2.One basic fact pattern indicates that a licensing structure would unlikely be
used, as the structure would be disadvantageous to the business and to the busi-
ness owner.
3.One basic fact pattern indicates that licensing would be advantageous to the
business and to the business owner, but that the IRS is ill prepared to address
that particular situation.As we shall see, the latter situation, in which the IRS is ill prepared, is most plen-
tiful, especially as tax advisors are increasingly advocating licensing structures in
light of Martin Ice CreamandNorwalk.
(d) How Taxpayers Would Structure Licensing Arrangements. In the first scenario,
the business owner is an U.S. resident, the business is located in the United States,
and the business is profit making. Here it is in the interest of the business owner and
the business to charge for the intangibles through a license arrangement. The tax-
payer is siphoning off a portion of the business’s profits in lieu of declaring and pay-
ing dividends.
This licensing transaction in the first scenario is a wholly domestic matter. In fact,
the impetus for these transactions is to achieve state tax savings when the business
owner moves to a low or no state income tax jurisdiction. As a practical matter, the
IRS is unlikely to address the licensing matter from the transfer pricing viewpoint be-
cause the IRS views transfer pricing as an international issue. At present, the only bar
to imposing excessive royalty amounts is the risk to the business owner that the IRS
will view part or all of the payments as imputed dividends.
(e) Additional Licensing Scenarios. In the second scenario, the business is incurring
persistent losses. Licensing would cause the business owner to reflect personal li-
censing income despite a business’s deficit in earning and profits. In that situation, it
would be in the business owner’s interest not to license the intangibles. In addition,
the value of the marketing intangibles would be open to question.
In the third scenario, the business owner is located in the United States and the
business is located outside the United States. The business owner and the business,
operating together, would consider the business’s deductibility of license fees, with-
holding rates, effectively connected status of the business owner, and taxability of li-
censing amounts accrued or received in the United States, after considering foreign
tax credit and similar issues. In any event, the IRS should have this information, in-
cluding transfer pricing information, through the filing of Form 5271.
29.13 LIFE-CYCLE BUSINESS ANALYSIS. The transfer pricing regulations fail to ad-
dress a number of transfer pricing issues, among them being the life cycle of an on-
going business.^13 As transfer pricing practitioners, we have seen that international
examiners and transfer pricing economists have different approaches to the business
life cycle:
- We have found that international examiners, for the most part, are not attuned to
business cycle analysis. The international examiner tends to ignore life-cycle
29.13 LIFE-CYCLE BUSINESS ANALYSIS 29 • 19(^13) Robert Feinschreiber, “Life-Cycle Analysis and Transfer Pricing,” Transfer Pricing Handbook#1,
3rd ed., edited by R. Feinschreiber (New York: John Wiley & Sons, 2001): Section 37.1.