In Veritas Software Corp. v. Comm’r, 2009 WL 4723602 (Dec. 10, 2009), a billion-dollar transfer pricing case, the expert for the Internal Revenue Service used the wrong beta, the wrong equity risk premium, the wrong risk-free rate, and the wrong growth rate in calculating the cost of capital for a large, multi-national developer and manufacturer of computer storage software. That wasn’t all: the U.S. Tax Court also found the IRS expert assumed the wrong useful life for the intangibles and he even used the wrong intangibles. “Put bluntly,” the court said, “his testimony was unsupported, unreliable, and thoroughly unconvincing.” Indeed, the expert’s only credibility consisted of his “numerous concessions and capitulations.”
By contrast, the expert for the taxpayer used an appropriate beta and ERP to calculate his discount rate, but the court adjusted his starting royalty rate as well as his “ramp-down” rate to account for the character and obsolescence of the intangibles. Read the complete digest of the Veritas Software case in the next (Feb. 2010) of the BVUpdate; the full-text of the Tax Court opinion is now available at BVLaw™.
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