LMSB-04-0907-62

Effective Date September 27, 2007

Coordinated Issue Paper - All Industries
Sec. 482 CSA Buy-In Adjustments

UIL: 482.11-11 (Cost Sharing Arrangements: Initial Buy-In)

UIL: 482.11-12 (Cost Sharing Arrangements: Subsequent Acquisition Buy-In)

I. EXECUTIVE SUMMARY

A. Initial Buy-In: Income Method is Generally the Best Method

B. Subsequent Acquisition Buy-In: Acquisition Price is Generally the Best Method

II. FACTS – TYPICAL BUY-IN SCENARIOS

A. Typical Initial Buy-In Scenario

B. Typical Subsequent Acquisition Buy-In Scenario

III. TAXPAYER METHODS AND POSITIONS 

A. Identification and Categorization of Intangibles 

B. Scope of Buy-In Intangible Rights - The "Sale" vs. "License" Issue;
     Useful Life Assumptions  

C. Transactions Claimed as "Cuts" Lack Similar Profit Potential and  
     Similar Risks/Economic Conditions

D. RPSM Equates Fundamentally Different Past and Future Risks

E. Appropriate Treatment of Goodwill and Going Concern Value; 
     Marketing and Research Team Intangibles

  1. “Foreign Goodwill or Going Concern Value” is Narrowly Defined 
  2. Accounting Value of “Goodwill” Not Reliable Basis to Determine
      the Buy-In 
  3. Research Team Intangible Contribution is Part of Buy-In Intangible 
  4. The Synergy Value of the Research Team Related to the Buy-In
       Intangible Must Be Included in the Buy-In 

F. Commensurate with Income - Not Open Transaction with Benefit of Hindsight

G. Attributing a Substantial Positive Net Present Value to the CFC's Projected R&D Expenditures

IV. INITIAL BUY-IN: BEST METHOD ANALYSIS - INCOME METHOD IS GENERALLY THE BEST METHOD

A. An Unspecified Method May be the Best Method

B. None of the Unspecified Methods Provide the Best Method for Determining the Initial Buy-In

1. Transactions Claimed as CUTs Are Not Comparable 
2. CPM Data Publicly Available Do Not Reflect Similar Risks 
3. RPSM that in Effect Equates Incomparable Past and Future Risks 

C. The Income Method Generally Provides the Best Method for Determining Initial Buy-In

1. Appropriate Discount Rate for Present Valuing Income and Expense Flows 
2. Projections: Begin with Taxpayer’s; Extrapolation from Actual Results
3. Arm’s Length Range of Initial Buy-In Results 

D. Initial Buy-In for CFC having Mature Foreign Operations

E. Independent or Corroborating Method for Determining an Initial Buy-In: Market Capitalization

V. SUBSEQUENT ACQUISITION BUY-IN BEST METHOD ANALYSIS - ACQUISITION PRICE METHOD IS GENREALLY THE BEST METHOD

A. An Unspecified Method may be the Best Method  
B. The Acquisition Price Method Generally Provides the Best Method for Determining a Subsequent Acquisition Buy-In

1. Determination of Subsequent Acquisition Buy-In Under the Acquisition Price Method 
2. Arm’s Length Range of Subsequent Acquisition Buy-In Results 
3. Adjustments to Reflect Timing Differences on Subsequent Acquisition Buy-In Payments 

VI. FORM OF BUY-IN PAYMENT

A. Initial Buy-In: Lump Sum vs. Contingent Royalties
B. Subsequent Acquisition Buy-In: Lump Sum vs. Contingent Royalties
C. Base for Application of Contingent Royalty

VII. TRANSFER PRICING DOCUMENTATION PENALTIES  

VIII. LIST OF EXHIBITS 

A. INITIAL BUY-IN (INCOME METHOD) 

1. Lump Sum Buy-In Payment Using Taxpayer Projections 
2. Lump Sum Buy-In Payment Using Projections Based on Extrapolation from Actual Experience. 
3. Converting a Lump-sum Buy-In Payment into a Perpetual Royalty 
4. Converting a Lump-sum Buy-In Payment into 10-year Royalty 
5. Ranges of Results 
6. Providing a Separate Return to Marketing Intangibles 

B. SUBSEQUENT ACQUISITION (ACQUISITION PRICE METHOD) 

1. Lump-sum Buy-In Payment 
2. Converting a Lump-sum Buy-In Payment into a Perpetual Royalty 
3. Converting a Lump-sum Buy-In Payment into a 10-year Royalty 
4. Ranges of Results 
5. Adjustments to Reflect Timing Differences on Subsequent Acquisition Buy-In Payments