Introduction
On February 24, 2023, the Wisconsin Tax Appeals Commission made a decision regarding Skechers’ licensing transaction with its subsidiary, Skechers USA Inc. II (SKII).
The Commission upheld the Department’s assessment that the transaction lacked a valid business purpose and economic substance.
Skeching out the background
Skechers entered into a license agreement with SKII upon the formation of the subsidiary, which resulted in significant royalty deductions claimed on Skechers’ Wisconsin tax returns. However, the Department disallowed the expense and assessed the intercompany transactions between Skechers and SKII as sham transactions.
The Commission agreed with the Department's assessment, stating that Skechers failed to prove that the transactions had a valid business purpose other than tax avoidance. While there may have been some non-tax benefits related to intellectual property, Skechers did not consider these before forming SKII. The Commission also found that there was no economic substance to the royalty payments, as Skechers could not provide any evidence of a change in business practices, profitability or intellectual property before and after the creation of SKII and the transactions at issue.
In upholding the Department’s assessments, the Commission determined that Skechers failed to provide persuasive evidence or testimony that the licensing transaction with SKII had a valid business purpose and economic substance.
Conclusion
This decision highlights the importance of ensuring that intercompany transactions have a valid business purpose beyond tax avoidance and demonstrate economic substance. Failure to do so may result in the disallowance of claimed expenses and potential tax assessments.