Tax News

CCH (cch.taxgroup.com) reports:

  The comparable uncontrolled transaction (CUT) method, used to calculate a buy-in payment for certain preexisting intangibles made by a foreign subsidiary corporation to its parent, pursuant to a cost sharing arrangement for the development and manufacture of storage management software products, was found to be the best method for determining such buy-in payment. The IRS's determination that the buy-in payment should have been calculated using an income method, and the factors it used in making its calculations under such method, were found to be arbitrary, capricious and unreasonable.

  The IRS relied on the testimony of an expert at was found to be unsupported, unreliable, and unconvincing. The expert used the wrong useful life for the product and the wrong discount rate.

  Moreover, the notice of deficiency relied on a report by a non-witness expert that resulted in a valuation one third higher than the valuation the IRS subsequently claimed at trial. This, together with other factors, suggested that the deficiency notice was arbitrary, capricious and unreasonable. Such other factors included a concession at trial by the IRS's expert that the beta factor he used by the in calculating the appropriate discount rate for the buy-in payment was erroneous.

  The IRS's modified computation of the correct buy-in payment in its amendment to its answer was also arbitrary, capricious and unreasonable. It relied on an assumption that the transfer of preexisting intangibles was akin to a sale of the US parent's business to its foreign subsidiary, that short-lived intangibles should be valued as though they would have perpetual life, and that subsequently developed, rather than just preexisting intangibles, should be factored in. This approach was found to be unreliable. Moreover, the IRS allocation took into account items not transferred or of insignificant value, as well as rights to future co-developed intangibles in violation of Reg. §1.482-7(g)(2). It also employed the wrong useful life, discount rate and growth rate in computing the appropriate buy-in payment.

  By contrast, the CUT method employed by the taxpayer satisfied the best method rule of Reg. §1.482-1(c) and was found to be essentially reliable. Certain adjustments were, however, made, including the starting royalty rate, the appropriate useful life of the preexisting product intangibles, the royalty degradation rate, the value assigned to trademark intangibles and sales agreements, and the appropriate discount rate.

Veritas Software Corp., 133 TC No. 14, Dec. 58,016

Other References:

 
Code Sec. 482

  CCH Reference - 2009FED ¶22,283.107

  CCH Reference - 2009FED ¶22,283.48

  Tax Research Consultant

  CCH Reference - TRC ACCTNG: 30,102.10
CCH Reference -
TRC INTL: 15,104
CCH Reference - TRC INTL: 15,104.10