Or, The Limits of Game-playing

A certain Director at a major accounting firm directed my attention to the new Treasury Regulations concerning Cost Sharing Arrangements and Platform Contribution Transfers among controlled entities.

She suggested that small businesses, for whose tax advisers I am writing, might encounter such dealings, principally in-bound US corporations and LLCs controlled by foreign entities. Quoting from the introduction to these regulations, “(A) unifying underpinning of the section 482 regulations is that controlled transactions reflecting similar economics, regardless of the type of transaction (such as transfer of intangibles or provision of services), should be valued in accordance with similar principles and methods.” Simple enough.

And as today is a Federal holiday, wherefore  school is out at Tax Court, I thought I’d fish for interesting morsels in TD 9568, a/k/a 80082 Federal Register / Vol. 76, No. 246 / Thursday, December 22, 2011 / Rules and Regulations, wherein the new Regulations appear.

But as I read the first fifty or so of the 202 pages of TD 9568, it became clear that it would be a rare small US firm that encountered the deals to which the Regulations were directed.

Again quoting TD 9568, “(I)t has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. It is hereby certified that the collections of information in these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that this rule applies to U.S. businesses and foreign affiliates that enter into cost sharing arrangements.

“Few small entities are expected to enter into cost sharing agreements, as defined by these regulations. Accordingly, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Code, these regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration (CCASBA) for comment on their impact on small businesses. CCASBA did not have any comments.”

Quite possibly the CCASBA’s eyes glazed over at the same point as mine did.

So I’ll take Treasury at its word, and presume my readers will rest content with my abstract of the Regulations, as follows. The calculations of cost and profit must be reasonable, and must be based upon arms’-length or equivalent transactions. You can’t have the right to reject future contingent payments. You can’t mix-and-match discount rates to get the results you want. Play nice, kids.

Takeaway–In the immortal words of the old cartoon about the schoolgirl’s book report, “This book told me more about penguins than I wanted to know.”