is a separate, subsequent deemed indirect disposition of that same intangible property in the same reorganization transaction.⁴²

In addition to the background above, there are further independent reasons as a matter of law discussed in subsections A through E below why no “subsequent transfer” of the Timberland Intangible Assets occurred in the Outbound F Reorganization to trigger the Lump-Sum Exception rules.

A. Any Deemed Distribution of the TBL GmbH Stock Was Part of the Outbound F Reorganization and Was Not a Transfer Subsequent to the § 361 Exchange.

Any deemed distribution of the TBL GmbH stock that occurred as part of the Outbound F Reorganization is an indivisible and essential component part of the reorganization itself. Such a deemed distribution of TBL GmbH stock cannot be considered to be a subsequent transfer independent of the Outbound F Reorganization exchange described in § 361. The deemed distribution is a constructive transaction that occurs only for purposes of applying certain reorganization rules. An F reorganization under the statute is defined as “a mere change in identity, form or place of organization of one corporation, however effected.”⁴³

Respondent's attempt to slice the Outbound F Reorganization into deemed, separate components is contrary to longstanding precedent. The U.S. Supreme Court in Commissioner v. Clark relied on the well-established principle that “interrelated yet formally distinct steps in an integrated transaction may not be considered independently of the overall transaction.”⁴⁴ The Supreme Court determined that “the character of the exchange as a whole and not simply its component parts” must be analyzed to determine the relevant tax consequences.⁴⁵

Under Commissioner v. Clark, only by “linking together all interdependent steps with legal or business significance, rather than taking them in isolation,” can federal tax liability be based “on a realistic view of the entire transaction.”⁴⁶ Further, other longstanding precedent also unequivocally provides that “the component steps of a single [reorganization] transaction cannot be treated separately” and that “the steps pursuant to a plan of reorganization [must be treated as] a single transaction rather than as isolated, unrelated transactions.”⁴⁷

Any deemed distribution of stock that occurs for purposes of certain tax-free reorganization rules cannot be treated as a transfer subsequent to the reorganization exchange described in § 361 for purposes of triggering the Lump-Sum Exception rules. If Congress wanted such a deemed distribution in the reorganization itself to trigger the § 367(d) Lump-Sum Exception, it surely would have so provided in § 367(d). It would have written the statute differently. It is implausible that Congress meant § 367(d) to operate in the manner that Respondent asserts in this case. The Annual § 367(d) Payment general rule would not operate as Congress intended and would not operate at all for most, or many, § 361 exchanges.⁴⁸

If Respondent wants to change the general rule in the § 367(d) Regulations,⁴⁹ he should propose new regulations and hold hearings, or ask Congress to change the statute. Comments would be very helpful to Respondent in the context of any such proposed regulations and related hearings. In any event, taxpayers would be put on notice regarding what Respondent's new rule is. Here, taxpayers, including Petitioner, have never been put on notice that Respondent would argue this novel theory or that he would disavow his 33-year-old § 367(d) Regulations.

Congress intended to treat § 351 and § 361 similarly. Section 367(d) states that it applies to a transfer of IP “to a foreign corporation in an exchange described in section 351 or 361.” A § 351 exchange generally results in the nonrecognition of gain or loss to transferors regarding their contribution of property to a controlled corporation in exchange for stock of that corporation. A § 361 exchange generally results in the nonrecognition of gain or loss to transferors of assets in exchange or deemed exchange for stock of the other corporation. Section 367(d) does not provide for different treatment for these two transactions. Congress never stated or otherwise signaled that it intended to treat them differently. Further, no congressional purpose would be served by treating them differently.⁵⁰

If § 351 and § 361 were to be treated differently under § 367(d), there would be a huge premium on avoiding the deemed stock distribution in a § 361 transaction and qualifying the asset transfer under § 351. It would be easy enough to do so. This is not a small point. It also should not be lost on Respondent that his proposed new rule (if implemented by regulation or by a court holding) would make lump-sum gain recognition elective (by using § 361 instead of § 351). There is no congressional or regulatory history that supports this elective treatment. Furthermore, an elective regime could benefit taxpayers, for example, those with net operating losses. Most importantly, Respondent's new theory should not be one that creates unfair surprise for unsuspecting taxpayers (such as Petitioner).

