Page 11 - Altera And Cost-Sharing Requirements Under Section 482 By Jerald David August

to the government uniformly agreed that stock options would not be taken into account in the context of an arrangement similar to a QCSA.
In dismissing these claims, the Pre- amble announced:
Treasury and the IRS believe that it is appropriate for regulations to pre- scribe guidance in this context that is consistent with the arm’s length standard and that also is objective and administrable. As long as the measurement method is determined at or before grant date, either of the prescribed measurement methods can be expected to result in an appropriate allocation of costs among QCSA participants and therefore would be consistent with the arm’s length standard.
Finally, the Preamble to the final rule provided that “[i]t has also been deter- mined that [APA] section 553(b) * * * does not apply to these regulations.” 45
CSAs Under the Current
Section 482 Regulations
Section 482 provides that in the case of any transfer of intangible property, the income with respect to the transfer shall be commensurate with the income attributable to the intangible. In a QCSA, controlled participants share the cost of developing one or more items of intan- gible property. Reg. 1.482-7 provides specific methods to be used to deter- mine arm’s-length results of controlled transactions in connection with a cost sharing arrangement. Regs.1.482-4 and -9 provide specific methods to deter- mine arm’s length results of arrange- ments, including partnerships, for the sharing of costs and risks in developing intangibles in arrangements other than cost sharing arrangement described in Reg. 1.482-7.
Under the current regulations, Reg. 1.482-7(a)(1) requires participants “to share the costs of development of one or more intangibles in proportion to their.. [respective] shares of reasonably antic- ipated benefits.” Anticipated benefits are defined as “additional income generat- ed or costs saved by the use of covered
intangibles.”46 Where the parties fail to share such costs in proportion with their benefits, respondent is authorized to make allocations “to the extent necessary to make each controlled participant’s share of the costs *** equal to its share of reasonably anticipated benefits.” 47
Economic Contributions
In a CSA, the controlled participants make economic contributions of two types, namely:
1. Cost Contributions: mutual com-
mitments to prospectively share intangible development costs in pro- portion to their reasonably antici- pated benefits from exploitation of the cost shared intangibles.
2. Platform Contributions: to provide any existing resources, capabilities, or rights that are reasonably antici- pated to contribute to developing cost shared intangibles.
CSAs may also involve economic contributions by the controlled par- ticipants of other existing resources, capabilities, or rights related to the exploitation of cost shared intangibles (operating contributions). Platform and operating contributions encom- pass any existing inputs that are rea- sonably anticipated to facilitate
26 Notice 88-123, 1988-2 CB 458, pages 498-500. (“The arm’s length standard is ....in all U.S. tax treaties, ...including the U.S. Model convention).
27 Prop. Reg. 1.482-2(g)(1992).
28 1992-1 CB 1164, 1166.
29 The 1992 proposed regulations provided that a
“method will be presumed not to reflect a rea- sonable effort to share costs in proportion to ben- efits if a U.S. participant’s cost/income ratio is grossly disproportionate to the cost/income ratio of all other eligible participants.” Prop. Regs. 1.482-2(g)(2)(ii)(A), 1.482-2(g)(2)(iii)(1992).
30 Prop. Reg. 1.514(c)(9)-2.
31 TD 8632, 12/20/1995.
32 See “E-Commerce Firms Using Cost Sharing to
Reduce Tax Uncertainty, Economist Says,” 9 Tax Mgmt. Transfer Pricing Report 70 (5/31/00). With the exception of special rules for CSAs, final reg- ulations were issued in July, 1994 which essen- tially duplicated the 1993 temporary regulations, with a few minor changes, and included both the comparable profits method and profit split methods. See Regs. 1.482-1 through 1.482-8. The changes adopted in the 1994 regulations were “intended to clarify and refine those provi- sions of the 1993 regulations that required
developing or exploiting cost-shared intangibles at any time, including resources, capabilities, or rights, such as expertise in decision-making con- cerning research and product devel- opment, manufacturing, or marketing intangibles or services, and manage- ment oversight and direction. Other prospective economic contributions consist of costs incurred to develop or acquire resources, capabilities, and rights that facilitate the exploitation of cost-shared intangibles (operating cost contributions).
improvement, without fundamentally altering the basic policies reflected in the 1993 regula- tions.” Regulations on cost sharing arrange- ments that were issued as temporary regula- tions were finalized in 1995. See former Reg. 1.482-7. For intangibles, the 1995 regulations authorize the use of the comparable uncon- trolled transactions (CUT) method as well as the comparable profits method, profit split methods and unspecified methods. See generally Reg. 1.482-4(a). The 1995 Regulations became gener- ally effective for tax years beginning after 10/6/1994, and were replaced by temporary reg- ulations that became effective 1/5/2009, subject to transition rules that, in general, would require amendment of applicable cost sharing contracts by 7/6/2009. The regulations provided that tax- payers could elect to apply retroactively all of the provisions of the regulations for any tax year still open under the statute of limitations. Such an election would be effective for the year of the election and all subsequent tax years. See for- mer Reg. 1.482-1(j)(1).
33 Reg. 1.482-7A(g)(5).
34 125 TC 37 (2005), aff’d, 598 F.3d 1191, 105
AFTR2d 2010-1490 (CA-9, 2010). 35 See Sections 83(b), 421(b).
COST-SHARING
14 BUSINESS ENTITIES
January/February 2016