IRS's calculation of buy-in payment held unreasonable.

• Author: Beavers, James A.

The Tax Court held that the IRS's calculation of the amount of a buy-in payment for the transfer of intangible assets from a U.S. company to a newly created foreign subsidiary was arbitrary, capricious, and unreasonable.

Background

VERITAS-US (V-US) is a Delaware corporation with its principal place of business in Cupertino, California. During the years at issue (1999, 2000, and 2001), the company was the parent of a group of affiliated subsidiaries. V-US develops, manufactures, markets, and sells advanced storage management software products. Because of constantly changing software technology, V-US's software had a relatively short life cycle, and the company generally assumed a four-year useful life for each version of its software. As it released each successive version of a software title, the company was already developing the next version. The company developed each new version of an existing software product by altering the code of the previous version in order to add desired new features to the software and improve its existing features.

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Prior to 1999, V-US had a limited sales presence in Europe, the Middle East, and Africa (EMEA) and the Asian Pacific countries and Japan (APJ). In 1999, recognizing the opportunity to increase its foreign sales, V-US decided to set up a foreign subsidiary that would direct its sales efforts in EMEA and APJ. After evaluating various factors, V-US decided to headquarter its EMEA and APJ operations in Ireland and set up an Irish holding company, VERITAS-Ireland (V-Ireland) to hold several new or existing subsidiary companies that were created to serve specific geographical regions.

In November 1999, V-US assigned to V-Ireland all of V-US's existing sales agreements with its European-based sales subsidiaries. Also effective on that date, the two companies entered into a cost-sharing arrangement for research and development costs (the CSA) and a technology license agreement (the TLA). Pursuant to the CSA, the companies agreed to pool their respective resources and R&D efforts related to software products and software manufacturing processes. They also agreed to share the costs and risks of such R&D going forward. Under the TLA, V-US granted V-Ireland the right to use certain "covered intangibles" as well as the right to use V-US's trademarks, trade names, and service marks in EMEA and APJ.

In exchange for the rights granted by the TLA, V-Ireland agreed to pay V-US royalties. In 1999, V-Ireland paid V-US $6.3 million and agreed to prepay the...