Academic journal article Journal of Accountancy

Method of Calculating Buy-In Payment Approved

Academic journal article Journal of Accountancy

Method of Calculating Buy-In Payment Approved

Article excerpt

[GRAPHIC OMITTED]

The Tax Court approved a software company's method of valuing a buy-in payment for the transfer of intangible assets to a subsidiary, calling the IRS' redetermination of the buy-in payment amount "arbitrary, capricious and unreasonable."

The case concerned tax years 1999 through 2001 of VERITAS Software Corp. (VERITAS U.S.), which in 2005 was acquired by Symantec Corp. In 1999, VERITAS U.S. entered into a cost-sharing arrangement with one if its foreign subsidiaries, VERITAS Ireland, to develop, manufacture and market storage management software products. In it, VERITAS U.S. granted VERITAS Ireland the right to use certain previously developed intangibles in various foreign markets. In exchange for these pre-existing intangibles, VERITAS Ireland made a $166 million buy-in payment to VERITAS U.S. The payment amount was calculated by the "comparable uncontrolled transaction" (CUT) method, which determines whether the amount charged for the transfer of intangible property between controlled entities is at arm's length (as required by Treas. Reg. [section] 1.482-1(b)) by comparing it with amounts charged for comparable transfers between uncontrolled entities.

Using a different method, the "forgone profits method," the IRS determined that the buy-in agreement should have taken into account access to VERITAS U.S.' research and development team, access to its marketing team and its distribution channels, customer lists, trademarks, trade names, brand names and sales agreements, increasing the buy-in payment to $2. …

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