The name DHL is as synonymous with international courier service as FedEx is with the domestic courier business. A recent Tax Court decision centered on a related-party sale of the DHL name, which resulted in the imposition of the 40% U.S. transfer-pricing penalty (DHL Corp., TC Memo 1998-461).
DHL started as a domestic courier service in 1969 and, by the early 1990s, had expanded to be the leading global service. By 1990, the legal structure was a brother-sister relationship with a U.S. corporation (DHL) and a Hong Kong corporation (DHLI). Although DHL created the U.S. domestic infrastructure of captive and third-party couriers, DHLI created this network in numerous locations outside the U.S. All worldwide subsidiaries and third-party couriers were required to use the DHL trade name.
Promoting Brand Name
To promote the DHL trade name, DHL spent approximately $150 million within the U.S.; DHLI spent approximately $380 million outside the U.S. between 1982 and 1992.
During the 1970s and 1980s, DHLI registered the DHL trade name in many foreign jurisdictions outside the U.S. During this time, there were no royalties between DHLI and its foreign subsidiary/third-party network, nor were there any such payments between DHLI and DHL. Further, there was no transfer of the DHL trade name to DHLI to enable the latter to register the trade name in foreign jurisdictions.
By 1992, various third parties purchased a controlling interest in DHLI for $450 million. As part of this transaction, DHLI agreed to purchase the DHL trade name for $20 million, DHL reserved the right to use its own name for 15 years on a royalty-free basis, and, after 15 years, DHL agreed to pay a royalty of 0.75% of its revenue.
In terms of the DHL trade name, the IRS attacked these royalty-related transactions as follows:
* DHL should have charged DHLI a royalty prior to the sale of its name. The Service asserted that, had the royalty been paid, it would have amounted to $80 million.
* In terms of the DHL trade name sale, the sale price was increased from the $20 million that had been agreed to by the parties to $600 million.
In the ensuing Tax Court litigation on the $80 million royalty issue, DHL introduced evidence that, in its dealings with third-party agents, the DHL trade name was used on a royalty-free basis. In lieu of cash royalties, DHL argued, it received noncash value in the form of enhancement to the image of its global network.
Despite this argument, the Tax Court...