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U.S. IRS Publishes Memorandum on Multiple RAB Shares and Subsequent PCTs

The U.S. IRS has published a Memorandum from the Office of Chief Counsel concerning the regulations for cost sharing arrangements (CSA), which require that cost sharing participants share the costs and risks of developing intangibles by engaging in cost sharing transactions (CST), resulting in CST Payments that are required to be determined by reference to the share of reasonably anticipated benefits (RAB).

The Memorandum addresses a request for legal advice regarding the recurring issue of whether the cost sharing regulations in § 1.482-7 prohibit the use of multiple RAB shares within a single CSA. The request arose specifically in response to a case in which a taxpayer determined an arm’s length price for a subsequent platform contribution transaction (PCT) that was a different percentage (of an acquisition price) than the RAB share used to determine current CSTs. The Memorandum sets out the issues as follows:

  1. Whether a taxpayer may determine and apply different RAB shares with respect to separate cost pools under a single CSA; and
  2. Whether a taxpayer may determine and apply a RAB share solely for the purpose of calculating PCT Payments with respect to a particular subsequent PCT that is different from the RAB share used by the taxpayer to calculate CST Payments under the CSA (or the same cost pool under a single CSA) that includes such PCT.

With respect to the two issues, the Memorandum provides the following conclusions:

  1. It may be appropriate in certain situations for controlled participants to use two or more RAB shares with respect to two or more discrete lines of research and development (“R&D”) under a single CSA. For this purpose, key considerations include whether R&D projects within the scope of the CSA Activity are, in fact, sufficiently different such that the anticipated benefits, cost pools, and platform contributions within each project can be collectively and accurately accounted for (separate from those of the other projects), and whether determination and application of multiple RAB shares is a more reliable basis for determining RAB shares than using a single RAB share for all projects.
  2. It may be appropriate in certain situations for controlled participants to use a separate RAB share to determine PCT Payments with respect to a subsequent PCT that is different from a RAB share that had been applied to calculate the CST Payments under the CSA (or the same cost pool under a single CSA) that includes that subsequent PCT. For this purpose, key considerations include whether determination and application of such separate RAB share is a more reliable basis for determining RAB shares than using the same RAB share for the subsequent PCT and the CST Payments under such CSA or cost pool. However, going forward, it must also be determined whether it would be more reliable to determine a blended RAB share (taking into account the impact of the subsequent PCT on the existing RAB share) to be applied to the CST Payments, or to establish a separate cost pool that includes only the IDCs related to the R&D project that includes the subsequently contributed platform contribution to which the separate RAB share will also be applied.

Click the following link for the full text of the Memorandum.

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