Academic journal article Journal of Accountancy

New Regs for Qualified Cost Sharing Arrangements

Academic journal article Journal of Accountancy

New Regs for Qualified Cost Sharing Arrangements

Article excerpt

The Internal Revenue Service has released final regulations for qualified cost sharing arrangements under Internal Revenue Code section 482, effective for tax years beginning on or after January 1, 1996. Taxpayers in existing cost Sharing arrangements have one year to bring them into compliance with the regulations.

Section 482 requires arm's-length consideration for transactions between related entities and mandates that intangible transfers be commensurate with the income attributed to the intangible. For example, the IRS can adjust the consideration charged in each taxable year to ensure that it matches income earned as a result of a transferred intangible. Parties who wish to avoid this provision may enter into a qualified cost sharing arrangement for research and development costs related to intangibles intended for more than one entity. All of the parties who enter this arrangement would beneficially own the intangibles, and no transfer would be required.

The final regulations address taxpayer comments to proposed regulations issued in 1992. One major change in the final regulations eliminates a provision that allowed the IRS to adjust a U.S. cost sharing participant's income annually if it had a substantially disproportionate cost-to-operating income ratio. The final regulations allow adjustments in income only if, under the facts and circumstances, the taxpayer did not use the most reliable method to allocate benefits.

The IRS also may scrutinize the projections used in estimating benefits. Projections may be considered unreliable if there is a discrepancy of more than 20% between projected and actual results that is within the control of the participants. In this case, the IRS may use actual benefits as the most reliable measuring method. …

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