Respondent's position requiring the Lump-Sum Exception to apply in every outbound § 361 reorganization improperly reads § 367(d)(2)(A)(ii)(I) out of the Code and Temp. Treas. Reg. § 1.367(d)-1T(c)(1) out of the § 367(d) Regulations for these § 361 exchanges.⁵¹ Congress and Treasury clearly and explicitly provided for Annual § 367(d) Payments in a § 361 transaction unless there was a subsequent transfer after the § 361 exchange. There certainly is no congressional or regulatory history that this particular related-party transaction should be treated differently from any other related party transaction under these rules.⁵²

After Petitioner's Outbound F Reorganization, Respondent relatively recently issued Notice 2012-39 (the “Notice")⁵³ which does not state that a § 361 distribution of stock, deemed or actual, is a subsequent transfer that triggers the Lump-Sum Exception rules. This Notice is directly at odds with Respondent's position in this case. If a deemed distribution that occurs as an indivisible part of an outbound reorganization were automatically a subsequent transfer that triggered a lump-sum inclusion, then Notice 2012-39 would have been unnecessary. If Respondent's new theory regarding the § 367(d) Regulations had been clear and reasonable, his Notice writers not only would have applied his new theory to the covered transactions in issuing the Notice but also would not have needed to issue the Notice at all.

B. Any Deemed Distribution of the TBL GmbH Stock Could Not Have Occurred Within the Useful Life of the Transferred Timberland Intangible Assets.

The § 367(d) Regulations contain the § 367(d) operative rules and Respondent's interpretations of the § 367(d) statutory language. They define the term “subsequent transfer.” A subsequent transfer is a transfer that occurs after the Annual § 367(d) Payments have started. Temp. Treas. Reg. § 1.367(d)-1T(a).⁵⁴ More specifically, under the § 367(d) Regulations it is a transfer that occurs within the useful life of the transferred intangible property. As noted, this is Respondent's interpretation of, and regulatory guidance regarding, the statutory term “disposition following.”⁵⁵ Thus, under Respondent's own regulations, a deemed transfer in the reorganization transaction itself cannot be a subsequent transfer.

The § 367(d) Regulations define subsequent transfers as follows:

• Temp. Treas. Reg. § 1.367(d)-1T(d)(1) provides that if “within the useful life of the intangible property that U.S. transferor subsequently disposes of the stock of the transferee foreign corporation. . . .” (Emphasis added).

• Temp. Treas. Reg. § 1.367(d)-1T(e)(1) provides that if “within the useful life of the intangible property, that U.S. transferor subsequently transfers the stock of the transferee foreign corporation. . . .” (Emphasis added).

• Temp. Treas. Reg. § 1.367(d)-1T(e)(3) provides that if “within the useful life of the intangible property, that U.S. transferor subsequently transfers any of the stock of the transferee foreign corporation. . . .” (Emphasis added).

• Temp. Treas. Reg. § 1.367(d)-1T(f)(1) provides that if “within the useful life of the intangible property that transferee foreign corporation subsequently disposes of the intangible property. . . .” (Emphasis added).

Respondent cannot argue against his own regulations.⁵⁶ “The Court . . . will not ignore the regulations' explicit terms in order to accommodate respondent's litigating position. While Treasury has the authority to modify its regulations to resolve any conflict within the regulatory scheme, [the Court] must 'apply the provisions of respondent's regulations as [the Court] find[s] them and not as [the Court] think[s] they might or ought to have been written.'”⁵⁷ The § 367(d) Regulations unequivocally define “subsequent transfer” to mean not something that happened in the reorganization itself, but something that happened after the beginning of, and within, the useful life of the transferred IP, which begins after the reorganization transaction.

The useful life of property commences when the new owner places the property into service,⁵⁸ which can occur no earlier here than the day after the Outbound F Reorganization was completed and TBL GmbH had the Timberland Intangible Assets to use in its trade or business. The reorganization transaction in issue was completed immediately before midnight on September 23, 2011 pursuant to a check-the-box election that was effective on September 24, 2011.⁵⁹ Therefore, the earliest that the useful life of the Timberland Intangible Assets could begin with TBL GmbH was Saturday, September 24, 2011. However, since that was a Saturday, the earliest possible placed in service date here would be Monday, September 26, 2011.

