Over the past year, the Tennessee Department of Revenue has been actively engaged in the process of compromising a series of Tennessee excise tax assessments issued against companies that deducted intangible expenses paid to affiliated holding companies. The negotiations culminated in a settlement offered in November when the Department agreed to drop the assessments if the assessed taxpayers agreed to pay 25% of the amounts assessed. On November 29, 2011, the Department issued Notice 11-17 expressing its willingness to extend similar settlement terms to taxpayers that have yet to be audited or assessed by the Department.
Assessments on this issue typically have been made in situations in which the Department has identified “significant concerns” regarding the economic substance of the underlying intangible holding company transaction. Factors that the Department has considered relevant are: (1) the nature of the intangible property and how it is used, (2) the method by which the intangible asset was transferred to the holding company, (3) whether actual cash was exchanged in the relevant transactions, (4) whether the holding company has separate employees and office space, and (5) whether there are practical economic effects resulting from the transaction aside from tax planning. See Tenn. Ltr. Rul. 06-28; Tenn. Ltr. Rul. 06-35. When the Department has determined that intangible expenses are not related to bona fide, arms-length transactions, the Department has issued assessments disallowing the deduction of the intangible expense.
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