New IRS Intangibles Regulations Published

by Glen Shapiro, LawAndTax-News.com, New York

08 January 2009

The IRS and the Treasury have issued long-awaited 'proposed and temporary' regulations (TD 9441) this week under Section 482 of the Tax Code dealing with: Methods to Determine Taxable Income in Connection With a Cost Sharing Arrangement.

The temporary regulations affect domestic and foreign entities that enter into cost sharing arrangements and are particularly relevant to transactions involving intangible assets. The regulations are effective as of January 5, 2009.

The IRS had published a notice of proposed rulemaking on this subject in 2005 and says it had received substantial comments on a wide range of issues addressed in the 2005 proposed regulations. In response to these comments, these temporary regulations make several significant changes to the rules of the 2005 proposed regulations.

The temporary regulations generally provide guidance regarding the application of section 482 and the arm’s length method to cost sharing arrangements. Several comments on the proposed regulations questioned whether and how the proposed regulations conform to the arm’s length standard, as well as its corollary, the 'commensurate with income' requirement added by the Tax Reform Act of 1986. In response, the temporary regulations provide further guidance on the evaluation of the arm’s length results of cost sharing transactions and platform contribution transactions.

The regulations address the material functional and risk allocations in the context of a cost-sharing arrangement, including the reasonably anticipated duration of the commitments, the intended scope of the intangible development, the degree and uncertainty of profit potential of the intangibles to be developed, and the extent of platform and other contributions of resources, capabilities, and rights to the development and exploitation of cost shared intangibles.

Under the temporary regulations, if available data of uncontrolled transactions reflect, or may be reliably adjusted to reflect, similar facts and circumstances to a cost-sharing arrangement, they may be the basis for application of a comparable uncontrolled transaction method to value the results. Because of the difficulty of finding data that reliably reflects such facts and circumstances (even after adjustments), the temporary regulations also provide for other methods. These include the newly specified income, acquisition price, market capitalization, and residual profit split methods.

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