Participant change did not materially change cost-sharing scope

Plain-English summary

Chief Counsel considered whether changing one or more controlled participants in a cost-sharing arrangement caused a material change in its scope under Treasury Regulation § 1.482-7(m)(3). The regulation uses “scope” to refer to intangible-development activities, while the list of participants is a separate required item in the arrangement's documentation. Its text and regulatory history did not treat a participant change as a material scope change. Consequently, changing controlled participants alone did not trigger the newer periodic-adjustment rules for later platform contribution transactions.

Ruling snapshot

• Question: Does a change in controlled participants constitute a material change in the scope of a grandfathered cost-sharing arrangement?
• Outcome: Advice given, a participant change alone is not a material scope change
• Key authorities: IRC § 482; Treas. Reg. §§ 1.482-4(f), 1.482-7(i), (m), 1.482-7A(b)

Full text (IRS public release)

ID: CCA_2025070913443000 [Third Party Communication:

UILC: 482.00-00 Date of Communication: Month DD, YYYY]

Number: 202538023
Release Date: 9/19/2025
From: -------------------
Sent: Wednesday, July 9, 2025 1:44:33 PM
To: ----------------------
Cc: -----------------
Bcc:
Subject: Material Change in Scope of a CSA

Good afternoon,

You asked whether a change in one or more of the controlled participants in a cost
sharing arrangement (“CSA”) constitutes a “material change in the scope of the CSA
from its scope as of January 5, 2009” under Treas. Reg. § 1.482-7(m)(3).

Treas. Reg. § 1.482-7(m) provides transition rules for certain CSAs in existence on
January 5, 2009, including a special rule for certain periodic adjustments. Specifically,
Treas. Reg. § 1.482-7(m)(2)(ii) and (m)(3) provide that if there is a material change in
the scope of the CSA from its scope as of January 5, 2009, the periodic adjustment
rules in Treas. Reg. § 1.482-7(i)(6) apply (rather than the rules of Treas. Reg. § 1.482-
4(f)(2) and (f)(6)) to platform contribution transactions (“PCTs”) that occur on or after the
date of such material change.

The periodic adjustment regulations generally allow the IRS, in its discretion, to use the
actual profits from a transferred intangible or PCT in making adjustments to payments
for a transferred intangible or PCT. See Treas. Reg. §§ 1.482-4(f)(2) (for transferred
intangibles) and -7(i)(6) (for PCTs). The periodic adjustment rules in Treas. Reg. §
1.482-7(i)(6) differ from those in -4(f)(2).

A material change in scope would subject any PCTs after that material change to a
potential Treas. Reg. § 1.482-7(i)(6) periodic adjustment under the transition rules for
existing qualified CSAs. Assuming for purposes of this analysis that the CSA at issue
was a “qualified CSA” under the provisions of 1.482-7A, was in existence on or before
January 5, 2009, and met the other transition rule requirements in Treas. Reg. § 1.482-
7(m)(1), a material change in scope would be required for Treas. Reg. § 1.482-7(i)(6) to
apply.

Under Treas. Reg. § 1.482-7(m)(3), a material change in the scope of the CSA
“includes a material expansion of the activities undertaken beyond the scope of the
intangible development area, as described in former Treas. Reg. § 1.482-
7(b)(4)(iv).” “[F]ormer Treas. Reg. § 1.482-7(b)(4),” which was redesignated as Treas.
Reg. § 1.482-7A(b)(4), lists six items that must be recorded in a document

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contemporaneous with the formation of the CSA. Notably, “a list of the arrangement’s
participants” is covered by Treas. Reg. § 1.482-7A(b)(4)(i) and thus entirely separate
from a “material expansion in the scope of the CSA” under Treas. Reg. § 1.482-
7A(b)(4)(iv). Had Treas. Reg. § 1.482-7(m)(3) been intended to include changes in the
controlled participants, it could have also cross-referenced Treas. Reg. § 1.482-
7A(b)(4)(i) (or paragraph (b)(4) generally). Thus, a change of controlled participant is
not a “material expansion of the activities undertaken” in the intangible development
area. This reading is also supported by the consistent use of the term “scope”
throughout Treas. Reg. § 1.482-7 to refer specifically to the scope of intangible
development activity. See Treas. Reg. §§ 1.482-7(d)(1); (d)(5), Ex. 3 (describing a
patent development as “outside the scope of the CSA”); (g)(3) (identifying as a CUT
reliability factor the similarity of the “scope” of the “subject intangible development”);
(k)(1)(ii)(B) (contract must describe scope of the intangible development activity);
(k)(2)(ii)(A) (same).

Although Treas. Reg. § 1.482-7(m)(3)’s statement that a material change in the scope
of the CSA “would include a material expansion of the activities undertaken,” read in a
vacuum, could imply that changes other than a change in intangible development
activity could give rise to a material change in scope of the CSA, this is not the correct
reading of the regulatory provision in context. The full sentence states that “A material
change in scope would include a material expansion of the activities undertaken beyond
the scope of the intangible development area, as described in [§ 1.482-7A(b)(4)(iv)].”
“Include” here indicates that a material expansion of the CSA activities other than to
facts described under Treas. Reg. § 1.482-7A(b)(4)(iv) may also constitute a material
change in the scope of the CSA. But it does not imply a change of participants could
constitute such a change in scope.

Moreover, the regulatory history of § 1.482-7(m)(3) indicates that a change in controlled
participants is not otherwise a material change in the scope of the CSA. The Preamble
to the Temporary Regulations under IRC 482 (74 FR 340), issued January 5, 2009 (the
“2009 Preamble”) explains that in the Proposed Regulations under IRC 482 (70 FR
51116), issued on August 29, 2005, protections under the transition rules for existing
qualified CSAs would be terminated in certain events, including a 50 percent or greater
change in the ownership of interests in cost shared intangibles. However, that event
was then removed from the temporary and final cost sharing regulations in response to
commentators’ concerns that it defeated taxpayers’ legitimate expectation under the
prior regulations. The 2009 Preamble states that the 2009 Temporary Regulations “do
not terminate grandfather treatment [that is, protection under the transition rules] upon a
50 percent change of ownership.” The 2009 Temporary Regulations and the 2011 Final
Regulations are the same with respect to Treas. Reg. § 1.482-7(m)(3). This suggests
that the drafters had considered changes in controlled participants as an event that
would terminate protections under the transition rules but ultimately chose not to include
this event.

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Thanks,

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