Internal Revenue Bulletin 2009-7 (PDF rendition): IRS Revenue Procedures

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

Bulletin No. 200
9-7
February 17, 200
9
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
T.D. 9441, page 460.
REG–144615–02, page 561.
Final, temporary, and proposed regulations under section 482
of the Code provide guidance with respect to the sharing of
costs and risks under cost sharing arrangements. The reg-
ulations replace the existing guidance under regulations sec-
tion 1.482–7 to provide clarification and additional guidance
regarding the scope and valuation of the external inputs for
which arm’s length consideration must be provided as an entry
condition into cost sharing (“buy-ins” under former regulations
section 1.482–7), as well as to address other technical and
procedural issues that have arisen in the course of administer-
ing the cost sharing rules. A public hearing on the proposed
regulations is scheduled for April 21, 2009.
Notice 2009–14, page 516.
Section 382. This notice provides additional guidance regard-
ing the application of section 382 treatment of interest in a loss
corporation acquired by the federal government pursuant to the
Emergency Economic Stabilization Act of 2008 (EESA). Notice
2008–100 amplified and superseded.
Rev. Proc. 2009–17, page 517.
Substitute tax forms and schedules.Requirements are set
forth for privately designed and printed federal tax forms and
conditions under which the Service will accept computer pre-
pared and computer-generated tax forms and schedules. Rev.
Proc. 2007–68 superseded.
Finding Lists begin on page ii.

The IRS Mission
Provide Americ
a’s taxpayers top quality service by helping them
understand an
d meet their tax responsibilities and by applying
the tax law with
integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
February 17, 20092009–7 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 482.—Allocation
of Income and Deductions
Among Taxpayers
26 CFR 1.482–7: Methods to determine taxable in-
come in connection with a cost sharing arrangement.
T.D. 9441
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1, 301, and 602
Section 482: Methods to
Determine Taxable Income
in Connection With a Cost
Sharing Arrangement
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains
temporary regulations that provide further
guidance and clarification regarding meth-
ods under section 482 to determine taxable
income in connection with a cost sharing
arrangement in order to address issues that
have arisen in administering the current
regulations. The temporary regulations
affect domestic and foreign entities that
enter into cost sharing arrangements de-
scribed in the temporary regulations. The
text of these temporary regulations also
serves as the text of the proposed regula-
tions (REG–144615–02) set forth in this
issue of the Bulletin.
DATES:Effective Date:These regulations
are effective on January 5, 2009.
Applicability Date:For dates of
applicability, see §§1.482–1T(j)(6)(i),
1.482–2T(f), 1.482–4T(h), 1.482–7T(l),
1.482–8T(c), 1.482–9T(n)(3), and
1.301–7701–1(f).
FOR FURTHER INFORMATION
CONTACT: Kenneth P. Christman, (202)
435–5265 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These temporary regulations are being
issued without prior notice and public pro-
cedure pursuant to the Administrative Pro-
cedure Act (5 U.S.C. 553). For this reason,
the collection of information contained in
these regulations has been reviewed and
pending receipt and valuation of public
comments, approved by the Office of Man-
agement and Budget under control number
1545–1364.
The collections of information in
these temporary regulations are in
§1.482–7T(b)(2) and (k). Responses to
the collections of information are required
by the IRS to monitor compliance of
controlled taxpayers with the provisions
applicable to cost sharing arrangements.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
control number assigned by the Office of
Management and Budget.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Background
A notice of proposed rulemaking and
notice of public hearing regarding addi-
tional guidance to improve compliance
with, and administration of, the rules in
connection with a cost sharing arrange-
ment (CSA) were published in theFederal
Register(REG–144615–02, 2005–2 C.B.
625 [70 FR 51116]) on (REG–144615–02)
August 29, 2005 (the 2005 proposed reg-
ulations). A correction to the notice of
proposed rulemaking and notice of pub-
lic hearing was published in theFederal
Register(70FR56611)onSeptember
28, 2005. A public hearing was held on
December 16, 2005.
The Treasury Department and the IRS
received substantial comments on a wide
range of issues addressed in the 2005 pro-
posed regulations. In response to these
comments, these temporary regulations
make several significant changes to the
rules of the 2005 proposed regulations.
The temporary regulations are generally
applicable for CSAs commencing on or
after January 5, 2009, with transition
rules for certain preexisting arrangements.
These regulations are being issued in
temporary and proposed form so that tax-
payers and the IRS may apply the new
cost sharing rules while maintaining the
opportunity for further input and refine-
ments before the issuance of final rules.
Explanation of Provisions
A.Overview
The temporary regulations generally
provide guidance regarding the applica-
tion of section 482 and the arm’s length
method to cost sharing arrangements.
Several comments on the proposed regu-
lations questioned whether and how the
proposed regulations conform to the arm’s
length standard, as well as its corollary,
the commensurate with income (CWI)
requirement added by the Tax Reform
Act of 1986. In response, the temporary
regulations provide further guidance on
the evaluation of the arm’s length results
of cost sharing transactions (CSTs) and
platform contribution transactions (PCTs).
The regulations address the material func-
tional and risk allocations in the context
of a CSA, including the reasonably antic-
ipated duration of the commitments, the
intended scope of the intangible develop-
ment, the degree and uncertainty of profit
potential of the intangibles to be devel-
oped, and the extent of platform and other
contributions of resources, capabilities,
and rights to the development and ex-
ploitation of cost shared intangibles (CSA
Activity).
Under the temporary regulations, if
available data of uncontrolled transactions
reflect, or may be reliably adjusted to re-
flect, similar facts and circumstances to a
CSA, they may be the basis for application
of a comparable uncontrolled transaction
method to value the CST and PCT re-
sults. Because of the difficulty of finding
data that reliably reflects such facts and
2009–7 I.R.B.460February 17, 2009

circumstances (even after adjustments),
the temporary regulations also provide for
other methods. These include the newly
specified income, acquisition price, mar-
ket capitalization, and residual profit split
methods. The temporary regulations also
make related changes to other sections of
the regulations, including Temp. Treas.
Reg. §§1.482–1T, 1.482–4T, 1.482–8T,
and 1.482–9T, and Treas. Reg. §1.6662–6.
