How appraisers can ‘get it right’ in reasonable royalty cases

BVWireIssue #88-4
January 27, 2010

Remember last week’s write up of Veritas Software Corp. v. Comm’r, 2009 WL 4723602 (Dec. 10, 2009), a $1.5 billion-dollar transfer pricing case? It’s now being hailed as a landmark decision relating to the valuation of cost-sharing buy-ins. In addition to rejecting the IRS’s traditional theories, the court also addresses the Obama administration’s recent efforts to “clarify” the definition of intangible property under Sec. 482 (transfer pricing regs) to include workforce in place, goodwill, and going concern value—a “clarification,” the court says, which could nevertheless raise nearly $3 billion dollars in tax revenues over the next ten years.

Given the current proposals and potential for raising revenues, don’t expect the IRS oversight of transfer pricing arrangements to wane, despite its recent loss in Veritas (which ultimately hinged on its expert getting the intangible assets and financial assumptions wrong). In fact, the IRS is currently hiring more economists, and its scrutiny of these cases should continue to intensify, says David Jarczyk, author of “Increased IRS Transfer Pricing Regulation Increases Opportunities for Appraisers,” in the recent (Sept. 2009) Business Valuation Update™.

Takeaway for appraisers. “With respect to intangible property cases, solid documentation and a thorough review of assumptions and comparables is crucial,” says Jarczyk, current COO of ktMINE. “For example, a practitioner should not use royalty rates without reading the actual license agreements and filings. There are too many variables the IRS can scrutinize with respect to royalty rates and license agreements that can materially impact one’s analysis.” For more information, visit ktMINE.
Please let us know if you have any comments about this article or enhancements you would like to see.