Comments on proposed regulations on methods to determine taxable income in connection with a cost sharing arrangement.

• Author: Ugai, Brian C.

June 5, 2009

On June 5, 2009, Tax Executives Institute submitted the following comments to the Internal Revenue Service and U.S. Department of Treasury, responding to questions asked by the government during the April 21 hearing on the proposed cost sharing regulations. The comments were prepared under the aegis of TEI's International Tax Committee, whose 2008-2009 chair is Brian C. Ugai of Starbucks Coffee Company. Other members contributing to the project were Dorothy C. Chao of Baxter International, Inc. and Janice L. Lucchesi of Akzo Nobel Inc. Mary Lou Fahey, TEI's General Counsel, serves as legal staff liaison to the committee.

This letter follows up on two questions posed to Tax Executives Institute during the April 21 IRS hearing on the proposed cost sharing regulations. The questions related to the definition of variable input parameters and the methodology for reflecting risks. Dorothy C. Chao, a member of TEI's International Tax Committee, represented the Institute at the hearing.

Variable Input Parameters

In the preamble to the regulations, the Treasury Department and IRS solicited comments on "the limitation of variable input parameters to market-based parameters." At the hearing, TEI was asked whether the definition of variable input parameters should be broadened to include projections to take into account the probability of different outcomes. TEI believes the answer is no.

Temp. Reg. [section] 1.482-7T(g)(2)(ix)(B) states:

An applicable method may determine [platform cost transaction] PCT Payments based on calculations involving two or more parameters whose values depend on the facts and circumstances of the case (input parameters). For some input parameters (market- based input parameters), the value is most reliably determined by reference to data that derive from uncontrolled transactions (market data). The regulation provides two examples. First, the profit level of a comparable company may be used to determine the value of the return to a controlled participant's routine contributions. Second, the stock beta of a comparable company may be used to determine the value for the discount rate that reflects the riskiness of a controlled participant's role in the CSA.

Temp. Reg. [section] 1.482-7T(g)(2)(ix)(C) provides that "[f]or some market-based input parameters (variable input parameters), the parameter's value is most reliably determined by considering two or more observations of market data that have, or with adjustment...