On August 16, 2019, the Ninth Circuit handed down another decision in favor of Amazon. In this case, the Ninth Circuit held up the U.S. Tax Court’s (Tax Court) 2017 decision regarding Amazon’s valuation of intellectual property (IP) transferred from the U.S. to Luxembourg in connection with Amazon’s 2005–2006 business restructuring. Under the terms of the cost-sharing arrangement (CSA), Amazon transferred the non-U.S. rights of its IP to Luxembourg. The IRS had proposed a hefty income adjustment of $2.2 billion, on the grounds that Amazon’s approach to determining the CSA platform contribution payment—or "buy-in payment," i.e., the payment by its Luxembourg affiliate for the transfer of value of existing IP rights—was deeply flawed.
The primary point of contention between Amazon and the IRS was the very definition of IP. Amazon closely followed the definition of IP contained in Treasury Regulation Section 1.482-4(b), which lists the following as IP assets: patents, inventions, formulae, processes, designs, patterns, know-how, copyrights and literary, musical or artistic compositions, trademarks, trade names or brand names, franchises, licenses or contracts, methods, programs, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists or technical data and the somewhat opaque “other similar items.” Based on this definition, Amazon discretely valued its patented technology and brand-related IP assets—assets that could be individually transferred to an interested third party. The IRS, on the other hand, adopted the point of view that the term “other similar items” was intended to capture the value of all the intangible assets of the business, i.e., the total value of the business transferred less the value of its tangible assets. Accordingly, the IRS’ viewpoint would inherently capture the value of other embedded intangible assets of the company such as workforce in place, customer relationships and goodwill (which generally could not be separately sold to unrelated parties). As one might expect, this difference in perspective resulted in a massive chasm between the platform contribution payment values estimated by the IRS and the taxpayer.
In this case, the Ninth Circuit reaffirmed that Amazon’s interpretation of the tax code at the time was the correct one. It will be interesting to see whether the IRS continues to pursue its case against Amazon or moves on to other tax court cases.
One thing that is more certain is that taxpayers pursuing an approach similar to Amazon in the future are much less likely to be successful in Tax Court. One direct result of 2017’s Tax Cuts and Jobs Act (TCJA) was a clarification of the definition of IP to include all the intangible assets of a company, including the previously unlisted items of workforce in place and goodwill. The TCJA also clearly presented the IRS’ preferred methods for valuing IP in intercompany transfers. The IRS’ futile pursuit of Amazon likely had a direct influence on these changes.
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