# Appendix — VFJ Ventures, Inc. v. Surtees (No. 08-916) > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386017_0069%3A02 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 2009 ## Text la APPENDIX A SUPREME COURT OF ALABAMA 1070718 Ex parte VFJ VENTURES, INC., f/k/a VF JEAN°WEAR, INC.; (In re: G. THOMAS SURTEES, in his official capacity as commissioner of the Alabama Department of Revenue, and the Alabama Department of Revenue We VFJ VENTURES, INC., f/k/a VF JEANSWEAR, INC.) PETITION FOR WRIT OF CERTIORARI TO THE COURT OF CIVIL APPEALS September 19, 2008, Released As Corrected September 25, 2008. OPINION JUDGES: LYONS, Justice. Cobb, C.J., and See, Woodall, Stuart, Smith, Bolin, Parker, and Murdock, JJ., concur. OPINION BY: LYONS LYONS, Justice. VFJ Ventures, Inc., f/k/a VF Jeanswear, Inc. (“VFJ”), sued in the Montgomery Circuit Court the commissioner of the Alabama Department of 2a Revenue, in his official capacity, and the Alabama Department of Revenue. At the time the complaint was filed, Dwight Carlisle was the commissioner of the Alabama Department of Revenue. During the pendency of the case, G. Thomas Surtees was substituted pursuant to Rule 25(d), Ala. R. Civ. P., as a defendant, in his official capacity, when he became the commissioner of the Alabama Department of Revenue. Tim Russell is now the commissioner of the Alabama Department of Revenue; he is now a defendant, in his official capacity, pursuant to Rule 43(b), Ala. R. App. P. (Russell and the Alabama Department of Revenue will hereinafter be referred to collectively as “the Department.”) The trial court entered a judgment in favor of VFJ. The Department appealed to the Court of Civil Appeals; that court re- versed the judgment of the trial court and remanded the case for the entry of a judgment in favor of the Department. Surtees v. VFJ Ventures, Inc., |Ms. 2060478, February 8, 2008] So. __ 2d __, (Ala. Civ. App. 2008). VFJ then filed a petition for certiorari with this Court; we granted certiorari review. After considering the record in this case, the briefs of the parties and the amici curiae, the oral arguments of the parties, and the opinion of the Court of Civil Appeals, we agree with the views expressed by Presiding Judge Thompson in his thorough and well reasoned opinion. In light of that thoughtful opinion, we see no need to explicate further. We affirm the judgment of the Court of Civil Appeals, and we adopt Presiding Judge Thompson’s opinion in its entirety, as the opinion of this Court. AFFIRMED 3a Cobb, C.J., and See,’ Woodall, Stuart, Smith, Bolin, Parker, and Murdock, JJ., concur. 1 ‘ . . ° Although Justice See did not sit for oral argument of this case, he has viewed the video recording of that oral argument 4a APPENDIX B COURT OF CIVIL APPEALS OF ALABAMA 2060478 G. THOMAS SURTEES, in his official capacity as commissioner of the Alabama Department of Revenue, and the Alabama Department of Revenue ¥. VFJ VENTURES, INC., f/k/a VF JEANSWEAR, INC. February 8, 2008, Released As Corrected October 22, 2008. OPINION JUDGES: THOMPSON, Presiding Judge. Thomas and Moore, JJ., concur. Pittman and Bryan, JJ., con- cur in the result, without writings. OPINION BY: THOMPSON THOMPSON, Presiding Judge. VFJ Ventures, Inc. (““VFJ”), f/k/a VF Jeanswear, Inc., filed an appeal in the Montgomery Circuit Court (“the trial court”) pursuant to § 40-2A-7(b)(5)(b), Ala. Code 1975, challenging a decision of the Alabama Department of Revenue assessing against VFJ an amount representing additional corporate income tax purportedly owed the State; it also named the com- missioner of the Department as a defendant.’ We re- VFJ named “Dwight Carlisle, in his official capacity as the commissioner of the Department of Revenue” as a defendant, it 5a fer to the two named defendants collectively as “the Department.” The Department responded, arguing that the as- sessment should be upheld. The Department later filed a motion for a partial summary judgment, which the trial court denied. The trial court conducted a lengthy trial at which evidence was presented ore tenus and numerous exhibits submitted. The trial court also accepted posttrial briefs from the parties. On January 24, 2007, the trial court entered a judgment in favor of VFJ. The Department timely appealed to this court pursuant to § 12-3-10, Ala. Code 1975. VFJ manufactures and sells jeanswear sold under the Lee@ and Wrangler® brand names in the United States. VFJ has two distribution facilities and a “cutting” facility in Alabama. Those facilities employ approximately 600 people. In 2001, the tax year at issue in this case, VFJ’s gross sales were approxi- mately $2.1 billion; only a portion of VFJ’s gross sales were attributable to its activities in Alabama. “Under both the Due Process and the Commerce Clauses of the [United States] Constitution, a state may not, when imposing an income-based tax, ‘tax value earned outside its borders.” Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 164, 103 S. Ct. 2933, 77 L. Ed. 2d 545 (1983) (quoting ASARCO, Inc. v. Idaho State Tax Comm’n, 458 U.S. 307, 315. 102 S. Ct. 3103, 73 L. Ed. 2d 787 (1982)). Thus, oniy that part of VFJ’s income that was fairly attributable to later substituted G. Thomas Surtees as a defendant in place of Carlisle when Surtees came to hold the office of commissioner of the Department of Revenue. See Rule 25(d), Ala. R. Civ. P. 6a its presence in Alabama is subject to taxation in this state. When a corporation such as VFJ has manufactur- ing facilities or operating facilities or performs activi- ties in more than one state, a formula known as an “apportionment factor” is used to determine how much income is attributable to each state. The appor- tionment factor is used to determine the portion of the corporation’s income that is subject tc income tax in each of the states in which the corporation has ac- tivity. See Allied-Signal, Inc. v. Director, Div. of Taxation, 504 U.S. 768, 778, 112 S. Ct. 2251, 119 L. Ed. 2d 533 (1992) (“Because of the complications and uncertainties in allocating the income of multistate businesses to the several States, we permit States to tax a corporation on an apportionable share of the multistate business carried on in part in the taxing State.”). In this case, the Department and VFJ seem to have agreed on the application of a common three- part apportionment factor that has been approved by the United States Supreme Court. See Container Corp. of America v. Franchise Tax Bd., 463 U.S. at 170 (“[NJot only has the three-factor formula met our approval, but it has become .. . something of a benchmark against which other apportionment for- mulas are judged.”). Alabama, like a number of other states, has adopted the apportionment factor referenced in Container Corp. of America v. Franchise Tax Bd., supra, for determining the portion of a multistate corporation’s income that may be taxed in this state. The appor- tionment factor is set forth in § 40-27-1, Art. IV, 7 9, Ala. Code 1975, as a part of Alabama’s adoption of the Multistate Tax Compact. The Multistate Tax Compact creates a uniform system for taxing entities Ja such as VFJ, who have operations or are active in more than one state. State Dep’t of Revenue v. MGH Megmt., Inc., 627 So. 2d 408, 408-09 (Ala. Civ. App. 1993) (“The [Multistate] Tax Compact provides for the allocation and apportionment of income of tax- payers doing business in more than one state in such a manner as to avoid duplicative taxation.”). In opening statements during the trial of this mat- ter, one of the attorneys accurately summarized Ala- bama’s apportionment factor for the trial court as follows: “You take the ratio of the property in the state to the property out of state, a ratio of the sales in the state to the sales out of the state, a ratio of the payroll in the state to the sales [sic] out of the state, add them together and divide by three, and that average is your apportionment factor.” For the 2001 tax year, VF.J’s apportionment factor for Alabama was 13.9299%. Using that factor, VFJ reported approximately $13,702,000 in income to be apportioned to Alabama on its state corporate income-tax return for the 2001 tax year. VFJ is a subsidiary of VF Cozporation (“VF”), a parent holding company comprising hundreds of sub- sidiaries worldwide. VF’s corporate headquarters is located in Greensboro, North Carolina. Among VF’s subsidiaries are numerous intangible management companies (“IMCOs”) that owa and manage trade- marks, most of which are used by other VF subsidi- aries. All the IMCOs are Delaware corporations. A treatise on state taxation has explained the func- tion of IMCOs like those in the VF corporate family as follows: 8a “One of the standard tax-planning devices corpo- rations employ to reduce taxable income in states where they conduct their operations is to trans- fer their trademarks or trade names to an intan- gibles holding company ({IMCO]) and license back the trademarks or trade names for a roy- alty. The royalty, which is deductible to the op- erating company, reduces its income in the states where it carries on its business. The [IMCO], on the other hand, ordinarily pays no tax on its roy- alty income because it is taxable—or at least taxpayers so contend—only in a state that does not tax such income (e.g., Delaware).” J. Hellerstein & W. Hellerstein, State Taxation q 9.20[3] j] (2007 Cum. Supp.). Two of the IMCQOs in the VF corporate family are the H.D. Lee Company, Inc. (“Lee”), and the Wran- gler Clothing Corporation (“Wrangler”), which own and manage trademarks for Lee® and Wrangler® brands, respectively. Lee and Wrangler license their respective trademarks to VFJ and other VF subsidi- aries, as well as to third parties. It is undisputed that VFJ and the other subsidiaries of VF, including Lee and Wrangler, are “related members” as that term is defined for the purpose of determining Alabama’s corporate income tax. Testimony at trial indicated * Section 40-18-1(18), Ala. Code 1975. defines the term “re- lated member” as: “A person that, with respect to the taxpayer any time during the taxable year, is a related entity as defined in this section, a component member as defined in 26 U.S.C. § 1563(b) of a controlled group of which the taxpayer is also a component, or is a perso. to or from whom there is attri- bution of stock ownership in «cordance with 26 U.S.C. § 1563/e).” Ya that Lee and Wrangler generally charge a 5% royalty rate to both related-member and third-party licen- sees. In 2001, the tax year at issue, approximately 78% of Lee’s income came from licensing agreements with related members. For that same year, approxi- mately 97% of Wrangler’s licensing income was de- rived from lic-nsing agreements with related mem- bers. In Delaware, [MCOs such as Lee and Wrangler are subject to taxation only under limited circumstances. See Del. Code Ann. tit. 30, § 1902. Because the roy- alty payments are generally deductible expenses as to the licensee operating companies, the royalty pay- ments made by related-member licensees that com- prise the corporate income of the IMCOs escape taxa- tion on the state level. Accordingly, the creation of the Delaware IMCOs created significant state-tax savings for VF.J and other subsidiaries of VF by effec- tively shifting income out of states that do impose corporate income tax to a state that does not impose such a tax. To illustrate this process, the record indicates that in 2001 VFJ paid Lee $36,220,000 in licensing royalty fees for its use of the Lee» trademarks on its prod- ucts, and it paid Wrangler $66,420,000 for the use of its Wrangler® trademarks. On its 2001 federal in- come-tax return, VFJ deducted those royalty pay- ments as ordinary and necessary business expenses, see 26 U.S.C. § 162, thereby reducing the amount of its federal taxable income. Because federal taxable income is the starting point for the calculation of tax- able income in Alabama, see § 40-18-33, Ala. Code 1975, the deduction of those royalty payments as business expenses also served to reduce VF.J’s tax- able income in Alabama. Thus, the royalty payments 10a VFJ made to Lee and Wrangler for the use of their trademarks in its operating facilities in Alabama and other states worked to transfer funds out of this state, which has a corporate income tax, to the Dela- ware IMCOs, thereby ensuring that those royalty payments could not be subjected to taxation on the state level. In the 2000 tax year, the use of the prac- tice of making royalty payments to the related- member IMCQOs resulted in a total state-tax savings for VFJ (for its total operations, not just those in Alabama) of approximately $ 5.5 million. VFJ’s 2001 state-tax savings as a result of royalty payments to the related-member IMCOs was approximately $ 6 million. The payment of royalty fees to a related member located in a jurisdiction that does not impose a state corporate income tax works to avoid state taxation only in states known as “separate-entity” or “sepa- rate-reporting” states. In those states, including Ala- bama, each entity in a corporate group that has activity in the state must file a separate corporate income-tax return in the state. The basis of taxation is the amount of income earned within the state by the individual corporate entity. In a_ separate- reporting state, “each part of an affiliated group of corporations is treated as a separate entity” for the purpose of determining the amount of taxable income to be apportioned to that state. E.g., Bridges v. Auto- Zone Props., Inc., 900 So. 2d 784, 792 (La. 2005). Other states allow a practice known as “combined reporting,” pursuant to which a taxing state treats a group of commonly owned companies, such as VF and its subsidiaries, as a single taxpayer. In a combined- reporting state, the incomes of the various members of the group are combined and a formula is applied to determine what portion of the entire group’s income lla is attributable to, and therefore taxable in, that state. See Citizens Utils. Co. of Illinois v. Department of Revenue, 111 Ill. 2d 32, 40, 488 N.E.2d 984, 987, 94 Ill. Dec. 737, 740 (1986) (containing a thorough dis- cussion of the difference in the methods of taxatiori of combined-reporting states and separate-entity states). In combined-reporting states, transactions between related members do not work to shift income because all income from the various members of the corporate group (including IMCQs) is included in the determination of taxable income for that state. The difference between combined-reporting states and separate-entity states has been aptly illustrated as follows: “Intercompany arrangements of this type [IM- COs] do not reduce state income taxes in ‘com- bined reporting’ states, that is, states which re- quire an affiliated group of corporations engaged in a common enterprise (a ‘unitary business’), part of which is conducted in the state, to file a combined income tax return. In those states, the [IMCO] ordinarily must be included in the com- bined return, and the intercompany transactions are eliminated. ... “In ‘separate reporting’ states, that is, states in which each corporation leven within a corporate family} files a separate income tax return, a number of state tax administrators have at- tempted to tax the income of out-of-state [IM- COs] that were not physically present in the state but earned income from licensing intangi- ble assets to related corporations that conducted business in the state.” 