Tax Court Deals IRS Another Transfer Pricing Loss

On March 23, in Amazon.com, Inc. & Subsidiaries v. Commissioner 148 T.C. No. 8 (2017) the Tax Court held that the IRS's approach to valuing an upfront cost sharing buy-in payment was arbitrary, capricious and unreasonable. The Tax Court also held that the IRS abused its discretion in determining that 100% of certain costs associated with a technology and content cost center constituted intangible development costs.

The case involved more than $234 million in tax deficiencies for 2005 and 2006. In the decision, the court agreed that the comparable uncontrolled transaction (CUT) method (with appropriate upward adjustments) used by the taxpayer, e-commerce giant Amazon, Inc., was the best method for determining the upfront cost sharing buy-in payment, and also agreed with Amazon's methodology for allocating its technology and content cost center.

In 2005, Amazon entered into a cost sharing agreement (CSA) with a Luxembourg subsidiary. The CSA granted the Luxembourg subsidiary the right to use certain pre-existing assets in Europe, namely the intangibles required to operate the European website business. The CSA required that the Luxembourg subsidiary pay an upfront cost sharing buy-in payment, and also make annual cost sharing payments to compensate Amazon for the ongoing intangible development.

The regulations under Section 482 require the application of thebest method when determining the arm's length price for related party transactions such as the buy-in payment. Amazon believed that the CUT method was the best method under the regulations, and determined that the upfront cost sharing buy-in payment should be $254.5 million by applying such a method. As part of the CSA computations, Amazon determined the allocable...