Private Letter Ruling 9852033

This letter responds to Taxpayer's request for a private letter ruling, dated September 5, 1997, regarding the federal income tax consequences of a proposed transaction under section 1253 of the Internal Revenue Code. Specifically, Taxpayer has requested a ruling that its sale to Subsidiary of all right, title, and interest in its Foreign Trademarks while it retains its U.S. Trademarks will not result in the retention of a significant power, right, or continuing interest within the meaning of section 1253(a).

Taxpayer's sale to Subsidiary of all right, title, and interest in its Foreign Trademarks while Taxpayer retains its U.S. Trademarks will not result in the retention of a significant power, right, or continuing interest within the meaning of 1253(a).

Taxpayer is a global developer and marketer of a products and services for the b markets. Taxpayer primarily functions as a manufacturer and distributor of these products and services in the United States. To serve its foreign customers, Taxpayer has established wholly-owned foreign subsidiaries to function as manufacturing and distribution subsidiaries by providing products and services to customers within their territories.

Taxpayer has over x trademarks and trade names registered in the United States and in over y foreign countries. Taxpayer created these trademarks and trade names and has held them for use in the active conduct of its trade or business. Taxpayer represents that its trademarks and trade names are separate property in each country where they are registered. Because trademark rights are territorial, trademarks and trade names may be assigned to different assignees in different countries. The assignee in a particular country receives all right, title, and interest and the exclusive right in that country to use the mark or name in that country with respect to the goods and services for which it is registered. No other company may use the mark or name in that country except under license from the assignee. The assignee has the sole right to license or further assign the mark or name and to renew or pledge the registration as a security.

Currently, Taxpayer receives royalty payments from its foreign subsidiaries that use the trademarks and trade names. A royalty rate for the use of Taxpayer's trademarks and trade names, as well as other intangibles, has been established by two Advance Pricing Agreements: a bilateral agreement with the United States and Country L, and a unilateral agreement with the United States for transactions with countries other than Country L.

Taxpayer intends to restructure its foreign operations to create operational efficiencies by centralizing and simplifying certain foreign management and treasury functions. The restructuring will include creating a holding company for certain of Taxpayer's foreign subsidiaries as well as changing the ownership of some or all of its intangible property, both within and without the United States.

Subsidiary was incorporated in Country M on date 1. Subsidiary purchases products from related parties and sells the products to customers in Country M. On or about date 2, Subsidiary will change its place of management to Country N. Subsidiary will not terminate its corporate charter in Country M.

On or about date 3, Taxpayer will sell the Foreign Trademarks to Subsidiary in exchange for a one-year, interest-bearing debt instrument issued by Subsidiary in an amount equal to the fair market value of the Foreign Trademarks as determined by a valuation at the time of the sale. The sale will require that Taxpayer transfer all right, title, and interest in the Foreign Trademarks. Taxpayer will not sell its U.S. Trademarks. Taxpayer represents that it will not retain any significant power, right, or continuing interest, within the meaning of section 1253, in any of the Foreign Trademarks. Any existing agreement between Taxpayer and its foreign subsidiaries regarding the use of the Foreign Trademarks will be assigned to Subsidiary.

Throughout year 1, Taxpayer will exchange all of the stock of certain foreign operating subsidiaries solely for additional shares of the voting common stock of Subsidiary with a fair market value equal to the value of the stock of the operating subsidiaries being transferred. These exchanges will be structured to qualify as type "B" reorganizations under section 368.

Section 1253(a) provides that a transfer of a franchise, trademark, or trade name shall not be treated as a sale or exchange of a capital asset if the transferor retains any significant power, right, or continuing interest with respect to the subject matter of the franchise, trademark, or trade name.

Section 1253(b)(2) provides that the term "significant power, right, or continuing interest" includes, but is not limited to, the following rights with respect to the interest transferred:

Taxpayer has represented that it will not retain any significant power, right, or continuing interest, within the meaning of section 1253, in any of the Foreign Trademarks. Section 1253(a) provides, in part, that the transfer of a trademark or trade name shall not be treated as a sale or exchange of a capital asset if the transferor retains any significant power, right, or continuing interest with respect to the subject matter of the trademark or trade name. Section 1253(b)(2) provides that the term "significant power, right, or continuing interest" includes, but is not limited to, certain rights with respect to the interest transferred. Taken together, these provisions indicate that the relevant inquiry is whether a taxpayer is retaining a significant power, right, or continuing interest with respect to the subject matter of the trademarks or with respect to the interests transferred. See Stokely USA, Inc. v. Commissioner, 100 T.C. 439 (1993).

In the instant case, Taxpayer has represented that it will transfer all of its powers, rights, and interests with respect to the use of the Foreign Trademarks to market a products and services within foreign countries. Moreover, Taxpayer has represented that these trademarks and trade names are separate property in each country where they are registered. Thus, in transferring its Foreign Trademarks, Taxpayer is transferring property interests that are separate from the U.S. Trademarks that it is retaining. Taxpayer is not retaining any significant power, right, or continuing interest with respect to the subject matter of the Foreign Trademarks or with respect to the Foreign Trademarks transferred. Therefore, based on the facts represented, we conclude that Taxpayer's sale to Subsidiary of all right, title, and interest in its Foreign Trademarks while Taxpayer retains its U.S. Trademarks will not result in the retention of a significant power, right, or continuing interest within the meaning of section 1253(a).

This ruling is restricted to the specific ruling requested and expresses no opinion with respect to any other issue or Code section not specifically addressed herein. Taxpayer has not requested, nor do we express any opinion with respect to potential issues regarding or arising out of the transfers of foreign trademarks, trade names, or other intangibles, or the transfer of the subsidiaries' stock, including without limitation any issues under section 367, any transfer pricing issues under section 482, or any matters governed by the advance pricing agreements currently in effect between Taxpayer and the Service, nor do we express any opinion as to whether the consideration paid in the proposed transaction is equal to the fair market value of the assets. Furthermore, Taxpayer has not requested, nor do we express any opinion regarding the applicability of subpart F to the proposed transaction or the resulting structure.

Final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted. Therefore, the ruling will be modified or revoked by adoption of final regulations, to the extent those regulations are inconsistent with any conclusions in this ruling. See section 12.04 of Rev. Proc. 98-1, 1998-1 I.R.B. 7, 47. A ruling, however, is generally not revoked or modified retroactively when a taxpayer satisfies the criteria of section 12.05 of Rev. Proc. 98-1.

Taxpayer should attach a copy of this letter to its federal income tax return for the year in which the transfer of Foreign Trademarks occurs.

This ruling is directed only to the taxpayer that requested it. Section 6110(j)(3) provides that it may not be used or cited as precedent.

In accordance with a power of attorney on file with the underlying request, a copy of this ruling is being sent to Francis R. Polance of Deloitte & Touche.

Assistant Chief Counsel

(Income Tax & Accounting)

Irwin A. Leib

Deputy Assistant Chief Counsel

(Income Tax & Accounting)