## Facts

- DHL, a U.S. package-delivery company, held exclusive rights to use the “DHL” trademark in the United States.
- Document Handling Ltd., International (DHLI), a related Hong Kong corporation, operated and expanded DHL’s business abroad through a network of foreign affiliates and held exclusive rights to use the mark in foreign commerce.
- DHL, DHLI, and another related entity were under common control for purposes of 26 U.S.C. § 482.
- In a late-1980s restructuring involving unrelated foreign investors, the transaction included an option to purchase the “DHL” trademark; the option price moved from an early figure around $50 million to $20 million at closing.
- Before the sale, DHL did not charge DHLI any royalties for DHLI’s foreign use of the “DHL” name and mark.
- The IRS asserted the parties’ arrangements were not arm’s length under § 482 and reallocated income to DHL based on a high trademark valuation and on “uncharged royalties” for DHLI’s pre-sale use.
- The Tax Court valued the worldwide trademark at $100 million, allocated $50 million to U.S. rights and $50 million to foreign rights, upheld § 482 income reallocations (including imputed royalties), and sustained accuracy-related penalties under 26 U.S.C. § 6662.

## Issues

1. Whether the Tax Court clearly erred in valuing the worldwide “DHL” trademark at $100 million for purposes of § 482 allocations.
2. Whether § 482 permitted allocating to DHL income attributable to foreign trademark rights when DHLI bore the costs and risks of developing the mark’s foreign value.
3. Whether § 482 permitted imputing “uncharged royalties” to DHL for DHLI’s pre-sale foreign use of the mark.
4. Whether § 6662 accuracy-related penalties were proper given DHL’s valuation support and reliance on professional advice.

## Decision

- The court affirmed the Tax Court’s $100 million valuation of the worldwide trademark as not clearly erroneous.
- The court reversed the § 482 allocation to DHL of income attributable to foreign trademark rights.
- The court reversed the § 482 allocation to DHL of income based on “uncharged royalties” for DHLI’s prior foreign use of the mark.
- The court reversed the imposition of § 6662 accuracy-related penalties.
- The court otherwise affirmed.

## Legal Principles

- Under 26 U.S.C. § 482, the IRS may reallocate income among commonly controlled entities to prevent tax evasion and to clearly reflect income, but allocations must reflect the economic ownership of income-producing activities.
- For intangibles, the “developer” that bears the costs and risks of development generally is entitled to the return attributable to the developed intangible; an “assister” may be entitled only to an arm’s-length fee.
- A court may uphold a factbound intangible valuation if it is not clearly erroneous, even when it differs substantially from both the taxpayer’s transaction price and the IRS’s asserted value.
- § 482 does not support imputing royalties to an entity for foreign exploitation of an intangible where the related foreign entity is the developer of the foreign rights and goodwill.
- Accuracy-related penalties under 26 U.S.C. § 6662 may be avoided where the taxpayer shows reasonable cause and good-faith reliance on professional valuation advice and transaction structure evidence consistent with that reliance.

## Conclusion

The Ninth Circuit upheld a $100 million worldwide trademark valuation but held that § 482 could not shift to the U.S. parent income tied to foreign trademark rights and pre-sale foreign-use royalties where the related foreign company developed the foreign goodwill, and it vacated § 6662 penalties based on reasonable-cause, good-faith reliance on professional valuation support.


DHL Corp. & Subsidiaries v. Comm’r of Internal Revenue, 285 F.3d 1210 (9th Cir. 2002)