The only state planning idea?

Introduction

After decades of state tax consulting, handling scores of merger and acquisition transactions, and reflecting on the opening of a new millennium, we are struck by the vitality of the Delaware Holding Company concept. Like the holiday fruitcake in the famed David Letterman skit, the Delaware Holding Company at first blush appears to be the only state planning idea on the planet.

The concept goes by many names and call letters: Delaware Holding Company (DHC), Delaware Royalty Company (DRC), Passive Investment Company (PIC), Intellectual Property Company (IPCO), and so forth. Not that Delaware is the only haven for this concept. Indeed, one enterprising deputy tax commissioner bemoaned that Puerto Rico was not an appropriate haven. He thought it fitting for accountants and attorneys to be saddled with the acronym for a putative Puerto Rican Investment Company.

Perhaps most amazing is how widespread the concept is. Consider any M & A transactional analysis for a major public U.S. company. The due diligence aspect will focus largely on the propriety of the DHC structure, with the buyer's and seller's hired guns intellectually battling to a draw. In the structuring phase of the M & A activity, practitioners will establish a DHC if it is not in place, extend its scope if it is in place, or present a variety of silver bullets to safeguard the device.

Consultants extolling the DHC's virtues generally cite three key phrases to the corporate buyer:

* The idea is the best thing since sliced bread.

* It is turn key.

* And amazingly, it is proprietary!

Whether this bespeaks marketing agility on the part of state tax consultants, or intellectual bankruptcy, is a matter of conjecture. But it is inescapable that the DHC is virtually the only arrow in many consultant's quivers.

Variations of proprietary planning items often include (1) raising your existing three-percent royalty to five percent; (2) shifting the DHC to a different jurisdiction; and (3) applying the DHC rules to a wider variety of intangible assets. What each of these planning ideas had in common is two-fold: They were the result of a costly state tax analysis, and in each case they were the only idea presented. Some enterprising practitioners have extended and camouflaged the concept. But look deeply at your buy-sell company, REIT, RIC, factoring company, financing company, etc. At the heart of each idea beats the sturdy DHC. And merrily the consultants roll along.

This is not to say there is no place for the DHC. Indeed, in some cases and in some states, it is viable. But the important point is that the corporate buyer, CEOs, Tax Directors, and the Managers of Corporate America, deserves a three-fold caveat:

* The concept should not be oversold.

* Problems with DHCs must be aired.

* Alternative state tax planning techniques should be presented.

Potential Sore Spots

We have identified at least 10 specific sore spots in the undue reliance on DHC:

* The DHC may be lacking the appearance of substance.

* The DHC may be lacking in substance.

* States are increasingly challenging the concept.

* Consolidated reporting negates the intended savings.

* Foreign (non-U.S.) tax issues are rarely identified.

* Legal issues may exist, cutting to the heart of the asset being monetized.

* Myriad hidden costs gush forth from this "turnkey" idea.

* Financial statements may be distorted.

* Practitioners' credibility is called into question.

* Overreliance by tax directors breeds unwarranted complacency.

Each of these will be pursued, before concluding with a modest proposal.

Failed Cosmetics

Many a tax director started down the road of the DHC with the best of intentions. He or she was given a check list of items to adhere to in order for the newly established holding company to have substance. The reason for this is that the DHC was in all likelihood established in a tax-free section 351 transaction. Stated differently, Newco was established by the parent corporation, which transferred the intangible asset into it in exchange for 100 percent of Newco stock. After all, there would be little point in trimming the state tax tail, only to be devoured by the federal dog. Structuring the operation from the outset as valid section 351 transaction was critical. Under section 351 of the Internal Revenue Code, an essential element requirement is that the transaction have business purpose and substance.(1) More about business purpose later.

Substance over form is vital for another reason, this one closer to the state tax side of the equation. If the jurisdictions of the parent corporation (either its state of incorporation or commercial domicile, or the states in which it conducts significant business operations) viewed the special purpose subsidiary as lacking in substance, they could well disregard the corporate existence. In such a case, all taxable incidents of the subsidiary would revert to the parent and be taxable in the parent jurisdiction making the assertion. Thus, substance is necessary to avoid having Newco's veil pierced.

