On March 29, 2012, the Circuit Court of the City of Richmond held that an exception to Virginia’s related party addback statute applied to licensing arrangements that included a sublicensor. Wendy’s International, Inc. v. Virginia Department of Revenue, No. CL09-3757 (Va. Cir. Ct. 2012). This decision is one of only a handful throughout the United States addressing the application of an exception to state “addback” statutes that requires the denial of deductions of intangible expenses paid to a related party.
For purposes of calculating Virginia taxable income, Virginia law requires taxpayers to make certain adjustments to federal taxable income. Va. Code Ann. § 58.1-402.A. In 2004, the Virginia legislature passed House Bill 5018, Sp. Sess. 1 (2004), which included an addback provision for intangible expenses and costs paid to related members that were excluded from federal taxable income. Specifically, Virginia’s addback statute provides, in relevant part:
[T]he amount of any intangible expenses and costs directly or indirectly paid, accrued, or incurred to, or in connection directly or indirectly with one or more direct or indirect transactions with one or more related members to the extent such expenses and costs were deductible or deducted in computing federal taxable income for Virginia purposes.
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