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Firm Comments on Proposed Regs on Cost-Sharing Arrangements

JUL. 1, 2009

Firm Comments on Proposed Regs on Cost-Sharing Arrangements

DATED JUL. 1, 2009
DOCUMENT ATTRIBUTES
  • Authors
    Fuller, James P.
    Kim, Andrew J.
    Fitzgibbon, Timothy J.
  • Institutional Authors
    Fenwick & West LLP
  • Cross-Reference
    For REG-144615-02, see Doc 2008-27342 or 2009 TNT 1-5 2009 TNT 1-5: IRS Proposed Regulations.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2009-15363
  • Tax Analysts Electronic Citation
    2009 TNT 129-40

 

July 1, 2009

 

 

Internal Revenue Service, Room 5203

 

Attn: CC:PA:LPD:PR (REG-144615-02)

 

P.O. Box 7604

 

Ben Franklin Station

 

Washington, D.C. 20224

 

 

Re: Comments on Proposed and Temporary Cost Sharing Regulations

Dear Sir or Madam:

We respectfully submit the following comments with respect to the proposed and temporary regulations under § 482 of the Internal Revenue Code regarding cost sharing arrangements ("CSAs"). These comments address the contractual requirements for CSAs set forth in Temporary Regulation section 1.482-7T(k)(1) ("Contractual Requirements") and the transition rule for qualified cost sharing arrangements in effect as of January 5, 2009 ("existing CSAs") in Temporary Regulation section 1.482-7T(m) ("Transition Rule").

One of the Contractual Requirements in Temporary Regulation section 1.482-7T(k)(1)(ii)(A) (the "Listing Requirement") provides that the CSA contract must "[l]ist the controlled participants and any other members of the controlled group that are reasonably anticipated to benefit from the use of the cost shared intangibles, including the address of each domestic entity and the country of organization for each foreign entity." In informal discussions with the IRS, it appears that the IRS may adopt a broad interpretation of the Listing Requirement that requires the CSA contract to include a list of any and all controlled group members that may be in contact with the cost shared intangibles, such as distributers, contract manufacturers, marketing subsidiaries, etc., regardless of whether such controlled group members have any legal or economic rights in the cost shared intangibles.

This position is inconsistent with the plain language of the Temporary Regulations. "Reasonably anticipated benefits" is defined in the Temporary Regulations to mean "the benefits that reasonably may be anticipated to be derived from exploiting cost shared intangibles." The term "benefits" is further defined as "the sum of additional revenue generated, plus cost savings, minus any cost increases from exploiting cost shared intangibles." See Temporary Regulation section 1.482-7T(j)(1)(i). A typical contract manufacturer, distributer, or marketing subsidiary does not have any legal or economic rights in the cost shared intangibles, and therefore cannot use or benefit from exploiting the cost shared intangibles (and in fact is generally prohibited from doing so). Thus, the plain language of the Temporary Regulations would not require a CSA contract to include a list of controlled members that do not own or exploit the cost shared intangibles, for example, in connection with the distribution, manufacturing, or marketing of products.

Significantly, the Listing Requirement also is set forth in prior Treasury Regulation section 1.482-7(b)(4)(i), using virtually the same language. A broad interpretation of the Listing Requirement would call into question whether the Transition Rule is of any relevance to existing CSAs. The Transition Rule in Temporary Regulation section 1.482-7T(m)(1) provides that an arrangement will be considered a CSA if prior to January 5, 2009, it was a "qualified cost sharing arrangement" under prior Treasury Regulation section 1.482-7, but only if it is amended to conform with the provisions of Temporary Regulation section 1.482-7T, as modified by Temporary Regulation section 1.482-7T(m)(2) and (3).

Under prior Treasury Regulation section 1.482-7(b)(4)(i), for an arrangement to be a "qualified cost sharing arrangement," the contract must have included "a list of the arrangement's participants, and any other member of the controlled group that will benefit from the use of intangibles developed under the cost sharing agreement." This contractual requirement is substantially similar to the Listing Requirement in Temporary Regulation section 1.482-7T(k)(1)(ii)(A).

To our knowledge, the IRS has never previously publicly stated or contended that a qualified cost sharing arrangement contract must list controlled members such as distributers, contract manufacturers, marketing subsidiaries, etc. In fact, most Taxpayers likely have concluded that including such service providers in the qualified cost sharing arrangement contract was not required under former Treasury Regulation 1.482-7(b)(4)(i) (and is not required under Temporary Regulation section 1.482-7T(k)(1)(ii)(A)). Such a list, if truly required, could result in some Taxpayers naming hundreds of domestic and foreign subsidiaries in the CSA contract.

If this broad interpretation of the Listing Requirement were the rule, there would be no need to include this information in the CSA under the Transition Rule if it was not in the previous CSA. A broad interpretation of the Listing Requirement could make the Transition Rule irrelevant and force many, if not most, Taxpayers into the new rules, including forced buy-ins and buy-outs to adjust divisional interests, or require that Taxpayers challenge the broad interpretation in court as being contrary to the plain language of the regulations. In the courts, ambiguity, if there is any, is resolved against the drafter (in this case, the government).

If the IRS and Treasury intend to adopt a broad interpretation of the Listing Requirement, the Treasury Regulations need to be clarified on this point. Further, we believe that at the very least, the Listing Requirement should be removed from the Contractual Requirements under Treasury Regulation section 1.482-7T(k)(1), and moved to the CSA documentation requirements under Temporary Regulation section 1.482-7T(k)(2). Even if the Listing Requirement is moved to Temporary Regulation section 1.482-7T(k)(2), however, the IRS should specifically describe the information it seeks to obtain. Based on the broad interpretation of the Listing Requirement, Taxpayers likely would end up having to simply provide a list of all domestic and foreign affiliates in the controlled group, or state "all," which we suspect is not what the IRS intends.

If the IRS were to adopt a broad interpretation of the Listing Requirement and require that this information be in the parties' contract, not only should the IRS issue a Notice clearly setting forth its position on the type of controlled group members that must be included under the Listing Requirement, but it also should provide Taxpayers additional time to comply, and clarify that the amendment of a CSA to address the adoption of a broad interpretation of the Listing Requirement does not disqualify Taxpayers from the Transition Rule with respect to existing CSAs.

Sincerely,

 

 

James P. Fuller

 

Andrew J. Kim

 

Timothy J. Fitzgibbon

 

Fenwick & West LLP

 

Mountain View, CA

 

cc:

 

Kenneth P. Christman, Associate Chief Counsel (Int'l), IRS
DOCUMENT ATTRIBUTES
  • Authors
    Fuller, James P.
    Kim, Andrew J.
    Fitzgibbon, Timothy J.
  • Institutional Authors
    Fenwick & West LLP
  • Cross-Reference
    For REG-144615-02, see Doc 2008-27342 or 2009 TNT 1-5 2009 TNT 1-5: IRS Proposed Regulations.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2009-15363
  • Tax Analysts Electronic Citation
    2009 TNT 129-40
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