The taxpayer in the case, See’s Candies, transferred its intangibles to a related insurance company in a tax-free transfer-and-license-back. On its tax return, See’s deducted the royalties it paid to the insurance company for the use of the intangibles. Normally, under Utah’s tax system, a corporation doing business in Utah which is part of a “unitary group” of related companies must compute and apportion its income collectively with the other members of that unitary group by filing a combined return. However, insurance companies are not subject to income tax in Utah, and See’s owned too few shares in the insurance company to be subject to combined reporting. See’s tax return therefore did not clearly reflect its income, because a portion had been shifted, tax-free, to a related entity.
Utah Code § 59-7-113 provides authority to the Commission to reallocate income and deductions between related companies. The Utah statute uses very similar wording to the federal 26 U.S.C. § 482, and so the lower court applied the related federal regulation in determining that the deduction was permissible. The MTC filed its amicus brief on appeal to point out that the federal regulation was inapplicable in this case, because under the federal taxing scheme, the effect of the deductions would already be eliminated. At the state level, this is accomplished by combined reporting, which is generally the standard used to remedy distortion of income. Although See’s was not unitary with the insurance company, under prior jurisprudence, See’s had asset unity with its trademarks, and should therefore be combined with them, and the deductions disallowed.
You can read the brief by clicking here 