Use of Differential Income Stream as an Application of the Income Method and as a Consideration in Assessing the Best Method, 52854-52856 [2013-20786]
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Federal Register / Vol. 78, No. 166 / Tuesday, August 27, 2013 / Rules and Regulations
§ 524.1465
[Amended]
(2) No. 058198 for use of product
described in paragraph (a)(2) of this
section.
*
*
*
*
*
■
§ 520.955
PART 556—TOLERANCES FOR
RESIDUES OF NEW ANIMAL DRUGS
IN FOOD
8. In paragraph (b) of § 524.1465, add
‘‘026637,’’ after ‘‘025463,’’.
PART 558—NEW ANIMAL DRUGS FOR
USE IN ANIMAL FEEDS
11. The authority citation for 21 CFR
part 558 continues to read as follows:
■
[Amended]
6. In paragraph (b) of § 520.955,
remove ‘‘No. 000061’’ and in its place
add ‘‘Nos. 000061 and 058198’’.
■
Authority: 21 U.S.C. 360b, 371.
12. In § 558.665, in the table, revise
paragraph (e)(5) to read as follows:
■
9. The authority citation for 21 CFR
part 556 continues to read as follows:
■
PART 524—OPHTHALMIC AND
TOPICAL DOSAGE FORM NEW
ANIMAL DRUGS
§ 558.665
Authority: 21 U.S.C. 342, 360b, 371.
§ 556.733
7. The authority citation for 21 CFR
part 524 continues to read as follows:
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[Amended]
Zilpaterol.
*
*
(e) * * *
*
*
10. In paragraph (a) of § 556.733,
remove ‘‘10 micrograms’’ and in its
place add ‘‘50 micrograms’’.
■
Authority: 21 U.S.C. 360b.
Zilpaterol in grams/
ton
Combination in
grams/ton
Indications for use
Limitations
*
(5) 6.8 to provide 60
to 90 mg/head/
day.
*
Monensin 10 to 40,
plus tylosin 8 to
10.
*
*
Cattle fed in confinement for slaughter:
As in paragraph (e)(1) of this section;
for prevention and control of coccidiosis due to Eimeria bovis and E.
zuernii; and for reduction of incidence
of liver abscesses caused by
Fusobacterium necrophorum and
Arcanobacterum
(Actinomyces)
pyogenes.
*
*
As in paragraph (e)(1) of this section;
see §§ 558.355(d) and 558.625(c) of
this chapter. Monensin as provided
by No. 000986; tylosin as provided by
Nos.
000986
or
016592
in
§ 510.600(c) of this chapter.
*
*
*
Dated: August 19, 2013.
Bernadette Dunham,
Director, Center for Veterinary Medicine.
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*
Sponsor
*
*
000061
016592
*
DATES:
DEPARTMENT OF THE TREASURY
Effective Date: These regulations
are effective on August 27, 2013.
Applicability Dates: For dates of
applicability, see § 1.482–7(l).
FOR FURTHER INFORMATION CONTACT:
Mumal R. Hemrajani, (202) 622–3800
(not a toll-free call).
SUPPLEMENTARY INFORMATION:
on December 23, 2011 (‘‘temporary and
proposed regulations’’). Comments were
submitted, which we address in this
Preamble. No request for a public
hearing was received. The Treasury
Department and the IRS are finalizing
the proposed regulations without
change.
Internal Revenue Service
Background
Explanation of Provisions
Final cost sharing regulations were
published in the Federal Register (76
FR 80082) (REG–144615–02) (TD 9568)
on December 22, 2011 (‘‘final cost
sharing regulations’’). Corrections to the
final cost sharing regulations were
published in the Federal Register (77
FR 3606, 77 FR 8143, and 77 FR 8144)
on January 25, 2012, and February 14,
2012. Certain guidance regarding
application of the differential income
stream approach was reserved in the
final cost sharing regulations because
the Treasury Department and the IRS
believed it was appropriate to solicit
public comments on that subject matter.
