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SWIMC and DIMC were incorporated in Delaware seven days after the January 23 vote. We embrace the reasoning of courts that have concluded that tax motivation is irrelevant where a business reorganization results in the creation of a viable business entity engaged in substantive business activity rather than in a “bald and mischievous fiction.” Moline Props. Their boards of directors first met on February 1, 1991, in Delaware. The contested assessment was the result of the commissioner's disallowance of approximately million that Sherwin-Williams had deducted from its taxable income for royalty payments to two wholly owned subsidiaries, Sherwin-Williams Investment Management Company, Inc. Exactly what constitutes an “ordinary and necessary” business expense has been the subject of much discussion over the years.

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Mc Donald discussed this idea with other senior corporate officials, who asked him to evaluate the potential benefits and risks of establishing such subsidiaries and transferring the Sherwin-Williams marks to them.

After concluding that the potential benefits would be substantial, Mc Donald traveled to Delaware, along with another Sherwin-Williams employee, to meet with individuals who had experience in the management of intangible asset holding companies there. It no longer had the exclusive right to use the marks.

(DIMC) (collectively referred to as the subsidiaries), for the use of certain trade names, trademarks, and service marks (marks) that Sherwin-Williams had transferred to the subsidiaries and licensed back as part of a corporate reorganization of its intangible assets in January, 1991.

(SWIMC), and Dupli-Color Investment Management Company, Inc.

On January 23, 1991, the Sherwin-Williams board of directors voted to form SWIMC and DIMC under Delaware law, and to transfer to them all of Sherwin-Williams's domestic marks. Commissioner of Internal Revenue, 899 F.2d 724, 726 (8th Cir.1990); Rose v. In making this inquiry, consideration of the often interrelated factors of economic substance and business purpose is appropriate. After applying the proper legal standards to the evidence, we conclude that the reorganization, including the transfer and licensing back of the marks, had economic substance in that it resulted in the creation of viable business entities engaging in substantive business activity. In this regard, the board's finding that Sherwin-Williams and not the subsidiaries incurred the costs of advertising its products is inconsequential to the ultimate question whether the reorganization was real. 595, 600, 1968 WL 1442 (1968) (tax avoidance purpose for reorganizing business into foreign corporate form irrelevant where form adopted was viable business entity, i.e., one which “actually engaged in substantive business activity”). Because the record in this case establishes that the reorganization and subsequent transfer and licensing transactions were genuine, creating viable businesses engaged in substantive economic activities apart from the creation of tax benefits for Sherwin-Williams, they cannot be disregarded by the commissioner as a sham regardless of their tax-motivated purpose.

The minutes of the January 23, 1991, board meeting set forth the reasons for the board vote, including:(1) improvement of quality control oversight and increased efficiencies with regard to the marks by virtue of having profit centers separate from Sherwin-Williams;(2) easier profit analysis of Sherwin-Williams by having profit centers for the marks that were separate from it;(3) enhanced ability to enter into third-party licensing arrangements at advantageous royalty rates;(4) increased over-all profitability because of the availability of Delaware's corporate income tax exemption for investment management and trademark holding companies;(5) maximized investment returns associated with the marks due to separate and centralized investment management;(6) enhanced borrowing capabilities; 7) subsidiaries could be used in certain instances to acquire businesses;(8) provided ability to take advantage of the well-developed body of corporate law and expeditious legal system in Delaware;(9) insulated the marks from Sherwin-Williams's liabilities;(10) provided flexibility in preventing a hostile takeover; and(11) increased liquidity. Sham transaction cases most often involve discrete transactions by businesses or individuals rather than business reorganizations. Commissioner of Internal Revenue, 752 F.2d 89 (4th Cir.1985) (Rice's Toyota). Commissioner of Internal Revenue, 868 F.2d 851, 854 (6th Cir.1989). United States, 174 F.3d 928, 932 (8th Cir.1999) (“a transaction must have a purpose, substance, or utility beyond creating a tax deduction for it to have ․ effect”). We turn now to the questioned transactions in this case. The evidence of economic substance, or substantive business activity, beyond the creation of tax benefits for Sherwin-Williams was substantial. Finally, that the subsidiaries contracted with Sherwin-Williams for professional services necessary to maintain the marks bears little relationship to whether the reorganization had economic substance. Commissioner of Internal Revenue, 208 F.2d 849, 852 (7th Cir.1954) (corporate taxpayer who transferred patents to stockholder partnership as dividend and licensed them back may convert form of business as it wishes, even though motive is to reduce taxes; conversion must be accorded recognition unless it is a change in form only, without substance); Bass v.

Under the board-approved plan, all of the marks affiliated with aerosol products were assigned to DIMC, and all of the marks affiliated with nonaerosol products were assigned to SWIMC. In determining whether a transaction is real or just form over substance, a number of Federal courts have adopted a “two prong” sham transaction inquiry. The first prong of the inquiry examines whether the transaction has economic substance other than the creation of a tax benefit, which has been labeled the “objective” economic substance test. Other courts have rejected a rigid two-step analysis, opting instead to treat economic substance and business purpose as “more precise factors to consider in the application of [the] traditional sham analysis; that is, whether the transaction had any practical economic effects other than the creation of income tax losses.” Sochin v. We agree with those courts that have concluded that whether a transaction that results in tax benefits is real, such that it ought to be respected for taxing purposes, depends on whether it has had practical economic effects beyond the creation of those tax benefits. The board found that none of the transactions at issue, however defined, had either economic substance or business purpose other than tax avoidance. Legal title and physical possession of the marks passed from Sherwin-Williams to the subsidiaries, as did the benefits and burdens of owning the marks. What is relevant is whether the subsidiaries paid the expenses of running their businesses (with whomever they may have contracted) or whether those expenses continued to be paid by the parent company, as they were in the Syms case. Commissioner of Internal Revenue, 115 F.3d 506, 512 (7th Cir.1997) (public utility's formation of wholly owned Netherlands subsidiary to borrow money for parent overseas without triggering Federal withholding tax requirement not a sham, in spite of tax avoidance motive, where subsidiary engaged in substantive business activity); Stearns Magnetic Mfg.

These assignments were recorded in the United States Patent and Trademark Office, and SWIMC and DIMC became the owners of the marks. Commissioner of Internal Revenue, 115 F.3d 506, 511 (7th Cir.1997), quoting Bass v. The second prong examines whether the transaction was motivated by any business purpose other than obtaining a tax benefit, which has been labeled the “subjective” business purpose test. Commissioner of Internal Revenue, 843 F.2d 351, 354 (9th Cir.), cert. In the context of a business reorganization resulting in new corporate entities owning or carrying on a portion of the business previously held or conducted by the taxpayer, this requires inquiry into whether the new entities are “viable,” that is, “formed for a substantial business purpose or actually engag[ing] in substantive business activity.” Northern Ind. The board also found that, even if the transactions had had a business purpose other than tax avoidance, their lack of economic substance was fatal to Sherwin-Williams's claim. These transactions (the transfer and license back of property) are a product and an intended part of a business reorganization, and their economic substance and business purpose must be assessed not in the narrow confines of the specific transactions between the parent and the subsidiaries, but in the broader context of the operation of the resultant businesses. The subsidiaries entered into genuine obligations with unrelated third parties for use of the marks. Here, those expenses were paid by the subsidiaries to Sherwin-Williams and, in significantly greater amounts, to other unrelated professionals.

Lee, for the Massachusetts Tax Coalition, amicus curiae, submitted a brief. Commissioner of Internal Revenue, 157 F.3d 231 (3d Cir.1998); interest paid on contrived loans, see Knetsch v.

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