The useful life of IP for purposes of § 367(d) could not possibly be treated as starting earlier than when the transferee acquired it. Respondent could not have intended an “earlier-than-acquired” useful life rule in writing the § 367(d) Regulations. Respondent certainly never provided notice to taxpayers that the useful life of transferred IP commences before the transferee receives those assets. Further, to view the properties' useful life as starting before the property was acquired by the transferee would produce bizarre, clearly improper, results.⁶⁰

Under the § 367(d) Regulations, Annual § 367(d) Payments are includible in the transferor's income during the intangible property's useful life, which under Temp. Treas. Reg. § 1.367(d)-1T(c)(3) in no event can be considered to exceed 20 years. An underpinning of the § 367(d) Regulations is that Annual § 367(d) Payments can continue for up to 20 years. Respondent did not intend that this period could be shortened (perhaps to zero) by starting the clock running before the assets are placed in service by the transferee. Doing so would permit a complete “end run” around the regulations' rules and the statute.

Suppose, for example, that a U.S. transferor used the property in its U.S. business for 19 years and then transferred the property to its foreign subsidiary in a § 367(d) transaction. If the transferor's period of use could be counted as a part of the IP's useful life, there would be only one year left for the Annual § 367(d) Payments rules to apply.⁶¹ Assume, as a further example, that the U.S. transferor used the property in its U.S. business for 20 years before the transfer. No Annual § 367(d) Payments would be due at all.

The § 367(d) Regulations' requirement that the intangible property's useful life begins after the close of the transaction in which the transferee acquired the property is consistent with the Annual § 367(d) Payments rule. It also is consistent with Temp. Treas. Reg. § 1.367(d)-1T(a)'s statement that a subsequent transfer is one that is “later,” i.e., after Annual § 367(d) Payment period has started.⁶²

Respondent's long-standing administrative practice is consistent with the § 367(d) Regulations definition of “subsequent transfer” discussed above. Respondent's reporting regulations require that a “subsequent transfer” that is “within the useful life of the intangible property” must be reported on the relevant taxpayer's U.S. federal income tax return.⁶³ This has been Respondent's requirement for the past 33 years.

As a result, a subsequent transfer of the Timberland Intangible Assets could not have occurred in this case since the useful life of the Timberland Intangible Assets for § 367(d) purposes could not have begun until September 26, 2011, which is after the Outbound F Reorganization.⁶⁴

C. The Check-the-Box Treasury Regulations Provide Specific Timing Rules for Any Deemed Transfer of TBL GmbH Stock and, as a Result, There Was No Subsequent Transfer of TBL GmbH Stock.

Any deemed asset transfer or deemed distribution of TBL GmbH stock that is treated as occurring as part of the Outbound F Reorganization was deemed to occur as a result of the Check-the-Box Election.⁶⁵ The Check-the-Box Regulations provide specific timing rules for any such deemed transactions.

Sections 361 and 368 provide the tax consequences for certain reorganization transactions but do not provide timing rules since the transactions all occur as part of the same reorganization transaction. However, Treas. Reg. § 301.7701-3(g) does provide specific timing rules in the context of a Check-the-Box Election, including a Check-the-Box Election that is part of a reorganization transaction.

Treas. Reg. § 301.7701-3(g)(2)(i) states that “The tax treatment of a change in the classification of an entity for federal tax purposes by [a check-the-box] election . . . is determined under all relevant provisions of the Internal Revenue Code and general principles of tax law, including the step transaction doctrine.”⁶⁶ A Check-the-Box Election, thus, is not an isolated event for U.S. federal income tax purposes. Thus, the Check-the-Box Election in the Outbound F Reorganization transaction in issue is not treated as an isolated transaction and cannot possibly be characterized as a parent-subsidiary liquidation governed by § 332⁶⁷ but rather is correctly characterized as part of an outbound F reorganization under these rules. The parties have so stipulated.⁶⁸

The Check-the-Box Election is what caused the transaction to constitute an F reorganization. Without that election there would be no F reorganization. There would only be a contribution by VFE of its interests in TBL (Petitioner) to TBL GmbH as a contribution to capital, which would simply be a § 351 transaction involving a contribution of stock, not IP.⁶⁹ Section 367(d) would not apply to such a stock transaction.

