E9-4686. Section 482: Methods To Determine Taxable Income in Connection With a Cost Sharing Arrangement; Correction

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Correcting amendment.

SUMMARY:

This document contains corrections to final and temporary regulations (TD9441) that were published in the Federal Register on Monday, January 5, 2009 (74 FR 340) providing further guidance and clarification regarding methods under section 482 to determine taxable income in connection with a cost sharing arrangement in order to address issues that have arisen in administering the current regulations. The temporary regulations affect domestic and foreign entities that enter into cost sharing arrangements described in the temporary regulations.

DATES:

This correction is effective March 5, 2009, and is applicable on January 5, 2009.

FOR FURTHER INFORMATION CONTACT:

Kenneth P. Christman, [phone] (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The final and temporary regulations that are the subject of this document are under sections 367 and 482 of the Internal Revenue Code.

Need for Correction

As published, final and temporary regulations (TD 9441) contains errors that may prove to be misleading and are in need of clarification.

List of Subjects in 26 CFR Part 1

• Income taxes
• Reporting and recordkeeping requirements

Correction of Publication

Accordingly, 26 CFR part 1 is corrected by making the following correcting amendments:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.482-0T is amended by revising the entries of § 1.482-2T(f)(2) and § 1.482-7T (e), (g)(2)(ix)(D)(2), (g)(4)(i)(D), and (h)(3)(vi)(B) as follows:

§ 1.482-0T

Outline of regulations under section 482 (temporary).

* * * * *

§ 1.482-2T

Determination of taxable income in specific situations (temporary).

* * * * *

(f) * * *

(2) Election to apply paragraph (b) to earlier taxable years.

* * * * *

§ 1.482-7T

Methods to determine taxable income in connection with a cost sharing arrangement (temporary).

* * * * *

(e) Reasonably anticipated benefits share.

* * * * *

(g) * * *

(2) * * *

(ix) * * *

(D) * * *

(2) One variable input parameter.

* * * * *

(4) * * *

(i) * * *

(D) Only one controlled participant with nonroutine platform contributions.

* * * * *

(h) * * *

(3) * * *

(vi) * * *

(B) Circumstances in which Periodic Trigger deemed not to occur.

* * * * *

Par. 3. Section 1.482-7A is amended by revising the applicable date as follows:

§ 1.482-7A

Sharing of costs.

Regulations applicable on or before January 4, 2009.

* * * * *

Par. 4. Section 1.482-7T is amended as follows:

1. Paragraph (b)(5)(iii) Example 4. (i) is revised.

2. The fifth sentence of paragraph (b)(5)(iii) Example 4. (iii) is revised.

3. The first two sentences of paragraph (c)(3) are revised.

4. The last sentence of paragraph (g)(4)(i)(E) is revised.

5. The second sentence of paragraph (g)(4)(i)(F)( 1 ) is revised.

6. The first sentence of paragraph (g)(4)(vi) is revised.

7. The first sentence of paragraph (g)(7)(v) Example 1. (i) is revised.

8. The seventh sentence of paragraph (g)(7)(v) Example 1. (ii) is revised.

9. The last sentence of paragraph (g)(7)(v) Example 1. (iii) is revised.

10. The last sentence of paragraph (g)(7)(v) Example 1. (iv) is revised.

11. The last sentence of paragraph (g)(7)(v) Example 2. (iii) is revised.

12. The second, fourth and last sentences of paragraph (g)(7)(v) Example 2. (iv) are revised.

13. The first sentence of paragraph (k)(1)(iv)(B) Example 1. is revised.

14. The first sentence of paragraph (k)(1)(iv)(B) Example 2. is revised.

15. Paragraph (k)(1)(iv)(B) Example 2. (i) is revised.

16. The first sentence of paragraph (k)(3)(ii) is revised.

17. Paragraph (k)(4)(i) is revised.

18. Paragraph (m)(2)(viii) is revised.

§ 1.482-7T

Methods to determine taxable income in connection with a cost sharing arrangement (temporary).