There is a curious conundrum. Tax advisers will tell state tax directors of the need for substance but not too much substance. The reason? With a Delaware-domiciled PIC, the balance of the entire scheme rests on section 1902(b)(8) of the Diamond State's tax code.(2) That provision grants an income tax exemption for passive income or non-Delaware realty income, with respect to a passive corporation. Thus, a parent must impart enough substance to the DHC to avoid an attack by the home jurisdiction (of the parent) without crossing the line (for Delaware purposes) into Newco's being engaged in an active trade or business.

Beyond the difficulty of balancing the not -always- consistent tax laws of the various states, there can be a problem where even the illusion of substance is lacking. Many companies do not have considerable presence in Delaware. True, it is a bastion of incorporation, but not of active corporate government or presence. The inconvenience of establishing major contacts in Delaware, possibly coupled with the home office's desire to cut costs, often leads to the indicia of Delaware substance becoming watered down over time.

For example, those directors' meetings that were supposed to occur quarterly, become annual meetings. Then every other year. Then they cease to take place in Delaware altogether. The requirement that all key investment and legal decisions take place within Delaware falls by the wayside as two realities set in: (1) the key decision-makers are at the parent's headquarters out-of-state; and (2) when litigation threatens the value of the intangible, corporation counsel is at the parent headquarters' state, as are outside counsel. Thus, adhering to the key rules falls by the wayside. As time goes on, the temptation to water down substance becomes powerful, a planning opiate the tax director becomes addicted to.

Until he is caught. And when that time comes, it is a relatively easy matter for the attaching state to pierce the DHC's veil.

Beyond Illusion

Two principles suffuse the Internal Revenue Code in terms of business transaction: substance over form and bona fide business purpose.(3) With respect to substance, the tax consultant may use a checklist that includes the following items (among others):

* Have at least annual directors' meetings in Wilmington.

* Establish a mailing address in Delaware.

* Open Delaware bank accounts.

* If possible, rent office space (several Delaware banks and accountants lease space in their own offices to hundreds of corporations).

* File the annual Delaware franchise tax return. Pay the $60 fee.

Even assuming a company adhered to these points, the pertinent inquiry becomes whether there is true substance in addition to the form. As a general rule, there is not a body of state tax law dealing with substance. A few states, however, have addressed the issue of substance in the context of a PIC. In Georgia, for instance, the Fulton County Superior Court determined that the royalty PIC had engaged in sufficient business activities to constitute a valid, separate, and distinct corporate entity, where the PIC carries on the following business activities:

* Maintains a separate corporate office in Delaware.

* Maintains separate bank accounts in the name of the Investment Company.

* Incurs operating costs.

* Contracts in its own corporate name.

* Holds itself out to third parties as a separate, distinct corporation.

* Holds and manages intangible assets and stock.

* Collects income and pays expenses.

* Makes intercompany loans, and holds unsecured promissory notes therefor.

* Files its own Delaware franchise tax returns.

* Has its own corporate officers and Board of Directors who told regular meetings.(4)

Similarly, the Maryland Circuit Court for Baltimore County recently determined that the Delaware PICs under attack by the State did have economic substance.(5) Therefore, they did not have nexus in Maryland based on the operating affiliate's in-state activities.

In contrast, Virginia has issued many rulings indicating a lack of substance on behalf of the PIC. The rulings examine the facts in detail to determine whether both the PIC and its transactions have economic substance. An absence of economic substance has been found where the PIC shared officers and employees; or had little or no payroll; little or no property or rent expense; insufficient expenses, such as advertising, accounting, and merchandising purportedly supplied to franchisees; a lack of trademarks or tradenames actually listed or valued on the balance sheet; nominal cash balances not correlated to the large number and amount of income and expense transactions; or large intercompany royalty accruals paid only at year end or converted to intercompany debt at year end.(6)

Outside of the above-mentioned cases and rulings, limited, if any, state guidance exists with respect to the necessary substance required of PICs. Hence, federal guidance is important, especially since the states generally incorporate large parts of the Internal Revenue Code. Indeed, for state purposes, the federal tax code is a gap-filler, unless the state code provides explicit guidance to the contrary.(7)

Thus, the federal provisions loom large. Again we ask: Even if a company adheres to a checklist, is this adequate substance?

