United States: Wisconsin Tax Appeals Commission Finds Intangible Holding Company Has No Liability, But Reserves Right To Assess Operating Company

The Wisconsin Tax Appeals Commission (WTAC) recently concluded that an out-of-state intangible holding company did not have a Wisconsin corporation income or franchise tax liability.1 Under the law in effect during the tax periods at issue, the taxpayer's incomeproducing activity occurred completely outside Wisconsin, resulting in a sales factor of zero. Based on this conclusion, the WTAC did not reach the issue of whether imposition of the tax on the intangible holding company violated either the Due Process or Commerce Clauses of the United States Constitution. However, a separate tax assessment against the holding company's parent operating company for the same period remains outstanding.


The taxpayer was formed as a wholly-owned subsidiary of a California-based operating company in 1999. Upon its formation, the parent contributed all of its existing domestic intellectual property, including trademarks, patents, and copyrights, to the taxpayer. The taxpayer licensed the intellectual property to its parent and to unrelated licensees, with the amount of the charged license fees established by a transfer pricing study prepared by the taxpayer's accounting firm.

For the 2000-2003 tax years, the taxpayer did not file Wisconsin corporate income / franchise tax returns. During that period, the taxpayer had no offices, employees, or representatives in Wisconsin and owned no real or tangible personal property in the state. Its parent sold tangible personal property bearing and incorporating its licensed intellectual property to Wisconsin customers. Pursuant to the terms of the licensing agreement, the parent, not the taxpayer, controlled how and where the domestic intellectual property was used.2

In December 2008, the Wisconsin Department of Revenue issued a Notice of Field Audit Action to the taxpayer reflecting an assessment for corporate franchise tax due in the amount of $2,402,930 for the 2000-2003 calendar years. The assessment was issued "in the alternative" to two separate corporate franchise tax assessments issued to the parent and denying its deductions for royalty payments made to the taxpayer (the assessments issued to the parent were held in abeyance pending a determination in this matter). The assessment asserted that the taxpayer had corporate franchise tax nexus with Wisconsin based on the fact that it licensed intellectual property to its parent company for use in Wisconsin. The taxpayer filed a Petition for Redetermination, which was ultimately denied, resulting in the WTAC hearing.

Income Tax Liability

The issues in this matter included: (i) whether the Department had the statutory authority to impose Wisconsin income or franchise tax on the taxpayer; (ii) whether all "incomeproducing activities" relating to the taxpayer's licensing of intangible property during the period at issue occurred outside Wisconsin, thereby resulting in the apportionment of none of the taxpayer's income to the state; (iii) whether the Department wrongly excluded the taxpayer's property and payroll factors from the otherwise applicable three-factor statutory apportionment formula; and (iv) whether the imposition of Wisconsin income or franchise tax on the taxpayer violated the Due Process Clause and/or Commerce Clause of the United States Constitution.

Nexus and Apportionment Law for Years at Issue

Corporations engaged in multistate business are subject to franchise tax in Wisconsin based on apportionable income.3 For the 2000-2003 tax years, Wisconsin taxable income was reportable on a separate entity basis and based on an apportionment fraction composed of a double-weighted sales factor, a property factor, and a payroll factor.4 To compute the sales factor, sales of items other than tangible personal property were sourced to Wisconsin if the income-producing activity was performed in Wisconsin. If the income-producing activity was performed both in and outside Wisconsin, the sales were divided in proportion to the direct costs of performance incurred in each such state in rendering the service (a pro rata approach).5 Specifically, the term "income producing activity" was defined as "the act or acts directly engaged in by the taxpayer for the ultimate purpose of obtaining gains or profit. This activity does not include activities performed on behalf of a taxpayer such as those conducted on its behalf by an independent contractor."6 In the years following the audit period, Wisconsin made a variety of changes to its corporation income tax system.7

Income-Producing Activity

The taxpayer argued that, for the tax years at issue, it engaged in no income-producing activities in Wisconsin, so none of its royalty income should be included in the numerator of its Wisconsin sales factor. The Department, in contrast, asserted that because the taxpayer's royalty income was generated by the sale of tangible property in Wisconsin which bore the licensed trademarks owned by the taxpayer, the relevant income-producing activity was the sale of the items. Thus, the Department contended, the royalties related to the sales of tangible property in Wisconsin by the parent should be included in the numerator of the sales factor and the royalties from the sale of tangible property everywhere by the licensee should be included in the denominator.