12a James A. Amdur, State Income Tax Treatment of In- tangible Holding Companies, 11 A.L.R. 6th 543, 553 (2006). As indicated earlier, Alabama is a separate-re- porting state. Alabama requires certain adjustments to the federal taxable-income amount in order to de- termine the amount of state taxable income. § 40-18- 33, Ala. Code 1975. The Alabama Legislature created one such adjustment when it enacted Act No. 2001- 1088, Ala. Acts 2001, which amended § 40-18-35, Ala. Code 1975, to add subsection (b). Subsection (b) of § 40-18-35 is now referred to as Alabama’s “add-back” statute.” Alabama’s add-back statute restricts the deducti- bility of certain intangible and interest expenses for the purpose of calculating state taxable income. Al- though Alabama’s add-back statute was enacted in December 2001, the Aiabama Legislature specified that the statute was effective “for all tax years beyin- ning subsequent to December 31, 2000.” See Act No. ‘In addition to Alabama, the following separate-reporting states also have add-back statutes: Arkansas, see Ark. Code Ann. § 26-51-423(g)(1); Connecticut, see Conn. Gen. Stat. § 12- 218(c); District of Columbia, see D.C. Code § 47-18035.02; Geor- gia, see Ga. Code Ann. § 48-7-28.3; Illinois, see 35 Ill. Comp. Stat. 5/203(a)(2); Indiana, see Ind. Code § 6-3-2-20; Kentucky, see Ky. Rev. Stat. Ann. § 141.205; Maryland, see Md. Code Ann., Tax-Gen. § 10-306.1; Massachusetts, see Mass. Gen. Laws ch. 63, § 311; Michigan, see Mich. Comp. Laws § 208.1201; Missis- sippi, see Miss. Code Ann. § 27-7-17; New Jersey, see N.J. Stat. Ann. § 54:10A-4.4; New York, see N.Y. Tax Law § 208; North Carolina, see N.C. Gen. Stat. § 105-130.7A; Ohio, see Ohio Rev. Code Ann. § 5733.042: South Carolina, see S.C. Code Ann. § 12- 6-1130; Tennessee, see Tenn. Code Ann. § 67-4-2006(b); and Virginia, see Va. Code Ann. § 58.1-402(B). l3a 2001-1088, § 10. Therefore, the add-back statute ap- plied to the 2001 tax year. Alabama’s add-back statute provides, in relevant part: “(b) Restrictions on the deductibility of certain intangible expenses and interest expenses with a related member. “(1) For purposes of computing its taxable in- come, a corporation shall add back otherwise de- ductible interest expenses and costs and intangi- ble expenses and costs directly or indirectly paid, accrued, or incurred to, or in connection directly or indirectly with one or more direct or indirect transactions, with one or more related members, except to the extent the corporation shows, upon request by the commissioner, that the corre- sponding item of income was in the same taxable year: a. Subject to a tax based on or measured by the related member’s net income in Alabama or any other state of the United States, or b. subject to a tax based on or measured by the related member’s net income by a foreign nation which has in force an income tax treaty with the United States, if the recipient was a ‘resident’ (as de- fined in the income tax treaty) of the foreign na- tion. For purposes of this section, ‘subject to a tax based on or measured by the related member's net income’ means that the receipt of the pay- ment by the recipient related member is reported and included in income for purposes of a tax on net. income. and not offset or eliminated in a combined or consolidated return which includes the payor. l4a “(2) The corporation shall make the adjust- ments required in subdivision (1) unless the corporation establishes that the adjustments are unreasonable, or the corporation and the Com- missioner of Revenue agree in writing to the application or use of alternative adjustments and computations. Nothing in this section shall be construed to limit or negate the commissioner’s authority to otherwise enter into agreements and compromises otherwise allowed by law. “(3) The adjustments required in subdivision (1) shall not apply to that portion of interest ex- penses and costs and intangible expenses and costs if the corporation can establish that the transaction giving rise to the interest expenses and costs or the intangible expenses and costs between the corporation and the related member did not have as a principal purpose the avoidance of any Alabama tax and the related member is not primarily engaged in the acquisition, use, licensing, maintenance, management, ownership, sale, exchange, or any other disposition of intan- gible property, or in the financing of related enti- ties. If the transaction giving rise to the interest expenses and costs or intangible expenses and costs, as the case may be, has a substantial busi- ness purpose and econumic substance and con- tains terms and conditions comparable to a similar arm’s length transaction between unre- lated parties, the transaction will be presumed to not have as its principal purpose tax avoidance, subject to rebuttal by the Commissioner of the Department of Revenue.” § 40-18-35(b). 15a Thus, Alabama’s add-back statute requires that a corporation add back into its taxable income expenses and costs related to intangibles such as trademarks that are paid to a related member. In this case, the Department contends that, subject to § 40-18-35(b), the royalty payments VFJ made to Lee and Wrangler during the 2001 tax year must be added to VFJ’s fed- eral taxable income for the purpose of calculating VFJ’s taxable income in Alabama. It is undisputed that the royalty payments VFJ made to Lee and Wrangler in 2001 for the use of the IMCOs’ trademarks were the type of intangible ex- penses referenced in Alabama’s add-back statute. VFJ deducted those royalty payments from its federal taxable income, and, therefore, those deductions flowed through to the starting point of corporate net income subject to taxation in Alabama. Accordingly, unless one of the three exceptions set forth in § 40- 18-35(b)(1), (2), or (3), applies, Alabama’s add-back statute requires that those deductions for intangible expenses paid to the related IMCOs be added back into the calculation of VFJ’s taxable income for Ala- bama. In calculating and paying its Alabama corporate income tax for the 2001 tax year, VFJ did not add back into the calculation of its taxable income the in- tangible expenses required to be added by Alabama’s add-back statute. The Department conducted an au- dit of VFJ’s corporate tax return for the 2001 tax year. Thereafter, the Department issued a notice of final assessment to VFJ, demanding payment of an additional $1,019,899 in state taxes. The vast major- ity of that assessment was attributable to the De- partment’s inclusion, based on the add-back statute, in the Department’s determination of VFJ’s taxable 16a income of the royalty payments VFJ made to Lee and Wrangler for the use of the trademarks of those IM- COs. VFJ has challenged only the portion of the as- sessment attributable to the add-back statute. In the trial court, VFJ challenged that part of the Department’s assessment that was based on the ap- plication of the add-back statute. VFJ argued that the add-back statute should not apply, based on cer- tain exceptions contained in the statute. Specifically, VFJ maintained that the royalty payments had been subject to taxation in another jurisdiction, see § 40- 18-35(b)(1), and that the application of the add-back statute was unreasonable because the royalty pay- ments to Lee and Wrangler had a legitimate business purpose ana economic substance, see § 40-18-35(b)(2). VFJ also challenged the constitutionality of Ala- bama’s add-back statute. The Department responded and insisted that the assessment was valid. Later, in its motion for a partial summary judgment, the De- partment argued that VFJ’s argument regarding the business purpose and economic substance of the IM- COs was not relevant to a determination of unrea- sonableness under § 40-18-35(b)(2). The trial court received ore tenus evidence and heard the arguments of the parties during a four-day trial. In addition, each party submitted numerous exhibits. Much of the evidence pertained to VFu’s at- tempt to demonstrate that the Lee and Wrangler IMCOs had legitimate business purposes and eco- nomic substance, and, therefore, according to VFu’s argument, application of the add-back statute would be unreasonable. Some of the evidence presented at the trial was summarized by the trial court in its judgment as follows: 17a “At trial, VFJ established several other pur- poses [other than the avoidance of state taxation] for segregating the ownership and management of [VF’s] trademarks into the IMCQOs. Centraliza- tion of trademarks increased efficiency by con- centrating management in one group of employ- ees instead of being spread throughout the various operating subsidiaries around the world. Centralization also allowed the employees to de- velop the expertise necessary to maintain the necessary registrations and monitor and combat infringement worldwide. The centralization and specialization also reduced duplicative efforts, costs, and reliance on outside counsel, increasing efficiency. VF was able to save at least $ 60,000 per month in fees paid to outside counsel when it began its centralized trademark management. “Centralization of trademark management al- lowed third party licensing efforts to be coordi- nated and managed. It also allowed easier moni- toring of expenses and revenues associated with the intangible assets. Furthermore, centraliza- tion of intangible property was also part of a larger effort by [VF] in the 1990s to begin sharing common services (such as data process- ing, information technology, payroll, treasury, employee benefits and legal services) to capital- ize on economies of scale. “The parties vigorously disputed at _ trial whether segregation of the different families of trade-marks into different IMCOs facilitated the ease of sale of VF companies or lines of business. I find that the evidence established that in VF's history of both selling and purchasing several lines of business, such sales were facilitated by 18a having the intangibles owned by an IMCO, thereby avoiding the need to transfer and assign each trademark, which could require thousands of assignments and filings around the world. VF in fact sold two IMCQs, Healthtex Apparel Corp., and Jantzen Appa:el Corp., to third party purchasers in recent years and found that the IMCO structure facilitated the transfer of the intangibles. “Segregating the intangible assets into sepa- rate management companies provided a more flexible business structure in other ways as well. For example, this structure would give the affiliated group more options in the case of a hostile takeover. It also became easier for the affiliated group to borrow money when it could demonstrate that the I[MCOs had valuable assets as potential collateral and steady streams of in- come, without potential for unforeseen liabilities. The use of several different IMCOs ensured clean title to the different families of trademarks, and segregated the liabilities of the operating compa- nies from the very valuable intangible assets. It also made it easier to track the profitability of the different families of trademarks. “There were also several advantages to incor- porating the IMCOs in Delaware. Delaware has advanced and favorable corporate law, and the U.S. District Court of Delaware has developed a specialty in intellectual property law. Delaware has an experienced workforce with experienced service providers in the intellectual property area. “[VFJ] did an excellent job during the course of this trial convincing the Court that Lee and 19a Wrangler are not merely ‘shell’ corporations, but carry on substantial activities. The Court had the benefit of watching a videotape which set out the entire operation in Delaware. They had 3,200 square feet of office space in Wilmington, Dela- ware. Lee currently has at least fifteen employ- ees, including two trademark attorneys, six trademark paralegals, one licensing paralegal, three trademark assistants, controller, staff accountant, and receptionist. These employees perform work for Wrangler as well. There was no question that this is a ‘working office,’ not just an empty space with a post office box. “The [IMCO] employees monitor and maintain thousands of trademark registrations throughout the world. They license trademarks to VF affili- ates like VFJ and also to numerous third parties. In 2001, approximately 22% of Lee’s royalty income and 3.2% of Wrangler’s royalty income were derived from third parties. Helen Winslow, assistant general counsel of Lee, reviews license applications from third parties and has _ the authority to turn down a license application from a potential licensee « 10se products might tar- nish a brand’s image wu: raise liability issues. Ms. Winslow can and often does require a test period for a new licensee or grant a license only in a certain geographic territory. Ms. Winslow en- gages in negotiations with the licensee, licensee’s counsel, and usually a representative from a VF manufacturing company in order to set the ternis of the license. Ms. Winslow, a past president of the Delaware State Bar Association, does not merely rubber stamp any paper brought to Lee by a related company. 