Temporary cost sharing regulations
and a notice of proposed rule making on
application of the differential income
stream approach were published in the
Federal Register (76 FR 80249 and 76
FR 80309) (REG–145474–11) (TD 9569)
The Treasury Department and the IRS
were aware that some taxpayers were
taking unreasonable positions in
applying the income method by using
relatively low licensing discount rates,
and relatively high cost sharing
discount rates, without sufficiently
considering the appropriate
interrelationship of the discount rates
and financial projections. This practice
gave rise to material distortions and the
potential for PCT Payments not in
accordance with the arm’s length
standard. To address these problems,
the temporary and proposed regulations
provided additional guidance on
evaluating the results of an application
of the income method (§ 1.482–
7T(g)(2)(v)(B)(2) (Implied discount rates)
and (g)(4)(vi)(F)(2) (Use of differential
income stream as a consideration in
assessing the best method)), and
[FR Doc. 2013–20538 Filed 8–26–13; 8:45 am]
BILLING CODE 4160–01–P
26 CFR Part 1
[TD 9630 ]
RIN 1545–BK71
Use of Differential Income Stream as
an Application of the Income Method
and as a Consideration in Assessing
the Best Method
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations and removal of
temporary regulations.
pmangrum on DSK3VPTVN1PROD with RULES
AGENCY:
This document contains final
regulations that implement the use of
the differential income stream as a
consideration in assessing the best
method in connection with a cost
sharing arrangement and as a specified
application of the income method.
SUMMARY:
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pmangrum on DSK3VPTVN1PROD with RULES
provided a new specified application of
the income method for directly
determining the arm’s length charge for
PCT Payments (§ 1.482–7(g)(4)(v)
(Application of income method using
differential income stream)).
Comments noted that § 1.482–
7T(g)(4)(vi)(F)(2) explicitly provides that
the implied discount rate may be used
to evaluate the reliability of the
corresponding actual discount rates
associated with the licensing and cost
sharing alternatives, but no similar
explicit provision is contained in
§ 1.482–7(g)(4)(v) regarding the use of
actual discount rates to evaluate the
reliability of the corresponding implied
discount rate. Thus, the comments
suggested that such an explicit
provision be adopted. The Treasury
Department and the IRS agree that,
depending on facts and circumstances,
separately derived discount rates
pursuant to a general application of the
income method may yield a more
reliable measure of an arm’s length
result than a proffered discount rate
pursuant to a differential income stream
application of the income method in a
particular case. In such a case, however,
the best method rule already would
require a determination of PCT
Payments under the method, and the
application of such method, that, under
the facts and circumstances, provides
the most reliable measure of an arm’s
length result. See, for example,
§§ 1.482–1(c)(1) and 1.482–
7(g)(4)(vi)(A). Accordingly, the
suggested change was not adopted.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
has been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to this
regulation, and because the regulation
does not impose a collection of
information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Internal Revenue
Code, these regulations have been
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration (CCASBA) for comment
on their impact on small business.
CCASBA had no comments.
Drafting Information
The principal author of these
regulations is Mumal R. Hemrajani,
Office of the Associate Chief Counsel
(International). However, other
personnel from the Internal Revenue
VerDate Mar<15>2010
13:33 Aug 26, 2013
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Service and the Treasury Department
participated in the development of the
regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
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 1.482–7 is amended by
revising paragraph (g)(2)(v)(B)(2),
adding paragraph (g)(4)(v), revising
paragraphs (g)(4)(vi)(F)(2), (g)(4)(viii)
Example 8, adding Example 9, and
revising paragraph (l).
■
§ 1.482–7 Methods to determine taxable
income in connection with a cost sharing
arrangement.
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*
*
*
(g) * * *
(2) * * *
(v) * * *
(B) * * *
(2) Implied discount rates. In some
circumstances, the particular discount
rate or rates used for certain activities or
transactions logically imply that certain
other activities will have a particular
discount rate or set of rates (implied
discount rates). To the extent that an
implied discount rate is inappropriate
in light of the facts and circumstances,
which may include reliable direct
evidence of the appropriate discount
rate applicable for such other activities,
the reliability of any method is reduced
where such method is based on the
discount rates from which such an
inappropriate implied discount rate is
derived. See paragraphs (g)(4)(vi)(F)(2)
and (g)(4)(viii), Example 8 of this
section.