Often that is not the case. Using a reasonable person standard, would a reasonable CEO truly place an intangible close to the heart of his company, into a separate legal entity with only the minimal controls the checklist suggests? Viewed from a different angle, is it reasonable that an asset that generates mega-dollars (i.e., if the transferred asset is the corporate name leased back at a rate of five percent of gross receipts), would be removed far from the corporate office and placed in a bare-bones entity? Do I turn over an asset critical to the core business to a part-time employee of a Delaware bank?

Turning to federal guidance, one frequently cited common law judicial doctrine is the sham transaction doctrine. Essentially, this doctrine inquires into the validity of the corporation as a separate legal entity and into the validity of the transactions as economically substantive. The doctrine is based on the premise that a transaction should be ignored if it has no valid non-tax business purpose and is entered into solely for the avoidance of taxes. In spite of the potentially harsh tax consequences, the degree of corporate purpose and activity required by courts to avoid the application of this doctrine has in the past been very low.

The standard for recognition of a corporate entity is derived from the decision of the U.S. Supreme Court in Moline Properties, Inc. v. Commissioner,(8) where the Court stated:

   The doctrine of corporate entity fills a useful purpose in business life.
   Whether the purpose be to gain an advantage under the law of the state of
   incorporation or to avoid or to comply with the demands of creditors or to
   serve the creator's personal or undisclosed convenience, so long as that
   purpose is the equivalent of business or is followed by the carrying on of
   business by the corporation, the corporation remains a separate taxable
   entity.

Note, however, that while it is commonly accepted that a corporation has the right to arrange its business in order to maximize tax savings,(9) the purpose of saving taxes is not equivalent to business.(10)

The low level of business activity required under the Moline Properties standard was illustrated in a 1991 decision by the U.S. Court of Appeals for the Eighth Circuit. In Sargent v. Commissioner, a three-judge panel of the Eighth Circuit reversed the Tax Court and found that several professional hockey players were employees of their personal service corporations rather than direct employees of their National Hockey League clubs.(11) Respecting the corporate form enabled the players to include in income only those amounts that their personal corporations paid them as salaries and also to set up richer corporate retirement plans. It was crucial to the Eighth Circuit's decision in Sargent that the players had entered into bona fide arm's-length agreements with their respective corporations, and that the formalities of the employment relationships were maintained after execution of the employment agreements.

Applying this reasoning to the PIC, we must look to whether or not the entity follows through on its stated business purposes, thereby substantiating its business purpose with activity actually performed. Often the non-tax purposes for establishing the PIC include the following:

* To protect the transferred intangibles against the claims of the company's creditors.

* To segregate the trademarks from the company's other assets so that the company can quantify how much money it is making off its trademarks and servicemarks.

* To enhance the value of the company's trademarks and servicemarks.

* To give company management greater flexibility to pursue other business strategies (e.g., franchise, tax-free spin-offs, and raising additional capital).

Segregating the intangibles into a separate legal entity may well protect them from the parent company's creditors without requiring much ongoing maintenance. Consider, however, the other purposes, and whether the PIC is seriously acting to further them. The attorneys involved are likely to be housed within the corporate headquarters; reports delineating the use and profitability of the trademarks and how to increase their value are typically not generated; and company management generally does not act any differently once the trademarks are segregated. One must ask whether a business purpose that is not subsequently followed through on is much of a safeguard.

