September 29, 2022

Medtronic Part Deux: The Best Method Is Yet To Come?

September 29, 2022/ Ruchelman P.L.L.C.

Bad blood exists between the I.R.S. and Medtronic Inc. when it comes to transfer pricing matters. Regarding the tax years 2005 and 2006, the I.R.S. challenged a transfer pricing methodology it approved in an M.O.U. settlement with Medtronic involving the same transactions and issues in the context of an earlier year. The I.R.S. lost in an earlier case, appealed to the 8th Circuit Court of Appeals, which sent the matter back to the Tax Court to address several factual issues. In a recent decision, the Tax Court modified its earlier finding by adjusting the comparable uncontrolled transaction (“C.U.T.”) in a subjective way to obtain a result that seemed to be fair in the view of the court. Michael Peggs suggests that the second trial did not produce practical guidance that was any better than the very limited guidance in the original decision.

January 30, 2022

Goodwill and Mister Donut – A Going Concern?

January 30, 2022/ Ruchelman P.L.L.C.

· A sale of a business often involves an element of goodwill, a term that can have different meanings in different contexts, depending on whether the term relates to (i) purchase price allocations for financial statement purposes or income tax purposes or (ii) attempting to compute the source of income for foreign tax credit purposes. Compounding the definitional inconsistency, the meaning of the term has changed over time. In a 25-year old case, the overseas Mister Donut franchising business was sold to a foreign buyer in an asset-sale transaction. Although only intimated in the case, the taxpayer likely had significant amounts of deferred assets on its balance sheet arising from unused foreign tax credits. Because the seller was a U.S. company, gain from the sale of business generally results in the generation of domestic source income. Under the law in effect at the time, goodwill was sourced where business was carried on. Was that provision the key to access deferred foreign tax credits? The U.S. Tax Court said no. Sometimes, goodwill is not goodwill for foreign tax credit planning purposes. Michael Peggs and Wooyoung Lee look at the court’s reasoning and comment on certain contemporary aspects of the decision in light of provisions in the Tax Cuts and Jobs Act and several I.R.S. pronouncements on goodwill.

May 27, 2021

The 15 Most Important Questions That Should Be Asked When Estate Planning for a Foreign Parent with U.S. Children

May 27, 2021/ Ruchelman P.L.L.C.

· U.S. estate tax planning is said to be among the most complicated aspect of tax planning because of the numerous moving parts and the changing needs and objectives of the family. The exercise becomes complicated when the client is not a U.S. person, but the heirs live in the U.S. and have started families in the U.S. For an estate planner with a focus on domestic clients, the customary tools may not work. It is easy to know what you know, but not always easy to know what you don’t know. Neha Rastogi and Stanley C. Ruchelman ask and answer 15 questions that highlight the favorable and unfavorable provisions of U.S. tax law affecting nonresident, non-citizen individuals having U.S. persons as heirs.

January 24, 2021

Form or Fizz? Coca-Cola Transfer Pricing Decision

January 24, 2021/ Ruchelman P.L.L.C.

In Coca-Cola Co. & Subsidiaries v. Commr., the taxpayer learned an important lesson for multinational groups using a residual profit split method to determine intercompany transfer prices. The factual underpinning of a residual profit split is critical to method selection, best method analysis, and selection of a reliable split metric when applying the method. In the case, the taxpayer relied on a favorable resolution of transfer pricing issues in an examination of earlier years and failed to confirm the continued existence of favorable facts. Michael Peggs explains all. Resolution of an examination does not provide the same certainty as an advance pricing agreement.

September 20, 2017

Tax 101: Deemed Annual Royalty on Outbound Transfers of I.P. to Foreign Corporations

September 20, 2017/ Ruchelman P.L.L.C.

U.S. tax law contains provisions that attempt to discourage the outbound migration of intangible assets including specific rules that target transfers affected through corporate inversions. Elizabeth V. Zanet and Stanley C. Ruchelman discuss the history and current standing of those provisions, while pointing out an alternative that is currently available to limit ongoing tax liability in the context of a start-up operation.

August 15, 2017

Tax 101: Taxation of Intellectual Property – Selected Issues Involving Corporations and Partnerships

August 15, 2017/ Ruchelman P.L.L.C.

