James F. McDonough
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Victoria's Secret Lawsuit May Have Tax Implications
Author: James F. McDonough
Date: April 8, 2013
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The outcome of a Victoria’s Secret lawsuit may have significant tax law implications for companies that use U.S.-based contract manufacturers, according to a new Reuters analysis.
L Brands Inc, owner of Victoria’s Secret and Bath & Body Works stores, is currently involved in a tax case surrounding whether $25.4 million in tax breaks are valid. A 2004 law was designed to help bring manufacturing jobs back to the U.S. by allowing American companies with manufacturing operations to claim a Section 199 tax deduction. L Brands, formerly Limited Brands, employed U.S.-based contract manufacturers produce gels, creams and other items for its stores and gave its contractors specific instructions to follow, Reuters explained.
Despite not owning the contract manufacturing company that produced and labeled its products, L Brands then claimed the tax deductions, arguing that it “controlled and monitored every stage of the production cycle,” the news source reports.
However, the Internal Revenue Service is disputing the deductions taken between 2007 and 2009.
The federal agency theorizes that L Brands did not “communicate frequently with the contract manufacturers” or have any control over the types of raw materials included in the manufacturing process. As a result, it claims the tax breaks are not valid.
The case has not yet began, but analysts say it will have large implications for several U.S. companies.
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