In addition, substance and business purpose are more likely to be challenged when the transaction provides the taxpayer no meaningful opportunity to earn a pre-tax economic profit and serious repercussions may follow. For example, in Goldstein v. Commissioner, the taxpayer was denied an interest deduction because the deduction was incurred as part of a transaction unlikely to produce a pre-tax profit.(12) Ms. Goldstein borrowed money at a four-percent interest rate and invested the funds in bonds paying less than two-percent interest. Ms. Goldstein prepaid the interest on the borrowed funds and deducted the interest on her tax return. The court determined that the transactions were legitimate borrowings and investments. Thus, the transactions themselves were not sham transactions; they had economic substance. Nevertheless, the court rejected Ms. Goldstein's claim that she expected to earn a profit from a rise in the price of the bonds and disallowed the deduction because Ms. Goldstein entered into the transactions without any realistic expectation of economic profit.

Federal case law has not applied the sham transaction doctrine or an economic substance analysis to the establishment of a PIC that holds intangible assets, since the transactions result in a wash for federal tax purposes. The results could be disastrous, however, if a state applied such an economic substance analysis, and looked to the likelihood of the taxpayer generating pre-tax profit. The question becomes whether it is likely that the PIC structure would truly enhance the value of the company's intangibles?

A similar discussion is appropriate with respect to the section 351 requirement of business purpose. In the absence of state language dealing with business purpose, reliance should be had to the Internal Revenue Code. A perfectly legitimate federal business purpose is the reduction of state (but not federal) taxes.(13) If the true intention in setting up a PIC is state tax reduction, can the taxpayer slap the state revenue commissioners in the face with this federally valid business purpose?

The Empire (of States) Fights Back

Increasingly, states are attacking the PIC concept. The seminal case is Geoffrey v. South Carolina.(14) Geoffrey was the special purpose intangible company established by Toys R Us. The State ruled against Geoffrey, under the dubious rationale that the holding company, a Delaware entity, alleging Delaware substance, with a New Jersey-commercially domiciled parent/transferor had nexus to the Palmetto State because of the presence of its intangibles within the State. Although this raises a host of issues (such as what happened to the physical presence requirement and how should apportionment be treated), the key point is that the State challenged the arrangement.

South Carolina's action spotlighted the PIC concept, and other states picked up the charge (presumably without paying a royalty to South Carolina). Lines of attack took different forms. Legislatively, Ohio enacted provisions that purported to disallow the tax benefits of a passive intangibles company.(15) New Jersey amended its regulation, providing that a foreign royalty company, licensing trademarks and tradenames in the State, is subject to the New Jersey corporate business tax as a result of its licensing activity.(16)

Other states undertook judicial attacks. New York is illustrative of this approach. Specifically, New York relied upon its power to compel combined filings.(17) The reason for the case-by-case reliance is that the Empire State regulations purporting to provide guidelines are meaningless. By way of background, the regulation sets forth three requirements for combination:

* Common ownership (80-percent control of voting stock).

* Unitary test (the companies must be in the same or related lines of business).

* Distortion.(18)

The rub comes with the last concept, distortion. Distortion means that filing on a separate basis does not fairly reflect the activity within the jurisdiction. A presumption of distortion exists if there are substantial intercorporate transactions (i.e., greater than 50 percent of receipts or expenses are intercompany in nature). This presumption, however, can be overcome by a showing of distortion.(19) Beyond this, the term is not defined in the regulations. Thus, the sine qua non is distortion. And distortion is proven by distortion. A tax tautology if one ever existed.

The area cries out for case-law approach, and the juridical pendulum has gone through three swings during the last 30 years. First came an exceptional reliance on the 50-percent test. The presumption was king. Next came a series of cases holding that, even where 50 percent existed, the presumption could be overcome by a showing that the intercompany pricing was at arm's-length. Most recently, a line of cases has arisen suggesting that arm's-length pricing can never be satisfactorily proven. The two cases heralding this approach are Burnham(20) and Tropicana.(21)

The core meaning of Burnham is the outright rejection of evidence purporting to show arm's-length pricing between parent and DHC, for the taxpayer in the case commissioned a contemporaneous third-party pricing study and a fourth, independent party testified to its validity at oral argument. The ruling? Third- and fourth-party evidence was disregarded, despite the lack of contrary evidence, because the workpapers showing the thought processes of the pricing study's authors was not introduced into evidence. This ruling creates an evidentiary standard far beyond the mandate of the administrative tribunal. It converts a best-evidence rule into what Mary Poppins would call the `practically perfect in every way" or the perfect-evidence rule. New York is the only jurisdiction to have such a rule.

