On March 23, in Amazon.com, Inc. & Subsidiaries v.
Commissioner 148 T.C. No. 8 (2017) the Tax Court held that
the IRS’s approach to valuing an upfront cost sharing buy-in
payment was arbitrary, capricious and unreasonable. The Tax Court
also held that the IRS abused its discretion in determining that
100% of certain costs associated with a technology and content cost
center constituted intangible development costs.
The case involved more than $234 million in tax deficiencies for
2005 and 2006. In the decision, the court agreed that the
comparable uncontrolled transaction (CUT) method (with appropriate
upward adjustments) used by the taxpayer, e-commerce giant Amazon,
Inc., was the best method for determining the upfront cost sharing
buy-in payment, and also agreed with Amazon’s methodology for
allocating its technology and content cost center.
In 2005, Amazon entered into a cost sharing agreement (CSA) with
a Luxembourg subsidiary. The CSA granted the Luxembourg subsidiary
the right to use certain pre-existing assets in Europe, namely the
intangibles required to operate the European website business. The
CSA required that the Luxembourg subsidiary pay an upfront cost
sharing buy-in payment, and also make annual cost sharing payments
to compensate Amazon for the ongoing intangible development.
The regulations under Section 482 require the application of the
“best method” when determining the arm’s length
price for related party transactions such as the buy-in payment.
Amazon believed that the CUT method was the best method under the
regulations, and determined that the upfront cost sharing buy-in
payment should be $254.5 million by applying such a method. As part
of the CSA computations, Amazon determined the allocable costs from
its cost centers to the intangible development costs by using a
multistep allocation system.
The IRS disagreed with Amazon’s approach and determined
that the upfront cost sharing buy-in payment should be $3.6 billion
by applying a discounted cash-flow method, which the government
believed was the best method. The IRS also disagreed with
Amazon’s allocation of certain costs related to technology
and content, finding that such costs should be intangible
The Tax Court’s decision reinforces a previous Tax Court
decision, in Veritas Software Corp. v. Commissioner,
133 T.C. 297 (2009). However, both cases addressed the issue
under the 1995 cost sharing regulations. The IRS and Treasury
released temporary regulations on Jan. 5, 2009, which were
finalized on Dec. 22, 2011. The final and temporary regulations
replaced the “buy-in” payments with “platform
contributions,” which expanded the scope of what constituted
a contribution under the 1995 regulations. Taxpayers should be
cognizant that, although parts of the decision do have broader
applications to transactions occurring after the temporary and
final regulations, the decision is addressing transactions under
the 1995 cost sharing regulations.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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