## Facts

- International Multifoods Corporation (IMC) was a U.S. corporation that developed and franchised donut shops in the United States and abroad using trademarks, franchise methods, and know-how controlled from the United States.
- IMC agreed to sell its Asian and Pacific franchise operations to Duskin Co., Ltd., a Japanese company.
- The sale included tangible assets and intangible assets, including franchise rights, trademarks, know-how, and associated goodwill relevant to the regional franchise business.
- IMC reported that a significant portion of the intangible value constituted “foreign goodwill and going-concern value” attributable to the foreign operations and treated the related gain as foreign-source to improve its foreign tax credit position.
- The IRS determined that the goodwill and franchise-related intangibles were not separable “foreign goodwill,” but were tied to IMC’s U.S.-developed trademarks and franchise system, and recharacterized the gain as U.S.-source income.
- IMC petitioned the U.S. Tax Court to redetermine the resulting deficiency, disputing the sourcing of gain from the intangible assets transferred to Duskin.

## Issues

1. Whether goodwill and going-concern value associated with IMC’s foreign franchise operations could be treated as “foreign goodwill” separate from IMC’s U.S.-developed trademarks, franchise system, and know-how.
2. Whether gain recognized on the sale of the franchise-related intangibles (including goodwill) was U.S.-source or foreign-source under the applicable source-of-income rules.

## Decision

- The Tax Court ruled for the Commissioner on the sourcing issue.
- The court held IMC could not segregate the transferred goodwill and related intangibles as standalone “foreign goodwill.”
- The court concluded the goodwill was part of an integrated set of intangible property derived from IMC’s U.S.-developed and U.S.-controlled franchise system and trademarks.
- As a result, the gain on the intangible assets, including goodwill, was treated as U.S.-source income.

## Legal Principles

- Goodwill claimed to be foreign must be economically distinct from, and not merely derivative of, U.S.-developed trademarks, franchise systems, and related know-how.
- For sourcing gain from the disposition of intangibles, the inquiry focuses on where the intangible value was created, developed, and controlled, not solely on where customers or operations are located.
- The foreign location of franchisees or operations does not, by itself, convert goodwill into foreign-source property when the principal drivers of intangible value originate from a U.S.-based enterprise.

## Conclusion

The Tax Court treated the gain from IMC’s sale of franchise-related intangibles to Duskin as U.S.-source because the asserted “foreign goodwill” was inseparable from IMC’s U.S.-created trademarks and franchise system, and foreign operations alone did not establish independently generated foreign goodwill for sourcing purposes.


International Multifoods Corp. v. Commissioner, 108 T.C. 25 (1997)