Contents - AL-Tax

130 9 Sale of Assets with Embedded Intellectual Propertyfunction of intercompany pricing, but, rather, of its own cost of services, operatingexpenses, and revenues received from third parties. As such, USS’ services fees arenot properly subject to analysis under IRC Section 482.Consequently, the resale price method can be applied to establish USS’ arm’slength gross margin on the resale of ETC system elements to those tolling authoritiesthat purchase equipment outright. This gross margin, in turn, implies a certaintransfer price. The resale price method cannot be used to establish USS’ arm’slength gross margin on transactions where it retains ownership of ETC system elements.However, FP should charge the same transfer price regardless of whetherUSS resells the ETC system elements or retains ownership thereof, because FP’scontributions are the same in both instances.We establish USS’ arm’s length gross margin on the sale of ETC system componentsand equipment to certain toll authorities by reference to the gross marginsearned by functionally comparable wholesale distributors. More particularly, weapply the resale price method in the following steps: Step 1: Adjust USS’ bundled pricing of systems and services (on transactionswith toll authorities that purchase equipment outright) to net out the followingelements: (i) embedded site analysis and construction costs, (ii) embedded programimplementation services fees, and (iii) the value of components that USSsources locally and adds to the systems prior to resale. Step 2: Develop a sample of third parties that distribute broadly similar equipmentand perform the same range of selling, marketing and other distributionfunctions that USS performs in connection with equipment sales. Step 3: Compute the arm’s length range of resale margins reported by the samplecompanies. Step 4: Apply the median arm’s length resale margin to USS’ unbundled sellingprice of equipment and infrastructure assets. Step 5: Determine the implied arm’s length transfer price for tangible property,payable by USS to FP.We develop a sample of functionally comparable U.S. wholesale distributors bymeans of several Standard Industrial Classification (SIC) Code- and keyword-basedsearches of publicly held U.S. companies. Our searches are summarized below. All firms included in SIC Code 504 (Professional and Commercial Equipmentand Supplies—Wholesale Trade); All firms with the terms “wholesale distributor” and “government” in their Form10-K filings with the Securities and Exchange Commission; All firms with the terms “wholesale distributor” and “toll collection” in theirForm 10-K filings; All firms with the terms “wholesale distributor” and “infrastructure equipment”in their Form 10-K filings; All firms with the terms “wholesale distributor” and “ETC” in their Form 10-Kfilings; All firms with the term “systems installation” in their Form 10-K filings;