In support of its position, the Department cited a case involving a Delaware corporation which sold local and national advertising placed in telephone directories distributed in Wisconsin during the years 1994 through 1996.8 In that instance, the income-producing activity was found to be the distribution of the directories to Wisconsin residents, not the ancillary activities performed in other states.

In considering the Department's position, the WTAC relied upon a prior decision with similar facts involving the sourcing of revenue from media advertising time.9 The Commission had considered whether the revenue earned by a taxpayer from the sale of network and national advertising time in Wisconsin was properly includable in the numerator of the sales factor of its Wisconsin apportionment formula. The taxpayer had derived advertising revenue in Wisconsin from both local advertising, solicited by a Wisconsin sales staff, and national advertising, placed by national sales representatives located outside the state. The Commission found that the network and national advertising revenues were based upon the showing or broadcasting of the advertisements. Thus, the income-producing activity was the actual broadcasting of the programming desired by the advertiser and the commercial spots during that programming, which was located in Wisconsin.

To identify the income-producing activity engaged in by the taxpayer in the current case, the WTAC focused on the terms of the licensing contract. Also, the WTAC relied upon the Department's long-standing rule for the tax period at issue, which stated that "income producing activity" means "the act or acts directly engaged in by the taxpayer for the ultimate purposes of obtaining gains or profits."10 The only activity directly engaged in by the taxpayer was the licensing of the domestic intellectual property. To the extent design, development, and marketing activities related to the intellectual property might have aided in these sales, the activities took place outside Wisconsin. Thus, the taxpayer engaged in no income-producing activities in Wisconsin during the tax period at issue, resulting in a Wisconsin sales factor of zero.

Distinguishing between the cases cited as supportive of the Department's position, the WTAC noted that those taxpayers had employees, property, and direct activities in Wisconsin. By contrast, the taxpayer had no employees or property in Wisconsin and did not directly engage in any activities in the state. As a result, it had no "income-producing activities" in Wisconsin and no part of its royalty income was includable in the numerator of its Wisconsin sales factor. While the sale of tangible property bearing the trademark owned by the taxpayer is certainly an income-producing activity, the WTAC found, "it is an activity of the taxpayer's parent corporation, not the taxpayer. To reach a different conclusion and impose a market-based sourcing rule like the one adopted by the Wisconsin legislature in 2009 would be contrary to the express language of the statutes and regulations in effect during the tax periods at issue, as well as the legislative history leading up to the 2009 statutory change."

Because the WTAC concluded that the taxpayer had a zero apportionment factor for Wisconsin franchise tax purposes, it did not consider whether the Department had the statutory or constitutional authority to impose the tax, nor whether the Department erred in excluding the taxpayer's property and payroll factors, which were zero, in its computation of taxable income.


The statutory changes enacted by Wisconsin effective for dates after the tax period at issue were adopted in part to address intellectual property affiliate structures which allowed certain companies to reduce taxes in separate reporting states. The adoption of sales factor sourcing rules for income from intangible assets based on where the intangible assets are used more closely mirrors destination-based sourcing rules long used to source income from sales of tangible personal property. Finally, the changes to the sales factor sourcing rules render the identification of an "income-producing activity," the very crux of this decision, unnecessary.

Wisconsin, like many other states, has denied operating companies a deduction for royalty payments made to intellectual property companies. Such claims have been sustained for a multitude of reasons, including that the primary purpose to form the intellectual property affiliate was tax avoidance and that such formation otherwise lacked a valid business purpose.11 Other arguments sustained in various jurisdictions include that the intellectual property affiliate lacked economic substance, the organization of the intellectual property affiliate was a sham transaction, and/or the denial of the deduction for the royalty payments was necessary to more clearly reflect income pursuant to the state's version of Internal Revenue Code Sec. 482. In Wisconsin, the WTAC has upheld the Department's denial of deductions for royalties paid to a related entity based on the fact that the primary purpose for the creation of the affiliate and payment of royalties was tax avoidance, and that payment of the royalties otherwise had no economic substance or business purpose.12