B.Flexibility and Scope of CSA Coverage
Commentators criticized the 2005 pro-
posed regulations for lack of flexibility
concerning the types and provisions of
arrangements eligible for CSA treatment.
Some comments also addressed non-con-
forming intangible development arrange-
ments that would not be treated as CSAs.
In response to these comments, the tem-
porary regulations provide taxpayers with
greater flexibility in designing certain as-
pects of CSAs. The temporary regulations
also address the treatment of non-conform-
ing intangible development arrangements.
1.Intangible Development Arrangements
other than CSAs — Temp. Treas.
Reg. §§1.482–1T(b)(2)(i) and (iii),
1.482–4T(g), 1.482–7T(b)(5), and
1.482–9T(m)(3)
The 2005 proposed regulations defined
the contractual terms, risk allocations,
and other material provisions of a CSA
covered by the cost sharing rules. While
other intangible development arrange-
ments might be referred to colloquially as
cost sharing arrangements, they were not
to be treated as CSAs by the 2005 pro-
posed regulations unless either a taxpayer
substantially complied with the CSA ad-
ministrative requirements and reasonably
concluded that its arrangement was a CSA,
or a taxpayer substantially complied with
the CSA administrative requirements and
the Commissioner determined to apply the
CSA rules to the arrangement.
Commentators suggested broadening
the scope of intangible development ar-
rangements that meet the CSA definition.
Some commentators urged the regulations
not to define CSA terms and conditions but
to extend CSA treatment to any arrange-
ment that uncontrolled parties might call
a cost sharing arrangement, even though
such arrangement may involve materially
different risk allocations and provisions
than addressed in the cost sharing rules.
Still other commentators, while accept-
ing that the regulations should define the
scope of arrangements treated under the
cost sharing rules, suggested that non-con-
forming arrangements would be subject
only to the general principles of Treas.
Reg. §1.482–1 and would not be gov-
erned by the sections of the regulations
addressed to specific transactional types.
Some commentators also expressed con-
cern that the Commissioner might treat
a non-conforming arrangement as a CSA
even in a situation where that result was
not warranted.
Because the cost sharing rules are de-
signed to provide guidance for specific
types of transactions and arrangements, the
Treasury Department and the IRS continue
to believe that the new rules set forth for
CSAs should apply only to the transac-
tions intended. From the standpoint of
the purpose of the cost sharing rules and
their administrability, it is important that
the rules be applicable only to the defined
scope of intangible development arrange-
ments and apply no more broadly or nar-
rowly than intended. In recognition of tax-
payer concerns, however, the temporary
regulations seek to provide taxpayers with
greater flexibility and scope in the types
and provisions of arrangements that may
qualify as CSAs.
Under Treas. Reg. §1.482–1(b)(2)(ii)
(Selection of category of method appli-
cable to transaction), non-conforming
arrangements are governed by methods
provided in other sections of the regu-
lations under section 482, as applied in
accordance with Treas. Reg. §1.482–1.
See also Treas. Reg. §§1.482–2(d),
3(a), and 4(a), and Temp. Treas. Reg.
§1.482–9T(a). Thus, intangible devel-
opment arrangements, including partner-
ships, outside the scope of the cost sharing
rules are governed by the transfer of in-
tangible rules of Treas. Reg. §1.482–4(a),
or the controlled services provisions of
Temp. Treas. Reg. §1.482–9T, as ap-
propriate. The temporary regulations
make clarifying amendments to Temp.
Treas. Reg. §§1.482–1T(b)(2)(i) and
(iii), 1.482–4T(g), and 1.482–9T(m)(3).
These amendments confirm that Treas.
Reg. §1.482–1 provides principles, not
methods. For methods, reference must be
made to the other sections of the regula-
tions under section 482. While treatment
of a CSA is governed by Temp. Treas.
Reg. §1.482–7T, Temp. Treas. Reg.
§§1.482–4T(g) and 1.482–9T(m)(3), as
appropriate, govern intangible develop-
ment arrangements other than CSAs,
including partnerships.
Nevertheless, the methods and best
method considerations under the cost shar-
ing rules may be adapted for purposes of
the evaluation of non-conforming intan-
gible development arrangements. Impor-
tantly, the temporary regulations provide
that the analysis under the intangible trans-
fer or controlled services provisions, as
applicable, shouldtake into account the
principles, methods, comparability, and re-
liability considerations set forth in Temp.
Treas. Reg. §1.482–7T in determining the
best method for purposes of those provi-
sions, including an unspecified method,
as those methods and considerations may
be appropriately adjusted in light of the
differences in the facts and circumstances
between the non-conforming arrangement
and a CSA.
Finally, Temp.Treas.Reg.
§1.482–7(b)(5) clarifies the circumstances
under which the Commissioner may treat
an arrangement as a CSA, notwithstanding
a technical failure to meet the substan-
tive requirements of a CSA. Namely, the
Commissioner must conclude that the
taxpayer substantially complied with the
CSA administrative requirements and
that application of the CSA rules to such
non-conforming arrangement will provide
the most reliable measure of an arm’s
length result. For these purposes, the
temporary regulations also clarify that
applicable contractual provisions will be
interpreted by reference to economic sub-
stance and the parties’ actual conduct, and
the Commissioner may disregard terms
lacking economic substance and impute
terms consistent with the economic sub-
stance.
2.Territorial and other Divisional
Interests — Temp. Treas. Reg.
§1.482–7T(b)(1)(iii) and (4)
The 2005 proposed regulations required
the controlled participants in a CSA to
receive non-overlapping territorial inter-
ests that entitled eachcontrolled partici-
pant to the perpetual and exclusive right to
the profits in its territory attributable cost
shared intangibles. Commentators sug-
February 17, 20094612009–7 I.R.B.

gested that requiring territorial divisions of
interests was overly restrictive and did not
align with common business models. They
also questioned the need for the non-over-
lapping, perpetual, and exclusivity condi-
tions.