Tax 101 continues its series regarding the U.S. Federal tax considerations involving the creation, acquisition, use, license, and disposition of intellectual property (“I.P.”). This month, Elizabeth V. Zanet and Stanley C. Ruchelman focus on I.P. held through a corporation or a partnership/L.L.C. In particular, the not-well-understood rules regarding the sale of interests in a partnerships/L.L.C.’s owning “hot assets” are explained. Not all gain benefits from favorable long-term capital gains tax rates.

May 23, 2017

Amazon Makes the C.U.T. – An Important Taxpayer Win, A Reminder to Consider Transactional Evidence

May 23, 2017/ Ruchelman P.L.L.C.

Last month, Insights reported on the Tax Court decision in Amazon v. Commr., involving the “buy-in” payment made as compensation for the right to use pre-existing I.P. in a related-party cost-sharing arrangement (“C.S.A.”). This month, Michael Peggs comments on the lessons learned from the taxpayer victory in that case regarding (i) the transfer pricing method used, (ii) the assumptions made and analyses used to value the buy-in payment, and (iii) the correct treatment of intangible development costs within the term of the C.S.A.

May 23, 2017

Economic Nexus Through Ownership and Use of Intellectual Property

May 23, 2017/ Ruchelman P.L.L.C.

For many tax advisers outside the U.S., state corporate income tax is viewed simply as an add-on to the Federal tax. This relatively simplistic view ignores the requirements of U.S. Federal and Constitutional law that an activity must have a connection – called a nexus – to a state before tax can be imposed on profits allocated to the state. Alvan L. Bobrow of Akerman LLP in New York explains the concept of “economic nexus,” a way by which digital activity within a state may trigger exposure to state tax. Companies that license marketing intangibles should be particularly wary.

May 23, 2017

Tax 101: Taxation of Intellectual Property – The Basics

May 23, 2017/ Ruchelman P.L.L.C.

This month, Tax 101 presents an overview of the basic U.S. Federal tax considerations of transactions that occur over the life cycle of intellectual property (“I.P.”) – from its creation to its acquisition, exploitation, and ultimate sale in a liquidity event. The article address several important questions: Should expenditures be capitalized or deducted? If capitalized, over what period is the expenditure amortized? How are acquisitions of I.P. reported to the I.R.S. when an entire business is acquired? What is the character of gain on sale? When is a sale treated as a license? And when is a license treated as a sale? Elizabeth V. Zanet and Stanley C. Ruchelman explain.

April 28, 2017

Tax Concerns on Outbound I.P. Transfers: Pitfalls & Planning in Light of I.R.S. Defeat in Amazon Case

April 28, 2017/ Ruchelman P.L.L.C.

In the 21st century, the method of apportioning income from intangible property (“I.P.”), between the various jurisdictions in which the I.P. is developed, owned, and used or consumed, is contentious. This was evidenced in a recent Tax Court case, Amazon.com, Inc. & Subsidiaries v. Commr., which dealt with transfer pricing rules applicable to an outbound transfer of I.P. and a related cost sharing agreement. Philip R. Hirschfeld discusses the case in the context of Code §367(d), which relates to outbound transfers of I.P., and Treas. Reg. §1.482-7, which addresses qualified cost sharing agreements.

January 15, 2016

International Practice Unit: License of Intangible Property from U.S. Parent to a Foreign Subsidiary

January 15, 2016/ Web Admin

Christine Long explains how I.R.S. examiners are encouraged to determine whether foreign subsidiaries are paying fair compensation for using I.P. owned by U.S. parent companies.

January 15, 2016

International Practice Unit: Deemed Annual Royalty Income Under Code §367(d)

January 15, 2016/ Web Admin

Christine Long delves into the world of I.P. contributions to foreign subsidiaries. She explains how Code §367(d) works and how the regulations have been revised recently to attack goodwill and going concern contributions.

January 15, 2016

Taxpayers Take Note: I.R.S. Publishes Audit Guides for International Examiners

January 15, 2016/ Web Admin

U.S.-based companies facing an I.R.S. examination of international operations may secretly wish to obtain an advance look at how I.R.S. examiners plan to carry out the examination. After all, what better way to prepare for a test than to get the questions in advance? Surprise – the Large Business & International (LB&I) Division of the I.R.S. has published its training guides for examiners.

LB&I is responsible for examining tax returns reporting international transactions, and it is in the process of revising the method by which returns are chosen for examination and the the process by which those examinations are conducted. Several aspects of the guidance will be addressed through out this edition of Insights. Stanley C. Ruchelman explains.

November 15, 2015

A Proposed Treatment For H.T.V.I.

