Final cost-sharing regulations.

• Author: Dicker, Adrian J.W.

On Dec. 19, 1995, the IRS issued final cost-sharing regulations under Sec. 482. Regs. Sec. 1.482-7 has some significant differences compared to the 1992 proposed regulations. Many controlled groups should consider cost-sharing agreements to deal with the allocation of intangible development costs.

The final regulations are effective for tax years beginning after 1995. A cost-sharing agreement already in place that was a bona fide cost-sharing agreement under Temp. Regs. Sec. 1.482-7 T will qualify under the final regulations only if it is amended, if necessary, to conform to the final regulations by Dec. 31, 1996. Consequently, existing cost-sharing agreements should be examined to determine if they should be amended.

Under Regs. Sec. 1.482-7(a) (1), a cost-sharing arrangement is an agreement under which costs to develop intangibles are shared in proportion to reasonably anticipated benefits from the individual exploitation of interests in the intangibles developed. Under Regs. Sec. 1.482-7(b), a qualified cost-sharing arrangement must:

* Include two or more participants.

* Provide a method to calculate each controlled participant's share of intangible development costs, based on factors that can reasonably be expected to reflect that participant's share of anticipated benefits.

* Provide for adjustments to the controlled participant's shares of intangible development costs to account for changes in economic conditions, the business operations and practices of the participants, and the ongoing development of intangibles under the arrangement.

* Be recorded in a contemporaneous document that includes certain detailed information.

A foreign corporation or nonresident alien individual will not be treated as engaged in a trade or business within the U.S. solely by reason of participation in a cost-sharing arrangement.

A participant may be either an uncontrolled taxpayer or (more likely) a controlled taxpayer that meets certain requirements. The key requirement is that the controlled taxpayer should use, or reasonably expect to use, the intangibles in the active conduct of a trade or business. This requirement will not be met if a controlled taxpayer's principal purpose for participating in the arrangement is to obtain the intangible for transfer or license to a controlled or uncontrolled taxpayer.

A controlled taxpayer that does not meet the active trade or business requirement, but provides research assistance, should receive separate...