To provide taxpayers with more flexi-
bility in designing qualifying divisional in-
terests, the temporary regulations permit
use of a new basis — the field of use di-
vision of interests — in addition to the ter-
ritorial basis. Further, the regulations also
authorize other non-overlapping divisional
interests provided that the basis used meets
four criteria: (1) the basis must clearly and
unambiguously divide all interests in cost
shared intangibles among the controlled
participants; (2) the consistent use of such
basis can be dependably verified from the
records maintained by the controlled par-
ticipants; (3) the rights of the controlled
participants to exploit cost shared intangi-
bles are non-overlapping, exclusive, and
perpetual; and (4) the resulting benefits as-
sociated with each controlled participant’s
interest in cost shared intangibles are pre-
dictable with reasonable reliability. The
temporary regulationsillustrate instances
in which divisional interests tied to spe-
cific manufacturing facilities, as an exam-
ple, would, and would not, qualify under
these criteria. See Temp. Treas. Reg.
§1.482–7T(b)(4)(v), Examples 2 and 3.
3.Platform and other Contributions —
Temp. Treas. Reg. §1.482–7T(c) and
(g)(2)(ii)
The 2005 proposed regulations de-
scribed external contributions for which
compensation was due from other con-
trolled participants, that is, preliminary
or contemporaneous transactions. A pre-
liminary or contemporaneous transaction
corresponded to the buy-in pursuant to
§1.482–7(g) of the 1995 final regulations.
Under the 2005 proposed regulations, an
external contribution generally consisted
of the rights in the reference transac-
tion (RT) in any resource or capability
reasonably anticipated to contribute to de-
veloping cost shared intangibles. The RT
consisted of a transaction, to be designated
in the CSA documentation, affording the
perpetual and exclusive rights in the sub-
ject resource or capability. While the RT
was relevant to valuing the compensation
obligation under a PCT, the controlled
participants were not required to actu-
ally enter into the RT. Although the RT
assumed perpetual and exclusive rights,
proration was required to the extent that
the subject resource or capability was
reasonably anticipated to contribute both
to the CSA Activity and other business
activities. Evaluation of the preliminary
or contemporaneous transaction compen-
sation obligation for the subject rights
could be in the aggregate with preliminary
or contemporaneous transaction compen-
sation obligation with respect to other
external contributions, or in the aggregate
with the compensation obligations with
respect to other rights, where valuation
on an aggregate basis would provide the
most reliable measure of an arm’s length
result for the aggregated preliminary or
contemporaneous transactions and other
transactions.
Commentators objected to the RT as
overbroad. Commentators further con-
tended that external contributions included
elements such as workforce, goodwill or
going concern value, or business oppor-
tunity, which in the commentators’ view
either do not constitute intangibles, or are
not being transferred, and so, in the com-
mentators’ view, are not compensable.
The temporary regulations replace the
term “external contribution” with the
term “platform contribution” and replace
the term “preliminary or contemporane-
ous transaction” with the term “platform
contribution transaction.” The temporary
regulations, like the 2005 proposed regu-
lations, do not limit platform contributions
that must be compensated in PCTs to the
transfer of intangibles defined in section
936(h)(3)(B). For example, to the extent
a controlled participant (the PCT Payee)
contributes the services of its research
team for purposes of developing cost
shared intangibles pursuant to the CSA,
the other controlled participant (the PCT
Payor) would owe compensation for the
services of such team under Temp. Treas.
Reg. §1.482–9T, just as would be the
case in a contract research arrangement.
Where there is a combined contribution of
research services, intangibles in process,
or other resources, capabilities, or rights,
the temporary regulations provide for an
aggregate valuation where that would pro-
vide the most reliable measure of an arm’s
length result for the aggregated PCTs and
other transactions. The treatment available
under the cost sharing rules of the contri-
bution of the services of a research team
as controlled services is without any in-
ference concerning the potential status of
workforce in place as an intangible within
the meaning of section 936(h)(3)(B).
On the other hand, the temporary reg-
ulations only require the PCT Payor to
compensate the PCTPayee for platform
contributions, or cross operating contribu-
tions, reasonably anticipated to contribute
to the CSA Activity in the PCT Payor’s di-
vision as defined in Temp. Treas. Reg.
§1.482–7T(j)(1)(i). A PCT Payor is not
obligated to compensate the PCT Payee for
any of the PCT Payee’s resources, capabil-
ities, or rights that are reasonably antici-
pated to benefit only the PCT Payee’s op-
erations. Similarly, under the temporary
regulations, the PCT Payee is also not en-
titled to compensation from the PCT Payor
on account of any of the PCT Payor’s own
resources, capabilities, or rights, including
any goodwill or going concern value of the
PCT Payor. For example, where opera-
tions of parties involve undertaking func-
tions and risks of scope and duration com-
parable to those of the PCT Payor, an ap-
plication of the income method based on
the comparable profits method would re-
tain for the PCT Payor the returns reason-
ably anticipated to its own contributions
to operations in its division, including any
goodwill or going concern value associ-
ated with those operations, based on the re-
turns to the comparablepartiesusedinthe
CPM analysis. Similarly, the PCT Payor
retains the ability to pursue its own busi-
ness opportunities in its division, includ-
ing through operating cost contributions to
maintain or develop resources, capabili-
ties, or rights to promote its operations.
In response to comments that the con-
cept of the RT was unnecessary and
confusing, the temporary regulations do
not use that concept. Instead, the tem-
porary regulations adopt a presumption
that a PCT Payee provides any resource,
capability, or right to the intangible de-
velopment activity (IDA) pursuant to the
CSA on an exclusive basis. A taxpayer
can rebut the presumption by showing to
the satisfaction of the Commissioner that
the subject resource,capability, or right
is reasonably anticipated to contribute
not just to the CSA, but to other business
activities as well. For example, if the plat-
form resource is a research tool, then the
2009–7 I.R.B.462February 17, 2009

taxpayer could rebut the presumption of
exclusivity by establishing to the satisfac-
tion of the Commissioner that the tool is
reasonably anticipated not only to be ap-
plied in the IDA, but also to be licensed to
an uncontrolled taxpayer. The temporary
regulations provide guidance on proration
of PCT payments in cases where the tax-
payer rebuts the presumption.