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*
*
*
*
(4) * * *
(v) Application of income method
using differential income stream. In
some cases, the present value of an
arm’s length PCT Payment may be
determined as the present value,
discounted at the appropriate rate, of
the PCT Payor’s reasonably anticipated
stream of additional positive or negative
income over the duration of the CSA
Activity that would result (before PCT
Payments) from undertaking the cost
sharing alternative rather than the
licensing alternative (differential
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52855
income stream). See Example 9 of
paragraph (g)(4)(viii) of this section.
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(vi) * * *
(F) * * *
(2) Use of differential income stream
as a consideration in assessing the best
method. An analysis under the income
method that uses a different discount
rate for the cost sharing alternative than
for the licensing alternative will be more
reliable the greater the extent to which
the implied discount rate for the
projected present value of the
differential income stream is consistent
with reliable direct evidence of the
appropriate discount rate applicable for
activities reasonably anticipated to
generate an income stream with a
similar risk profile to the differential
income stream. Such differential income
stream is defined as the stream of the
reasonably anticipated residuals of the
PCT Payor’s licensing payments to be
made under the licensing alternative,
minus the PCT Payor’s cost
contributions to be made under the cost
sharing alternative. See, for example,
Example 8 of this paragraph (g)(4)(viii).
*
*
*
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*
(viii) * * *
Example 8. (i) The facts are the same as in
Example 1, except that the taxpayer
determines that the appropriate discount rate
for the cost sharing alternative is 20%. In
addition, the taxpayer determines that the
appropriate discount rate for the licensing
alternative is 10%. Accordingly, the taxpayer
determines that the appropriate present value
of the PCT Payment is $146 million.
(ii) Based on the best method analysis
described in Example 2, the Commissioner
determines that the taxpayer’s calculation of
the present value of the PCT Payments is
outside of the interquartile range (as shown
in the sixth column of Example 2), and thus
warrants an adjustment. Furthermore, in
evaluating the taxpayer’s analysis, the
Commissioner undertakes an analysis based
on the difference in the financial projections
between the cost sharing and licensing
alternatives (as shown in column 11 of
Example 1). This column shows the
anticipated differential income stream of
additional positive or negative income for FS
over the duration of the CSA Activity that
would result from undertaking the cost
sharing alternative (before any PCT
Payments) rather than the licensing
alternative. This anticipated differential
income stream thus reflects the anticipated
incremental undiscounted profits to FS from
the incremental activity of undertaking the
risk of developing the cost shared intangibles
and enjoying the value of its divisional
interests. Taxpayer’s analysis logically
implies that the present value of this stream
must be $146 million, since only then would
FS have the same anticipated value in both
the cost sharing and licensing alternatives. A
present value of $146 million implies that the
discount rate applicable to this stream is
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Federal Register / Vol. 78, No. 166 / Tuesday, August 27, 2013 / Rules and Regulations
34.4%. Based on a reliable calculation of
discount rates applicable to the anticipated
income streams of uncontrolled companies
whose resources, capabilities, and rights
consist primarily of software applications
intangibles and research and development
teams similar to USP’s platform contributions
to the CSA, and which income streams,
accordingly, may be reasonably anticipated
to reflect a similar risk profile to the
differential income stream, the Commissioner
concludes that an appropriate discount rate
for the anticipated income stream associated
with USP’s platform contributions (that is,
the additional positive or negative income
over the duration of the CSA Activity that
would result, before PCT Payments, from
switching from the licensing alternative to
the cost sharing alternative) is 16%, which is
significantly less than 34.4%. This
conclusion further suggests that Taxpayer’s
analysis is unreliable. See paragraphs
(g)(2)(v)(B)(2) and (g)(4)(vi)(F)(1) and (2) of
this section.
(iii) The Commissioner makes an
adjustment of $296 million, so that the
present value of the PCT Payments is $442
million (the median results as shown in
column 6 of Example 2).