Treas. Reg. § 301.7701-3(g)(3)(i) provides rules for the timing of any deemed transactions that result from the Check-the-Box Election. Specifically, Treas. Reg. § 301.7701-3(g)(3)(i) states that “Any transactions that are deemed to occur under this paragraph (g) as a result of a change in classification are treated as occurring immediately before the close of the day before the election is effective.” Here, that is September 23, 2011, since the election was effective September 24, 2011.

Under Treas. Reg. § 301.7701-3(g)(2) the Check-the-Box Election caused the Outbound F Reorganization. As such, it also caused any concomitant deemed transfers and distributions that are deemed parts of the Outbound F Reorganization to occur. These deemed transactions include the deemed § 361 asset transfer, the deemed stock distribution, and the deemed treatment of TBL (Petitioner) as a disregarded entity. They also caused TBL (Petitioner)'s taxable year to end on the specified date.

As noted above, the Check-the-Box election in issue was effective on September 24, 2011. Thus, the Outbound F Reorganization and its deemed component parts that Respondent asserts should be accorded independent status all occurred simultaneously immediately before midnight on September 23, 2011.⁷⁰ Thus, any deemed distribution as a result of the Check-the-Box Election could not possibly be a transfer subsequent to the § 361 exchange.

The rules in Treas. Reg. § 301.7701-3(g) have been in force for nearly 20 years⁷¹ and provide clear timing rules for deemed transactions in a Check-the-Box reorganization or other transaction. They undoubtedly were intended not only to provide clarity but also to avoid what otherwise could have been a great many disputes in transactions in which Check-the-Box Elections are made (such as Respondent's argument in this very case).

Any contrary rule or holding by this Court that the Check-the-Box Regulations do not apply to a reorganization transaction, of course, would retroactively affect the consequences and the taxable year ends for literally thousands or tens of thousands of reorganizations and other transactions with regard to which a great many taxpayers and IRS examiners have been relying on these very clear timing rules.

D. Taxpayers Need to be Compliant, Not Prescient

Taxpayers need to be compliant, not prescient.⁷² Taxpayers, including Petitioner, certainly could not have foreseen that Respondent would make the argument that he makes in this case leading to a lump-sum inclusion, an argument that he has never made before in any official administrative guidance, and that he would contradict his administrative practice as evidenced in PLR 9731039. Taxpayers, including Petitioner, also could not have foreseen that Respondent would argue against a U.S. Supreme Court decision and his own regulations requiring that any subsequent transfer be within the useful life of the transferred IP or his own Check-the Box Regulations.

If Respondent believes his new theory, he should propose regulations that modify all of these regulations, including his Check-the-Box Regulations and, perhaps, Treas. Reg. § 1.167(a)-3(b)(3) (regarding when an asset is “placed in service”), to implement his new theory. He should hold hearings and receive comments. At least, taxpayers would then be on notice regarding what the new rules are. It is even possible that after hearings and comments Respondent would decide that his new theory is not so good, after all. But he should not ask the Court to write his regulations for him, especially with the risk of causing so much collateral damage in other areas.

E. The Annual § 367(d) Payments Were Properly Reported.

Petitioner correctly reported that the transfer of the Timberland Intangible Assets pursuant to the Outbound F Reorganization under § 367(d) resulted in Annual § 367(d) Payments pursuant to § 367(d)(2)(A)(ii)(I) and Temp. Treas. Reg. § 1.367(d)-1T. Petitioner correctly did not include in its income a lump-sum inclusion amount pursuant to the Lump-Sum Exception.

A portion of Petitioner's Treas. Reg. § 1.6038B-1 Statement entitled “(2) Subsequent Transfers” attached to Petitioner's Short Period Return was erroneously completed. While the statement had no effect on Petitioner's tax return position that Annual § 367(d) Payments were due, it erroneously implied that TBL (Petitioner) subsequently transferred TBL GmbH stock to VFE. Petitioner advised Respondent on April 3, 2017 that this portion of the statement was erroneously completed.⁷³

Any suggestion that there was a subsequent transfer of the stock of TBL GmbH, deemed or actual, simply as a result of Petitioner's erroneous statement would be improper. Petitioner is not bound by a statement that is a mistake of law.⁷⁴ Petitioner is not aware of any legal precedent where a taxpayer was bound by a statement on his tax return that states an incorrect legal position. Under the Check-the-Box Regulations, and for the other the legal reasons described above, there could not have been a subsequent transfer in the Outbound F Reorganization.