20a “The IMCOs generally charged the same arm’s- length rates for intercompany license agreements as third-party license agreements. The general rule was a flat 5% license or royalty fee, as determined by industry standards. “... The IMCOs then negotiated with poten- tial licensees in order to ensure the quality stan- dards were sufficiently high that the licensees’ use of the trademarks would not harm their value. If the standards were acceptable, the IMCO adopted those quality standards for the license; if the potential licensee would not agree to sufficiently high quality standards, no license was granted. “In order to ensure compliance with the stan- dards, the IMCOs entered into ‘Technical Assis- tance and Know-How Agreements’ with related VF manufacturing companies. In these agree- ments, the manufacturing entity agreed to pro- vide certain technical assistance to the entities to which the IMCOs licensed particular trade- marks. The assistance included provision of technical know-how and expertise with respect to the design, manufacture, quality control, promo- tion, marketing and distribution of the branded products. In exchange, the IMCOs reimbursed the manufacturing company for all costs associ- ated with such consulting plus 5%. “The IMCOs monitored all licenses, both VF and third-party, for proper trademark usage. In addition, the IMCOs hired third parties to investigate licensees’ factories and ensured that the affiliated group’s centralized audit group also investigated factories for quality control. The inspection program also ensured proper 2la quality control over the goods manufactured by [the] licensees. “Lee and Wrangler also engaged in monitoring for potential trademark infringements. The IMCO staff received and reviewed ‘watch service’ reports daily to monitor for trademark applica- tions claiming rights in trademarks that resem- bled Lee’s or Wrangler’s trademarks. They also reviewed weekly the Official Gazette, a publica- tion of the U.S. Patent and Trademark Office that lists all approved trademark applications. If an IMCO discovered a potential infringement, it took steps to protect its trademarks, including filing court proceedings against the potential infringers if necessary. “VFJ entered into license agreements with Lee and Wrangler that governed the licensing ar- rangement; these agreements contained terms comparable to those in the IMCOs’ agreements with third parties. There is no dispute that the 5% royalty rate was an arm’s length rate. Pursuant to these license agreements, VFJ paid royalties in cash to Lee and Wrangler for the use of their trademarks based on the amount of VFJ’s sales. VFJ transferred cash to Lee and Wrangler when making royalty payments.” In addition to the foregoing, VFJ presented the tes- timony of Professor Richard Pomp, an expert witness in the area of state and local taxation, who testified that there are no add-back statutes of which he ap- proves. He characterized Alabama’s add-back statute as “overbroad [and] overreaching.” Pomp testified that royalties on intangibles are business expenses that should be deducted in determining taxable in- come regardless of whether the royalty payments are 22a made to a related-member company. In Pomp’s opin- ion, the appropriate inquiry in determining whether the application of an add-back statute is unreason- able is whether the deduction is truly one for a le- gitimate or ordinary and necessary business expense. According to Pomp, the determination of whether it is unreasonable to require a corporation to comply with the add-back statute should focus on whether there is a legitimate business purpose or economic substance to the royalty-payment transactions. On cross-examination, Pomp acknowledged that states have other methods of preventing those deductions that lack a legitimate business purpose or economic substance, also known as “sham” deductions. There- fore, Pomp also conceded that add-back statutes are not limited to the prevention of sham deductions. The Department presented the testimony of wit- nesses who spoke in support of the add-back statute. Dr. Alan Shapiro, a professor of finance at the Uni- versity of Southern California, testified ¢::at add-back statutes attempt to “cure some of the distortions” that arise in separate-reporting states because of transactions between related corporations. Dr. Shapiro explained that Alabama operating companies add value to their products through the use of intan- gibles for which royalties are paid and that the add- back statute is an attempt to allocate some of that value or income to Alabama. Peter Enrich, a law professor from Northeastern University who specializes in state and local taxa- tion, testified that add-back statutes are not designed to address the issue of sham deductions. Enrich stated that he believed that unreasonableness excep- tions to add-back statutes, such as the one in § 40-18- 35(b)(2), are designed to avoid situations in which the 23a resultant tax on the corporation would be out of pro- portion to the corporation’s activity in the taxing state. Joe Garrett, the Department’s administrator of tax policy, testified that in August 2003 the Department adopted a regulation (“the add-back regulation”) that interprets the provisions of the add-back statute. See Rule 810-3-35-.02, Ala. Admin. Code (Department of Revenue). In essence, that regulation, in part, inter- prets the unreasonableness exception to apply when there is “no fair relation” to the corporate taxpayer’s activities in Alabama. It is undisputed, however, that the add-back regulation does not apply to this case because it was adopted by the Department after this dispute arose. Garrett’s testimony indicated that on numerous oc- casions during the 14-month interim between the De- cember 2001 enactment of the add-back statute and the August 2003 adoption of the add-back regulation, the Department had granted exceptions pursuant to § 40-18-35(b)(2). Garrett explained that the Depart- ment had granted exceptions both on the basis of the unreasonableness exception to the add-back statute and as an alternative adjustment by the commis- sioner. See § 40-18-35(b)(2). Garrett testified that a large number of taxpayers had sought to avoid the add-back statute by asserting that the unreasonable- ness exception set forth in subsection (b)(2) applied to the transactions at issue because of business purpose or economic substance and that the Department has denied those requests. According to Garrett, the Department has applied the unreasonableness exception to those situations in which a corporation’s tax as a result of the applica- tion of the add-back statute would be “out of propor- 24a tion with what could reasonably be said to be attrib- uted to the State.” Garrett stated that the add-back regulation was formulated in response to questions concerning the interpretation of the add-back statute. Garrett testified that the provisions of the add-back regulation pertaining to the unreasonableness excep- tion were consistent with the interpretation the De- partment had followed from the date the add-back statute was enacted. Garrett also stated that the adoption of the add-back regulation had not resulted in a change in the manner in which the Department had interpreted or applied the unreasonableness ex- ceptien to the add-back statute.’ VFJ also presented expert testimony to support its claim that the subsection (b)(1) exception, known as the “subject-to-tax exception,” of the add-back statute exempted it from the statute’s application. That evi- dence is set forth in the section of this opinion ad- dressing VFJ’s claim with regard to the subject-to-tax exception. * Garrett testified, in part: “[GARRETT:} Well, we—--we told our people—our people meaning primarily our audit staff, people who reviewed returns—from early on, as soon as returns came in with the add-back issues on them, particularly with regard to the exceptions we're talking about here today, what our interpretation was. “THE COURT: Right. “[GARRETT:] . . . . And at least with respect to the unreasonableness exception, that business purpose, economic substance, arm’s length pricing was not enough. “THE COURT: Okay. “{(GARRETT:] And so we didn’t really -we didn’t have to go backward and do anything differently after the reg came about.” 25a Judgment In its judgment, the trial court concluded that the unreasonableness exception to the add-back statute contained at § 40-18-35(b)(2) applied, and, therefore, it reversed the Department’s assessment. In con- cluding that the add-back statute did not apply be- cause the unreasonableness exception disposed of the case, the trial court found it unnecessary to resolve VFJ’s claim regarding the subject-to-tax exception found in § 40-18-35(b)(1) and VFJ’s constitutional challenges to the add-back statute.’ The Department timely appealed. * We conclude that the trial court’s judgment is final. The trial court disposed of the case based on one of the exceptions to the add-back statute claimed by VFJ; accordingly, it was unnec essary for it to address the other claimed exception. The trial court was not required to address the constitutional challenges VFJ had asserted, because, once the trial court had ruled in fa- vor of VFJ on another basis, it was not necessary to reach the constitutional issues. Our supreme court has explained: ““A court has a duty to avoid constitutional questions unless essential to the proper disposition of the case.” Lowe v. Fulford, 442 So. 2d 29, 33 (Ala. 1983) (quoting trial court’s order citing Doughty v. Tarwater, 261 Ala. 263, 73 So. 2d 540 (1954); Moses v. Tarwater, 257 Ala. 361, 58 So. 2d 757 (1952); and Lee v. Macen County Bd. of Educ., 231 F. Supp. 743 (M.D. Ala. 1964)). “Generally courts are reluctant to reach constitutional questions, and should not do so, if the merits of the case can be settled on non- constitutionai grounds.” Lowe, 442 So. 24 at 33 (quoting trial court’s order citing White v. U.S. Pipe & Foundry Co., 646 F.2d 203 (5th Cir. 1981)). “No matter how much the parties may desire adjudication of important questions of constitutional law, broad considerations of the appropriate exercise of judicial power prevent|] such determinations unless actually compelled by the litigation before the court.” Lowe, 442 So. 2d at 33 (quoting trial court’s order 26a As an initial matter, this court must resolve a con- flict in the manner in which the parties interpret the trial court’s judgment. In making its arguments to this court, the Department asserts that the trial court’s judgment was based on a finding that the ap- plication of the add-back statute would be unreason- able because the royalty payments to the IMCOs had a business purpose and an economic substance. In contrast, VFJ contends that the trial court based its judgment on a determination that the application of the add-back statute would result in a distortion of VFJ’s income attributable to Alabama. In reaching its legal conclusions, the trial court stated, in pertinent part: “Because add-back in VFJ’s circumstances effec- tively denies it a deduction for a necessary cost of doing business in Alabama, thereby resulting in a calculation of taxable income that includes in- come fairly attributable to other states, add-back is unreasonable and thus not required for VFJ. “States have rightfully been concerned about taxpayers taking advantage of IMCO structures by setting up ‘shell’ or ‘sham’ corporations in low- tax jurisdictions such as Delaware or Nevada or several other states and shifting substantial por- tions of their income to low-tax jurisdictions without any real business activity taking place in those other states. See, e.g., Syms Corp. v. Com- missioner of Revenue, 436 Mass. 505, 765 N.E.2d 758 (Mass. 2002). In response to taxpayers gen- erating large deductions from these sham or citing Troy State Univ. v. Dickey, 402 F.2d 515 (5th Cir. 1968)).” Chism v. Jefferson County, 954 So. 2d 1058, 1063 (Ala. 2006). 27a shell corporations, several states passed statutes intended to deny taxpayers tax benefits from these sham corporations. Alabama’s add-back statute is one of these statutes. “Lee and Wrangler, however, are not sham or shell corporations. There were several business purposes for their creation and continued viabil- ‘ty. They carry on substantial activities that are vital to the business operations of the VF group. VFJ had a business purpose for making the roy- alty payments—it needed the use of these valu- able trademarks in its operations. The payments also had economic substance—they were made in cash and conferred on VFJ the right to use the trademarks. “Deductions for the cost of doing business are an essential part of any tax on net income. Recognizing this, Alabama has long allowed deductions for ‘the expenses of carrying on such business.’ Subdivision 5, § 454, Code of Alabama ‘1886). Alabama encourages such deductions for ordinary and necessary business expenses, ‘(t]he theory being, presumably, that the spending of money to make money should be encouraged to the end that taxes will be paid on the net accom- plished.’ Boswell v. Bonham, 53 Ala. App. 54, 297 So. 2d 379 (Ala. Civ. App. 1974). “An expense is an ‘ordinary’ business expense when it is normal, common, and accepted under the circumstances by the business community. Welch v. Helvering, 290 U.S. 111, 113-115, 54 S. Ct. 8, 78 L. Ed. 212, 1933-2 C.B. 112 (1933). The testimony revealed that payment of royalties to IMCOs (both related and non-related) is normal, common, and accepted in the business commu- 28a nity. An expense is a necessary business expense when it is ‘appropriate and helpful’ in developing the taxpayer’s business. Welch v. Helvering, 290 U.S. [at] 113... (also noting that courts ‘should be slow to override [the taxpayer’s] judgment’ as to whether an expense is ‘necessary’). The royalty payments made by VFJ in 2001 were thus ordi- nary and necessary in its business, giving VFJ the right to manufacture jeanswear with the valuable Lee and Wrangler trademarks. “Unreasonable’ is not defined in the statute; it thus should be interpreted in accordance with the legislature’s intent in enacting the statute. State Dep’t of Revenue v. Amerada Hess Corp, 788 So. 2d 179 (Ala. Civ. App. 2000). Since the purposes of the add-back statute are to prevent abusive deductions and to ensure that income fairly attributable to Alabama is taxed in Ala- bama, it is unreasonable to require add-back when these purposes would be frustrated by add- back. Add-back is unreasonable in VFJ’s case be- cause VFJ’s royalty payments are not abusive— they have economic substance and business pur- pose—and represent real and necessary costs of doing business in Alabama, and to disallow these deductions would distort the amount of VF J's in- come fairly attributable to this state. “Accordingly, considering the language and purpose of the add-back statute, Alabama public policy allowing deductions for business expenses in determining net income, and the particular facts of this case, I find that it would be ‘unrea- sonable’ to require add-back to VFJ’s royalty payments.” (Emphasis added. ) 29a After reviewing the legal conclusions in the trial court’s judgment, we agree with the Department’s characterization of the nature of the trial court’s de- termination with regard to the unreasonableness ex- ception to the add-back statute. The trial court’s judgment sets forth a finding that VFJ’s income would be distorted by the application of the add-back statute. However, the language of the judgment indi- cates that the trial court interpreted the unreason- ableness exception as being largely dependent on whether there 1s business purpose or economic sub- stance to the royalty-payment transactions. Specifi- cally, the judgment indicates that the trial court con- cluded that so long as a plausible business purpose for the royalty payments exists or the royalty deduc- tions are not abusive, any refusal to allow the deduc- tion for those royalty payments would result