Example 9. The facts are the same as in
Example 1, except that additional data on
discount rates are available that were not
available in Example 1. The Commissioner
determines the arm’s length charge for the
PCT Payment by discounting at an
appropriate rate the differential income
stream associated with the rights contributed
by USP in the PCT (that is, the stream of
income in column (11) of Example 1). Based
on an analysis of a set of public companies
whose resources, capabilities, and rights
consist primarily of resources, capabilities,
and rights similar to those contributed by
USP in the PCT, the Commissioner
determines that 15% to 17% is an
appropriate range of discount rates to use to
assess the value of the differential income
stream associated with the rights contributed
by USP in the PCT. The Commissioner
determines that applying a discount rate of
17% to the differential income stream
associated with the rights contributed by USP
in the PCT yields a present value of $446
million, while applying a discount rate of
15% to the differential income stream
associated with the rights contributed by USP
in the PCT yields a present value of $510
million. Because the taxpayer’s result, $464
million, is within the interquartile range
determined by the Commissioner, no
adjustments are warranted. See paragraphs
(g)(2)(v)(B)(2), (g)(4)(v), and (g)(4)(vi)(F)(1) of
this section.
pmangrum on DSK3VPTVN1PROD with RULES
*
*
*
*
*
(l) Effective/applicability dates.
Except as otherwise provided in this
paragraph (l), this section applies on
December 16, 2011. Paragraphs
(g)(2)(v)(B)(2), (g)(4)(vi)(F)(2), and
(g)(4)(viii), Example 8 of this section
apply to taxable years beginning on or
after December 19, 2011. Paragraphs
(g)(4)(v) and (g)(4)(viii), Example 9
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apply to taxable years beginning on or
after August 27, 2013.
*
*
*
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*
Background
officers and employees of the Bureau for
the purpose of, but only to the extent
necessary in, the structuring of censuses
and conducting related statistical
activities authorized by law. Section
301.6103(j)(1)–1 of the existing
regulations further defines such
purposes by reference to 13 U.S.C.
chapter 5 and provides an itemized
description of the return information
authorized to be disclosed for such
purposes.
By letter dated July 24, 2009, the
Secretary of Commerce requested that
additional items of return information
be disclosed to the Bureau for purposes
of allowing the Bureau to study a
developing trend of increased use of
contract workers. Specifically, the
Secretary of Commerce requested
disclosure of the following additional
items: (1) Total number of documents
reported on Form 1096 transmitting
Forms 1099–MISC and (2) total amount
reported on Form 1096 transmitting
Forms 1099–MISC.
Section 301.6103(j)(1)–1 of the
regulations formerly permitted
disclosure of the total number of
documents reported on Form 1096
transmitting Forms 1099–MISC and the
total amount reported on Form 1096
transmitting Forms 1099–MISC. At the
request of the Secretary of Commerce,
the Treasury Department removed these
items from the list of items of return
information authorized to be disclosed,
as disclosure of this return information
was no longer necessary (See TD 9372,
72 FR 73262 [Dec. 27, 2007]).
In 2009, the Secretary of Commerce
determined that these items of return
information were needed again to
provide critical data about contract
labor necessary to estimate total
employment and payroll in the United
States. The employment and
compensation data compiled by the
Bureau are important to analysts and
policy makers in both the public and
private sectors. Thus, the Secretary of
Commerce asserted that good cause
existed to amend § 301.6103(j)(1)–1 of
the regulations to restore these items to
the list of items of return information
that may be disclosed to the Bureau.
The Treasury Department and the IRS
agree that amending existing regulations
to permit disclosure of these items to
the Bureau is appropriate to meet the
analytical needs of the Bureau.
This document contains amendments
to 26 CFR part 301. Section 6103(j)(1)(A)
authorizes the Secretary of Treasury to
furnish, upon written request by the
Secretary of Commerce, such return or
return information as the Secretary of
Treasury may prescribe by regulation to
Explanation of Provisions
On August 26, 2010, the IRS and the
Treasury Department published
temporary regulations under § 6103(j)(1)
and issued a notice of proposed
rulemaking cross-referencing those
temporary regulations. See TD 9500 (75
§ 1.482–7T
■
[Removed]
Par. 3. Section 1.482–7T is removed.
