NZ Sportswear Co. Can’t Deduct Management Fee

(CN) - The North Face founder and his partners in the New Zealand sportswear company Canterbury can't claim a deduction on their U.S. tax return for management fees paid to Canterbury's former owners, the U.S. Tax Court ruled.

In 1999 Kenneth Klopp, founder of The North Face brand of outdoor gear, and partners Christopher Woodward and David Treece formed a shell corporation to acquire LWR Industries. LWR owned the Canterbury brand, a major sponsor of New Zealand's famed rugby team the All Blacks.

The U.S.-based Canterbury Holdings created a New Zealand corporation to take over LWR Industries. LWR Industries then hired BIL, its former parent company, to manage LWR.

Canterbury Holdings tried to deduct the management fees paid to BIL on its taxes.

The Internal Revenue Service rejected Canterbury Holdings' claim that the fees were an ordinary and necessary business expense, because the company had no other business function than to buy the Canterbury brand. Nor did the New Zealand entity directly benefit from BIL's management, the IRS said, as LWR received BIL's management expertise.

Judge Holmes of the U.S. Tax Court agreed that the money used to pay for LWR's management looked more like a non-deductible loan or capital expenditure than a necessary business expense.

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