New Final Regs on Use of Differential Income Stream in Evaluating Cost-Sharing Arrangements

On August 26, 2013, the United States Treasury Department issued new final regulations under Internal Revenue Code (IRC) Section 482. The new regulations provide guidance on the “income method” for determining taxable income in connection with cost-sharing arrangements (CSAs) entered into among members of a controlled group for the joint development of intangibles. Specifically, the regulations provide guidance on measuring the proper arm’s-length price of buying into a CSA by calculating the present value of the “differential income stream,” i.e., the incremental income projected to result from cost-sharing versus licensing.

Treasury issued final cost-sharing regulations under IRC § 482 in December 2011, reserving guidance related to the differential income stream approach, which it addressed in temporary regulations also promulgated in December 2011. The new regulations finalize those temporary regulations without change.

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