DHL Corporation and Subsidiaries V. Commissioner

DHL Trademark Royalty TP case –Facts DHLI, Hong Kong is a subsidiary of DHL, is responsible for the handling the courier

business outside the U.S. Since 1970s, DHLI designed the DHL logo and registered the DHL name in countries

outside the U.S. DHLI bore the cost of advertising the DHL network outside the U.S. In 1990, DHL and DHIL entered into a agreement, which DHL has the exclusive right

to use and sublicense the “DHL” trademark, and DHLI has exclusive rights outside U.S. The agreement contained no provision for payment of royalties for DHLI’s use of the trademark.

On July 9, 1990, DHL and DHLI executed an agreement granting DHLI an option to purchase the "DHL" trademark for $20 million

In 1995, IRS notified DHL of $194,534,167 deficiencies and $74,777,222 penalties for the tax year 1990-1992. The deficiencies were based on trademark valuation.

U.S. tax court was found in favor of IRS, but limited tax deficiency to $59,427,093. DHL appealed afterwards.

The U.S. Court of Appeals for the Ninth Circuit affirmed the tax court’s application of Section 482, but reverse the tax court’s allocation of a $50 million value of the foreign trademark rights.

The ArgumentsTaxpayer's Arguments:

• DHL contended that the $20 million value set in connection with the acquisition by the foreign investors was determinative.

• DHLI is the developer of the DHL trademark outside the U.S. and the value of that portion should be allocated to DHLI instead of DHL

• DHL argued that the allocation of income between DHL & DHLI was at Arm’s Length

Tax Authority's Arguments: • The income allocation and the

uncharged royalties between DHL & DHLI is not at Arm’s Length

• The valuation of DHL trademark was $600 million instead of $20 million

U.S. Tax Court Decision/Opinion

• the tax court upheld deficiencies and penalties totaling $59,427,093

• The tax court upheld an income allocation to DHL under Section 482 based on a $ 100 million valuation of the trademark.

• The tax court upheld an allocation to DHL based on imputed income for uncharged royalties and uncharged transfer fees for DHLI’s prior use of the trademark.

U.S. Court of Appeal Ninth Circuit decision

• U.S. Court of Appeal upheld the decision of U.S. tax court, deciding the value of the trademark was $100 million

• U.S. Court of Appeal found that DHLI was the developer of the international trademark, which means that the allocation of foreign trademark rights to DHL was inappropriate

• The Ninth Circuit reversed the allocation of unpaid royalties to DHL

Implications

• It is important to identify the ownership of the intangible property; a identification of economic ownership and legal ownership is essential for valuation

• Multinational companies need to prepare proper documentation for tax audits

• Outside advisers should be independent

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