Wrong-headed as the result in Burnham is, it suggests how deep the taxing authority's intent is to attack the DHC concept. The ferocity of the attack, and another example of the perfect-evidence rule, was the Tropicana case. There the third-party pricing study was also disregarded. Straining to find that certain of the comparables were not as comparable as he would have liked, the judge tossed out the entire study. Thus, a study that includes analogies, tangential points, and the like may be doing so at great peril. Of course, if these are not added, the judge can view the study as not as weighty as the traditional pricing study, and dismiss it.

If this case-law attack on the DHC is frustrating, what of a state that takes action solely by administrative fiat? This has been the case in Georgia, which as a matter of audit policy attacks the DHC with the weak underpinning that it is within the state's discretionary powers to do so. This is particularly troubling since Georgia's statute and case law specifically provide that the Department must consider the fair profits that would otherwise be earned when it re-determines the income attributable to the State.(22) Of course, there is also a long line of cases, especially in administrative law, that discretion must be accompanied by publicized, articulated standards.

As wrong-headed as the South Carolina-New York-Georgia attacks have been for the reasons enumerated, the attacks have prevailed. Those who rely solely on DHC as a state planning device skate on thin ice, and the crack is spreading.

Consolidated Reporting

New York's forced combined reporting is predicated upon the fact that granting or compelling combination is an exercise of the state's discretionary power.(23) In most other unitary jurisdictions, the concept is not one of discretion, but rather of automatic exercise once the applicable tests are met. The unitary tests have some element of subjectivity, but this is a far cry from discretion.

The relevant test goes by different names: the three unities test, the contribution and dependency test, the functional integration test, and so on.(24) But the underlying standard is whether a flow of value exists among the related corporate parties.(25) In some cases, this is understood to exist outside the arm's-length pricing rules.(26)

Under any formulation of the test, the DHC and its transferor/parent meet the flow-of-value test. Consider the parent that has transferred its name and is licensing it back from the PIC. The elements evincing flow of value are multiple:

* The very fact of the parent's transferring away its own name.

* The fact of siphoning off operating profit from taxable states.

* The low degree of ties in the DHC state and hence strong oversight by the parent.

* Shared functions such as legal or quality control.

Thus, DHC/Parent unity is a certainty. Given the large number of unitary jurisdictions (more than two dozen), the tax benefits of a DHC are compromised from the outset. Yet even here, some taxpayers may claim state tax benefits, even in the unitary states. This could lead to financial statement distortion, not to mention undue reliance on the tax savings vehicle.

Hidden Foreign Issues

At times state tax consultants stray far from their expertise. A classic illustration of this is where state practitioners recommend non-U.S. vehicles. This could come about in a variety of ways. One example, apropos the earlier discussion on New York's combined reporting rules, is to house the intellectual property in a foreign jurisdiction, rather than Delaware. The reason is to avoid call-back of the tax benefits in a combined reporting. New York regulations specifically excluded alien (non-U.S.) corporations from inclusion in a combined return.(27)

But proceeding down this path may spawn a host of unwanted national-level tax issues, which could easily dwarf any state tax savings realized. What if the passive income is not exempt in the foreign jurisdiction? Do the treaty provisions apply? Are there strict withholding requirements? These little-addressed problems can arise for a special purpose vehicle domiciled overseas, for a non-U.S. company doing business via a branch or division in the United States, or for an American multinational. Moreover, as the global economy shifts, those tax issues could well be in flux.