This statement was also factually inaccurate. As shown in the stipulated Charts I and II, VFE (VF Enterprises S.á.r.l.) did not dispose of any, and continued to own all, of the stock of TBL GmbH.⁷⁵ Further, as noted in Section II supra, the VF Controlled Group continues to own and operate the Timberland business and to use the Timberland Intangible Assets in that business.⁷⁶

Moreover, even if this statement were accorded respect as Respondent likely will assert, the statement would be without consequence because the relevant useful life of the transferred IP would not have yet started.

III. PETITIONER PREVAILS UNDER TEMP. TREAS. REG. § 1.367(D)-1T(E)(3), EVEN IF A SUBSEQUENT TRANSFER OF THE TIMBERLAND INTANGIBLE ASSETS OCCURRED.

There is a further reason that the Court should hold for Petitioner in this case. Petitioner complied with Temp. Treas. Reg. § 1.367(d)-1T(e)(3) under which a lump-sum inclusion is not triggered under the Lump-Sum Exception rules. Temp. Treas. Reg. § 1.367(d)-1T(e)(3) provides that even if there were a subsequent transfer of the stock of the transferable corporation to a related person, the U.S. transferor “shall continue to include in its income” the Annual § 367(d) Payments.

Temp. Treas. Reg. § 1.367(d)-1T(e)(3) states:

Transfer to related foreign person not treated as disposition of intangible property. — If a U.S. person transfers intangible property that is subject to section 367(d) and the rules of this section to a foreign corporation in an exchange described in section 351 or 361, and within the useful life of the transferred intangible property, that U.S. transferor subsequently transfers any of the stock of the transferee foreign corporation to one or more foreign persons that are related to the transferor within the meaning of paragraph (h) of this section, then the U.S. transferor shall continue to include in its income the deemed payments described in paragraph (c) of this section in the same manner as if the subsequent transfer of stock had not occurred. The rule of this paragraph (e)(3) shall not apply with respect to the subsequent transfer by the U.S. person of any of the remaining stock to any related U.S. person or unrelated person.

The heading of this subsection says it all: “Transfer [of stock of transferee corporation] to related foreign person not treated as disposition of intangible property.” The text of this regulation should be construed and applied in accordance with this heading,⁷⁷ which is consistent with the Purpose and Scope provision of the § 367(d) Regulations. If an indirect subsequent transfer by Petitioner were deemed to have occurred, it would have been to a related foreign person and should not be treated as a disposition of intangible property triggering the Lump-Sum Exception rules.

Thus, Petitioner should prevail under this rule even if there were a subsequent transfer. The fact that Lee Bell continued to receive payments after TBL (Petitioner), the initial U.S. transferor, changed its form neither divests Petitioner of the protection of this section nor triggers an obligation for Petitioner to suffer a lump-sum inclusion under the Lump-Sum Exception rules.

The Tax Court will sustain a taxpayer's reasonable interpretation of the law.⁷⁸ Under the circumstances of this case, the inclusion of Annual § 367(d) Payments by Lee Bell constituted compliance with Temp. Treas. Reg. § 1.367(d)-1T(e)(3) for the reasons discussed in Section I above and for the additional reasons set forth below.

There are a number of independent reasons as a matter of law discussed in Section I, incorporated herein by reference, and in subsections A, B and C below why Temp. Treas. Reg. § 1.367(d)-1T(e)(3) applies to provide for a continuation of the Annual § 367(d) Payments and to prevent a trigger of the Lump-Sum Exception.

A. The Structure and Purpose of the § 367(d) Regulations Support that the Inclusion of the Annual § 367(d) Payments by Lee Bell Was Reasonable.

Tenets of statutory construction apply to regulations.⁷⁹ In interpreting a statute, courts consider its structure and context and the context of terms.⁸⁰ When deciding whether language is plain, a court must read the words “in their context and with a view to their place in the overall statutory scheme.”⁸¹ Further, provisions in regulations that set out the purpose and scope are relied on by courts in interpreting the regulations.⁸²

Under these rules of interpretation, the term “U.S. transferor” should be construed by looking at the § 367(d) Regulations as a whole, including their purpose and scope. Temp. Treas. Reg. § 1.367(d)-1T(a) states, “This section provides rules under section 367(d) concerning transfers of intangible property by U.S. persons to foreign corporations pursuant to section 351 or 361.” It is titled “Purpose and Scope” and states that the Annual § 367(d) Payments are “the general useful life-contingent payment rule.” It also states that “for cases in which there is a later direct or indirect disposition of the [IP] transferred” in the § 351 or § 361 exchange, “[i]n general, deemed annual license payments will continue if a [later] transfer is made to a related person, while gain must be recognized immediately if the transfer is to an unrelated person.”

