tax notes international - Tuck School of Business - Dartmouth College

SPECIAL REPORTS
provides the most reliable evidence of the arm’s-length
price of the platform contributions depends on a number
of factors, including the reliability of the determination
of the relative values of the platform contributions
for purposes of the residual profit-split method,
and the extent to which the acquisition price of the
company can be reliably adjusted to account for
changes in value over the period between the acquisition
and the formation of the CSA and to account for
the value of the rights and in-process research done by
Company X that does not constitute platform contributions
to the CSA. It is also relevant to consider
whether the results of each method are consistent with
each other, or whether one or both methods are consistent
with other potential methods that could be applied.
Transition Rules
The proposed regulations included transition rules
for existing qualified cost-sharing arrangements. Grandfather
treatment would have been terminated in some
events, including the occasion of a periodic trigger as a
result of a subsequent PCT, a material change in the
scope of the arrangement, such as a material expansion
of the activities undertaken beyond the scope of
the intangible development area, or a 50 percent or
greater change in the ownership of interests in costshared
intangibles. Commentators objected to the
grandfather termination events.
The temporary regulations do not terminate the
grandfather treatment upon a 50 percent change of
ownership or on account of a subsequent periodic trigger
or a material change in the scope of the arrangement.
The temporary regulations instead adopt a targeted
provision that applies the temporary regulations’ periodic
adjustment rules to PCTs that occur on or after
the date of a material change in the scope of a grandfathered
CSA. A material change in scope would include
a material expansion of the activities undertaken
beyond the scope of the IDA. For this purpose, a contraction
of the scope of the CSA, absent the material
expansion into one or more lines of research and development
beyond the scope of the IDA, does not constitute
a material change in the scope of the CSA.
Whether a material change in scope has occurred is
determined on a cumulative basis. Therefore, a series
of expansions, any one of which is not a material expansion
by itself, may collectively constitute a material
expansion.
An arrangement in existence on January 5, 2009,
will be considered a CSA if before that date it was a
qualified cost-sharing arrangement under Treas. reg.
section 1.482-7, but only if the written agreement is
amended if necessary to conform with, and only if the
activities of the controlled participants substantially
comply with, the provisions of the new rules by July 6,
2009. Temp. Treas. reg. section 1.482-7T(m) sets forth
specific rules for how the temporary regulations apply
to existing CSAs.
Other Regulations
Entity Classification
The IRS finalized regulations to make the federal
tax classification of the Bulgarian public limited liability
company (aktsionerno druzhestevo) consistent with the
federal tax classification of public limited liability companies
organized in other countries of the European
economic area: a per se corporation. (For the final
regs, see Doc 2008-25013 or 2008 WTD 230-26.)
Conduit Financing Arrangements
The IRS and Treasury proposed regulations under
sections 881 and 7701(l) dealing with conduit financing
structures. (For the proposed regs, see Doc 2008-26696
or 2008 WTD 246-27.) Treas. reg. section 1.881-3 allows
the IRS to disregard the participation of one or more
intermediate entities in a financing arrangement in
which the entities are acting as conduit entities, and to
recharacterize the financing arrangement as a transaction
directly between the remaining parties to the financing
arrangement for purposes of imposing tax under
sections 871, 881, 1441, and 1442.
Since the publication of Treas. reg. section 1.881-3,
the IRS and Treasury issued the so-called check-thebox
regulations. The preamble to the newly proposed
regulations states that Treasury and the IRS are aware
that issues have arisen regarding the proper treatment
of disregarded entities under Treas. reg. section
1.881-3. These proposed regulations clarify that a disregarded
entity is a person under Treas. reg. section
1.881-3. Thus, transactions that a disregarded entity
enters into will be taken into account for purposes of
determining whether a financing arrangement exists.
The preamble also states that the IRS and Treasury
are continuing to study conduit financing arrangements
and may issue separate guidance to address the treatment
under those regulations of some hybrid instruments.
Specifically, the IRS and Treasury are studying
transactions in which a financing entity advances cash
or other property to an intermediate entity in exchange
for a hybrid instrument that is treated as debt under
the laws of the foreign jurisdiction in which the intermediate
entity is resident and is not treated as debt for
U.S. federal tax purposes.
The issue is whether these instruments should constitute
a financing transaction under the section 881
regulations. One possible approach, the preamble
states, is to treat all transactions involving these hybrid
instruments between a financing entity and an intermediate
entity as financing transactions. Comments are
requested. Another possible approach is to add additional
factors to consider in determining when stock in
a corporation (or other similar interest in a partnership
470 • FEBRUARY 2, 2009 TAX NOTES INTERNATIONAL
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