International Finance and Accounting Handbook

• Pricing adjustments tend to be made after the fact rather than being contempo-
  raneous with the events that would precipitate change. Obsolete data can change
  the pricing method being selected.

29.12 DETERMINING WHO OWNS THE INTANGIBLES. Transfer pricing profes-
sionals, whether within the IRS or private practitioners, expend considerable effort in
determining whether a particular intangible is owned by a U.S. business rather than
owned by its foreign affiliates.^10 These professionals most typically undertake this
transfer pricing analysis with a view toward ascertaining the applicable arm’s length
licensing rate. These transfer pricing professionals, however, expend much less effort
in ascertaining whether the business owners or the business owns the intangibles. The
intangibles may initially begin with the business owner, and these intangibles remain
with the business owner, never having been transferred to the business itself.

(a) When Does the Intangible Issue Arise? This intangible ownership issue most
typically arises in either of two contexts:

1.Capital gains or reorganization context, in the event of a sale or disposition of

the business

2.Estate planning

As a practical matter, the intangible ownership issue infrequently arises in the trans-
fer pricing context. The failure of the IRS to actively address this intangible owner-
ship issue in the transfer pricing context has become more serious in light of taxpayer
victories in Martin Ice Cream v. Commissioner^11 andNorwalk v. Commissioner.^12

(b) Case Law. InMartin Ice Cream, the father (a shareholder) had extensive mar-
keting contacts and marketing expertise, which he used to introduce ice cream to su-
permarkets. The Tax Court recognized marketing contacts and marketing expertise as
being intangible assets. The Tax Court concluded these marketing rights were the
property of the father and these rights did not belong to the corporation.
InNorwalk, two accountants set up an accounting corporation, which had em-
ployment agreements, a covenant not to compete, and protection over client records.
The agreements terminated and the corporation liquidated. The IRS asserted that the
market-based intangibles were assets of the corporation, subject to tax under Section

336. The Tax Court held that these assets were owned by the shareholders them-
     selves, and that no tax was applicable.

(c) Three Scenarios. Consider three scenarios for intangible ownership in the con-
text of potential transfer pricing issues.

1.The IRS is likely to have the requisite data in two of the four basic fact patterns

to address transfer pricing concerns.

29 • 18 TRANSFER PRICING FOR INTERCOMPANY TRANSACTIONS

(^10) Robert Feinschreiber, “Comparable Uncontrolled Transaction Method for Intangibles,” Transfer
Pricing Handbook#1, 3rd ed., edited by R. Feinschreiber (New York: John Wiley & Sons, 2001): Sec-
tion 39.1.
(^11) 110 T.C. 189 (1998).
(^12) T.C. 279 (1998).