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Details

  • Service: Tax, Global Transfer Pricing Services, International Tax
  • Type: Regulatory update
  • Date: 7/28/2014

United States - CSA allocations to shared intangible development costs 

July 28:  The U.S. Tax Court today—finding a genuine dispute of material fact—denied the taxpayer’s motion for partial summary judgment concerning its cost sharing arrangement and the allocation of costs to shared intangible development costs. Amazon.com, Inc. v. Commissioner, T.C. Memo. 2014-149 (July 28, 2014)

Read the 10-page opinion (PDF 61 KB)

Background

The taxpayer’s cost accounting system during 2005-06 did not specifically segregate intangible development costs (IDCs) from other operating costs. Rather, the taxpayer developed a formula and applied it to allocate as IDCs, a portion of the costs accumulated in various “cost centers.”


The IRS did not challenge the taxpayer’s use of its allocation method, but disputed the taxpayer’s allocation to IDCs of costs accumulated in the “Technology & Content” category. The IRS issued a notice of deficiency determining that 100% of the T&C category costs constituted IDCs, and thus the IRS adjusted the percentage of “General and Administrative” costs that the taxpayer had allocated to IDCs.


The case was calendared for trial before the Tax Court in November 2014, when the issues for consideration would concern section 482 deficiencies, as determined by the IRS, in the taxpayer’s income tax for 2005 and 2006.

Summary judgment motions

The current issue before the court was the taxpayer’s motion for partial summary judgment. The taxpayer claimed that it was entitled to judgment on two related questions:


  • Whether the IRS abused its discretion by allocating 100% of the costs in certain cost centers to intangible development costs (IDCs) under Reg. section 1.482-7(d)(1)
  • Whether the taxpayer was entitled as a matter of law to apply an allocation method to determine IDCs under the governing regulations

The Tax Court today found that concerning the first question, there are genuine disputes of material fact that preclude partial summary judgment.


Concerning the second question, the Tax Court concluded that the taxpayer must show that the cost centers constituted “mixed costs”—i.e., the costs benefiting other business activities as well as intangible development activities—before the taxpayer could justifiability employ an allocation method to determine IDCs under Reg. section 1.482-7(d)(1).


Again, the court found there was a genuine dispute of material fact and denied the taxpayer’s motion for partial summary judgment.



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