November 15, 2015/ Web Admin

H.T.V.I. has been singled out as being one of the leading causes of base erosion and profit shifting (“B.E.P.S.”). Michael Peggs, co-head of the transfer pricing practice of Ruchelman P.L.L.C., makes a valiant attempt at explaining a method to value intangible property that is “hard to value” while being compliant with the B.E.P.S. Action Plan. He suggests a combination of common sense and reliable data.

April 15, 2015

Shifting Income and Business Operations

April 15, 2015/ Web Admin

volume 2 no 4 / Read article

By Stanley C. Ruchelman and Kenneth Lobo

This month, our team delves into the Joint Committee Report addressing international tax reform in a series of articles.The report discovers that a better tax result is obtained when income is booked in low tax countries. Stanley C. Ruchelman and Kenneth Lobo explain. See more →

See all articles in this series →

April 15, 2015

Competitiveness of the U.S. Tax System

April 15, 2015/ Web Admin

volume 2 no 4 / Read article

By Stanley C. Ruchelman, Andrew P. Mitchel, and Sheryl Shah

This month, our team delves into the Joint Committee Report addressing international tax reform in a series of articles. The report compares the U.S. tax system with the systems of other countries. Stanley C. Ruchelman, Andrew P. Mitchel, and Sheryl Shah explain what the J.C.T. staff believes. It is not pretty. See more →

See all articles in this series →

February 15, 2015

Proposed Legislation for Italian Patent Box Regime

February 15, 2015/ Web Admin

Currently. the O.E.C.D. and E.U. are finalizing new rules for the design of acceptable tax regimes for intangible property (“I.P.”) box companies – a tax benefit that is seen by the E.U. as a form of illegal state aid. Germany, France, Spain, and Italy are seen as the champions of the new regulations. However, Italy recently introduced its own I.P. tax incentive plan, known as a “patent box regime.” Stanley C. Ruchelman and Kenneth Lobo examine Italy’s incentive program, in light of the O.E.C.D. and E.U. attacks on such regimes.

January 15, 2015

B.E.P.S. Actions 8, 9 & 10: Assuring that Transfer Pricing Outcomes are in Line with Value Creation

January 15, 2015/ Web Admin

Read Publication

On December 19, 2014, the Organisation of Economic Co-operation and Development (“O.E.C.D.”) released a discussion draft on Actions 8, 9, and 10 of the Base Erosion and Profit Shifting (“B.E.P.S.”) Action Plan (“Discussion Draft” or “Draft”). Actions 8, 9, and 10 reinforce the goal of assuring that transfer pricing outcomes are in line with value creation.

In July 2013, the O.E.C.D. published the B.E.P.S. Action Plan for the purpose of establishing a comprehensive agenda to resolve B.E.P.S. issues. The B.E.P.S. Action Plan identifies 15 actions to combat B.E.P.S. and establishes deadlines for application of each action.

The Discussion Draft introduces revisions to Chapter I of the Transfer Pricing Guidelines and addresses the related topics in Actions 8, 9, and 10. Specifically, the Discussion Draft focuses on the development of the following:

(i) rules to prevent B.E.P.S. by transferring risks among, or allocating excessive capital to, group members. This will involve adopting transfer pricing rules or special measures to ensure that inappropriate returns will not accrue to an entity solely because it has contractually assumed risks or has provided capital. The rules to be developed will also require alignment of returns with value creation.

(ii) rules to prevent B.E.P.S. by engaging in transactions which would not, or would only very rarely, occur between third parties. This will involve adopting transfer pricing rules or special measures to: (i) clarify the circumstances in which transactions can be recharacterized.

(iii) transfer pricing rules or special measures for transfers of hard-to-value intangibles.

October 15, 2014

Action Item 8: Changes to the Transfer Pricing Rules in Relation to Intangibles - Phase I

October 15, 2014/ Web Admin

Read Publication

INTRODUCTION

Unlike some of the other B.E.P.S Action Items, Action Item 8 has a basis in existing O.E.C.D. rules. In this regard, the O.E.C.D. Transfer Pricing Guidelines41 have established the operating rules for transfer pricing. It is understandable that Action Item 8 merely presents a series of amendments to Chapters I, II, and VI of the O.E.C.D. Guidelines.

Action Item 8 states that it seeks to:

Clarify the definition of I.P.,
Provide guidance on identifying transactions involving I.P., and
Provide supplemental guidance for determining arm’s length conditions for transactions involving I.P.

Action Item 8 also considers the treatment of local market features and corporate synergies.