in a dis- tortion of VFJ’s income attributable to Alabama. As further support for this conclusion, it should be noted that other than some very general testimony, VFJ presented no evidence tending to support a finding that the application of the add-back statute would distort its income attributable to Alabama. VFJ has asserted generally that disallowing the de- duction for royalty payments to a related member distorts its income by not allowing it to deduct that expense as an ordinary and necessary cos. vu. doing business in Alabama. As discussed later in this opin- ion, however, states may fashion their own income- tax formulas and are not required to grant all the de- ductions allowed by the federal taxing scheme. VFJ did not challenge the Department’s calculation of the amount of income to be added back under § 40-18- 35(b), nor did it present any evidence tending to sup- port a conclusion that the amount of tax resulting from the application of the add-back statute would 30a result in its paying an amount of tax disproportionate to its presence and operations in Alabama. Thus, the trial court’s finding that the application to VFJ of the add-back statute would “distort the amount of VFJ’s income fairly attributable to this state” is based upon its interpretation of the general effect of the applica- tion of the add-back statute. We next address the ar- guments presented by the parties with regard to the unreasonableness exception of the add-back statute, which exception is set forth at § 40-18-35(b)(2), Ala. Code 1975. The Unreasonableness Exception The Department raises several arguments on ap- peal to support its contention that the trial court erred in interpreting the unreasonableness exception to Alabama’s add-back statute. It contends that the trial court’s interpretation of the unreasonableness exception found in § 40-18-35(b)(2) effectively nulli- fies another exception to the add-back statute, spe- cifically the exception contained in subsection (b)(3). The Department also contends that the trial court’s interpretation of the unreasonableness exception renders the add-back statute itself ineffective by giving it no field of operation, or, phrased another way, that the trial court’s interpretation allows the exception to “swallow the add-back rule.” As mentioned earlier in this opinion, the un- reasonableness exception to the add-back statute provides, in pertinent part, that the costs or expenses related to intangibles owned by related-member cor- porations are to be added back into the calculation of taxable income “unless the corporation establishes that the adjustments are unreasonable ... .” § 40-18- 35(b)(2). The term “unreasonable” is not defined in the article governing income taxation contained in 3la the Alabama Code. Our general rule of statutory in- terpretation is that the commonly accepted definition of a term should be used when the legislature enacts legislation that fails to define the term therein. Our supreme court has explained: “It is this Court’s responsibility to give effect to the legislative intent whenever that intent is manifested. State v. Union Tank Car Co., 281 Ala. 246, 248, 201 So. 2d 402, 403 (1967). When interpreting a statute, this Court must read the statute as a whole because statutory language depends on context; we will presume that the Legislature knew the meaning of the words it used when it enacted the statute. Ex parte Jack- son, 614 So. 2d 405, 406-07 (Ala. 1993). Addi- tionally, when a term is not defined in a statute, the commonly accepted definition of the term should be applied. Republic Steel Corp. v. Horn, 268 Ala. 279, 281, 105 So. 2d 446, 447 (1958). Furthermore, we must give the words in a stat- ute their plain, ordinary, and commonly under- stood meaning, and where plain language is used we must interpret it to mean exactly what it says. Ex parte Shelby County Health Care Auth., 850 So. 2d 332 (Ala. 2002).” Bean Dredging, L.L.C. v. Alabama Dep’t of Revenue, 855 So. 2d 513, 517 (Ala. 2003). The term “unreasonable” has been defined as “[n]ot guided by reason; irrational or capricious,” see Black’s Law Dictionary 1574 (8th ed. 2004), and as “not gov- erned by or acting according to reason” or “exceeding the bounds of reason or moderation,” Merriam-Web- ster’s Collegiate Dictionary 1371 (11th ed. 2003). 32a The add-back regulation has established guidelines for determining whether the “unreasonableness” ex- ception applies. In essence, that regulation specifies that the application of the add-back statute will be deemed “unreasonable” when the tax resulting from the application of the statute has no “fair relation” to or is out of proportion to the corporation’s activities in Alabama.° The add-back regulation does not apply to this case because it was not in effect at the time this dispute arose. However, the fact that the add-back regulation does not apply does not mean that we should disregard the Department’s interpretation of the provisions of the add-back statute during the pe- riod between the enactment of the add-back statute and the adoption of the add-back regulation. The Departnient’s interpretation of the add-back statute is entitled to deference. See Farmer v. Hypo Holdings, Inc., 675 So. 2d 387, 390 (Ala. 1996) (“[A]n interpretation placed on a statute by an adminis- * With regard to the unreasonableness exception to Alabama’s add-back statute, the add-back regulation specifies: “(h) The [add-back statute] will be considered unreasonable if: “1. The taxpayer establishes that, based on the entirety of the taxpayer’s particular facts and circumstances, the adjustments have increased the taxpayer’s Alabama income tax lability to an amount that bears no fair relation to the taxpayer’s Alabama presence, or “2. The taxpayer establishes that the interest or intangi- ble expense was paid to a related member that passed through the interest or intangible payment via a corresponding interest or intangible expense payment to an unrelated third party... .” Rule 810-3-35-.02(3)(h), Ala. Admin. Code (Department of Revenue). 33a trative agency charged with its enforcement will be given great weight and deference by a reviewing court.”). The deference to be afforded the De- partment’s interpretation of the add-back statute is based on the Department’s expertise in the area of taxation. Hamrick v. Alabama Alcoholic Beverage Control Bd., 628 So. 2d 632, 633 (Ala. Civ. App. 1993). “[W]hen the highest administrative officials charged with the duty of administering the tax laws have construed a tax statute, their construction should be given favorable consideration.” Bean Dredging, L.L.C. v. Alabama Dep’t of Revenue, 855 So. 2d at 517. “{I]t is well established that in interpreting a statute, a court accepts an administrative inter- pretation of the statute by the agency charged with its administration, if that interpretation is reasonable. Ex parte State Dep’t of Revenue, [683 So. 2d 980 (Ala. 1996)] (citing Alabama Metal- lurgical Corp. v. Alabama Pub. Serv. Comm’n, 441 So. 2d 565 (Ala. 1983)). Absent a compelling reason not to do so, a court will give great weight tou an agency’s interpretations of a statute and will consider them persuasive. Ex parte State Dep’t of Revenue, supra (citing Moody v. Ingram, 361 So. 2d 513 (Ala. 1978)).” State v. Pettawa,;. 794 So. 2d 1153, 1157 (Ala. Civ. App. 2001). The undisputed evidence presented by the De- partment indicates that the Department had previ- ously interpreted the “unreasonableness” exception in the manner now set forth in the add-back regulation. Garrett’s testimony indicated that even before the adoption of the add-back regulation, the Department had consistently interpreted the unreasonableness 34a exception as applying when the resulting tax would be “out of proportion” to the corporation’s presence in Alabama. He further testified that on many occasions before the adoption of the add-back regulation, the Department, in evaluating a taxpayer corporation’s claim that the add-back statute was unreasonable under subsection (b)(2), had refused to consider whether the transactions paid to a related company had a legitimate business purpose or economic sub- stance. Thus, the Department has consistently inter- preted the unreasonableness exception as not being determined by business purpose or economic sub- stance. Further, the foregoing demonstrates that the interpretation of the unreasonableness exception the Department implemented even before the adoption of the add-back regulation 1s consistent with the com- monly accepted definition of the term “unreasonable,” i.e., exceeding reasonable limits or clearly excessive. See Bean Dredging, L.L.C. v. Alabama Dep’t of Reve- nue, supra. The remainder of the Department’s ar- guments with regard to the unreasonableness excep- tion strengthen the presumption in favor of its interpretation of that exception. The Department argues that to interpret the un- reasonableness exception as based almost exclusively on a determination of whether transactions pertain- ing to intangibles between related companies have a business purpose or economic substance would pro- vide the add-back statute with little, if any, field of operation other than to disallow sham deductions. The Department insists that the add-back statute was not enacted in order to address the problem of deductions based on sham transactions, 1.e., those transactions that lack a legitimate business purpose or economic substance. The evidence presented at trial referenced on several occasions an example of a 35a classic sham royalty-payment transaction. In that situation, a parent company creates a corporation to which royalty payments or licensing fees are paid. The sham corporation has no employees or business office; its sole function is to receive licensing fees or royalty payments from a related member. Because the sham corporation is located in a state in which that royalty income would not be subject to corporate income tax, the payments escape state taxation. The parties did not dispute that both before and af- ter the enactment of the add-back statute, Alabama could, without resorting to the add-back statute, in- vestigate and refuse to grant deductions such as those just described on the basis that payments made to sham corporations did not have a legitimate busi- ness purpose or economic substance. As indicated earlier, the starting point for determining a corpora- tion’s taxable income in Alabama is the amount of federal taxable income. Under the Internal Revenue Code, a deduction is allowed for all “ordinary and necessary expenses paid or incurred during the tax- able year in carrying on any trade or business.” 26 U.S.C. § 162(a). Alabama can challenge a sham de- duction as being not “ordinary and necessary” under 26 U.S.C. § 162. See § 40-18-33, Ala. Code 1975 (“In the case of a corporation... , the term ‘taxable in- come’ means federal taxable income without the benefit of federal net operating losses plus the addi- tions prescribed and less the deductions and adjust- ments allowed by this chapter and as allocated and apportioned to Alabama.”); see also Baisch v. De- partment of Revenue, 316 Ore. 203, 850 P.2d 1109 (1993). The parties do not dispute the Department’s power to contest sham transactions in this manner, and at trial, all the witnesses who were asked about this matter confirmed that Alabama has the power to 36a challenge sham transactions without reference to the add-back statute. Given the foregoing, it seems unlikely that the legislature intended the add-back statute to address the problem of sham transactions, a problem that may be addressed in the absence of an add-back stat- ute. It e!so seems unlikely that in enacting the add- back statute the Alabama Legislature was attempt- ing to create a new method by which it could chal- lenge sham transactions. Rather, the courts should assume that in enacting the add-back statute the legislature had in mind « different purpose and field of operation. “This court notes that a statute is presumed to have been enacted with a meaningful purpose. Adams v. Mathis, 350 So. 2d 381, 385-86 (Ala. 1977). “The legislature wil! not be presumed to have done a futile thing in enacting a statute.” Ex parte Watley, 708 So. 2d 890, 892 (Ala. 1997).”” Board of School Comm’rs of Mobile County v. Biggs, 939 So. 2d 942, 945 (Ala. Civ. App. 2006) (quoting State v. Pettaway, 794 So. 2d at 1156). The title to Act No. 2001-1088, which, in part, cre- ated the add-back statute, indicates that the legisla- ture intended, among other things, to “disallow de- ductions for certain payments for intangible property (patents and copyright) and interest expense to re- lated entities” and “to waive certain interest and penalties ... and the add back of certain interest and intangible expenses.” That statement of legisla- tive purpose does not mention any intent to address the issue of sham or fraudulent transactions or de- ductions. 