The term “U.S. transferor” should not be read in a narrow way that strains the overall scheme of the § 367(d) Regulations. The general purpose of the regulations should be supported.

The § 367(d) Regulations provide that a lump-sum inclusion under the Lump-Sum Exception results only when there is a subsequent transfer to an unrelated party, which the parties here agree has not occurred.⁸³ The § 367(d) Regulations do not provide that a lump-sum inclusion under the Lump-Sum Exception results when there is a subsequent transfer to a related party, even if the U.S. transferor becomes a foreign corporation. On the contrary, the § 367(d) Regulations provide that the Annual § 367(d) Payments should continue. That is their purpose and scope.

Nowhere do the § 367(d) Regulations provide for taxing lump-sum gain where only related parties are involved in the initial transfer or a subsequent transfer. This is understandable. As the NYSBA stated in its lengthy 2010 report,

The 1984 Act . . . introduced the concept in Section 367(d) that, rather than having current recognition of gain determined definitively at the time of transfer, the U.S. person transferring the intangible property would be treated as having sold the property in exchange for annual payments contingent on the productivity, use or disposition of the property. This change . . . was intended to better capture the amount of profit attributable to the asset transferred.⁸⁴

The NYSBA Report also states:

[Thus t]hese provisions [the § 367(d) regulations] imply a preference for continuing the regime of Section 367(d) inclusions while there is a U.S. taxpayer to include the amounts, with at least one purpose being so that transfers to related persons cannot be used as a means to elect current recognition in a manner inconsistent with Section 367(d).⁸⁵

Petitioner's reasonable interpretation of Temp Treas. Reg. § 1.367(d)-1T(e)(3), requiring Lee Bell to include the Annual § 367(d) Payments, is consistent with Respondent's administrative practice, which is illustrated in PLR 9731039.⁸⁶ PLR 9731039 holds that a U.S. related party should include in its income Annual § 367(d) Payments under Temp. Treas. Reg § 1.367(d)-1T(e)(3) where the U.S. transferor corporation transferred IP to a related foreign transferee corporation in a § 351 exchange subject to § 367(d) and, in a subsequent transfer following the § 367(d) transfer (apparently some time later), the U.S. transferor reincorporated as a foreign corporation in an outbound F reorganization.

If this Court were to agree that having a related U.S. company treated as a proxy for the U.S. transferor is a reasonable interpretation under the circumstances, then Temp. Treas. Reg. § 1.367(d)-1T(e)(3) is easy to apply. There would be no revenue lost by the government in this situation at all. The government would collect the same tax revenue that it expected when it stated the purpose and scope of the § 367(d) Regulations.

Lee Bell remains in existence as a U.S. entity and Respondent has full powers under §§ 367 and 482 to make sure the Annual § 367(d) Payments are arm's length and that the commensurate-with-income rules apply. This also would be in accord with the scope and purpose of the regulations.

Certainly, imposing a lump-sum inclusion would be a draconian result, essentially a penalty, simply because Respondent believes that the taxpayer chose the wrong party to report the Annual § 367(d) Payments. It is Respondent who has declined to write new § 367(d) regulations. He could have written regulations to cover the transaction in which the transferor becomes a foreign corporation as well as the transaction in which the transferor goes out of existence if he thought the rules needed to be changed. He has had 33 years to do so.

Taxing taxpayers on a lump-sum amount under the Lump-Sum Exception in this situation is not what Congress intended or what the § 367(d) Regulations intend in situations in which all of the relevant parties are related parties.

As a result, even if there were a subsequent transfer under the § 367(d) Regulations, which there was not, Lee Bell, the first U.S. owner of TBL (Petitioner) and TBL GmbH, has been properly including in its income the Annual § 367(d) Payments and should continue to do so, which complies with Temp. Treas. § 1.367(d)-1T(e)(3).

