Monday, December 14, 2009

IRS Loses Billion Dollar Transfer Pricing Case

The IRS lost a billion dollar § 482 transfer pricing case yesterday. Veritas Software Corp. v. Commissioner, 133 T.C. No. 14 (Dec. 10, 2009):

P entered into a cost-sharing arrangement with S, its foreign subsidiary, to develop and manufacture storage management software products. Pursuant to the cost-sharing arrangement, P granted S the right to use certain preexisting intangibles in Europe, the Middle East, Africa, and Asia. As consideration for the transfer of preexisting intangibles, S made a $166 million buy-in payment to P. P employed the comparable uncontrolled transaction method to calculate the payment. In a notice of deficiency issued to P, R employed an income method and determined a requisite buy-in payment of $2.5 billion and made an income allocation to P of that amount. In an amendment to answer, R reduced the allocation from $2.5 to $1.675 billion. R further determined that the requisite buyin payment must take into account access to P’s research and development team; access to P’s marketing team; and P’s distribution channels, customer lists, trademarks, trade names, brand names, and sales agreements. P contends that R’s determinations are arbitrary, capricious, and unreasonable and the comparable uncontrolled transaction method is the best method to calculate the requisite buy-in payment.

Held: R’s determinations are arbitrary, capricious, and unreasonable.