Beth Tucker,
Deputy Commissioner for Operations
Support.
Approved: August 15, 2013.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2013–20786 Filed 8–26–13; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[TD 9631]
RIN 1545–BL66
Disclosures of Return Information
Reflected on Returns to Officers and
Employees of the Department of
Commerce for Certain Statistical
Purposes and Related Activities
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations and removal of
temporary regulations.
AGENCY:
This document contains final
regulations that authorize the disclosure
of certain items of return information to
the Bureau of the Census (Bureau) in
conformance with section 6103(j)(1) of
the Internal Revenue Code (Code). The
final regulations are made pursuant to a
request from the Secretary of Commerce.
Because the return information will be
disclosed to the Bureau in statistical
format, specific taxpayers will not be
identified, and, therefore, no taxpayers
are affected by the disclosures
authorized by this guidance.
DATES: Effective Date: These regulations
are effective on August 27, 2013.
Applicability Date: For dates of
applicability, see § 301.6103(j)(1)–1(e).
FOR FURTHER INFORMATION CONTACT:
Melissa Avrutine, (202) 622–7950 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
SUMMARY:
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]]>Agencies
[Federal Register Volume 78, Number 166 (Tuesday, August 27, 2013)]
[Rules and Regulations]
[Pages 52854-52856]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-20786]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9630 ]
RIN 1545-BK71
Use of Differential Income Stream as an Application of the Income
Method and as a Consideration in Assessing the Best Method
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations that implement the
use of the differential income stream as a consideration in assessing
the best method in connection with a cost sharing arrangement and as a
specified application of the income method.
DATES: Effective Date: These regulations are effective on August 27,
2013.
Applicability Dates: For dates of applicability, see Sec. 1.482-
7(l).
FOR FURTHER INFORMATION CONTACT: Mumal R. Hemrajani, (202) 622-3800
(not a toll-free call).
SUPPLEMENTARY INFORMATION:
Background
Final cost sharing regulations were published in the Federal
Register (76 FR 80082) (REG-144615-02) (TD 9568) on December 22, 2011
(``final cost sharing regulations''). Corrections to the final cost
sharing regulations were published in the Federal Register (77 FR 3606,
77 FR 8143, and 77 FR 8144) on January 25, 2012, and February 14, 2012.
Certain guidance regarding application of the differential income
stream approach was reserved in the final cost sharing regulations
because the Treasury Department and the IRS believed it was appropriate
to solicit public comments on that subject matter.
Temporary cost sharing regulations and a notice of proposed rule
making on application of the differential income stream approach were
published in the Federal Register (76 FR 80249 and 76 FR 80309) (REG-
145474-11) (TD 9569) on December 23, 2011 (``temporary and proposed
regulations''). Comments were submitted, which we address in this
Preamble. No request for a public hearing was received. The Treasury
Department and the IRS are finalizing the proposed regulations without
change.
Explanation of Provisions
The Treasury Department and the IRS were aware that some taxpayers
were taking unreasonable positions in applying the income method by
using relatively low licensing discount rates, and relatively high cost
sharing discount rates, without sufficiently considering the
appropriate interrelationship of the discount rates and financial
projections. This practice gave rise to material distortions and the
potential for PCT Payments not in accordance with the arm's length
standard. To address these problems, the temporary and proposed
regulations provided additional guidance on evaluating the results of
an application of the income method (Sec. 1.482-7T(g)(2)(v)(B)(2)
(Implied discount rates) and (g)(4)(vi)(F)(2) (Use of differential
income stream as a consideration in assessing the best method)), and
[[Page 52855]]
provided a new specified application of the income method for directly
determining the arm's length charge for PCT Payments (Sec. 1.482-
7(g)(4)(v) (Application of income method using differential income
stream)).