* * * * *

(b) * * *

(5) * * *

(iii) * * *

Example 4. * * *

(i) The facts are the same as in Example 1 except that P does not own proprietary software and P and S use a method for determining the arm's length amount of the PCT Payment for the P-Cap patent rights different from the method used in Example 1.

* * * * *

(iii) * * * See § 1.482-4(c)(4). * * *

* * * * *

(c) * * *

(3) * * * For purposes of § 1.482-1(b)(2)(ii) and paragraph (a)(2) of this section, a PCT must be identified by the controlled participants as a particular type of transaction (for example, a license for royalty payments). See paragraph (k)(2)(ii)(H) of this section. * * *

* * * * *

(g) * * *

(4) * * *

(i) * * *

(E) * * * For converting to another form of payment, see generally § 1.482-7T(h) (Form of payment rules).

(F) * * *

(1 ) * * * See, for example, § 1.482-7T(g)(2)(v)(B)(1 ) (Discount rate variation between realistic alternatives). * * *

* * * * *

(vi) * * * For purposes of this paragraph (g)(4), any routine contributions that are platform or operating contributions, the valuation and PCT Payments for which are determined and made independently of the income method, are treated similarly to cost contributions and operating cost contributions, respectively. * * *

* * * * *

(7) * * *

(v) * * *

Example 1. * * *

(i) USP, a U.S. electronic data storage company, has partially developed technology for a type of extremely small compact storage devices (nanodisks) which are expected to provide a significant increase in data storage capacity in various types of portable devices such as cell phones, MP3 players, laptop computers and digital cameras. * * *

(ii) * * * FS undertakes routine distribution activities in its markets that constitute routine contributions to the relevant business activity of exploiting nanodisk technologies. * * *

(iii) * * * Therefore, the present value of the nonroutine residual divisional profit is $1.336 billion.

(iv) * * * Therefore, FS's PCT payments should have an expected present value equal to $802 million (.6 × $1.336 billion).

Example 2. * * *

(iii) * * * Therefore, the present value of the nonroutine residual divisional profit in USP's territory is $39,243X and in CFC's territory is $19,622X (for simplicity of calculation in this example, all financial flows are assumed to occur at the beginning of each period).

(iv) * * * Consequently, the present value of the arm's length amount of the PCT payments that USP should pay to FS for FS's platform contribution is $10,007X (.255 x $39,243X). * * * Consequently, the present value of the arm's length amount of the PCT payments that FS should pay to USP for USP's platform contribution is $12,362 (.63 x $19,622X). Therefore, FS is required to make a net payment to USP with a present value of $2,355X ($12,362X−$10,007X).

* * * * *

(k) * * *

(1) * * *

(iv) * * *

(B) * * *

Example 1. The contractual provisions recorded upon formation of an arrangement that purports to be a CSA provide that PCT payments with respect to a particular platform contribution will consist of payments contingent on sales. * * *

Example 2. An arrangement that purports to be a CSA provides that PCT payments with respect to a particular platform contribution shall be contingent payments equal to 10% of sales of products that incorporate cost shared intangibles. * * *

(i) The contingent payment terms with respect to the platform contribution do not have economic substance because the controlled participants did not act in accordance with their upfront risk allocation; or

* * * * *

(3) * * *

(ii) * * * For purposes of this section, the controlled participants may not rely solely upon financial accounting to establish satisfaction of the accounting requirements of this paragraph (k)(3). * * *

(4) * * *

(i) * * * Each controlled participant must file with the Internal Revenue Service, in the manner described in this paragraph (k)(4), a “Statement of Controlled Participant to § 1.482-7T Cost Sharing Arrangement” (CSA Statement) that complies with the requirements of this paragraph (k)(4).

* * * * *

(m) * * *

(2) * * *

(viii) Paragraph (k)(4)(iii)(A) of this section shall be construed as requiring a CSA Statement with respect to the revised written contractual agreement described in paragraph (m)(2)(vi) of this section no later than September 2, 2009.

* * * * *

LaNita Van Dyke,

Chief, Publications and Regulations Branch, Legal Processing Division, Associate Chief Counsel, (Procedure and Administration).