On April 12, 2019, attorneys for the IRS and Amazon, respectively, presented oral arguments in the United States Court of Appeals for the Ninth Circuit. This marks the start of the next round of arguments between the two parties concerning the value of intangibles transferred under Amazon’s cost sharing arrangement between its U.S. and Luxembourg entities.1
The core argument of this case and its subsequent appeal stems from each party’s interpretation of what qualifies as an intangible under Section 1.482-4(b) and as referenced in the cost sharing regulations (Section 1.482-7A(a)(2)) at the time of Amazon’s 2005-2006 cost sharing arrangement. Amazon argues that the IRS’ calculation of the buy-in payment included items (e.g., workforce-in-place, going concern value, goodwill, and certain “growth options” such as company culture) that were outside the scope of what constitutes an “intangible” as defined in Section 1.482-4(b). However, the IRS argues that the definition of intangibles under the 1994 regulations was broad and thus did not specifically exclude residual business assets (such as those currently under dispute) from the scope of the buy-in requirement.
On July 5, 2017, the U.S. Tax Court ultimately agreed with Amazon that such “residual business” intangibles were not subject to the buy-in requirements at the time of Amazon’s 2005-2006 cost sharing arrangement. However, the IRS is appealing this decision by arguing that the U.S. Tax Court’s interpretation of Section 1.482-4(b) conflicts with the overall purpose of the arm’s-length standard. The IRS also stated upon appeal that its own interpretation of the broad definition of intangibles was conclusive and supported by the recent changes in legislation to U.S. Tax Code in 2017. Amazon refutes these points by pointing to the 1994 regulatory definition of intangibles, which it interpreted as being limited to intangibles that could be sold independently of a business. Amazon further argues that the statutory definition precludes the IRS’ interpretation of the regulation and that the 2017 amendments to the Section 936 definition of intangibles, which explicitly include the items being disputed, indicates that such intangibles were not intended to be included in the broad definition of intangibles presented by the 1994 regulations. The IRS is requesting that the Court of Appeals for the Ninth Circuit remand the U.S. Tax Court’s decision.
An IRS win in this case could mean increased scrutiny and litigation for other U.S. multinational enterprises (“MNE’s”) that took similar approaches to Amazon to the definition of intangibles and the determinations of buy-ins when they entered into (or augmented) similar cost sharing arrangements, especially those prior to changes in the cost sharing regulations which broadened the definition of compensable contributions to a cost sharing arrangement. The IRS argues that a taxpayer win in this case could set a precedent blessing transactions, especially those occurring before 2017 regulatory and statute changes, that provide access to valuable intangibles to offshore affiliates for free, even though the transfer of such intangibles between third-parties would have required some form of compensation. Either way, the decision in the Amazon case will have a large impact on the scope of the IRS’ discretion in making adjustments based on its interpretation of broad language within the U.S. Tax Code.