37a Rather, in enacting the add-back statute, the leg- islature evidenced its intent to eliminate, subject to certain exceptions, one type of deduction for ordinary and necessary business exceptions. A state, subject to constitutional limitations, may fashion its own taxing scheme. In doing so, a state is not required to use the same deductions the federal-taxation scheme allows. “{A] statutory tax deduction or exemption is a matter of legislative grace.” Ex parte State Dep’t of Revenue, 441 So. 2d 598, 601 (Ala. 1983). In enacting the add- back statute, the Alabama Legislature elected not to extend its “grace” to deductions for transactions be- tween related entities involving royalty payments for intangible assets. Under the general rules of statu- tory interpretation, which provide that a statute ic presumed to have a meaningful purpose, we conclude that Alabama’s add-back statute was intended to have the purpose set forth by the legislature in Act No. 2001-1088. Such an interpretation affords the add-back statute both a meaningful purpose and a field of operation. Each of the exceptions to the add-back statute should also be interpreted as having a meaningful purpose and effect. ““There is a presumption that every word, sentence, or provision [of a statute] was intended for some useful purpose, has some force and effect, and that some effect is to be given to each, and also that no superfluous words or provisions were used.””” Ex parte Uniroyal Tire Co., 779 So. 2d 227, 236 (Ala. 2000) (quoting Sheffield v. State, 708 So. 2d 899, 909 (Ala. Crim. App. 1997)). Section 40-18-35(b)(3) provides an exception when the corporation can establish, first, that the pay- ments to the related-member IMCO did not have as their primary purpose the avoidance of state taxa- 38a tion, and, second, that the related member to whom the payment was made was not engaged primarily in managing intangible assets. The § 40-18-35(b)(3) ex- ception specifies that a transaction will be presumed not to have tax avoidance as its primary purpose if the transaction has a substantial business purpose or economic substance. “ee § 40-18-35(b)(3), Ala. Code 1975. However, in order for the existence of a busi- ness purpose or economic substance to be relevant, there must also be a showing that the related entity to which the transaction is paid does not have the management of intangible assets as its primary busi- ness purpose. § 40-18-35(b)(3). In this case, VFJ did not seek an exception from the add-back statute under subsection (b)(3). Lee and Wrangler, the related members to whom VFJ made its royalty payments, are undisputedly engaged pri- marily in managing intangible assets, as specified in § 40-18-35(b)(3), so that subsection could not apply to the facts of this case. However, the trial court seems to have focused on the first part of the subsection (b\(3) exception in determining that the application of the add-back statute in this case was unreasonable because the royalty-payment transactions had a sub- stantial business purpose or economic substance. In- terpreting the unreasonableness exception of subsec- tion (b)(2) in that manner, however, nullifies the effect of the subsection (b)(3) exception by eliminating the need for that exception. As the Department points out, the trial court’s interpretation “would en- sure that the [unreasonableness exception in § 40-18- 35(b)(2) would] apply in every case in which the (b)(3) exception might apply.” In other words, to construe the unreasonableness exception in subsection (b)(2) as requiring only a showiny of a business purpose or economic substance would effectively render ineffec- 39a tive the exception set forth in § 40-18-35(b)(3), which requires a similar showing as well as a showing that the related company to whom the payment is made does not manage an intangible asset. We must pre- sume that the legislature did not, in enacting subsec- tion (b)(3), create a redundant exception to the add- back statute. Ex parte Uniroyal Tire Co., supra (it must be presumed the legislature did not intend to enact a superfluous provision). The rules of statutory construction require that each statute or part thereof be given effect when pos- sible. Ex parte Uniroyal Tire Co., supra. Accordingly, in order for the unreasonableness exception to have its own effect or field of operation that is not duplica- tive of the subsection (b)(3) exception, the unreason- ableness exception must be interpreted not to focus on a showing of business purpose or economic sub- stance. The Department has interpreted the unreason- ableness exception as being concerned with whether the add-back statute results in taxation that is out of proportion to the corporation’s activities in Alabama. That interpretation, which was later formalized in the add-back regulation, is consistent with the com- mon-usage definitions of the term “unreasonable” as “irrational,” “capricious,” or “exceeding the bounds of reason or moderation.” Black's Law Dictionary 1574; Merriam-Webster’s Collegiate Dictionary 1371. “Ab- sent a compelling reason not to do so, a court will give great weight to an agency’s interpretations of a statute and will consider them persuasive.” State v. Pettaway, 794 So. 2d at 1157 (citing Ex parte State Dep’t of Revenue, 683 So. 2d 980 (Ala. 1996), citing in turn Moody v. Ingram, 361 So. 2d 513 (Ala. 1978)). VFJ has presented no “compelling reason” that leads 40a this court to disagree with the arguments submitted by the Department or its interpretation of the unrea- sonableness exceptior to the add-back statute. Ac- cordingly, we hold that the Department’s interprcta- tion of the unreasonableness exception is appropriate and is the correct interpretation that should govern the disposition of this matter. The parties have disputed only the interpretation of the add-back statute. They did not present any evidence regarding whether the facts of this case jus- tify the application of the subsection (b)(2) exception to the add-back statute. There is no specific evidence showing a possible distortion of VFJ’s income if the add-back statute is applied, and there is no evidence indicating that the amount of tax to which VFJ is subject under the add-back statute is out of propor- tion to VFJ’s activities in Alabama. In other words, the record does not demonstrate that the application of the add-back statute to VFJ for the tax year in question was unreasonable under the proper inter- pretation of the exception in subsection (b)(2) of the statute. Given the arguments and evidence pre- sented, we must reverse that part of the trial court’s judgment that concluded that the application of the add-back statute to VFJ was unreasonable under § 40-18-35(b)(2), It is well settled that an appellate court may affirm a judgment if the judgment is correct for any reason, even one not argued. Tucker v. Nichols, 431 So. 2d 1263, 1264-65 (Ala. 1983); see also Bay Lines, Inc. v. Stoughton Trailers, Inc., 833 So. 2d 1013, 1017 (Ala. 2002); Boykin v. Magnolia Bay, Inc., 570 So. 2d 639, 642 (Ala. 1990); Bennett v. Bennett, 454 So. 2d 535, 538 (Ala. 1984); and Upchurch v. Universal Un- derwriters Ins. Co., 610 So, 2d 1163, 1167 (Ala. Civ. 4la App. 1992). Accordingly, we next consider whether the trial court’s judgment in favor of VFJ may be af- firmed on the basis of VFJ’s alternate claim that the exception found in § 40-18-35(b)(1), Ala. Code 1975, exempts it from the application of the add-back stat- ute. See Steele v. Walser, 880 So. 2d 1123 (Ala. 2003) (noting the rule that an appellate court may affirm a judgment based on an issue that is rejected by the trial court by considering an alternative argument asserted by the appellee). The Subject-to-Tax Exception VFJ argued at trial that the subject-to-tax excep- tion found in subsection (b)(1) of the add-back statute precluded the Department from imposing its assess- ment. We reiterate the specific language of the sub- section (b)(1) exception: “(1) For purposes of computing its taxable in- come, a curporation shall add back otherwise de- ductible interest expenses and costs and intangi- ble expenses and costs directly or indirectly paid, accrued, or incurred to, or in connection directly or indirectly with one or more direct or indirect transactions, with one or more related members, except to the extent the corporation shows, upon request by the commissioner, that the corre- sponding item of income was in the same taxable year: a. Subject to a tax based on or measured by the related member’s net income in Alabama or any other state of the United States, or b. subject to a tax based on or measured by the related member’s net income by a foreign nation which has in force an income ‘ ax treaty with the United States, if the recipient was a ‘resident’ (as de- fined in the income tax treaty) of the foreign na- tion. For purposes of this section, ‘subject to a tax 42a based on or measured by the related member's net income’ means that the receipt of the pay- ment by the recipient related member is reported and included in income for purposes of a tax on net income, and not offset or eliminated in a combined or consolidated return which includes the payor.” § 40-18-35(b)(1). VFJ filed a corporate income-tax return in North Carolina, a separate-reporting state, for the tax year in question. For reasons not fully explained in the re- cord, Lee and Wrangler also filed corporate income- tax returns in North Carolina, although each IMCO filed that return “under protest.” Joseph McGraw, VF’s manager of state taxes, opined that Lee and Wrangler did not have a sufficient nexus with North Carolina to require those IMCOQOs to pay corporate in- come tax in that state. The testimony at trial showed that the IMCOs may have filed the returns in North Carolina in order to benefit VFJ and other VF sub- sidiaries. Pursuant to North Carolina’s add-back statute, VFJ and other VF subsidiaries with activity in North Carolina would not have to add back the royalty payments they made to the IMCOs if the IM- COs also filed corporate income-tax returns in North Carolina. See N.C. Gen. Stat. § 105-130.7A(c). In calculating taxable income in North Carolina, each IMCO listed its federal taxable income on its North Carolina corporate tax return. Lee reported federal taxable income of $ 73,021,142, and Wrangler reported $ 69,644,967 in federal taxable income. Each IMCO applied its apportionment factor to determine the amount of income attributable or apportionable to North Carolina. Therefore, neither IMCO paid North Carolina state income taxes on the 43a full amount of its federal taxable income. For the 2001 tax year, Lee’s apportionment factor for North Carolina was 2.8783%, and Lee paid $ 143,480 in North Carolina corporate income tax. For the 2001] tax year, Wrangler’s apportionment factor for North Carolina was 3.9415%, and it paid $ 190,155 in corporate income tax in that state. With regard to the specific facts of this case, the subject-to-tax exception applies if Lee and Wrangler (the “related members” under the subject-to-tax ex- ception) “reported and included” the royalty pay- ments from VF.J (the taxpayer corporation) “for pur- poses of a tax on net income” in another state (in this case, North Carolina). See § 40-18-35(b)(1), Ala. Code 1975. The parties dispute the proper interpretation of the “reported and included” language of the subject- to-tax exception. VFJ argues that the subject-to-tax exception should be interpreted to mean that the entire amount of federal taxable income the IMCQOs listed on their respective North Carolina corporate income-tax re- turns was “subject to tax,” even if only a small part of that was actually apportioned to North Carolina and taxed in that state. According to VFJ, the entire amount of federal taxable income for each of the IM- COs was both “reported” and “included,” as those terms are used in § 40-18-35(b)(1), on their respective North Carolina corporate income-tax returns. Thus, according to VFJ’s argument, all the IMCOs’ income was “subject to tax,” and the subsection (b)(1) excep- tion applies and prohibits this state from adding back into the calculation of its taxable income any of the royalty payments it made to the IMCOs. The Department, on the other hand, argues that the subject-to-tax exception excludes from the appli- 44a cation of Alabama’s add-back statute only that in- come the IMCOs apportioned to North Carolina. In other words, the Department argues that only 2.8783% of Lee’s income and 3.9415% of Wrangler’s income, the amounts those IMCOs apportioned to North Carolina, should be considered “subject to tax” in that state. According to the Department, the re- mainder of the IMCQOs’ income, 1.e., that income not apportioned to North Carolina, is not “reported and included” as that term is used in the subject-to-tax exception to Alabama’s add-back statute. Under the Department’s interpretation, even considering the subject-to-tax exception, the Department could add back the royalty payments to VFJ’s federal taxable income and apply the Alabama apportionment factor to that part of VFJ’s income that was not apportioned to North Carolina. In other words, the Department argues that the subject-to-tax exception should apply only on what is known as a “post-apportionment” ba- sis, and VFJ contends that the subject-to-tax excep- tion should be applied on a “pre-apportionment” ba- Sis. Professor Pomp’s testimony concerning the subject- to-tax exception supported the interpretation ad- vanced by VFJ. Pomp testified that any income that is listed on an income-tax return should be subject to a tax, regardless of whether an apportionment factor would result in only a minimal taxation of the related member for a large amount of reported federal tax- able income. Professor Enrich testified that a number of states that have add-back statutes do not have a subject-to- tax exception because an add-back statute itself re- quires only that income that can be properly appor- tioned to that state be included in calculating taxable 45a income. In Enrich’s opinion, the logical reason for some states’ inclusion in their add-back statutes of a subject-to-tax exception is “really nothing more than an abundance of caution.” Enrich also stated that the Department’s interpretation achieves a reasonable result, given that the purpose of an add-back statute is to ensure that income is taxed in some state.’ Fur- ther, Enrich pointed out that to interpret the subject- to-tax exception in the manner advocated by VFJ would render the add-back statute prectically mean- ingless because it would be relatively simple for a corporation to find a way in which to pay a minimal amount of state tax in one state for the specific pur- pose of avoiding taxation in states with subiect-to-tax exceptions in their add-back statutes. Richard Henninger, the director of individual and corporate income tax for the Department, testified that during the interim between the enactment of the add-back statute and the adoption of the add-back regulation, the Department haa always applied the subject-to-tax exception on a post-apportionment ba- sis. Joe Garrett, the administrator for tax policy for ’ Professor Enrich explained: “The ambition of the add-back statute is to make sure that all of the income is subject to tax somewhere, that it’s all apportioned out and that each state is able to tax or not tax as it chooses the share that is attributed to it. “If the statute were read to say, well, if some one state to which some, perhaps quite small, portion of the income is attributable, if that state taxes it, then nobody else can—or we can't attribute our fair share to us would be a non- sensical reading of the statute, whereas to say, well, to the extent that one state does tax some, we'll just apportion the rest, is going to achieve the statutory purpose of making sure that all the income is attributed to some place that can choose whether to tax it or not.” 46a the Department, also testified that the Department had consistently applied the subject-to-tax exception on a post-apportionment basis. The add-back regulation, adopted after this dispute arose, interprets the definition of “subject to a tax” as referring to income that is “reported and included in post-allocation and apportionment income for pur- poses of a tax applied to the net income apportioned or allocated to the taxing jurisdiction.” Rule 810-3-35-.02(3)(f), Ala. Admin. Code (Department of Revenue). The evidence presented at trial indicates that, similar to the Department’s interpretation of the unreasonableness exception, the Department has consistently interpreted the subject-to-tax exception in the manner eventually adopted in the add-back regulation and that there was no change in the Department’s actions with regard to the subject-to- tax exception when the add-back regulation was ultimately adopted. Thus, since the enactment of the add-back statute, the Department’s interpretation of the subject-to-tax exception has been consistent. As stated earlier in this opinion, the interpretation of the add-back statute by the Department, the agency charged with the enforcement of the statute, is entitled to deference. Bean Dredging, L.L.C. v. Alabama Dep't of Revenue, supra; Farmer v. Hypo Holdings, Inc., supra; and Hamrick v. Alabama Alcoholic Beverage Control Bd., supra. The research conducted by the parties and by this court has failed to uncover any caselaw that has ad- dressed the application of an exception similar to the one at issue here. Therefore, we must turn to the spe- cific language of the subsection (b)(1) exception and apply the general rules of statutory construction in interpreting that exception. 