Recently, U.K. Inland Revenue published a discussion document supporting reform of the taxation of intellectual property.(28) How likely is it that the state tax consultant has considered this? At present in the United Kingdom, there is a dichotomy affecting whether (and at what rate) intellectual property that receipts are taxed/expensed. Intangible assets are separated from one another, for example, goodwill from patents.(29) Inland Revenue's discussion paper addresses the need to modernize tax treatment of such property in the electronic commercial world of today. Generally, the new treatment would be to bring tax principles closer to GAAP and to simplify the treatment of royalty flows by removing withholding obligations. In addition, a wider range of royalties would be subjected to tax.(30)

Another key driver in this proposal is to prevent any tax advantage coming about from using consolidated accounting policies rather than those separate subsidiaries. Curiously, if Inland Revenue followed the accounting treatment in the recently promulgated accounting standard FRS 10 on goodwill and intangible assets, there would be bifurcated treatment depending on whether the asset was internally generated or organized.(31) If acquired, it could be capitalized and amortized and hence tax deductible over its useful life as long as the life could be reasonably measured. If internally generated, it would be less susceptible to amortization.

In any event, issues abound that must be considered at the outset (or reviewed periodically thereafter) for any company contemplating this sort of planning device.

Legal Issues

Care must be taken that the very establishment of a DHC does not impair the transferor's use of the tradename. This may be true in certain foreign jurisdictions, where divorcing the tradename from the active administration, quality control, and other functions integrated to the assets continued vitality constitutes a breach.

Imagine the horror a tax director would face if he blithely entered into a DHC arrangement expecting a state tax benefit, and ended up forfeiting any rights to the tradename.

Hidden Costs

The DHC idea is so often sold as a turnkey concept. But, in reality, the implementation costs can be significant. Consider the legal costs of re-registering patents. For a company with a sizable patent portfolio, such as one in a pharmaceutical industry, the expense involved could quickly gobble up the anticipated savings.

The remedy is of course to insist on an itemized, budgeted implementation checklist, so there are no surprises. Why not include a provision in the tax adviser's contract that they are wholly responsible for cost overruns? If the advisers truly know what they are doing and have properly prepared the implementation checklist, then this should not cause a problem. Similarly, if the idea is truly a turnkey, and not so much puffery, there should not be a problem.

Financial Statement Distortion

If any remembered contingencies have not been accounted for, the publicly reported financials, the hallmark of the accounting system, may be severely understated.(32) What if the taxpayer has not taken into account the almost-certain collapse of the DHC structure by the unitary states? Or states adopting the alter ego approach?

Suppose the DHC started out with all appropriate substance, but over time these have been whittled away? In preparing the annual financials, have the independent auditors reviewed the DHC's level of substance? If not (and considering that in a non-DHC filing situation there is no statute of limitations), the potential liabilities owing to a state or states can be excessive and have a dramatic impact on the integrity of the financials. If indeed these need to be restated, the company has incurred actual costs (in the re-preparation) and psychic costs (in terms of lost public credibility) that will nearly always outweigh the savings the DHC offered in the first place.

Practitioners' Credibility Impugned

As more of these arrangements unravel owing to poor planning and misrepresentation (even if by omission) on the part of the tax adviser, the credibility of the entire profession is called into question. Since the bedrock value for a practitioner is reputation, any loss of integrity is damaging in the long-term, and certainly far outweighs short-term revenue gain.

That the actions of a few can undermine the entire group you need only look at recent public opinion surveys. Is the public's uniformly low regard for Congress, or for that matter attorneys, indicative of indifference on a grand scale?(33) Hardly. Rather, the well-publicized malfeasance of a few taints the whole profession.

Familiarity Breeds Complacency

As tax directors glom onto the DHC idea comforted by the thought that everyone is doing it, and having been oversold on its virtues by the practitioner community, an unwarranted tax complacency sets in. The tax director assumes the company's state tax posture is set and thus pays little attention to it. This results in a form over substance creep, as the substance is frittered away over time (perhaps in an excess of cost cutbacks) without anyone to police it. Worse, complacency leads to over-reliance on the one planning idea, and other truly cutting-edge ideas never get an airing. The opportunity cost is staggering. The real cost is unimaginable if the DHC house of cards comes collapsing down.

