On August 26, 2013, the Internal Revenue Service (IRS) and the Treasury Department finalized the portion the cost sharing regulations issued on December 16, 2011 that was reserved at the time of release. In addition to the final cost sharing regulations issued at that time, the December 2011 regulations had included certain provisions issued in the form of temporary regulations and proposed regulations. These temporary and proposed regulation provisions, designed to limit certain analytical approaches taken by taxpayers in applying the income method, have now been finalized. Our PKN Alert issued on December 21, 2011, previously summarized and discussed these regulations.
The newly finalized regulations provide additional guidance and testing around the selection and use of discount rates under an income method analysis. The stated intent of this guidance is to address what the IRS views to be ""unreasonable positions"" taken by taxpayers in relation to the selection of discount rates under the income method and resultant ""material distortions and . . . potential for [platform contribution transaction] payments not in accordance with the arm's length standard.""
From a practical perspective, taxpayers that engage in cost sharing platform contribution transactions (PCTs) can expect that their selection of discount rates, a central parameter in an income method analysis, will be subject to additional scrutiny and tests. The likely consequences are an additional compliance burden for taxpayers along with a greater possibility of disputes.