4.Intangible Development Activity and
Costs — Temp. Treas. Reg. §1.482–7T(d)
Some commentators suggested that tax-
payers can limit the application of the cost
sharing rules by defining the IDA with ref-
erence only to specifically listed platform
contributions. Without any inference in-
tended as to the economic substance of
such an approach, the temporary regula-
tions are clarified to exclude this possi-
bility. The scope of the IDA includes
all activities that could reasonably be an-
ticipated to contribute to developing the
reasonably anticipated cost shared intangi-
bles. The IDA cannot be described merely
by a list of particular resources, capabili-
ties, or rights that will be used in the CSA,
since the IDA is a function of what are
the reasonably anticipated cost shared in-
tangibles and such a list might not iden-
tify reasonably anticipated cost shared in-
tangibles. Also, the scope of the IDA may
change as the nature or identity of the rea-
sonably anticipated cost shared intangibles
or the nature of the activities necessary for
their development become clearer. For ex-
ample, the relevance of certain ongoing
work to developing reasonably anticipated
cost shared intangibles or the need for ad-
ditional work may only become clear over
time.
The Treasury Department and the IRS
requested in Notice 2005–99, 2005–2 C.B.
1214 comments regarding the valuation
of stock options and other stock-based
compensation. The Treasury Department
and the IRS received comments and con-
tinue to consider the technical changes
and issues described in Notice 2005–99
andintendtoaddressthoseinasubse-
quent regulations project. See Treas. Reg.
§601.601(d)(2)(ii)(b).
5.Changes in Participation — Temp.
Treas. Reg. §1.482–7T(f)
The increased flexibility to adopt a divi-
sional basis other than a territorial or field
of use basis entails the need for provisions
to prevent abuse and facilitate compli-
ance. Capability fluctuations, whether
market-driven or strategic, that materi-
ally alter the controlled participants’ RAB
shares as compared with their respective
divisional interests create the equivalent
of a controlled transfer of interests and
should therefore equally occasion arm’s
length compensation. Accordingly, the
temporary regulations modify the change
of participation provision to classify such
a material capability variation, in addition
to a controlled transfer of interest, as a
change in participation that requires arm’s
length consideration by the controlled par-
ticipant whose RAB share increases, to the
controlled participant whose RAB share
decreases, as the result of the capability
variation.
C.Income and other Specified and
Unspecified Methods
1.Best Method Analysis Considerations
— Temp. Treas. Reg. §1.482–7T(g)(2)
The 2005 proposed regulations articu-
lated “general principles” — such as the
realistic alternativesprinciple — applica-
ble to any method to determine the arm’s
length charge in a PCT. Commentators ex-
pressed uncertainty about the role intended
for these principles. For example, they
wondered if these principles themselves
dictated, or trumped, methods or applica-
tions of methods.
The temporary regulations clarify that
these principles were intended to provide
supplementary guidance on the application
of the best method rule to determine which
method, or application of a method, pro-
vides the most reliable measure of an arm’s
length result in the CSA context. In other
words, the principles provide best method
considerations to aid the competitive eval-
uation of methods or applications, and are
not themselves methods or trumping rules.
a.Consistency with upfront terms and risk
allocation — the investor model — Temp.
Treas. Reg. §1.482–7T(g)(2)(ii)
The investor model is a core princi-
ple of the 2005 proposed regulations. A
PCT Payor, through cost sharing and pay-
ments made pursuant to the PCT (PCT
Payments), is investing for the term of
the CSA Activity and expects returns over
time consistent with the riskiness of that
investment.
The upfront evaluation pursuant to
the investor model of expected returns
to particular risks assumed in intangible
development and exploitation under the
facts and circumstances is key to ensur-
ing consistency of the results of a CSA
with the arm’s length standard. Commen-
tators have criticized the investor model
for stripping away risky returns from the
PCT Payor. The temporary regulations
provide additional guidance to explain
that when the PCT Payor assumes risks it
accordingly, enjoys the returns (or suffers
the detriments) that may result from such
risks.
For example, in addition to its cost
contributions to developing cost shared
intangibles, a PCT Payor may also commit
significant operating contributions, such
as existing marketing or manufacturing
process intangibles, to operations in its
division as well as make significant op-
erating cost contributions towards further
developing such intangibles. To the extent
parties to comparable transactions under-
take similar risks of similar scope and
duration, the PCT Payor will be appro-
priately awarded based on a method that
relies in whole or part on the returns in
such comparable transactions (including
applications of the income method based
onaCUTortheCPM).Totheextentits
operating contributions are nonroutine,
that is, not reflected in available compara-
ble transactions, then the PCT Payor may
share in nonroutine divisional profit under
the application of the residual profit split
method (RPSM) provided in the tempo-
rary regulations.
Moreover, the temporary regulations
provide guidance on discount rates and
arm’s length ranges, so as to further clarify
the ability of the PCT Payor to achieve
results commensurate with its assumption
of risks.
b.Aggregation of transactions — Temp.
Treas. Reg. §1.482–7T(g)(2)(iv)
The temporary regulations make con-
forming changes to the guidance included
in the 2005 proposed regulations on aggre-
gate evaluation of multiple transactions.
Thus, if the combined effect of transac-
tions in connection with a CSA involving
February 17, 20094632009–7 I.R.B.

platform, operating, and other contribu-
tions of resources, capabilities, or rights
are reasonably anticipated to be inter-
related, then determination of the arm’s
length charge for PCTs and other transac-
tions on an aggregate basis may provide
themostreliablemeasureofanarm’s
length result.
c.Discount rates — Temp. Treas. Reg.
§1.482–7T(g)(2)(v)
The 2005 proposed regulations pro-
vided general guidance that, where a
present value is needed for a purpose in
a cost sharing analysis, a discount rate
should be used that most reliably reflects
the risk of the particular set of activities
or transactions based on all the informa-
tion potentially available at the time for
which the present value calculation is to
be performed. Further, depending on the
particular facts and circumstances, the
discount rate may differ among a com-
pany’s various activities and transactions.
As examples, the proposed regulations
indicated that a weighted average cost of
capital (WACC) of the taxpayer, or an
uncontrolled taxpayer, could provide the
most reliable basis for a discount rate if
the CSA Activity involves the same risk
as projects undertaken by the taxpayer,
or uncontrolled taxpayer, as a whole. As
another example, in certain appropriate
conditions, a company’s internal hurdle
rate for projects of comparable risk might
provide a reliable basis for a discount rate
in a cost sharing analysis.
