On April 12, 2019, attorneys for the IRS and Amazon,
respectively, presented oral arguments in the United States Court
of Appeals for the Ninth Circuit. This marks the start of the next
round of arguments between the two parties concerning the value of
intangibles transferred under Amazon's cost sharing arrangement
between its U.S. and Luxembourg entities.1
The core argument of this case and its subsequent appeal stems from
each party's interpretation of what qualifies as an intangible
under Section 1.482-4(b) and as referenced in the cost sharing
regulations (Section 1.482-7A(a)(2)) at the time of Amazon's
2005-2006 cost sharing arrangement. Amazon argues that the IRS'
calculation of the buy-in payment included items (e.g.,
workforce-in-place, going concern value, goodwill, and certain
"growth options" such as company culture) that were
outside the scope of what constitutes an "intangible" as
defined in Section 1.482-4(b). However, the IRS argues that the
definition of intangibles under the 1994 regulations was broad and
thus did not specifically exclude residual business assets (such as
those currently under dispute) from the scope of the buy-in
requirement.
On July 5, 2017, the U.S. Tax Court ultimately agreed with Amazon
that such "residual business" intangibles were not
subject to the buy-in requirements at the time of Amazon's
2005-2006 cost sharing arrangement. However, the IRS is appealing
this decision by arguing that the U.S. Tax Court's
interpretation of Section 1.482-4(b) conflicts with the overall
purpose of the arm's-length standard. The IRS also stated upon
appeal that its own interpretation of the broad definition of
intangibles was conclusive and supported by the recent changes in
legislation to
U.S. Tax Code in 2017. Amazon refutes these points by pointing
to the 1994 regulatory definition of intangibles, which it
interpreted as being limited to intangibles that could be sold
independently of a business. Amazon further argues that the
statutory definition precludes the IRS' interpretation of the
regulation and that the 2017 amendments to the Section 936
definition of intangibles, which explicitly include the items being
disputed, indicates that such intangibles were not intended to be
included in the broad definition of intangibles presented by the
1994 regulations. The IRS is requesting that the Court of Appeals
for the Ninth Circuit remand the U.S. Tax Court's
decision.
An IRS win in this case could mean increased scrutiny and
litigation for other U.S. multinational enterprises
("MNE's") that took similar approaches to Amazon to
the definition of intangibles and the determinations of buy-ins
when they entered into (or augmented) similar cost sharing
arrangements, especially those prior to changes in the cost sharing
regulations which broadened the definition of compensable
contributions to a cost sharing arrangement. The IRS argues that a
taxpayer win in this case could set a precedent blessing
transactions, especially those occurring before 2017 regulatory and
statute changes, that provide access to valuable intangibles to
offshore affiliates for free, even though the transfer of such
intangibles between third-parties would have required some form of
compensation. Either way, the decision in the Amazon case will have
a large impact on the scope of the IRS' discretion in making
adjustments based on its interpretation of broad language within
the U.S. Tax Code.
Source:
1 For additional information concerning the
arguments being presented by both parties to the Appeal, please
refer to the Government's Opening Brief (https://appellatetax.com/wp-content/uploads/2019/04/Amazon.com-Government-Opening-Brief.pdf),
the Taxpayer's Response Brief (https://appellatetax.com/wp-content/uploads/2019/04/Amazon.com-Taxpayer-Response-Brief.pdf),
and the Government's Response Brief (https://appellatetax.com/wp-content/uploads/2019/04/Amazon.com-Taxpayer-Response-Brief.pdf),
which were filed with the United States Court of Appeals for the
Ninth Circuit prior to each parties' oral arguments on April
12, 2019.
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