In the recent Amazon Tax Court case, the IRS challenged the valuation of trademarks the company transferred to its overseas subsidiary. The case involved tax deficiencies of over $200 million, but the court agreed with Amazon’s experts on almost all points. To value the trademarks, experts used the comparable uncontrolled transaction (CUT) method to whittle down market transactions into those that most closely compare to the subject. This is not easy because of the large amount of empirical data on royalty rates, which can be “noisy.” Fortunately, we have an inside look at how the winning side did it.
Three-step approach: An expert for Amazon, Robert Reilly (Willamette Management Associates), found over 7,700 agreements in his initial search of the ktMINE database. Of these, he identified 865 to be in the “marketing intangible” category. Narrowing his search to the retail and Internet industries yielded 167 agreements, all of which he reviewed to find CUTs. To do this, he used a three-step approach where you (1) eliminate, (2) adjust, and (3) assess the data. In the end, he selected six comparables to determine a royalty rate.
We point out that you should not rely on only one data source when doing this analysis. In the Amazon case, Reilly also used RoyaltySource and RoyaltyRange, but did not identify any additional CUTs beyond what he determined from ktMINE data.
Get the details: An article that illustrates Reilly’s approach in detail with a hypothetical example he supplied but using real-world data is available from BVR as a complimentary download. This article originally appeared in Business Valuation Update titled “Three-Step Analysis to Manage the ‘Noise’ in IP Royalty Rate Data.” BVU subscribers already have access to this article as part of a searchable archive of over 20 years of articles that represent the collective wisdom and practical advice from the top experts in the valuation profession.
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