Participant liquidation changes cost-sharing projections

Plain-English summary

A participant withdrew from a cost-sharing arrangement during the second quarter and was to be liquidated into a U.S. subsidiary at year end. If the taxpayer already knew of that intended liquidation when the withdrawal occurred, Chief Counsel advised that post-withdrawal royalties potentially could be omitted from the subsidiary's five-year projection. After the liquidation, however, the subsidiary would own the rights previously retained by the withdrawing participant and future rights to exploit later-developed intellectual property. The taxpayer therefore potentially would need to include all reasonably anticipated benefits from those rights in the subsidiary's projection beginning the following year.

Ruling snapshot

• Question: How should the planned liquidation of a withdrawing participant affect the U.S. subsidiary's five-year cost-sharing projection?
• Outcome: Advice given: post-withdrawal royalties may be omitted under the stated condition, but the subsidiary's later projected benefits may expand.
• Key authorities: IRC § 482; cost-sharing agreement principles

Full text (IRS public release)

ID: CCA_2020092214302213
UILC: 482.00-00, 482.11-00, 482.11-08

Number: 202118013
Release Date: 5/7/2021
From: --------------------------
Sent: Tuesday, September 22, 2020 2:30:22 PM
To: -------------------
Cc: ----------------------------
Bcc: --------------------------
Subject: RE: ---FY----CSA

If the taxpayer knew at the end of the second quarter of the fiscal year, when the
withdrawal occurred, that it intended to liquidate the withdrawing participant into the
U.S. subsidiary at the end of the fiscal year, then potentially taxpayer would not need to
include any royalties after the second half of the FY of the withdrawal in its 5-year
projection for U.S. subsidiary. However, if that is the case, then beginning in the year
following the withdrawal (after the liquidation of the withdrawing participant into the U.S.
subsidiary) the U.S. subsidiary would own all the rights to exploit IP previously retained
by the withdrawing participant, as well as the future rights to exploit IP developed post-
withdrawal, and taxpayer would potentially need to include all of U.S. subsidiary’s
reasonably anticipated benefits from all of those rights in its 5-year projection for U.S.
Subsidiary.

Kind regards-