In comments during an American Law Institute webcast (program available online) on recently promulgated Cost-Sharing Agreement (CSA) regulations under Section 482 (transfer pricing), the IRS announced its belief that the new regulations displace longstanding case law in the area. The IRS representative stated that, under the Supreme Court’s Mayo decision, the CSA regulations trump the landmark Veritas and Xilinx decisions. In the 2009 Veritas decision, the Tax Court overturned IRS reallocations of cost-sharing payments as arbitrary and capricious, holding instead that the taxpayer’s uncontrolled transaction method was superior. In the 2005 Xilinx decision, the IRS had determined that payment in the form of stock options should be included in a cost-sharing calculation between related companies. The Court found the taxpayer’s calculation excluding the options from the cost-sharing calculation was valid under the transfer pricing regulations. CSAs relying on the Veritas and Xilinx decisions can expect a chilly reception from the Service going forward.
New Cost-Sharing Agreement Regulations Move IRS Beyond Veritas & Xilinx In Transfer Pricing Arena
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