Section 482: Methods To Determine Taxable Income in Connection With a Cost Sharing Arrangement; Correction, 9570-9572 [E9-4686]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 74, Number 42 (Thursday, March 5, 2009)]
[Rules and Regulations]
[Pages 9570-9572]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-4686]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9441]
RIN 1545-BI46


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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correcting amendment.

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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, (202) 435-5265 
(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

0
Accordingly, 26 CFR part 1 is corrected by making the following 
correcting amendments:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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


[[Page 9571]]



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


Sec.  1.482-0T  Outline of regulations under section 482 (temporary).

* * * * *


Sec.  1.482-2T  Determination of taxable income in specific situations 
(temporary).

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


Sec.  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.
* * * * *

0
Par. 3. Section 1.482-7A is amended by revising the applicable date as 
follows:


Sec.  1.482-7A   Sharing of costs.

    Regulations applicable on or before January 4, 2009.
* * * * *

0
Par. 4. Section 1.482-7T is amended as follows:
0
1. Paragraph (b)(5)(iii) Example 4. (i) is revised.
0
2. The fifth sentence of paragraph (b)(5)(iii) Example 4. (iii) is 
revised.
0
3. The first two sentences of paragraph (c)(3) are revised.
0
4. The last sentence of paragraph (g)(4)(i)(E) is revised.
0
5. The second sentence of paragraph (g)(4)(i)(F)(1 ) is revised.
0
6. The first sentence of paragraph (g)(4)(vi) is revised.
0
7. The first sentence of paragraph (g)(7)(v) Example 1. (i) is revised.
0
8. The seventh sentence of paragraph (g)(7)(v) Example 1. (ii) is 
revised.
0
9. The last sentence of paragraph (g)(7)(v) Example 1. (iii) is 
revised.
0
10. The last sentence of paragraph (g)(7)(v) Example 1. (iv) is 
revised.
0
11. The last sentence of paragraph (g)(7)(v) Example 2. (iii) is 
revised.
0
12. The second, fourth and last sentences of paragraph (g)(7)(v) 
Example 2. (iv) are revised.
0
13. The first sentence of paragraph (k)(1)(iv)(B) Example 1. is 
revised.
0
14. The first sentence of paragraph (k)(1)(iv)(B) Example 2. is 
revised.
0
15. Paragraph (k)(1)(iv)(B) Example 2. (i) is revised.
0
16. The first sentence of paragraph (k)(3)(ii) is revised.
0
17. Paragraph (k)(4)(i) is revised.
0
18. Paragraph (m)(2)(viii) is revised.


Sec.  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 Sec.  1.482-4(c)(4). * * *
* * * * *
    (c) * * *
    (3) * * * For purposes of Sec.  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 
Sec.  1.482-7T(h) (Form of payment rules).
    (F) * * *
    (1 ) * * * See, for example, Sec.  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 x $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) * * *

[[Page 9572]]

    (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 Sec.  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).
 [FR Doc. E9-4686 Filed 3-4-09; 8:45 am]
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