Commentators offered several criti-
cisms of the discount rate guidance. Some
comments concluded that the 2005 pro-
posed regulations placed an inappropriate
emphasis on a taxpayer’s WACC as a basis
for analysis. Other comments suggested
aclarificationbemadethatmorethana
single discount rate may be appropriate
in a cost sharing analysis. Yet other com-
ments addressed whether a discount rate
in a cost sharing analysis should be before,
or after, tax. Some commentators asserted
that cash flows, rather than items entering
into income, analytically are the more ap-
propriate amounts to be discounted.
The temporary regulations revise and
elaborate upon the best method analysis
considerations in regard to discount rates.
Guidance is provided recognizing that the
appropriate discount rate may, depending
on the facts and circumstances, vary be-
tween realistic alternatives and forms of
payment. As regards discount rate varia-
tion between realistic alternatives, for ex-
ample, licensing intangibles needed for its
operations would ordinarily be less risky
for a licensee, and so require a lower dis-
count rate, than entering into a CSA which
would involve the licensee assuming the
additional risk of funding its cost contri-
butions to the IDA. As regards discount
rate variation between forms of payment,
for example, ordinarily a royalty computed
on a profits base would be more volatile,
and so require a higher discount rate to dis-
count projected payments to present value,
than a royalty computed on a sales base.
The temporary regulations recognize
that, in general, discount rates inferred
from the operations of the capital markets
are post-tax rates. An analysis applying
post-tax discount rates would be expected
to treat taxes like any other expense. How-
ever, the equivalent result may in certain
circumstances be achieved by applying a
post-tax discount rate to pre-tax net in-
come multiplied by the difference of one
minus the tax rate. If such an approach is
adopted in applying the income method, to
the extent that the controlled participants’
respective tax rates are not materially
affected by whether they enter into the
cost sharing or licensing alternative (or
if reliable adjustments may be made for
varying tax rates), the mulitiplier (that
is, one minus the tax rate) may be can-
celled from both sides of the equation of
the cost sharing and licensing alternative
present values. Accordingly, in such cir-
cumstance it is sufficient to apply post-tax
discount rates to pre-tax items for purpose
of equating the cost sharing and licensing
alternatives. See also the discussion of the
income method in this preamble.
The specific reference to a WACC or to
hurdle rates are eliminated as unnecessary,
but without any inference as to a WACC
or a hurdle rate being an appropriate dis-
count rate, or an appropriate starting point
in ascertaining a discount rate, depending
on the particular facts.
Certain methods inthe temporary reg-
ulations (such as the income method un-
der Temp. Treas Reg. §1.482–7T(g)(4))
are theoretically based on valuation tech-
niques that use “cash flow” projections
rather than income projections. While use
of cash flow projections is permitted un-
der these methods, for a number of prac-
tical and administrative reasons, detailed
guidance on the specific applications of the
methods are based on income, rather than
cash flow, measures. The Treasury De-
partment and the IRS considered whether
to provide guidance on the use of cash
flows, rather than income, as the appro-
priate amounts to be discounted in a cost
sharing analysis. The Treasury Depart-
ment and the IRS continue to consider, and
solicit comments, on whether and how the
cost sharing rules could be reliably be ad-
ministered on the basis of cash flows in-
stead of operating income, and whether
such a basis is consistent with the second
sentence of section 482 and its CWI re-
quirement.
d.Projections — Temp. Treas. Reg.
§1.482–7T(g)(2)(vi)
The temporary regulations note that the
reliability of an estimate will often depend
upon the reliability of the projections used
in making the estimate. Projections should
reflect the best estimates of the items pro-
jected (for example, reflecting a proba-
bility weighted average of possible out-
comes).
e.Arm’s length range — Temp. Treas.
Reg. §1.482–7T(g)(2)(ix)
The 2005 proposed regulations pro-
vided supplemental guidance on applying
arm’s length methods in the cost sharing
context in accordance with the provisions
of Treas. Reg. §1.482–1 including,inter
alia, the arm’s length range of Treas. Reg.
§1.482–1(e). The proposed regulations
did not, however, provide guidance on
how to adapt an arm’s length range for
cost sharing.
The temporary regulations adapt the
guidance in Treas. Reg. §1.482–1(e) for
use with some of the methods for com-
puting PCT Payments that are specified in
the temporary regulation. The provisions
elaborate, where the entire range of results
cannot be regarded as of sufficient com-
parability and reliability, how to derive
a statistically enhanced range of arm’s
length charges for a PCT.
The guidance in Treas.Reg.
§1.482–1(e) regarding arm’s length ranges
is most easily understood in the context
of a method (for example, comparable
uncontrolled price, cost plus, resale price,
2009–7 I.R.B.464February 17, 2009

comparable uncontrolled transaction,
comparable profits), in which the result
of each comparable transaction directly
provides an estimate for the result of the
controlled transaction. Some of the meth-
ods specified in the temporary regulations
(for example, the income method) have
a different structure, in which an arm’s
length result is estimated by performing
mathematical calculations that depend on
two or more input parameters (for ex-
ample, a relevant discount rate, certain
financial projections, a return for rou-
tine activities) that must be determined.
The additional guidance in this section
addresses the arm’s length range in the
context of such methods.
The temporary regulations distinguish
certain input parameters (variable input
parameters)that,forpurposesofdeter-
mining an arm’s length range, may be
assigned more than one possible value.
Such input parameters are limited to those
whose value is most reliably determined
by considering two or more observations
of market data (for example, profit levels
or stock betas of two or more compa-
nies) that have, or with adjustment can
be brought to, a similar reliability and
comparability, as described in Treas. Reg.
§1.482–1(e)(2)(ii). If there are two or
more variable input parameters, the nar-
rowing effect of the interquartile range
is used twice: first, to narrow the varia-
tion of each input parameter, and again to
narrow the resulting set of PCT Payment
values. This double narrowing reflects
that the use of two or more variable input
parameters normally introduces additional
unreliability into a method, even though
that method may be the best method.