A Simple Rx

There is a fairly straightforward, two-point remedy to this sorry mess. At its core is the imperative that the tax director exercise restraint and responsibility. The tax director is the guardian of the company's tax position. The buck for accepting unwarranted tax advice stops there. We urge two steps for the diligent tax director:

* Challenge the Adviser. Simple enough, but how often do we ask the probing questions? Do we regularly require a pre-engagement itemized implementation budget, and provide for cost overruns? Solicit a second opinion? Check references if, indeed, they are asked for)? Do you ask more probing questions when purchasing a $30,000 car, then when purchasing a $300,000 state tax plan?

* Diversify the Planning Portfolio. It is amazing how companies that automatically diversify their investment portfolio and place business reliance on several product lines rely on the DHC as the sole state tax strategy. Part two of the prescription is a customized array of planning techniques that fit the company's unique facts to generate state tax savings. Then, if the off-the-shelf DHC idea fails, there is an adequate fallback. If your adviser cannot develop cogent ideas unique to your company's facts, that in and of itself is an indictment of this one-trick pony. And that horse is one that a prudent tax director never should ride.

Final Words

In the land of the intellectually bankrupt, the DHC has become king. It should not be so. While use of passive investment companies can be of value, this is clearly an idea under the microscope. Caveat emptor.

Practitioners and investors need to be held to a higher standard. Practitioners must be expected to display an intellectual grasp and appreciation of a company's nuances beyond the off-the-shelf.

Directors must adhere to the standard in word and deed. A director looking for an off-the-shelf idea because it is less expensive (because it is so routine) could benefit from the adage You buy cheap; you get cheap.

And what of the state tax administrators? In many cases, it is their overreaching that has led many a sincere tax director to do something aggressive, possibly unsound, as a necessary defensive tactic. Thus, while this article has dwelled on the misdeeds of the private sector, the sins of the public sector are great. As scripture says, They will receive the greater condemnation. That is fodder for another article. Suffice it to again resort to scripture: Collect no more than is appointed to you.

(1.) Rev. Rul. 60-331, 1960 C.B. 189; Rev. Rul. 70-140, 1970-1 C.B. 73; Gregory v. Helvering, 293 U.S. 465 (1935); Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943).

(2.) 30 Del. Code [sections] 1902(b)(8).

(3.) Rev. Rul. 60-331, 1960 C.B. 189; Rev. Rul. 70-140, 1970-1 C.B. 73; Gregory v. Helvering, 293 U.S. 465 (1935); Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943).

(4.) Aaron Rents Inc. v. Collins, Fulton County Superior Court, No. D-96025 (June 2, 1994).

(5.) MCI International Telecommunications Corp. v. Comptroller of the Treasury (Md. Circ. Ct., Case No. 24-C-99-002387); SYL Inc. v. Comptroller or the Treasury (Md. Circ. Ct., Case No. 24-C-99-002389); Crown Cork and Seal (Delaware) Inc. v. Comptroller or the Treasury (Md. Circ. Ct., Case No. 24-C-99-002388).

(6.) Ruling of Commissioner, P.D. Nos. 97-439, 97-290, 96-393, 96-387, 96-346, 96-310, 95-229, 94-179.

(7.) Cal. Rev. & Tax Code [sections] 23051.5; Michigan Code [sections] 208.5.

(8.) Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943).

(9.) Helvering v. Gregory, 69 F.2d 809, aff'd, 293 U.S. 465 (1934); Knetsch v. United States, 364 U.S. 361 (1960); National Investors Corp. v. Hoey, 144 F.2d 466 (2d Cir. 1944).

(10.) National Investors Corp. v. Hoey, 144 F.2d 466 (2d Cir. 1944).

