Contents - AL-Tax

158 11 Global Trading of Commoditiesensure access to product are also potentially important intangible assets in a tradingcontext. However, as with its reputation, the Group has historically developed suchrelationships jointly, not through investment per se, but in the ordinary course ofbusiness. (Moreover, in the alumina and aluminum markets in particular, establishedrelationships with customers and suppliers have greatly diminished in value recentlyas a result of China’s substantially reduced role in these markets.)Most trading firms utilize off-the-shelf software developed specifically for tradingapplications, and this Group is no exception. However, the software generallyhas to be extensively customized. Hence, the customization component constitutesan intangible asset of some significance, owned by FP in this case.In sum, FP has created an intangible asset through the customization of software.Expenditures on customization activities are a reasonable approximation ofthe asset’s value: One would not pay more than this amount to purchase the customizationfeatures, because the software engineering work can readily be replicated.11 The Group’s offtake arrangements have largely expired; if this were notthe case, they would also be valuable intangible assets, and ownership should beascribed to the Group member that is the legal counterparty. 12 A reputation forreliability, while a highly valuable intangible asset, has been developed jointly byall members of the Group, and, as such, cannot be used to allocate trading profitsamong members. Established relationships likewise have been developed jointly,and now have de minimis value in any event. More broadly, in circumstances whereone is justified in applying the formulary apportionment method, joint ownershipof intangible assets that are developed in the normal course of business is the rulerather than the exception.Where most intangible assets are jointly developed and owned by all members ofa controlled trading group (as in this case), the allocation of after-tax free cash flowsby entity should be based primarily on each entity’s contribution (or utilization)of capital over the course of the year, and the degree of risk assumed thereby. Asdescribed in the summary of key facts above, in many instances (including thiscase), individual group members have their own designated lines of credit, extendedby third party lenders, and bear the associated interest costs. Under these circumstances,the borrower should retain the after-tax free cash flows earned on all tradesfinanced by drawdowns on its credit lines (out of which it will repay principal andinterest). For swing lines, loans extended to the Group as a whole, or equity capital,the same basic logic applies: The entity that draws on such capital to finance tradesincurs the associated cost of capital, and should retain the associated after-tax freecash flows, out of which it compensates lenders and investors. 1311 The Constructive Cost Model (COCOMO) is a widely used means of estimating software developmentcosts.12 Under the U.S. Temporary Regulations issued in 2006, “[t]he legal owner of an intangible pursuantto the intellectual property law of the relevant jurisdiction ... will be considered the soleowner of the respective intangible ...” See Temp. Treas. Reg. Section 1.482-4T(f)(3)(i)(A).13 To illustrate, consider an extreme case where a single group member provides all of the capitalnecessary to finance transactions, while other group members employ only as much working