Publish Date

Feb 21, 2019

Legislating History: The Changed Valuation Rules For Intangible Property

A&M Tax Advisor Weekly

“You can’t change the past.”

We don’t know who owns the copyright to that saying. But most of us have probably infringed on that intangible property (IP) right numerous times, and a quick Google search will expose dozens of famous people for that same transgression. If nothing else, this belief (whether copyrighted or not) seems to be universally accepted.

By such conventional wisdom, Congress appears to have engaged in an effort to change legislative history by means of subsequent legislation in the Tax Cuts and Jobs Act (TCJA). Specifically, the TCJA included a provision (Act Section 14221) that appears to be an attempt to retroactively change the interpretation of code Sections 367 (dealing with transfers of property by U.S. persons to foreign corporations), and 482 (dealing with related party transfer pricing) in regard to the required valuation methodology for the transfer of IP rights in the context of “outbound” restructuring transactions, as well as in intercompany transfer pricing arrangements.

The Change in Question

The change relates to an issue with respect to which the Internal Revenue Service has suffered some high-profile litigation losses.[1] The issue is whether transfers of IP should be valued on an item by item basis, on an aggregate basis or if an alternative principle should be applied. The Service’s position is that Sections 367 and 482, prior to the TCJA, authorized the Service to require aggregate basis valuation and the application of the realistic alternative principle, if the Service determined that those approaches achieved a more reliable result. But the Service has had little success in convincing courts to accept that position.[2] In light of the Service’s lack of success, Congress codified the Service’s position in TCJA section 14221(b).

Potential Retroactive Impact

There is little question that Congress had the authority to codify the Service’s position prospectively. But there would seem to be a legitimate question as to the authority of Congress to change the past. The possibility that Congress may have already attempted this is seen by its choice of wording for the heading to Section 14221(b) (“Clarification of Allowable Valuation Methods”) and for the effective date language in Section 14221(c). The heading to Section 14221(b) reads: “Clarification of Allowable Valuation Methods.” That, alone, would seem to send a clear message that this Congress believes that the Service’s position has been right all along.