(11.) Sargent v. Commissioner, 929 F.2d 1252 (8th Cir. 1991), rev'g 93 T.C. 572 (1989) (reviewed by the full Tax Court, twelve judges concurred in the opinion written by Judge Tannenwald; six judges dissented). The IRS subsequently issued a nonacquiescence in response to the Sargent decision.

(12.) Goldstein v. Commissioner, 364 F.2d 734 (1966), cert. denied, 87 S. Ct. 708 (1967).

(13.) Treas. Reg. [sections] 1.355-2(b)(2); Rev. Rul. 76-187, 1976-1 C.B. 97.

(14.) Geoffrey Inc. v. South Carolina Tax Commission, 437 S.E. 2d. 13 (S.C.), cert. denied, 114 S. Ct. 550 (1993).

(15.) O.R.C. [sections] 5733.042.

(16.) N.J.A.C. [sections] 18:7-1.9.

(17.) Express, Inc., DTA Nos. 812330-812334 (N.Y.S. Div. of Tax Appeals, Sept. 14, 1995); Burnham Corp., DTA No. 814531 (N.Y.S. Div. of Tax Appeals, July 10, 1997); Tropicana Product Sales Inc., DTA Nos. 815253 and 815564 (N.Y.S. Div. of Tax Appeals, Nov. 25, 1998).

(18.) 20 NYCRR [subsections] 6-2.1, 6-2.3.

(19.) 20 NYCRR [sections] 6-2.3.

(20.) Burnham Corp., DTA No. 814531 (N.Y.S. Div. of Tax Appeals, July 10, 1997).

(21.) Tropicana Product Sales Inc., DTA Nos. 815253 and 815564 (N.Y.S. Div. of Tax Appeals, Nov. 25, 1998).

(22.) O.C.G.A. [sections] 48-7-58; Aaron Rents Inc. v. Collins, Fulton County Superior Court, No. D-96025 (June 1, 1994); Blackmon v. Campbell Sales Company, 125 Ga. App. 859, 189 S.E. 2d 474 (1974).

(23.) Tax Law [sections] 211 (4).

(24.) Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U.S. 425 (1980); Edison California Stores, Inc., v. McColgan, 183 P. 2d 16 (1947); Butler Brothers v. McColgan, 315 U.S. 501 (1942).

(25.) Kraft General Foods, Inc. v. Iowa Department of Revenue, 505 U.S. 71 (1992); Container Corp. of America v. Franchise Tax Board, 463 U.S. 159 (1983).

(26.) Allied Signal, Inc. v. Director, Div. of Taxation, 504 U.S. 768 (1992); Container Corp. of America v. Franchise Tax Board, 463 U.S. 159 (1983).

(27.) 20 NYCRR [sections] 6-2.5.

(28.) Reform of the Taxation of Intellectual Property, A Technical Note by the Inland Revenue (March 1999).

(29.) Income and Corporation Taxes Act 1988, [sections] 520 et seq.

(30.) Reform of the Taxation of Intellectual Property, A Technical Note by the Inland Revenue (March 1999).

(31.) FRS 10, Goodwill and Intangible Assets, ASB (December 1997).

(32.) Statement of Financial Accounting Standards No. 5, Accounting for Contingencies.

(33.) Alan Fram, 106th Congress Begins; New Speaker Seeks End to "Pool of Bitterness," Associated Press Newswires (January 6, 1999) (available in Dow Jones Interactive Services).

KENNETH T. ZEMSKY is a partner with Ernst & Young. He has more than two decades of experience in state and local taxation, and is both a certified public accountant and a lawyer. Concentrating on mergers and acquisitions, he is a frequent author and speaker on state tax matters.

DARIAN TWIGG is a certified public accountant and a manager with Ernst & Young LLP in Atlanta. She received her Bachelors of Science degree from the University of Alabama and a Masters of Accountancy from the University of Tennessee. Ms. Twigg specializes in state and local taxation, with an emphasis in corporate restructuring and mergers and acquisitions.