Comments noted that Sec. 1.482-7T(g)(4)(vi)(F)(2) explicitly
provides that the implied discount rate may be used to evaluate the
reliability of the corresponding actual discount rates associated with
the licensing and cost sharing alternatives, but no similar explicit
provision is contained in Sec. 1.482-7(g)(4)(v) regarding the use of
actual discount rates to evaluate the reliability of the corresponding
implied discount rate. Thus, the comments suggested that such an
explicit provision be adopted. The Treasury Department and the IRS
agree that, depending on facts and circumstances, separately derived
discount rates pursuant to a general application of the income method
may yield a more reliable measure of an arm's length result than a
proffered discount rate pursuant to a differential income stream
application of the income method in a particular case. In such a case,
however, the best method rule already would require a determination of
PCT Payments under the method, and the application of such method,
that, under the facts and circumstances, provides the most reliable
measure of an arm's length result. See, for example, Sec. Sec. 1.482-
1(c)(1) and 1.482-7(g)(4)(vi)(A). Accordingly, the suggested change was
not adopted.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to this regulation, and because the
regulation does not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Internal Revenue Code, these
regulations have been submitted to the Chief Counsel for Advocacy of
the Small Business Administration (CCASBA) for comment on their impact
on small business. CCASBA had no comments.
Drafting Information
The principal author of these regulations is Mumal R. Hemrajani,
Office of the Associate Chief Counsel (International). However, other
personnel from the Internal Revenue Service and the Treasury Department
participated in the development of the regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
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 * * *
0
Par. 2. Section 1.482-7 is amended by revising paragraph
(g)(2)(v)(B)(2), adding paragraph (g)(4)(v), revising paragraphs
(g)(4)(vi)(F)(2), (g)(4)(viii) Example 8, adding Example 9, and
revising paragraph (l).
Sec. 1.482-7 Methods to determine taxable income in connection with a
cost sharing arrangement.
* * * * *
(g) * * *
(2) * * *
(v) * * *
(B) * * *
(2) Implied discount rates. In some circumstances, the particular
discount rate or rates used for certain activities or transactions
logically imply that certain other activities will have a particular
discount rate or set of rates (implied discount rates). To the extent
that an implied discount rate is inappropriate in light of the facts
and circumstances, which may include reliable direct evidence of the
appropriate discount rate applicable for such other activities, the
reliability of any method is reduced where such method is based on the
discount rates from which such an inappropriate implied discount rate
is derived. See paragraphs (g)(4)(vi)(F)(2) and (g)(4)(viii), Example 8
of this section.
* * * * *
(4) * * *
(v) Application of income method using differential income stream.
In some cases, the present value of an arm's length PCT Payment may be
determined as the present value, discounted at the appropriate rate, of
the PCT Payor's reasonably anticipated stream of additional positive or
negative income over the duration of the CSA Activity that would result
(before PCT Payments) from undertaking the cost sharing alternative
rather than the licensing alternative (differential income stream). See
Example 9 of paragraph (g)(4)(viii) of this section.
* * * * *
(vi) * * *
(F) * * *
(2) Use of differential income stream as a consideration in
assessing the best method. An analysis under the income method that
uses a different discount rate for the cost sharing alternative than
for the licensing alternative will be more reliable the greater the
extent to which the implied discount rate for the projected present
value of the differential income stream is consistent with reliable
direct evidence of the appropriate discount rate applicable for
activities reasonably anticipated to generate an income stream with a
similar risk profile to the differential income stream. Such
differential income stream is defined as the stream of the reasonably
anticipated residuals of the PCT Payor's licensing payments to be made
under the licensing alternative, minus the PCT Payor's cost
contributions to be made under the cost sharing alternative. See, for
example, Example 8 of this paragraph (g)(4)(viii).
* * * * *
(viii) * * *
Example 8. (i) The facts are the same as in Example 1, except
that the taxpayer determines that the appropriate discount rate for
the cost sharing alternative is 20%. In addition, the taxpayer
determines that the appropriate discount rate for the licensing
alternative is 10%. Accordingly, the taxpayer determines that the
appropriate present value of the PCT Payment is $146 million.
