Amazon Wins Transfer Pricing Dispute on Regulations Interpretation (8/18/19)

In Amazon.com, Inc. v. Commissioner, ___ F.3d ___ (9th Cir. 2019), here, a transfer pricing case, the Court held that, under the applicable regulations (but superseded for later years as noted in footnote 1 discussed below) did not require that residual business assets (like workforce in place, going concern value) be included in the required buy-in for a cost sharing agreement between related parties because they were not independently transferable assets.

Here is the Court's summary (not part of the opinion):

The panel affirmed the Tax Court’s decision on a petition for redetermination of federal income tax deficiencies, in an appeal involving the regulatory definition of intangible assets and the method of their valuation in a cost-sharing arrangement. 

In the course of restructuring its European businesses in a way that would shift a substantial amount of income from U.S.-based entities to the European subsidiaries, appellee Amazon.com, Inc. entered into a cost sharing arrangement in which a holding company for the European subsidiaries made a “buy-in” payment for Amazon’s assets that met the regulatory definition of an “intangible.” See 26 U.S.C. § 482. Tax regulations required that the buy-in payment reflect the fair market value of Amazon’s pre-existing intangibles. After the Commissioner of Internal Revenue concluded that the buy-in payment had not been determined at arm’s length in accordance with the transfer pricing regulations, the Internal Revenue Service performed its own calculation, and Amazon filed a petition in the Tax Court challenging that valuation. 

At issue is the correct method for valuing the pre-existing intangibles under the then-applicable transfer pricing regulations. The Commissioner sought to include all intangible assets of value, including “residual-business assets” such as Amazon’s culture of innovcation (sic), the value of workforce in place, going concern value, goodwill, and growth options. The panel concluded that the definition of “intangible” does not include residual-business assets, and that the definition is limited to independently transferrable assets.

I won't get into the weeds on the opinion because it appears to be an unexceptional application of standard rules of interpretation of the regulation (a similar exercise to interpreting the text of a statute).  The IRS's interpretation of its own regulation was not entitled to Auer deference, which is now substantially constrained by the decision in Kisor v. Wilkie, 588 U.S. ___, 139 S.Ct. 2400 (2019) [Sup Ct Slip Op here; Google Scholar with S.Ct. pagination here].

The important point on the substance of the IRS position is that the IRS changed the regulation.  In footnote 1 (Slip Op. p. 6]:

   n1 This case is governed by regulations promulgated in 1994 and 1995. In 2009, more than three years after the tax years at issue here, the Department of Treasury issued temporary regulations broadening the scope of contributions for which compensation must be made as part of the buy-in payment. See 74 Fed. Reg. 340 (Jan. 5, 2009). In 2017, Congress amended the definition of “intangible property” in 26 U.S.C. § 936(h)(3)(B) (which is incorporated by reference in 26 U.S.C. § 482). Tax Cuts and Jobs Act of 2017, Pub. L. 115-97, § 14221(a), 131 Stat. 2054, 2218 (2017). If this case were governed by the 2009 regulations or by the 2017 statutory amendment, there is no doubt the Commissioner’s position would be correct.

So, except for the dollars involved (bit, as is the way with Amazon), the case would be unexceptional.