Contents - AL-Tax

3.6 Proposed Cost-Sharing Regulations and Coordinated Issue Paper 37arrangement, and the fair market value of assets in total is derived from the group’spublicly traded shares (increased by the value of its liabilities), rather than an acquisitionprice. To obtain the fair market value of intangible assets constituting anexternal contribution, the fair market value of tangible assets owned by the group isnetted out of its total market capitalization.If more than one entity owns intangible property, the market capitalizationmethod necessitates that one compute market capitalization on an entity-specificbasis. This is clearly not feasible (although one can value individual group membersby other means). Therefore, while not explicitly stated in the proposed cost-sharingregulations or the CIP, the market capitalization method can only be applied whenownership of intellectual property is centralized in a single group member. The marketcapitalization method also presupposes that all of this entity’s intangible assetsconstitute external contributions.3.6.4 CritiqueThe 2005 proposed cost-sharing regulations are based on a set of assumptions thatthe IRS simply asserts are valid, despite an abundance of theory and evidence to thecontrary. Arm’s length research joint ventures cannot be distinguished from intercompanycost-sharing arrangements by a bright line and may shed considerable lighton how the latter should be structured and evaluated, consistent with the arm’s lengthstandard in general. While pre-existing intangible assets that are further developedoften retain some of their separate identity and original value, this value does notpersist indefinitely, and does not account for all of the next-generation intangibleassets’ value. Further, third parties can and do regularly revisit commercial contractswhen the benefits to each party differ significantly from those expected at the outset,and often incorporate provisions in long-term contracts that permit adjustments interms. 33The comparable uncontrolled transaction, acquisition price and market capitalizationmethods are very limited in their applicability and have certain innatedrawbacks. Those associated with the comparable uncontrolled transaction methodare discussed elsewhere in this Chapter. The acquisition price method only applieswhen a target company has been purchased for the express purpose of obtainingaccess to specific identifiable assets, all of which will be contributed to an ongoingcost-sharing arrangement (while all remaining acquired assets will be abandoned).Under most other circumstances, the acquisition price method will result in an overvaluationof external contributions, because goodwill and going concern value willbe included in this valuation.33 See, for example, King, Elizabeth, “Is the Section 482 Periodic Adjustment Requirement ReallyArm’s Length? Evidence from Arm’s Length Long Term Contracts.” Tax Notes International,April11, 1994.