Implied Discount rate - NABE

2011 Temporary Regulations - Example 8• Two cost sharing participants; one has a PCT contribution which is valued usingIncome Method• The discount rates for the cost sharing alternative is estimated at 20 percent andthat for the licensing alternative is estimated at 10 percent resulting in a $146 millionPCT• The Commissioner computes an “implied discount rate” by equating the net presentvalue of the “differential income stream” to the PCT value of $146 million, whichresulted in a “implied discount rate” of 34.4 percent• By analyzing comparable uncontrolled companies, the Commissioner concluded thata reasonable “implied discount rate” based on market evidence is about 16 percent• Thus the taxpayer’s analysis was deemed unreasonable and an adjustment wasissued17