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Tier I -- Transfer of Intangibles Offshore / § 482 Cost Sharing Buy-in Payment Issue Directive #2

LMSB Control No: LMSB-4-0308-016
Impacted IRM 4.51.5

March 21, 2008

MEMORANDUM FOR INDUSTRY DIRECTORS
                                       DIRECTOR, FIELD SPECIALISTS
                                       DIRECTOR, PREFILING AND TECHNICAL GUIDANCE
                                       DIRECTOR, INTERNATIONAL COMPLIANCE STRATEGY
                                       AND POLICY

  FROM:                          Patricia C. Chaback  /s/ Patricia C. Chaback
                                        Industry Director
                                        Communications, Technology, and Media

  SUBJECT:                    Tier I -- Transfer of Intangibles Offshore / § 482
                                        Cost Sharing Buy-in Payment Issue Directive #2

The purpose of this Industry Director Directive (IDD) is to provide additional guidance to the field regarding the examination of Tier I IRC Section 482 Cost Sharing Arrangement (CSA) Buy-In issues. Because §482 CSA buy-ins are Tier I compliance issues, it is necessary to ensure that the Service provides an appropriate level of examination coverage of  CSA buy-ins, and that a consistent approach is taken in the development and resolution of these strategically important issues.

When determining whether a CSA buy-in issue will be examined on a particular case, the teams must apply the appropriate LMSB risk analysis procedures in accordance with the applicable transfer pricing guidance, including Internal Revenue Manual - 4.46.3 Planning the Examination (Cont. 2),   Exhibit 4.46.3-5 Transfer Pricing Compliance Process.  The risk analysis should address the application of the Coordinated Issue Paper - Sec. 482    CSA Buy-In Adjustments issued on September 27, 2007 (CIP).  Due to the   fact that “acquisition” buy-in issues, as distinguished from “initial” buy-in issues, can arise at any time once a taxpayer enters into a CSA, the audit team should consider and perform the applicable risk analysis for these issues for all subsequent years under examination. 

Once a CSA buy-in issue (initial and/or acquisition) is determined to be a material issue for examination, contacts and referrals should be made to secure the necessary technical and legal support for the case. 

Audit teams are expected to comply with the “Best Method Rule” at Treasury Regulation §1.482-1(c).  For the reasons stated in the CIP, this   rule will generally require that certain unspecified transfer pricing methods described in the CIP be applied to determine the arm’s   length result for a buy-in unless factual distinctions exist that would make significant deviations within the CIP methods or some other transfer pricing method more reliable.  In the event a team determines that significant deviations within the CIP methods are necessary or a transfer pricing method not recommended by the CIP will be more reliable, they must contact the Issue Management Team (IMT) Program Manager as outlined below. 

Background / Strategic Importance
In recognition of the strategic importance of the §482 CSA buy-in issues, the IMT was established to enhance the Service-wide coordination efforts, and to set forth a plan to improve the level of compliance.  The overarching goals for   the IMT are to ensure that CSA buy-in issues are properly risk assessed and identified for audit, that the initial and acquisition buy-in transactions are examined in accordance with published guidance, and that all taxpayers with CSA buy-in issues are treated fairly and consistently relative to their facts and circumstances.  One step in achieving these goals was the development of the   CIP which provides guidance and direction to exam teams on the application of   appropriate economic valuation methodologies for CSA buy-in transactions.

The Industry Director Directive #1 on Transfer of Intangibles Offshore/ §482 Cost Sharing Buy-in Payment issued on April 5, 2007 (IDD #1) provides general guidance on the issue, recommends audit techniques and the use of the Checklist for Cost Sharing Arrangements for the development of cost sharing issues, describes published legal guidance, and identifies technical staff available to assist the field. 

This Industry Director Directive #2 (IDD#2) provides further guidance on the application of the CIP, to ensure proper interpretation and treatment for CSA buy-in issue development and valuation methods. 

Issue Planning and Examination Guidance
Once the audit is initiated and the examiner’s risk analysis results in the determination that the cost sharing buy-in issue(s) will be examined, the CSA issues must be established on IMS, and fully developed in accordance with  transfer pricing guidance Internal Revenue Manual - 4.46.3 Planning the Examination (Cont. 2), Exhibit 4.46.3-5 Transfer Pricing Compliance Process, and the CIP.  The examiner / team will be expected to follow these minimum guidelines and procedures:

Promptly establish the issue(s) on IMS utilizing the following UIL codes:

482.11-11 CSA Buy-in Payment for Pre-existing Intangibles

482.11-12 CSA Buy-in Payment for Post Formation Acquisition Intangibles

Conduct a thorough review of the taxpayer’s IRC § 6662(e)(3)(B) transfer pricing documentation.

Solicit the assistance and assignment of an International Examiner, IRS Economist and IRS Field Counsel for technical support. (Request other specialists and/or outside experts as needed.)

The unspecified transfer pricing methods described in the CIP will be applied to determine the arm’s length result for a buy-in unless factual distinctions exist that would make significant deviations within the CIP methods or application of another transfer pricing method more reliable.  In the event a team determines that significant deviations within the CIP methods are necessary or that a transfer pricing method not recommended by the CIP is likely to be more reliable, they must contact the IMT Program Manager at that time.  The team should provide a brief memo via e-mail with an explanation of the alternative transfer pricing method they intend to employ along with the factual distinctions necessitating the deviation from the CIP.  The IMT Program Manager will review the CIP deviation memo, confer with other key IMT members as necessary, and provide prompt feedback and support to the field team regarding the appropriateness of the deviation.  Alternatively, if the CIP methods are being properly applied, then no notification of the IMT Program Manager is required.  

The CSA Buy-in IMT will continue to engage with the various examination teams in order to provide assistance in the development of these challenging compliance issues, to assess cases for potential litigation, and to seek further opportunities for improved guidance for both taxpayers and the field.   
 
Contact:  Any questions regarding this directive may be forwarded to the Issue Management Team Program Manager,                 

Effect on Other Guidance:  This directive has no effect on previous guidance.

This Directive is not an official pronouncement of law, and cannot be   used, cited, or relied upon as such.

  cc:   Commissioner, LMSB
          Deputy Commissioner, Operations
          Deputy Commissioner, International
          Division Counsel, LMSB
         Chief, Appeals
          Directors, Field Operations
          Director, Planning, Quality, Analysis and Support

Page Last Reviewed or Updated: 28-Jan-2014