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Friday, June 3, 2011

Goodbye, Delaware Holding Company

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The glory days of the Delaware holding company have passed, the author of a new Tax Management Portfolio says in an interview published in this week’s Weekly State Tax Report(11/13/09).

"It has a negative connotation to a business trying to protect its intangibles. It has a tax shelter taint to it," says John J. Cronin, author of 1250 T.M., Income Taxes: State Tax Minimization Strategies.

State efforts to combat income-base shifting by multistate corporations—as well as a new climate of caution on the part of corporate management—have changed the state income tax minimization underpinnings, Cronin says. One of the big changes is that companies are losing interest in using an affiliated holding company to house intellectual property.

When that holding company is based in Delaware—a state without an income tax—the effect can be to reduce the tax base of affiliates in separate return states.

While the structure can be defended—and in some cases, might even be advised, "I don't think you'll see that happening as a stand-alone strategy," Cronin says.

"I could make a case for that," he adds, "but central to my case is going to be an extensive § 482 analysis. That's the only way I know of to make any plan involving an intellectual property holding company pass muster."

Portfolio 1250 addresses taxpayer strategies for reducing taxes at the state level, as well as the various jurisdictions' efforts to counter or combat them.

While state efforts to combat income-base shifting — such as royalty interest addback statutes and § 482-like provisions — have hampered efforts to minimize state income taxes, Cronin says, there are still some steps companies can take. He provides several examples in the portfolio of corporate restructurings that should survive state scrutiny.

The key, he says, is that the restructuring cannot be motivated solely by the tax advantage.

"Whatever you do, it has to be done for good business reasons in addition to resulting in savings in state and local income taxes," Cronin says.

— By Dolores W. Gregory

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