B. The Language of Temp. Treas. Reg. § 1.367(d)-1T(e)(3) Neither Prohibits the Inclusion of Annual § 367(d) Payments by Lee Bell nor Requires a Lump-Sum Inclusion Under the Lump-Sum Exception.

Temp. Treas. Reg. § 1.367(d)-1T(e)(3), quoted in full above, does not limit the inclusion of Annual § 367(d) Payments to the initial “U.S. transferor.” The regulation does not contain limitation language — it does not say that the income inclusion contemplated by the section can “only be by the U.S. transferor” or that the Annual § 367(d) Payments must be included “exclusively [by] the U.S. transferor.”

The phrase “U.S. transferor” does not proscribe inclusion of Annual § 367(d) Payments in income by Lee Bell, a U.S. related party that is the first U.S. owner of TBL (Petitioner) and TBL GmbH. Put differently, Temp. Treas. Reg. § 1.367(d)-1T(e)(3) does not require a U.S. transferor to be the only U.S. person that can include the Annual § 367(d) Payments and is consistent with Respondent's administrative practice.

Petitioner's interpretation of the term “U.S. transferor” is reasonable under the circumstances and supported by caselaw. The U.S. Supreme Court has read terms in a statute as not having a limited application to particular parties when the context of the statue provided that these terms should have a broader meaning.⁸⁷

Further, regardless of the interpretation of the phrase “U.S. transferor,” no language in Temp. Treas. Reg. § 1.367(d)-1T(e)(3) provides for a lump-sum inclusion. Respondent could have included a specific provision in Temp. Treas. Reg. § 1.367(d)-1T(e)(3) concerning this situation, but chose not to do so.⁸⁸

The § 367(d) Regulations do not provide that having Annual § 367(d) Payment income inclusions reported by a related party triggers a lump-sum inclusion under the Lump-Sum Exception. It would have been contrary to § 367(d)'s scope and purpose for Respondent to have written such a regulation.

It also would be an unreasonable reading of the § 367(d) Regulations to require a lump-sum inclusion under the Lump-Sum Exception when the “U.S.” entity that includes in income the Annual § 367(d) Payments is arguably not the initial “transferor,” but nevertheless is a closely related U.S. party, certainly a reasonable proxy for a related entity that has become a foreign corporation for U.S. tax purposes. That, of course, is Respondent's administrative practice as illustrated in PLR 9731039 — to avoid such an extreme result and to apply its regulations in accordance with § 367(d)'s scope and purpose.

As a result, even if there were a subsequent transfer under the § 367(d) Regulations, Lee Bell, the first U.S. owner of TBL (Petitioner) and TBL GmbH, has properly included in its income the Annual § 367(d) Payments, which complies with Temp. Treas. § 1.367(d)-1T(e)(3).

C. Petitioner Is Not Required to Remain a U.S. Person, Therefore, Even if Lee Bell Is Not the Proper Party, the Lump-Sum Exception Does Not Apply.

If this Court disagrees with the reasonableness of Petitioner's designating Lee Bell to include the Annual § 367(d) Payments and also is of the view that there was a “subsequent transfer,” there should still be no lump-sum inclusion under the Lump-Sum Exception in this case.

Temp. Treas. Reg. § 1.367(d)-1T(e)(3) provides that the U.S. transferor must continue to include the Annual § 367(d) Payments in income if there is a subsequent transfer of the transferee's stock to a related person. Thus, TBL (Petitioner) would need to include in income the Annual § 367(d) Payments. There is no requirement under Temp. Treas. Reg. § 1.367(d)-1T(e)(3) that the U.S. transferor remain a U.S. entity.

The regulation uses the term “U.S. transferor,” a noun, to designate the particular entity that must include the Annual § 367(d) Payments in income. It does not state as a direction or condition that the entity must remain as a U.S. entity. Here, TBL GmbH is the successor to TBL (Petitioner), or even more to the point, under the direction of § 368(a)(1)(F), is one in the same entity as TBL (Petitioner).⁸⁹

If Respondent now believes that Lee Bell should not be treated as the transferor to include the Annual § 367(d) Payments, then the literal rule that follows from the language of the regulations is that TBL (Petitioner) should report those amounts. Under the rules of Subpart F, Lee Bell would be taxed on the same amounts that it reported directly, but in this case, under Subpart F instead.