Generally, Treas. Reg. §1.482–1(e)(3)
governs the Commissioner’s ability to
make an adjustment to a PCT Payment
due to the taxpayer’s results being out-
side the arm’s length range. Consistent
with the principles expressed there, ad-
justment under the temporary regulations
will normally be to the median, as defined
in Treas. Reg. §1.482–1(e)(3). Also, the
Commissioner is not required to establish
an arm’s length range prior to making an
allocation under section 482.
The Treasury Department and the IRS
solicit comments on the design and me-
chanics of the supplemental guidance on
determination of an arm’s length range in
paragraph (g)(2)(ix) of the temporary reg-
ulations, including the limitation of vari-
able input parameters to market-based in-
put parameters. Any alternative proposal
should specify the design and mechanics
in detail, and should discuss whether such
an approach enhances the reliability of the
analysis, is administrable, and is not so ma-
nipulable as to yield unrealistic ranges.
2.Comparable Uncontrolled Transaction
Method — Temp. Treas. Reg.
§1.482–7T(g)(3)
The 2005 proposed regulations pro-
vided for possible use of the comparable
uncontrolled transaction (CUT) method
to determine the arm’s length charge in
a PCT where appropriate in accordance
with the standards of the intangibles trans-
fer and controlled services provisions of
the regulations under section 482. Some
commentators asserted that any arrange-
ment that uncontrolled parties might call a
cost sharing arrangement could serve as a
CUT, even though such arrangement may
involve materially different risk alloca-
tions and provisions than addressed in the
cost sharing rules.
In response to these comments, the tem-
porary regulations describe the relevant
considerations for purposes of evaluating
whether a putative CUT may, or may not,
reflect the most reliable measure of an
arm’s length result. Although all of the
factors entering into a best method analysis
described in Treas. Reg. §§1.482–1(c) and
(d) must be considered, comparability and
reliability under the CUT method in the
CSA context are particularly dependent
on similarity of contractual terms, degree
to which allocation of risks is proportional
to reasonably anticipated benefits from
exploiting the results of intangible devel-
opment, similar period of commitment as
to the sharing of intangible development
risks, and similar scope, uncertainty, and
profit potential of the subject intangible
development, including a similar alloca-
tion of the risks of any existing resources,
capabilities, or rights, as well as of the
risks of developing other resources, capa-
bilities, or rights that would be reasonably
anticipated to contribute to exploitation
within the parties’ divisions, that is con-
sistent with the actual allocation of risks
between the controlled participants as pro-
vided in the CSA in accordance with the
cost sharing rules.
3.Income Method — Temp. Treas. Reg.
§1.482–7T(g)(4)
The 2005 proposed regulations made
the income method a specified method for
purposes of evaluating the arm’s length
charge in a PCT. Under the general rule,
the arm’s length charge was an amount
that equated a controlled participant’s
present value of entering into a CSA with
the present value of the controlled par-
ticipant ’s best realistic alternative. Also
provided were two applications of the
income method. One, based on a CUT
analysis, assumed that a PCT Payee’s best
realistic alternative would be to develop
the cost shared intangibles on its own,
bearing all the intangible development
costs (IDCs) itself, and then license the
cost shared intangibles. A second, based
on a comparable profits method (CPM)
analysis, assumed that the PCT Payor’s
best realistic alternative would be to ac-
quire the rights to external contributions
(renamed platform contributions under the
temporary regulations) for payments with
a present value equal to the PCT Payor’s
anticipated profit, after reward for its rou-
tine contributions to its operations, from
the CSA Activity in its territory (the only
division permitted under the 2005 pro-
posed regulations). Both income method
applications provided for a cost contribu-
tion adjustment in order to allocate to the
PCT Payor the return to its additional risk,
as compared to its realistic alternative, of
bearing its reasonablyanticipated benefits
(RAB) share of the IDCs. As set forth in
the 2005 proposed regulations, both the
CUT and CPM based applications of the
income method built in a conversion to a
royalty form of payment, either on sales
or on operating profit.
Commentators offered several crit-
icisms with reference to the income
method. As a general matter, some com-
ments asserted that the income method
stripped away risky returns from the PCT
Payor. Other comments focused on tech-
nical aspects of the method and the appli-
cations. In particular, comments pointed
to the potential risk differentials between
cost sharing and the alternative arrange-
ments. For example, cost sharing would
generally be more risky than licensing for
the PCT Payor as the result of its sharing
with the PCT Payee the risks of the IDA.
As a corollary, cost sharing would gener-
February 17, 20094652009–7 I.R.B.

ally be less risky for the PCT Payee than
licensing. The comments observed that
these risk differentials would ordinarily be
reflected in different discount rates being
appropriate under the cost sharing and
licensing alternatives. Other comments
suggested the possible use of different dis-
counts for different financial flows (sales,
cost of sales, operating expenses, cost
contributions, etc.).
The temporary regulations provide fur-
ther guidance on the income method and
its applications. In general, they provide
that the best realistic alternative of the PCT
Payor to entering into the CSA would be
to license intangibles to be developed by
an uncontrolled licensor that undertakes
the commitment to bear the entire risk of
intangible development that would other-
wise have been shared under the CSA.
Similarly, the best realistic alternative of
the PCT Payee to entering into the CSA
would be to undertake the commitment to
bear the entire risk of intangible devel-
opment that would otherwise have been
shared under the CSA and license the re-
sulting intangibles to an uncontrolled li-
censee.
The licensing alternative is derived on
the basis of a functional and risk analy-
sis of the cost sharing alternative, but with
a shift of the risk of cost contributions to
the licensor. Accordingly, the PCT Payor’s
licensing alternative consists of entering
into a license with an uncontrolled party,
for a term extending for what would be the
duration of the CSA Activity, to license the
make-or-sell rights in subsequently to be
developed resources,capabilities, or rights
of the licensor. Under such license, the li-
censor would undertake the commitment
to bear the entire risk of intangible devel-
opment that would otherwise have been
shared under the CSA. Apart from the dif-
ference in the allocation of the risks of the
IDA, the licensing alternative should as-
sume contractual provisions with regard to
non-overlapping divisional intangible in-
terests, and with regard to allocations of
other risks, that are consistent with the ac-
tual CSA in accordance with the cost shar-
ing rules. For example, the analysis under
the licensing alternative should assume a
similar allocation of the risks of any ex-
isting resources, capabilities, or rights, as
well as of the risks of developing other re-
sources, capabilities, or rights that would
be reasonably anticipated to contribute to
exploitation within the parties’ divisions,
that is consistent with the actual allocation
of risks between the controlled participants
as provided in the CSA in accordance with
the temporary regulations.