47a “The fundamental rule of statutory construction is to ascertain and give effect to the intent of the legis- lature in enacting the statute.” IMED Corp. v. Sys- tems Eng’g Assocs. Corp., 602 So. 2d 344, 346 (Ala. 1992). Where possible, the legislature’s intent in en- acting the statute should be discerned from the lan- guage of the statute. Perry v. City of Birmingham, 906 So. 2d 174, 176 (Ala. 2005). Further, ““lilf the statute is ambiguous or uncertain, the court may consider conditions which might arise under the pro- visions of the statute and examine results that will flow from giving the language in question one par- ticular meaning... .” “In deciding between alternative meanings... , we will not only consider the results that flow from assigning one meaning over another, but will also presume that the legislature intended a rational result, one that advances the legislative purpose in adopting the legislation, that is “workable and fair,” and that is consistent with related statutory provisions.” Ex parte Berryhill, 801 So. 2d 7, 10 (Ala. 2001) (quot- ing John Deere Co. v. Gamble, 523 So. 2d 95, 100 (Ala. 1988)). The language of the subsection (b)(1) exception specifies that the add-back statute does not apply “to the extent the corporation shows ... that the corre- sponding item of income was .. . [slubject to a tax based on or measured by the related member’s net income in Alabama or any other state of the United States.” § 40-18-35(b)(1) (emphasis added). The sub‘ect-to-tax exception goes on to define “subject to a tax ovased on or measured by the related member's net income” as meaning “that the receipt of the pay- ment by the recipient related member ts reported and 48a included in income for purposes of a tax on net in- come, and not offset or eliminated in a combined or consolidated return which includes the payor.” Id. (emphasis added). Thus, the legislature specified that for items of in- come to be “subject to... tax,” they must be both “re- ported and included in income for purposes of a tax on net income.” § 40-18-35(b)(1) (emphasis added). Therefore, this court must assume that the legisla- ture intended that the terms “reported” and “in- cluded” have different meanings. The courts must presume that in enacting the add-back statute, the legislature intended that each word of the statute have effect, and we must also presume that the leg: islature did not. include meaningless language or re- dundancies in the statute. Ex parte Children’s Hosp. of Alabama, 721 So. 2d 184, 190-91 (Ala. 1998); see also Board of School Comm'rs of Mobile County v. Biggs, supra. Accordingly, under the subsection (b)(1) exception to the add-back statute, the items of income are to be reported by the corporation for which those payments constitute income, ana that income must be “included in income for the purposes of a tax on net income.” We hold that for the purposes of the subject-to-tax exception, the term “included in income for the pur- poses of a tax on net income” means that the income at issue is actually taxed as a part of a tax on net in- come. Stated another way, we interpret the subject- to-tax exception set forth in subsection (b)(1) of Ala- bama’s add-back statute to apply on a post-appor- tionment, rather than on a pre-apportionment, basis. We believe that this holding is consistent with the intention of the legislature in enacting the add-back statute and that it advances the purpose of the leg 49a islature in enacting the add-back statute. See Ex parte Berryhill, supra; John Deere Co. v. Gamble, su- pra. As Professor Enrich pointed out in his testimony, interpreting the subject-to-tax exception to apply ona pre-apportionment basis would effectively negate the operation of the add-back statute. Under a pre-appor- tionment interpretation, a corporation could easily avoid the application of an add-back statute that con- tains a subject-to-tax exception by paying corporate income tax in a state in which its apportionment fac- tor is relatively insignificant. This case is an example of that possibility. Although each IMCO reported sig- nificant federal taxable income, Lee had a state-tax burden in North Carolina of approximvtely .0019% of its federal taxable income, and Wrangler paid state tax of approximately .0027% of its federal taxable in- come.” Based on its argument that that modest level of taxation met the requirements of the subsection (b)(1) exception to Alabama’s add-back statute, VFJ sought to avoid the application of that statute. An interpretation of the subject-to-tax exception that, in most cases, would result in a taxpayer’s abil- ity to avoid the application of the add-back statute would be “unreasonable, and, consequently, [it can- not] be considered to be the intent of the legislature.” John Deere Co. v. Gamble, 523 So. 2d at 100. Such an interpretation would also serve to place Alabama back in the position it was in before the enactment of the add-back statute. “The legislature surely did not intend such a nonsensical result.” Ex parte State Dep't of Revenue, 441 So. 2d at 604. We will presume “Lee reported $ 73,021,142 in 2001 in federal taxable income, and it paid ¢ 143,480 for state taxes in North Carolina. Wrang- ler reported $ 69,644,967 in 2001 in federal taxable income, and it paid $ 190,155 for state taxes in North Carolina. 50a that the legislature “intended a rational result.” Ex parte Berryhill, 801 So. 2d at 10 (quoting John Deere Co. v. Gamble, 523 So. 2d at 100). Because we con- clude that the trial court erred in its interpretation of the unreasonableness exception in entering a judg- ment in favor of VFJ, and because we cannot affirm the trial court’s judgment on the basis of the subject- to-tax exception, we reverse the trial court’s judg- ment. See Steele v. Walser, supra; see also Fidelity Nat'l Title Ins. Co. of Tennessee v. Jericho Mgmt. Inc., 722 So. 2d 740, 743-44 (Ala. 1998) (declining to affirm a trial court’s order based on other arguments as- serted by the appellee); Mutual Assurance, Inc. v. Wilson, 716 So. 2d 1160, 1165 (Ala. 1998) (same). Constitutionality This court has rejected the other bases VFJ has advanced in support of the trial court’s judgment in its favor. Therefore, because the case cannot ““be set- tled on non-constitutional grounds,”” see Chism uv. Jefferson County, 954 So. 2d 1058, 1063 (Ala. 2006) (quoting Lowe v. Fulford, 442 So. 2d 29, 33 (Ala. 1983)), we will consider VFJ’s constitutional chal- lenges to the add-back statute. ““Tn reviewing [a question regarding] the constitu- tionality of a statute, we ‘approach the question with every presumption and intendment in favor of its va- lidity, and seek to sustain rather than strike down the enactment of a coordinate branch of the govern- ment.” Moore v. Mobile Infirmary Ass’n, 592 So. 2d 156, 159 (Ala. 1991) (quoting Alabama State Fed’n of Labor v. McAdory, 246 Ala. 1, 9, 18 So. 2d 810, 815 (1944)). Moreover, “[w]here the validity of a statute is assailed and there are two possible interpretations, by one of which the statute would be unconstitutional and by the other would be valid, the courts should 5la adopt the construction [that] would uphold it.” McA- dory, 246 Ala. at 10, 18 So. 2d at 815. In McAdory, this Court further stated: ““(I]n passing upon the constitutionality of a legislative act, the courts uniformly approach the question with every presumption and intend- ment in favor of its validity, and seek to sustain rather than strike down the enactment of a coor- dinate branch of the government. All these prin- ciples are embraced in the simple statement that it is the recognized duty of the court to sustain the act unless it is clear beyond reasonable doubt that. it is violative of the fundamental law.” “246 Ala. at 9, 18 So. 2d at 815 (citation omit- ted). We must afford the Legislature the highest degree of deference, and construe its acts as con- stitutional if their language so permits. [d.”” Kirby v. State, 899 So. 2d 968, 972-73 (Ala. 2004) (quoting Monroe v. Harco, Inc., 762 So. 2d 828, 831 (Ala. 2000)). In the trial court, VFJ alleged that the add-back statute violates both the Due Process Clause and the Commerce Clause of the United States Constitution. Although on appeal VFJ purports to challenge the statute only on the basis that it violates the Com- merce Clause, we note that at least one part of its ar- gument on the issue of constitutionality intertwines with concepts that are related to both the Commerce Clause and the Due Process Clause. The United States Supreme Court has stated: “Article I, § 8, cl. 3 [the Commerce Clause], of the Constitution expressly authorizes Congress to ‘regulate Commerce with foreign Nations, and among the several States.’ It says nothing about 52a the protection of interstate commerce in the ab- sence of any action by Congress. Nevertheless, as Justice Johnson suggested in his concurring opinion in Gibbons v. Ogden, 22 U.S. 1, 9 Wheat 1, 231-232, 239, 6 L. Ed. 23 (1824), the Com- merce Clause is more than an affirmative grant of power; it has a negative sweep as well. The Clause, in Justice Stone’s phrasing, ‘by its own force’ prohibits certain state actions that inter- fere with interstate commerce. South Carolina State Highway Dept. v. Barnwell Brothers, Inc., 303 U.S. 177, 185, 58 S. Ct. 510, 82 L. Ed. 734 (1938).” Quill Corp. v. North Dakota, 504 U.S. 298, 309, 112 S. Ct. 1904, 119 L. Ed. 2d 91 (1992). The “negative sweep” of the Commerce Clause referenced above, known as “the dormant Commerce Clause,” has been interpreted by the United States Supreme Court as prohibiting a state from imposing taxation on income that is not attributable to that state. Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175, 179-80, 115 S. Ct. 13831, 131 L. Ed. 2d 261 (1995); Quill Corp. vu. North Dakota, supra. The United States Supreme Court has established precedent for determining the constitutionality of a state-imposed tax on entities or activities that involve interstate commerce. In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S. Ct. 1076, 51 L. Ed. 2d 326 (1977), the State of Mississippi imposed a tax on motor vehicles manufactured outside that state. The Supreme Court upheld the tax. In doing so, the Court rejected its prior decisions that held that a state could not tax income from activities that were part of interstate commerce. See, e.g., Spector Motor Serv. v. O'Connor, 340 U.S. 602, 71 S. Ct. 508, 95 L. Ed. 573 53a (1951), and Freeman v. Hewit, 329 U.S. 249, 67 S. Ct. 274, 91 L. Ed. 265 (1946). Instead, the Court relied on other decisions that held that the Commerce Clause was not designed to relieve those engaged in inter- state commerce from the burden of state taxation but was instead intended to allew a state to impose taxa- tion only on the state’s fair share of the income de- rived from interstate activity. See, e.g., General Mo- tors Corp. v. Washington, 377 U.S. 436, 84 S. Ct. 1564, 12 L. Ed. 2d 430 (1964), and Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 58 S. Ct. 546, 82 L. Ed. 823 (1938). In reaching its holding, the Su- preme Court adopted language from cases in which it “considered not the formal language of the tax statute but rather its practical effect, and... sustained a tax against Commerce Clause challenge when the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.” Complete Auto Transit, Inc. v. Brady, 430 U.S. at 279 (citing in a footne . General Motors Corp. v. Washing- ton, supra; Northwestern Cement Co. v. Minnesota, 358 U.S. 450, 79 S. Ct. 357, 3 L. Ed. 2d 421 (1959); Memphis Gas Co. v. Stone, 335 U.S. 80, 68 S. Ct. 1475, 92 L. Ed. 1832 (1948); and Wisconsin v. J.C. Penney Co., 311 U.S. 435, 61S. Ct. 246, 85 L. Ed. 267 (1940)) (emphasis added), The foregoing four factors have become known as “the Complete Auto test” and are used to determine the validity of a tax on income derived from activity involving interstate commerce. Two of VFJ’s arguments regarding the constitu- tionality of Alabama’s add-back statute address the elements of the Complete Auto test. First, VI.J con- 54a tends that “the add-back statute is effectively an at- tempt” to tax the income of Lee and Wrangler and that Alabama lacks a sufficient nexus with those IMCQOs to justify the imposition of that tax. See Com- plete Auto, supra; see also Quill Corp. v. North Da- kota, supra (discussing the requirement that a state have a “sufficient nexus” with a taxpayer in order for the taxpayer to be subject to taxation), The requirement of a sufficient nexus between the state and the taxpayer has been explained as follows: “The Due Process and Commerce Clauses of the Constitution do not allow a State to tax income arising out of interstate activities—even on a proportional basis—unless there is a “minimal connection” or “nexus” between the interstate ac tivities and the taxing State, and “a rational re- lationship between the income attributed to the State and the intrastate values of the enter- prise.” Exxon Corporation v. Wisconsin Dept. of Revenue, [447 U.S. 207,] 219-220, 100 S. Ct. 2109, 65 L. Ed. 2d 66 [(1980)], quoting Mobil Oil Corp. v. Commissioner of Taxes, [445 U.S. 425], 436, 437, 100 8S. Ct. 1223, 63 L. Ed. 2d 510 ((1980)].” Container Corp. of America v. Franchise Tax Bd., 463 U.S. at 165-66. This court’s research has revealed some examples in which a state has attempted to tax income received by an IMCO from a corporation required to pay in- come tax in that state. In Comptroller of the Treasury v. SYL, Inc., 375 Md. 78, 106, 825 A.2d 399, 415 (2003), the Maryland Court of Appeals addressed two companion cases in which tax audits by Maryland's comptroller of the treasury sought to require a Dela- 55a ware IMCO to pay taxes on franchise fees paid to it by a related-member corporation with activities in Maryland. The tax court had held in each case that there was not a sufficient nexus between the IMCO and the State of Maryland to justify the imposition of the tax on the IMCO. SYL, Inc. v. Comptroller of the