Department of Revenue Wins Ruling; Holding Companies Required to Pay
RALEIGH –The Department of Revenue has won a case in Wake County Superior Court which
affirms that corporations that create intellectual property holding companies must pay their
fair share of North Carolina corporate taxes. The decision has implications for more than
$150 million in state revenue due to the widespread use of this tax planning technique.
“This ruling is a victory for the taxpayers of North Carolina,” said Secretary
Norris Tolson. “This is a matter of fairness for the businesses and individuals who
pay their taxes without trying to avoid them.”
The Department had assessed corporate income and franchise taxes against nine wholly-owned
subsidiaries of the Limited Stores Inc. In tax-free transactions, the Limited Stores and eight
of its retail subsidiaries – Lane Bryant Inc., Lerner Inc., Victoria’s Secret
Inc., Abercrombie & Fitch Inc., Cacique Inc., Limited Too Inc., Express Inc. and Structure
Inc. – transferred the trademarks they owned to the taxpayers. The taxpayers then licensed
the trademarks back to the retail companies, which paid royalties to the holding companies
based on the retail companies’ sales. The effect of these transactions was to significantly
reduce the retail corporation’s tax liability. The holding companies paid no tax to
North Carolina or any other state on the royalties.
On May 7, 2002, the North Carolina Tax Review Board upheld the Secretary’s
decision that the holding companies were doing business in the
state for corporate income and franchise tax purposes and are required
to pay North Carolina corporate taxes. The companies appealed the
Board’s ruling to Superior Court.
Today, Judge Leon Stanback issued an order affirming the two lower decisions. At issue in
this case is approximately $2 million. The ruling has far-reaching implications for other
companies that engage in similar accounting and tax maneuvers. The technique of creating a
holding company in a tax haven state to avoid paying North Carolina taxes – one marketed
by tax firms – has gained in popularity in recent years. To date, the Department of
Revenue has identified more than $150 million in corporate income and franchise taxes at issue
due to this practice.
While establishing a holding company in the state is not illegal under North Carolina law,
the decision makes clear that companies engaging in these practices are doing business in
this state and must pay taxes for this privilege.
Public Affairs Office
P.O. Box 25000, Raleigh, NC 27640-0001
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Last modified on:
10/31/07 03:43:46 PM.