(ii) Based on the best method analysis described in Example 2,
the Commissioner determines that the taxpayer's calculation of the
present value of the PCT Payments is outside of the interquartile
range (as shown in the sixth column of Example 2), and thus warrants
an adjustment. Furthermore, in evaluating the taxpayer's analysis,
the Commissioner undertakes an analysis based on the difference in
the financial projections between the cost sharing and licensing
alternatives (as shown in column 11 of Example 1). This column shows
the anticipated differential income stream of additional positive or
negative income for FS over the duration of the CSA Activity that
would result from undertaking the cost sharing alternative (before
any PCT Payments) rather than the licensing alternative. This
anticipated differential income stream thus reflects the anticipated
incremental undiscounted profits to FS from the incremental activity
of undertaking the risk of developing the cost shared intangibles
and enjoying the value of its divisional interests. Taxpayer's
analysis logically implies that the present value of this stream
must be $146 million, since only then would FS have the same
anticipated value in both the cost sharing and licensing
alternatives. A present value of $146 million implies that the
discount rate applicable to this stream is
[[Page 52856]]
34.4%. Based on a reliable calculation of discount rates applicable
to the anticipated income streams of uncontrolled companies whose
resources, capabilities, and rights consist primarily of software
applications intangibles and research and development teams similar
to USP's platform contributions to the CSA, and which income
streams, accordingly, may be reasonably anticipated to reflect a
similar risk profile to the differential income stream, the
Commissioner concludes that an appropriate discount rate for the
anticipated income stream associated with USP's platform
contributions (that is, the additional positive or negative income
over the duration of the CSA Activity that would result, before PCT
Payments, from switching from the licensing alternative to the cost
sharing alternative) is 16%, which is significantly less than 34.4%.
This conclusion further suggests that Taxpayer's analysis is
unreliable. See paragraphs (g)(2)(v)(B)(2) and (g)(4)(vi)(F)(1) and
(2) of this section.
(iii) The Commissioner makes an adjustment of $296 million, so
that the present value of the PCT Payments is $442 million (the
median results as shown in column 6 of Example 2).
Example 9. The facts are the same as in Example 1, except that
additional data on discount rates are available that were not
available in Example 1. The Commissioner determines the arm's length
charge for the PCT Payment by discounting at an appropriate rate the
differential income stream associated with the rights contributed by
USP in the PCT (that is, the stream of income in column (11) of
Example 1). Based on an analysis of a set of public companies whose
resources, capabilities, and rights consist primarily of resources,
capabilities, and rights similar to those contributed by USP in the
PCT, the Commissioner determines that 15% to 17% is an appropriate
range of discount rates to use to assess the value of the
differential income stream associated with the rights contributed by
USP in the PCT. The Commissioner determines that applying a discount
rate of 17% to the differential income stream associated with the
rights contributed by USP in the PCT yields a present value of $446
million, while applying a discount rate of 15% to the differential
income stream associated with the rights contributed by USP in the
PCT yields a present value of $510 million. Because the taxpayer's
result, $464 million, is within the interquartile range determined
by the Commissioner, no adjustments are warranted. See paragraphs
(g)(2)(v)(B)(2), (g)(4)(v), and (g)(4)(vi)(F)(1) of this section.
* * * * *
(l) Effective/applicability dates. Except as otherwise provided in
this paragraph (l), this section applies on December 16, 2011.
Paragraphs (g)(2)(v)(B)(2), (g)(4)(vi)(F)(2), and (g)(4)(viii), Example
8 of this section apply to taxable years beginning on or after December
19, 2011. Paragraphs (g)(4)(v) and (g)(4)(viii), Example 9 apply to
taxable years beginning on or after August 27, 2013.
* * * * *
Sec. 1.482-7T [Removed]
0
Par. 3. Section 1.482-7T is removed.
Beth Tucker,
Deputy Commissioner for Operations Support.
Approved: August 15, 2013.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2013-20786 Filed 8-26-13; 8:45 am]
BILLING CODE 4830-01-P