Treasury, No. C-96-0154-01, 1999 Md. Tax LEXIS 3 (Md. Tax Ct. April 26, 1999) (unpublished opinion); see also Comptroller of the Treasury v. SYL, Inc., su- pra. In each case, the Circuit Court for Baltimore City affirmed the tax court’s reversal of the tax as- sessment, and the comptroller again appealed. The Maryland Court of Appeals reversed and upheld the tax assessments, concluding that “an appropriate portion” of each IMCO’s income was taxable in Maryland. Comptroller of the Treasury v. SYL, Inc., supra. In reaching its holding, however, the Mary- land Court of Appeals did not focus on the issue of nexus. Rather, the court based its decision on its de- termination that neither of the IMCOs at issue had any real economic substance and that the predomi- nant reason for the creation of each IMCO was the avoidance of state taxation. Comptroller of the Treas- ury v. SYL, Inc., 375 Md. at 106-07, 825 A.2d at 415- 16. In Geoffrey, Inc. v. South Carolina Tax Commis- sion, 313 S.C. 15, 437 S.E.2d 13 (1993), the South Carolina Tax Commission took the position that an IMCO was required to pay corporate income tax in that state on income it had received from royalty payments made—by a related-member corporation with activities in South Carolina. The South Carolina Supreme Court held that the IMCO had a sufficient nexus with that state to justify the taxation at issue under both the Due Process Clause and the Com- merce Clause of the United States Constitution. Jd. 56a In the cases discussed above, each state, pursuant to its interpretation of its taxation statutes, specifi- cally sought to impose a tax directly on the out-of- state IMCOs rather than on the corporations that ac- tually conducted activity within the state. Alabama’s add-back statute does not expressly impose a tax on Lee and Wrangler, nor has the Department sought to impose a tax directly on those IMCOs. VFJ contends, however, that the add-back statute does effectively impose a tax on the IMCOs. We conclude that the add-back statute does not implicitly (or “effectively”) impose a tax on the IMCOs. Rather, the add-back statute disallows a deduction sought by the taxpayer, VFJ, which does have activities in Alabama sufficient to justify its paying corporate income tax in this state. As stated earlier in this opinion, deductions are a matter of legislative grace. Ex parte State Dep't of Revenue, 441 So. 2d at 598. We do not agree with VFJ that disallowing a deduction for an expense it pays constitutes a tax on the entities to whom it paid that expense, in this case Lee and Wrangler. Accordingly, we decline to affirm the trial court’s judgment on this basis. We next turn to VFJ’s argument that Alabama’s add-back statute results in a tax that is not fairly ap- portioned to Alabama and, therefore, that it fails to meet the third element of the Complete Auto test. In discussing this element, the Supreme Court has stated: “For over a decade now, we have assessed any threat of malapportionment by asking whether the tax is ‘internally consistent’ and, if so, whether it is ‘externally consistent’ as well. See Goldberg |v. Sweet, 488 U.S. 252,] 261, 109 S. Ct. 582, 102 L., Ed. 2d 607 [(1989)]; Container Corp. 57a [of America v. Franchise Tax Board], 463 U.S. [159], at 169, 103 S. Ct. 2933, 77 L. Ed. 2d 545 ((1983)]. Internal consistency is preserved when the imposition of a tax identical to the one in question by every other State would add no bur- den to interstate commerce that intrastate com- merce would not also bear. This test asks nothing about the degree of economic reality reflected by the tax, but simply looks to the structure of the tax at issue to see whether its identical applica- tion by every State in the Union would place in- terstate commerce at a disadvantage as com- pared with commerce intrastate. A failure of internal consistency shows as a matter of law that a State is attempting to take more than its fair share of taxes from the interstate transac- tion, since allowing such a tax in one State would place interstate commerce at the mercy of those remaining States that might impose an identical tax. See Gwin, White & Princel, Inc. v. Henne- ford,| 305 U.S. [434], at 439, 59 S. Ct. 325, 83 L. Ed. 272 [(1939)].... “External consistency, on the other hand, looks not to the logical consequences of cloning, but to the economic justification for the State’s claim upon the value taxed, to discover whether a State’s tax reaches beyond that portion of value that is fairly attributable to econemic activity within the taxing State. See Goldberg, supra, at 262; Container Corp., supra, at 169-170. Here, the threat of real multiple taxation (though not by literally identical statutes) may indicate a State’s impermissible overreaching.” Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. at 185 (emphasis added). 58a In this case, VFJ has maintained that the add-back statute lacks external consistency, i.e., that it at- tempts to tax activity beyond that that is fairly at- tributable to its activity in Alabama. Oklahoma Tax Comm'n v. Jefferson Lines, Inc., supra. In support of its argument, VFJ cites Hans Rees’ Sons, Inc. v. North Carolina, 283 U.S. 1238, 51S. Ct. 385, 75 L. Ed. 879 (1931). In that case, the evidence indicated that between 17% and 21% of the taxpayer’s income was attributable to its activities in North Carolina. How- ever, the statutory tax provision the taxpayer chal- lenged had allocated approximately 80% of the tax- payer’s income to North Carolina for the purpose of imposing a tax on that income. The Supreme Court invalidated the tax, concluding that North Carolina had exceeded its authority in imposing the tax. In so holding, the Supreme Court determined that the evi- dence demonstrated that the tax “operated unrea- sonably and arbitrarily” as applied to the taxpayer and that it was “out of all appropriate proportion to the business transacted by the [taxpayer] in [North Carolina].” Hans Rees’ Sons, Inc. v. North Carolina, 283 U.S. at 135. Another case to which VFJ refers this court ad- dresses the issue of fair apportionment. In Hunt-Wes- son, Inc. v. Franchise Tax Board of California, 528 U.S. 458, 120 S. Ct. 1022, 145 L. Ed. 2d 974 (2000), the taxpayer challenged as unconstitutional the State of California’s limitation of a deduction allowed under its tax code. Under the provision at issue in that case, California (a unitary or combined-reporting state) allowed a corporate taxpayer to deduct interest ex- penses to the extent that the interest expense ex- ceeded other, unrelated income, e.g., income that did not arise out of the taxpayer’s activities in California. 528 U.S. at 461-62. The Supreme Court concluded 59a that, under the facts of that case, the limitation on the deductibility of interest expenses was not a true limit on a deduction but was instead more in the na- ture of an impermissible tax. The Supreme Court noted that had California demonstrated that the limitation “reflected the por- tion of the expense properly related to nonunitary in- come, the limit would not, in fact, be a tax on nonuni- tary income” but would instead be a “proper allocation of the deduction.” 528 U.S. at 465. The Supreme Court held that the provision at issue was “not a reasonable allocation of expense deductions to the income that the expense generate[d],” and, there- fore, it concluded that the provision violated the Due Process Clause and the Commerce Clause. Hunt-Wes- son, Inc. v. Franchise Tax Bd. of California, 528 U.S. at 468. In reaching its holding, the Supreme Court, quoting Container Corporation of America v. Fran- chise Tax Board, 463 U.S. at 165-66, noted that a state may not impose a tax in the absence of a nexus between the state and the interstate activities or in the absence of a “rational relationship” between the income properly attributable to the state and the “in- trastate values of the enterprise.” Hunt-Wesson, Inc. v. Franchise Tax Bd. of California, 528 U.S. at 464. We find the facts of this case to be distinguishable from those that would necessitate holdings similar to the holdings of Hans Rees’ Sons, Inc. v. North Caro- lina, supra, and Hunt-Wesson, Inc. v. Franchise Tax Board of California, supra. The Department, pursu- ant to the add-back statute, seeks to disallow the de- duction of that part of the royalty payments VFJ made to Lee and Wrangler that is attributable to 60a Alabama.” In other words, the Department seeks to apply VFJ’s Alabama apportionment factor to that part of the royalty payments that was not subject to taxation in North Carolina as part of the IMCOs’ taxable income in that state. Accordingly, we con- clude that the Department’s interpretation of the add-back statute is consistent with the requirements of a nexus between Alebama and the interstate ac- tivities, i.e., the royalty payments. See Hunt-Wesson, Inc. v. Franchise Tax Bd. of California, supra; Con- tainer Corp. of America v. Franchise Tax Bd., supra. Further, the evidence did not demonstrate that the application of the add-back statute has resulted in taxation that is out of proportion to VF.J’s activities in this state. The United States Supreme Court has established that it is the burden of VFJ, as the taxpayer, to establish “by “clear and cogent evi- dence”” that, as a result of the application of Ala- bama’s add-back statute, “the income attributed to {Alabama] is in fact “out of all appropriate propor- tions to the business transacted in [Alabamal],” or has “led to a grossly distorted result.”” Container Corp. of America v. Franchise Tax Bd., 463 U.S. at 170 (quoting Moorman Mfg. Co. v. Bair, 437 U.S. 267, 274, 98 S. Ct. 2340, 57 L. Ed. 2d 197 (1978)) (internal citations omitted). In this case, there has been no showing that the tax resulting from the application of Alabama’s add-back statute was out of proportion to ’ With regard to the issue of fair apportionment, VFJ has challenged only the Department’s interpretation and application of the add-back statute. It has not argued that the add-back statute does not contain a provision requiring fair apportion- ment. We do not attempt to address that issue on its behalf. See, generally, Jansen v. State ex rel. Downing, 273 Ala. 166, 168, 137 So. 2d 47, 48 (1962) (quoted infra). 6la VFJ’s activities in Alabama or that the resulting tax reached “beyond that portion of value that is fairly attributable to economic activity within the taxing State [(i.e., Alabama)].” Oklahoma Tax Comm’n uv. Jefferson Lines, Inc., 514 U.S. at 185; see also Con- tainer Corp. of America v. Franchise Tax Bd., supra. Under the facts of this case, we conclude that there exists a rational relationship between the income the Department seeks to add back pursuant to § 40-18- 35(b) and the income that is to be included in the de- termination of VFJ’s taxable income. See Hunt-Wes- son, Inc. v. Franchise Tax Bd. of California, supra; Container Corp. of America v. Franchise Tax Bd., su- pra. Accordingly, we hold that VF.J has not demon- strated that the add-back statute results in taxation of income that is not fairly attributable to Alabama. VFJ also asserts that the add-back statute imper- missibly discriminates against-interstate commerce. It is well settled that “[a] state may not tax a trans- action or incident more heavily when it crosses state lines than when it occurs entirely within the State.” Chemical Waste Mgmt., Inc. v. Hunt, 504 U.S. 334, 342, 112 S. Ct. 2009, 119 L. Ed. 2d 121 (1992) (quot- ing Armco, Inc. v. Hardesty, 467 U.S. 638, 642, 104 S. Ct. 2620, 81 L. Ed. 2d 540 (1984)). VFJ contends that under the subject-to-tax exception the income-tax burden imposed by the add-back statute “depends upon where the recipient IMCO is located” and, therefore, that it results in differential treatment that rises to the level of unconstitutional discrimina- tion. In support of its argument, VFJ cites only to au- thority discussing facially discriminatory statutes. See South Cent. Tel. Co. v. Alabama, 526 U.S. 160, 119 S. Ct. 1180, 143 L. Ed. 2d 258 (1999); Camps 62a Newfound /Owatonna, Inc. v. Town of Harrison, 520 U.S. 564, 117 S. Ct. 1590, 137 L. Ed. 2d 852 (1997); Fulton Corp. v. Faulkner, 516 U.S. 325, 116 S. Ct. 848, 133 L. Ed. 2d 796 (1996); and AT&T Corp. v. Surtees, 953 So. 2d 1240, 1245 (Ala. Civ. App. 2006). In order to determine whether a statute is facially discriminatory, “the text of the statute must treat in- state economic interests differently from out-of-state economic interests in such a way as to benefit the in- state economic interests and burden the out-of-state economic interests.” AT&T Corp. v. Surtees, 953 So. 2d at 1245 (also setting forth examples of cases in which the United States Supreme Court found state statutes to be facially discriminatory). The subject-to-tax exception of Alabama’s add-back statute specifies that the exception applies when the related member’s income is taxed “in Alabama or any other state of the United States.” § 40-18-35(b)(1) (emphasis added). Thus, the subject-to-tax exception challenged by VFJ is implicated regardless of which state imposes a tax on the related member’s income. The language of the subject-to-tax exception clearly indicates that, with regard to that exception, the ap- plication of Alabama’s add-back statute does not benefit in-state corporations to the detriment of, or disproportionately to, out-of-state corporations. Ac- cordingly, we must conclude that the add-back stat- ute does not, as VFJ contends, discriminate against interstate commerce on the ground that the subject- to-tax exception results in differential tax treatment between states. Alternatively, VFJ has asserted in its brief submit- ted to this court an argument concerning the foreign- jurisdiction portion of the subject-to-tax exception as it relates to the Commerce Clause. See § 40-18- 63a 35(b)(1), Ala. Code 1975. However, VFJ presented no evidence demonstrating that the facts of this case implicate that part of the subsection (b)(1) exception. “A party establishes standing to bring a chal- lenge under the Commerce Clause when it demonstrates the existence of (1) an actual, concrete and particularized ‘injury in fact’—‘an invasion of a legally protected interest’; (2) a ‘causal connection between the injury and the conduct complained of; and (3) a likelihood that the injury will be ‘redressed by a favorable decision.’ Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61, 112 S. Ct. 2130, 119 L. Ed. 2d 351 (1992). A party must also demonstrate that ‘he is a proper party to invoke judicial resolution of the dispute and the exercise of the court’s remedial powers.” Warth [v. Seldin], 422 U.S. [490] at 518, 95 S. Ct. 2197, 45 L. Ed. 2d 343 [(1975)].” Alabama Alcoholic Beverage Control Bd. v. Henri- Duval Winery, L.L.C., 890 So. 2d 70, 74 (Ala. 2003). VFJ, because it has not shown that the foreign-juris- diction portion of the subsection (b)(1) exception ap- plies in this case, has failed to demonstrate sufficient injury so as to confer standing with regard to this ar- gument. See Muhammad v. Ford, 986 So. 2d 1158, 1162, 2007 Ala. LEXIS 266, *8 (Ala. 2007) (in the ab- sence of a legal injury, “there is no case or contro- versy for a court to consider”). In addressing the issue of the constitutionality of Alabama’s add-back statute, this court has addressed only those arguments VFJ has asserted in an effort to support the trial court’s judgment in its favor. We de- cline to address any other arguments that might have been made regarding the alleged unconstitu- 64a tionality of Alabama’s add-back statute. As the Ala- bama Supreme Court has explained: “In passing on the validity of a statute it must be remembered that the legislature, except insofar as specifically limited by the state and federal constitutions, is all-powerful in dealing with matters of legislation; that a legislative act is presumed to be constitutional and valid, and all doubts are to be resolved in favor of its validity; that a statute, if reasonably possible, must be so construed as to sustain its validity and will not be declared invalid unless the court is clearly convinced that it cannot stand; that all questions of propriety, wisdom, necessity, utility and expe- diency in the enactment of laws are exclusively for the legislature, and are matters with which the courts have no concern.” Jansen v. State ex rel. Downing, 273 Ala. 166, 168, 137 So. 2d 47, 48 (1962). We reverse the trial court’s judgment in favor of VFJ, and we remand the case to the trial court for the entry of a judgment consistent with this opinion. REVERSED AND REMANDED WITH INSTRUC- TIONS. Thomas and Moore, JJ., concur. Pittman and Bryan, JJ., concur in the result, with- out writings. 65a APPENDIX C IN THE CIRCUIT COURT OF MONTGOMERY COUNTY, ALABAMA [Filed Jan 24, 2007] CV-03-3172 VFJ VENTURES, INC., f/k/a VF JEANSWEAR, INC., Plaintiff, ¥. G. THOMAS SURTEES, in his official capacity as Commissioner of the Department of Revenuc for the State of Alabama, and the STATE OF ALABAMA DEPARTMENT OF REVENUE, Defendants. Order This case concerns the application and constitu- tionality of section 40-18-35(b), Code of Alabama (1975) (“the add-back statute”). The Alabama De- partment of Revenue (the “Department”) issued a Fi- nal Assessment to VFJ Ventures, Inc. (“VFJ”) for Alabama corporate income tax in the amount of $1,019,899 on November 6, 2003. VFJ timely ap- pealed the Final Assessment to this Court. A trial was held before this Court from July 26 to July 31, 2006. Although the Final Assessment covers several issues, the sole issue before this Court is the validity under the add-back statute of the Department’s re- quirement that VFJ add the amount of certain roy- alty payments paid by VFJ to the H.D. Lee Company, Inc. (“Lee”) and Wrangler Clothing Corp. (“Wran- 66a gler”) back to VFJ’s Alabama income for the 2001 tax year. This is a case of first impression in that no other state has issued a ruling concerning the appli- cation and constitutionality of add-back statutes. This Court had the benefit of hearing from the pre- mier experts in the fields of taxation and patents and trademarks. Finding of Fact VFJ manufactures and markets jeanswear, pri- marily with the LEE® and WRANGLER® brand names throughout the United States. During 2001, VFJ had two distribution facilities and a cutting fa- cility in Alabama employing approximately 600 em- ployees. Accordingly, VFJ filed an Alabama corporate income tax return and paid income tax to the State of Alabama for that year. In 2001, VFJ paid $36,220,000 in royalties to Lee and $66,420,000 in royalties to Wrangler for the use of dozens of trademarks owned by those corporations in VFJ’s manufacturing and marketing processes. VFJ deducted the royalties as business expenses for federal income tax purposes, and this deduction flowed through to its Alabama income tax return, which uses federal taxable income as the starting point for the calculation of Alabama taxable income. VIJ, Lee, and Wrangler are among the hundreds of direct or indirect subsidiaries of V.F. Corporation (“VF”), which is headquartered in Greensboro, North Carolina. Lee and Wrangler are Delaware corpora- tions engaged in the business of owning, managing, and licemsing extensive trademark portfolios (“intan- gibles menagement companies” or “IMCOs”). Their trademark portfolios are quite valuable; one witness 67a estimated that they were worth approximately $5 billion. Lee has been engaged in the business of manufac- turing jeanswear since 1889, In 1983, Lee transferred its operating and manufacturing assets to The Lee Apparel Company, Inc., but it retained its trade- marks. In 1993, VF created several more companies like Lee that were to hold and manage the many dif- ferent trademarks it and its subsidiaries used all over the world. These IMCQOs, including Wrangler, were located in Delaware. Each IMCO held a differ- ent family of trademarks. The establishment of these IMCOs had beneficial state tax effects for the VF group. If the IMCOs were located in Delaware, their income would not be sub- ject to an income tax, but operating subsidiaries, such as VFJ, could deduct royalties paid to the IMCOs on the state income tax returns in the states in which they were doing business. At trial, VFJ established several other purposes for segregating the ownership and management of its trademarks into the IMCOs. Centralization of trade- marks increased efficiency by concentrating man- agement in one group of employees instead of being spread throughout the various operating subsidiaries around the world. Centralization also allowed the employees to develop the expertise necessary to maintain the necessary registrations and monitor and combat infringement worldwide. The centraliza- tion and specialization also reduced duplicative ef- forts, costs, and reliance on outside counsel, increas- ing efficiency. VF was able to save at least. $60,000 per month in fees paid to outside counsel when it be- gan its centralized trademark management. 68a Centralization of trademark management allowed third party licensing efforts to be coordinated and managed. It also allowed easier monitoring of ex- penses and revenues associated with the intangible assets. Furthermore, centralization of intangible property was also part of a larger effort by VFJ in the 1990s to begin sharing common services (such as data processing, information technology, payroll, treasury, employee benefits and legal services) to capitalize on economies of scale. The parties vigorously disputed at trial whether segregation of the different families of trademarks into different IMCOs facilitated the ease of sale of VF companies or lines of business. I find that the evi- dence established that in VF’s history of both selling and purchasing several lines of business, such sales were facilitated by having the intangibles owned by an IMCO, thereby avoiding the need to transfer and assign each trademark, which could require thou- sands of assignments and filings around the world. VF in fact sold two IMCOs, Healthtex Apparel Corp. and Jantzen Apparel Corp., to third party purchasers in recent years and found that the [MCO structure facilitated the transfer of the intangibles. Segregating the intangible assets into separate management companies provided a more flexible business structure in other ways as well. For exam- ple, this structure would give the affiliated group more options in the case of a hostile takeover. It also became easier for the affiliated group to borrow money when it could demonstrate that the IMCOs had valuable assets as potential collateral and steady streams of income, without potential for unforeseen liabilities. The use of several different IMCOs en- sured clean title to the different families of trade- 69a marks, and segregated the liabilities of the operating companies from the very valuable intangible assets. It also made it easier to track the profitability of the different families of trademarks. There were also several advantages to incorporat- ing the IMCOs in Delaware Delaware has advanced and favorable corporate law, and the U.S. District Court of Delaware has developed a specialty in intel- lectual property law. Delaware has an experienced workforce with experienced service providers in the intellectual property area. VF did an excellent job during the course of this trial convincing the Court that Lee and Wrangler are not merely “shell” corporations, but carry on substan- tial activities. The Court had the benefit of watching a videotape which set out the entire operation in Delaware. They had 3,200 square feet of office space in Wilmington, Delaware. Lee currently has at least fifteen employees, including two trademark attor- neys, six trademark paralegals, one licensing parale- gal, three trademark assistants, controller, staff ac- countant, and receptionist. These employees perform work for Wrangler as well. There was no question that this is a “working office,” not just an empty space with a post office box. The employees monitor and maintain thousands of trademark registrations throughout the world. They license trademarks to VF affiliates like VFJ and also to numerous third parties. In 2001, approximately 22% of Lee’s royalty income and 3.2% of Wrangler’s royalty income were derived from third parties. Helen Winslow, assistant general counsel of Lee, re- views license applications from third parties and has the authority to turn down a license application from a potential licensee whose products might tarnish a 70a brand’s image or raise liability issues. Ms. Winslow can and often dues require a test period for a new li- censee or grant a license only in a certain geographic territory. Ms. Winslow engages in negotiations with the licensee, licensee’s counsel, and usually a repre- sentative from a VF manufacturing company in order to set the terms of the license. Ms. Winslow, a past president of the Delaware State Bar Association, does not merely rubber stamp any paper brought to Lee by a related company. The IMCOs generally charged the same arm’s- length rates for intercompany license agreements as third party license agreements. The general rule was a flat 5% license or royalty fee, as determined by in- dustry standards. The only criticism of the operation by the Court was the quality control method used. The IMCOs re- quired potential licensees, both related and unre- lated, to submit proposed quality standards, however, the Court saw definite room for improvement in this area. The IMCOs then negotiated with potential li- censees in order to ensure the quality standards were sufficiently high that the licensees’ use of the trade- marks would not harm their value. If the standards were acceptable, the IMCO adopted those quality standards for the license; if the potential licensee would not agree to sufficiently high quality stan- dards, no license was granted. In order to ensure compliance with the standards, the IMCOs entered into “Technical Assistance and Know-How Agreements” with related VF manufac- turing companies. In these agreements, the manufac- turing entity agreed to provide certain technical as- sistance to the entities to which the IMCOs licensed particular trademarks. The assistance included pro- T1la vision of technical know-how ani expertise with re- spect to the design, manufacture, quality control, promotion, marketing and distribution of the branded products. In exchange, the IMCOs reimbursed the manufacturing company for all costs associated with such consulting plus 5%. The IMCOs monitored all lcenses, both VF and third-party, for proper trademark usage. In addition, the IMCOs hired third parties to investigate licen- sees’ factories and ensured that the affiliated group’s centralized audit group also investigated factories for quality control. The inspection program also ensured proper quality control over the goods manufactured by licensees. Lee and Wrangler also engaged in monitoring for potential trademark infringements. The IMCO staff received and reviewed “watch service” reports daily to monitor for trademark applications claiming rights in trademarks that resembled Lee’s or Wrangler’s trademarks. They also reviewed weekly the Official Gazette, a publication of the U.S. Patent and Trade- mark Office that lists all approved trademark appli- cations. If an IMCO discovered a potential] infringe- ment, it took steps to protect its trademarks, including filing court proceedings against the poten- tial infringers if necessary. VFJ entered into license agreements with Lee and Wrangler that governed the licensing arrangement; these agreements contained terms comparable to those in the IMCOs’ agreements with third parties. There is no dispute that the 5% royalty rate was an arm’s length rate. Pursuant to these license agree- ments, VFJ paid royalties in cash to Lee and Wran- gler for the use of their trademarks based on the 72a amount of VFJ’s sales. VFJ transferred cash to Lee and Wrangler when making royalty payments. Lee and Wrangler each file separate corporate in- come tax returns in North Carolina. Lee apportioned (and paid tax on) 2.8783% of its income to North Carolina for tax year 2001. Wrangler apportioned (and paid tax on) 3.9415% of its income to North Carolina for tax year 2001. In addition, the IMCOs are included in VF group consolidated or combined returns in California, Illinois, Kansas, and Colorado. VFJ filed Alabama corporate income tax returns in 2000 and 2001. After an audit, the Department is- sued a Final Assessment to VFJ in the amount of $1,019,899 on November 6, 2003. VFJ timely ap- pealed the Final Assessment to this Court. The pri- mary adjustment in the audit—and the sole issue in the appeal before this Court—concerns the Depart- ment’s disallowance of deductions for bona fide roy- alty payments to Lee and Wrangler under the De- partment’s interpretation of the add-back statute. Opinion The Add-back Statute In 2001, the Alabama legislature amended section 40-18-35, Code of Alabama (1975), by adding a new subsection (b), commonly referred to as the “add-back statute.” This new subsection required corporations, when computing their taxable income, to “add back othe: wise deductible ... intangible expenses and costs directly or indirectly paid, accrued, or incurred to... one or more related members” unless certain excep- tions apply. Ala. Code § 40-18-35(b)(1). In the instant case, there is no dispute that VFJ and Lee and Wrangler are “related members” or that 73a the royaltics paid by VFJ to Lee or Wrangler consti- tute “intangible expenses.” VFJ deducted these roy- alty payments as ordinary and necessary business expenses on its federal return, and these deductions flowed through to [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386017_0069%3A02. Public record. Not legal advice.