Petitioner did not apply this literal approach because it understood from Respondent's administrative practice that Respondent preferred to have a U.S. related party include the Annual § 367(d) Payments in its income, which would be consistent with the guidance in Temp. Treas. Reg. § 1.367(d)-1T(a). Further, the NYSBA Report that was issued nearly contemporaneously (published a year earlier) with TBL (Petitioner)'s transaction stated a view that was in accord with Respondent's administrative practice, that the § 367(d) Regulations imply a preference for continuing the regime of Annual § 367(d) Payments while there is a U.S. taxpayer to include the amounts.⁹⁰

If Respondent is unhappy with his regulation in this regard, specifically, Temp. Treas. Reg. § 1.367(d)-1T(e)(3), he should fix it. Nonetheless, that is what the regulation provides and in so providing is in accord with the purpose and scope rules of Temp. Treas. Reg. § 1.367(d)-1T(a). Any other interpretation would violate the statutory scheme and the scope of purpose of the § 367(d) regulations.

Most importantly, however, with this literal application of the regulation it is clear that there is no regulatory direction to tax anybody on a lump-sum amount on the facts of this case.

IV. IF THIS COURT CONCLUDES THAT A LUMP-SUM INCLUSION UNDER THE LUMP-SUM EXCEPTION IS APPROPRIATE, ANY SUCH PAYMENT SHOULD BE DETERMINED PURSUANT TO THE 20-YEAR USEFUL LIFE LIMITATION OF TEMP. TREAS. REG. § 1.367(D)-1T.

If this Court determines that a subsequent transfer occurred resulting in a lump-sum inclusion amount under the Lump-Sum Exception, Temp. Treas. Reg. § 1.367(d)-1T(c)(3) requires that the inclusion be calculated with a 20-year useful life limitation. Specifically, Temp. Treas. Reg. § 1.367(d)-1T(c)(3) provides that “For purposes of this section, the useful life of intangible property is the entire period during which the property has value. However, in no event shall the useful life of an item of intangible property be considered to exceed twenty years.”⁹¹

Petitioner showed the fair market values of the Timberland Intangible Assets on its Form 926 without the application of the regulations' useful life limitation, since Form 926 states that the full fair market value be stated on the form.⁹²

The 20-year useful life portion of the Trademark Amount is $1,029,200,000.⁹³ Ernst & Young LLP extracted this amount from its valuation analysis dated January 25, 2012 applying the 20-year limited useful life rule in Treas. Reg. § 1.367(d)-1T.⁹⁴ It is not a new valuation.

Respondent has accepted EY's calculation of the IP's fair market value (calculated using an indefinite useful life) and used that calculated amount in his statutory Notice.⁹⁵ It would be inconsistent for Respondent to now dispute the calculation of the 20-year portion of that amount which is based on the exact same methodology.

As a result, if the Court here determines that a subsequent transfer occurred resulting in a lump-sum inclusion under the Lump-Sum Exception, the inclusion should be determined pursuant to the 20-year useful life limitation in the § 367(d) Regulations with the Trademark Amount that is part of the Timberland Intangible Assets being $1,029,200,000.

CONCLUSION

No immediate lump-sum gain recognition is required pursuant to § 367(d)(2)(A)(ii)(II) or Temp. Treas. Reg. § 1.367(d)-1T for Petitioner's short taxable year ending September 23, 2011. Accordingly, Petitioners asks the Court to grant its Motion for Summary Judgment.

Dated: July 19, 2019

Counsel for Petitioner

James P. Fuller
Fenwick & West
Silicon Valley Center
801 California Street
Mountain View, CA 94041
Telephone: (650) 988-8500
T.C. Bar Number FJ0682
jpfuller@fenwick.com

Larissa B. Neumann
Fenwick & West
Silicon Valley Center
801 California Street
Mountain View, CA 94041
Telephone: (650) 988-8500
Tax Court Bar No. NL0104
lneumann@fenwick.com

Kenneth B. Clark
Fenwick & West
Silicon Valley Center
801 California Street
Mountain View, CA 94041
Telephone: (650) 988-8500
T.C. Bar Number CK0148
kclark@fenwick.com

Julia V. Ushakova-Stein
Fenwick & West
Silicon Valley Center
801 California Street
Mountain View, CA 94041
Telephone: (650) 988-8500
Tax Court Bar No. UJ0049
jushakova-stein@fenwick.com