The temporary regulations, like the
2005 proposed regulations, describe both
CUT-based applications and CPM-based
applications of the Income Method. How-
ever, they differ from the applications
described in the 2005 proposed regula-
tions by equating the cost sharing and
licensing alternatives of the PCT Payor
using discount rates appropriate to those
alternatives. In circumstances where the
market-correlated risks as between the
cost sharing and licensing alternatives are
not materially different, a reliable anal-
ysis may be possible by using the same
discount rate with respect to both alter-
natives. Otherwise, as recognized in the
best method considerations concerning
discount rates, realistic alternatives having
the same reasonably anticipated present
value may nevertheless involve varying
risk exposure and, thus, generally are more
reliably evaluated using different discount
rates. To the extent that the controlled
participants’ respective tax rates are not
materially affected by whether they enter
into the cost sharing or licensing alterna-
tive (or reliable adjustments may be made
for varying tax rates), it is appropriate to
apply post-tax discount rates to pre-tax
items for purpose of equating the cost
sharing and licensing alternatives. The
discount rate for the cost sharing alter-
native will generally depend on the form
of PCT Payments assumed (for example,
lumpsum,royaltyonsales,royaltyon
divisional profit).
The income method may be applied to
determine PCT Payments in any form of
payment (for example, lump sum, royalty
on sales, royalty on divisional profit). If
an income method applicationisusedto
determine arm’s length PCT Payments in
a particular form, then the PCT Payments
in that form may be converted to an al-
ternative form in accordance with Temp.
Treas. Reg. §1.482–7(h) (Form of pay-
ment rules).
The temporary regulations clarify the
opportunities, depending on the facts and
circumstances, for the PCT Payor to as-
sume risks and, accordingly, to enjoy the
returns (or suffer the detriments) that may
result from such risks. For example, in
addition to its cost contributions to de-
veloping cost shared intangibles, a PCT
Payor may also commit significant operat-
ing contributions, such as existing market-
ing or manufacturing process intangibles,
to operations in its division as well as make
significant operating cost contributions to-
wards further developing such intangibles.
To the extent partiesto comparable trans-
actions undertake risks of similar scope
and duration, the PCT Payor will be appro-
priately rewarded based on a method that
relies in whole or part on returns in such
comparable transactions under an applica-
tion of the income method whether based
on a CUT or the CPM. Where its operating
contributions are nonroutine, that is, not
reflected in available comparable transac-
tions, the PCT Payor may share in nonrou-
tine divisional profit under the application
of the RPSM provided in the temporary
regulations. Similarly, while the income
method is limited to cases in which only
one of the controlled participants provides
nonroutine platform contributions as the
PCT Payee, the RPSM in the temporary
regulations addresses the situation where
more than one controlled participant fur-
nishes nonroutine platform contributions.
Yet other comments criticized the in-
come method as positing an unrealistic
“perpetual life.” The income method is
premised on the assumption that, at arm’s
length, an investor will make a risky in-
vestment (for example, in a platform for
developing additional technology) only if
the investor reasonably anticipates that the
present value of its reasonably anticipated
operational results will be increased at
least by a present value equal to the plat-
form investment. It may be, depending on
the facts and circumstances, that the tech-
nology is reasonably expected to achieve
an incremental improvement in results for
only a finite period (after which period,
results are reasonably anticipated to return
to the levels that would otherwise have
been expected absent the investment). The
period of enhanced results that justifies
the platform investment in such circum-
stances effectively would correspond to a
finite, not a perpetual, life.
2009–7 I.R.B.466February 17, 2009

4.Acquisition Price and Market
Capitalization Methods — Temp. Treas.
Reg. §1.482–7T(g)(5) and (6)
The 2005 proposed regulations in-
cluded guidance on the acquisition price
and market capitalization methods for
evaluating the arm’s length charge in a
PCT. Under the acquisition price method,
the arm’s length charge for a PCT is the
adjusted acquisition price, that is, the ac-
quisition price increased by the value of
the target’s liabilities on the date of ac-
quisition, and decreased by the value on
that date of target’s tangible property and
any other resources and capabilities not
coveredbythePCT.Underthemarket
capitalization method, the arm’s length
charge for a PCT is the adjusted average
market capitalization, that is, the average
daily market capitalization over the 60
days ending with the date of the PCT, in-
creased by the value of the PCT Payee’s
liabilities on such date, and decreased
on account of tangible property and any
other resources and capabilities of the PCT
Payee not covered by the PCT.
Commentators questioned the reliabil-
ity of these methods in light of volatility
of stock prices and lack of correlation be-
tween stock price and underlying assets,
for example, owing to control premiums or
economies of integration.
The Treasury Department and the IRS
recognize that these comments point to
considerations that, depending on the facts
and circumstances, will need to be taken
into account in a best method analysis
that compares the reliability of the re-
sults under application of these methods
as against the results under application
of other methods (which may themselves
may have aspects that reduce their reliabil-
ity). The temporary regulations retain the
best method considerations from the 2005
proposed regulations that observe that re-
liability is reduced under these methods
if a substantial portion of the target’s, or
PCT Payor’s, nonroutine contributions
to business activities is not required to
be covered by a PCT and, in the case of
the market capitalization method, if the
facts and circumstances demonstrate the
likelihood of a material divergence be-
tween the PCT Payee’s average market
capitalization and the value of its under-
lying resources, capabilities, and rights
for which reliable adjustments cannot be
made. The temporary regulations also
provide that proximity in time between
the acquisition of the target and the PCT
Payment is an important comparability
factor under the acquisition price method.
5.Residual Profit Split Method — Temp.
Treas. Reg. §1.482–7T(g)(7)
The temporary regulations conform the
modified RPSM from the proposed regu-
lations to the changes made to the income
method.
6.Unspecified Methods — Temp. Treas.
