In several cases involving tax years 2005-2007, the IRS has unsuccessfully attempted to rewrite cost-sharing agreements and, in the alternative, argued that a transfer of foreign goodwill is covered by section 367(d). Effectively, the IRS argued that foreign goodwill is included in section 936(h)(3)(B) —the very question the drafters refused to answer in the final section 367(d) regulations. Readers, never go to court to find out what the law is. You might not like the answer.
Although Amazon was primarily a cost-sharing agreement case under the 1995 regulations, the court addressed the foreign goodwill question (Amazon.com Inc. v. Commissioner, 148 T.C. No. 8 (2017)). In Amazonas in Veritas, the dispute was about the amount of the buy-in payment (Veritas Software Corp. v. Commissioner, 133 T.C. 297 (2009), nonacq.AOD 2010-005).
In a cost-sharing agreement, the buy-in payment covers the initial transfer of preexisting intangibles, while the cost-sharing payments cover the technology developed under the agreement. In Amazon, the government succeeded in getting the buy-in amount increased, but failed to have Veritas overturned on the law. As it had in Veritas, the government was essentially trying to retroactively apply the 2011 cost-sharing regulations’ platform contribution requirement to intangibles transfers that predated the rule changes.
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“Each and every aspect of the cost-sharing saga seems like a self-inflicted wound,” said H. David Rosenbloom of Caplin & Drysdale, Chartered. The technique is intended as a safe harbor. It is not self-evident that it should be available at all, or that it should be governed by the arm’s-length method, or that the government cannot impose reasonable restrictions it wishes on its use.”
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Excerpt taken from the article “Challenging Outbound Transfers of Intangibles” by Lee A. Sheppard for Tax Notes.