Held in abeyance are franchise tax assessments against the taxpayer's parent company, which deny the deductions taken by that entity related to the royalty payments made to the taxpayer. No specific details were provided regarding the decision to move forward with this proceeding first, rather than proceeding with the seemingly more common approach of first addressing the assessments against the parent company. Perhaps the tax liability at issue in this case was greater than the assessments against the parent, or the taxpayer was more confident of its abilities to succeed in this argument. As no other case involving royalty payments to an intellectual property affiliate has gone to trial in Wisconsin since Hormel, it appears that the taxpayer's parent will likely face additional action if the taxpayer's matter is not appealed by the Department.13 Time will tell whether that case reaches the WTAC or whether the parties decide it more prudent to settle the issue.

1 Skechers USA, Inc. II v. Wisconsin Department of Revenue, Wisconsin Tax Appeals Commission, No. 10-1-173, July 31, 2015.

2 Importantly, the licensing agreement between the taxpayer and its parent was negotiated and executed outside Wisconsin. In addition, all activity engaged in by the taxpayer relating to the designing, developing, and marketing of its intellectual property, as well as all work to increase the number of its patents and trademarks, took place outside Wisconsin.

3 WIS. STATS. § 71.25 (5) (prior law).

4 WIS. STATS. § 71.25 (9)(d) (prior law).

5 WIS. STATS. § 71.25 (9)(e) (prior law).

6 WIS. ADMIN. CODE § 2.39(6) (prior law).

7 Wisconsin enacted legislation to phase in a single sales factor apportionment formula, which became fully implemented for taxable years beginning after December 31, 2007. Act 37 (S.B. 197), Laws 2003. Wisconsin also changed the rules for sourcing sales of services and intangible property. Act 25 (A.B. 100), Laws 2005; Act 2 (S.B. 62), Laws 2009. The new method of sourcing sales, other than sales of tangible personal property, generally assigns receipts from royalty income based on a market-sourcing approach. Specifically, for taxable years beginning on or after January 1, 2009, gross royalties and other gross receipts received for the use or license of intangible property, are sourced to Wisconsin if the purchaser or licensee uses the intangible property in the operation of a trade or business at a location in Wisconsin. If the purchaser or licensee uses the intangible property in more than one state, the royalties from the use of the intangible property are divided in proportion to the use of the intangible property in those states. WIS. STATS. § 71.25(9)(dj), adopted by Act 2 (S.B. 62), Laws 2009. A listing of intangible property receiving such treatment includes patents, copyrights, trademarks, trade names, services names, franchises, licenses, specifications, blueprints, processes, techniques, formulas, designs, layouts, patterns, drawings, manuals, technical know-how, contracts, and customer lists. Finally, for tax years beginning on or after January 1, 2009, Wisconsin adopted mandatory combined reporting. Act 2 (S.B. 62), Laws 2009.

8 Ameritech Publishing, Inc. v. Wisconsin Department of Revenue, 788 N.W.2d 383 (Wis. Ct. App. 2010).

9 The Hearst Corp. v. Wisconsin Department of Revenue, Wisconsin Tax Appeals Commission, No. 01-I- 227 (P-II), Jan. 22, 2008.

10 WIS. ADMIN. CODE § 2.39(6) (prior law) (emphasis added).

11 Wisconsin was the first state to codify an economic substance requirement. WIS. STATS. §§ 71.10(1m) and 71.30(2m), as adopted by Act 2 (S.B. 62), Laws 2009. For tax years beginning on or after January 1, 2009, transactions considered to lack economic substance are statutorily disallowed. Wisconsin had followed a similar administrative policy prior to codification. See, for example, Hormel Foods Corp. v. Department of Revenue, Wisconsin Tax Appeals Commission, No. 7-I-17, Mar. 29, 2010. In that instance, the WTAC applied general economic substance principles to a period prior to adoption of the statute.

12 Hormel Foods Corp. v. Department of Revenue, Wisconsin Tax Appeals Commission, No. 7-I-17, Mar. 29, 2010.

13 Although Hormel appealed the WTAC decision to the Circuit Court, the case was ultimately settled prior to hearing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.