Reg. §1.482–7T(g)(8)
Under the temporary regulations in or-
der to use an unspecified method, a tax-
payer must maintain documentation to de-
scribe and explain the method selected to
determine the arm’s length payment due in
aPCT.
D.Form of Payment
1.Post Formation Acquisitions
The 2005 proposed regulations gen-
erally provided taxpayers flexibility to
provide for PCT Payments either in fixed
amounts (whether in lump sums or install-
ment payments with arm’s length interest)
or in contingent amounts. PCT Payments
could not be paid in shares of stock of
the PCT Payor. The form of payment
selected for any PCT, including the basis
and structure of the payments, had to be
specified no later than the date of the PCT.
In the case of a post formation acquisition
(PFA) — that is, an external contribu-
tion (renamed platform contribution in the
temporary regulations) that is acquired by
a controlled participant in an uncontrolled
transaction (either directly, or indirectly
through the acquisition of an interest in
an entity or tier of entities) — the con-
sideration under the PCT for a PFA had
to be paid in the same form as the con-
sideration in the uncontrolled transaction
in which the PFA was acquired. An ex-
ample indicates thatacquisitions for stock
were considered to be for a fixed form of
payment. One principal rationale for the
specialrulesforPFAswasthatPFAsstand
in the place of IDCs and, therefore, reflect
a risk allocation equivalent to that in the
IDC context, which requires the sharing
of outlays on a fixed form of payment
basis. Another principal rationale was the
difficulty the IRS has had in examining
CSAs using a contingent form of payment
for PFAs.
Commentators criticized the same form
of payment requirement for PFAs, espe-
cially the treatment ofstock acquisitions as
having a fixed form of payment. The com-
ments pointed out that a purchaser paying
with its own stock is selling a part of its
business, and thus pays consideration that
is ultimately contingent on the success of
its business. Other comments objected to
the timing mismatch caused by the same
form of payment rule, because fixed PCT
Payments would be immediately includ-
able, but the PFA assets would be amortiz-
able only over time. Still other comments
asserted that taxpayers may choose their
form of payment for PFAs, as with other
external contributions, so long as the price
(taking into account the form of payment)
is arm’s length.
The temporary regulations do not retain
the special rules for PFAs. Subsequent
acquisitions remain an important source
of platform contributions that occasion
the requirement of PCT compensation.
However, the temporary regulations no
longer require a special form of payment
for such compensation. Therefore, con-
trolled participants may choose the form
of payment for PCTs regardless of whether
the PCTs occur at the outset of the CSA
or later. Removal of the special rules for
PFAs moots questions regarding whether
stock consideration should be treated as
contingent or fixed payment and whether
(and how) the timing mismatch should
be addressed. Nonetheless, the IRS will
continue to scrutinize the contractual doc-
umentation, pricing, and implementation
of contingent forms of payment for PFAs.
2.Contingent Payments — Temp. Treas.
Reg. §1.482–7T(h)(2)(iii) and (iv)
The temporary regulations incorporate
rules to ensure that the contingent form
for PCT Payments is applied properly by
both taxpayers and the IRS. In accordance
with Treas. Reg. §1.482–1(d)(3)(iii)(B),
a CSA contractual provision that provides
for payments for a PCT (or group of PCTs)
to be contingent on the exploitation of cost
shared intangibles will be respected as
consistent with economic substance only
if the allocation between the controlled
February 17, 20094672009–7 I.R.B.

participants of the risks attendant on such
form of payment is determinable before
the outcomes of such allocation that would
have materially affected the PCT pricing
are known or reasonably knowable. The
temporary regulations require a contingent
payment provision to clearly and unam-
biguously specify the basis on which the
contingent payment obligations are to be
determined. In particular, the contingent
payment provisionmust clearly and un-
ambiguously specify the events that give
rise to an obligation to make PCT Pay-
ments, the royalty base (such as sales or
revenues), and the computation used to
determine the PCT Payments. The royalty
base specified must permit verification of
its proper use by reference to books and
records maintained by the controlled par-
ticipants in the normal course of business
(for example, books and records main-
tained for financial accounting or business
management purposes).
The temporary regulations also provide
that where a method yields a fixed value
for PCT Payments, a conversion may be
made to a contingent form of payments.
Guidance is also provided on discount
rates for purposes of such conversion.
Certain forms of payment may involve
different risks than others. For example,
ordinarily a royalty computed on a prof-
its base would be more volatile, and so
require a higher discount rate to discount
projected payments to present value, than
a royalty computed on a sales base.
E.Periodic Adjustments
1.Determination of Periodic Adjustments
— Temp. Treas. Reg. §1.482–7T(i)(6)(v)
and (vi)
The 2005 proposed regulations ad-
dressed the CWI principle of the second
sentence of section 482 in the context of
cost sharing. The Commissioner could
make periodic adjustments for an open
taxable year (the Adjustment Year) and
all subsequent years of the CSA Activity
in the event of a Periodic Trigger. Under
the 2005 proposed regulations, a Periodic
Trigger arose if the PCT Payor realized,
over the period beginning with the earliest
date on which an IDC occurred through
the end of the Adjustment Year, an actu-
ally experienced return ratio of the present
value of its total territorial operating prof-
its divided by the present value of its
investment consisting of the sum of its cost
contributions plus PCT Payments, outside
the periodic return ratio range of between
.5 and 2. In arriving at these present
values, the Commissioner would use an
applicable discount rate, which in the case
of certain publicly traded entities would
be their weighted average cost of capital,
unless the Commissioner determines, or
the controlled participants establish, that
another discount rate better reflects the
degree of risk of the CSA Activity. Pe-
riodic adjustments would be determined
under a modified RPSM. Exceptions were
provided, such as for an effective CUT
or for results due to extraordinary events
beyond the controlled participants’ control
and that could not have been reasonably
anticipated. In determining whether to
make any periodic adjustments, the Com-
missioner would consider whether the
outcome as adjusted more reliably reflects
an arm’s length result under all the rele-
vant facts and circumstances.
Commentators offered several criti-
cisms of the periodic adjustment rules.
Some comments considered the periodic
adjustment rules to be inconsistent with
the arm’s length standard and, through
hindsight, to strip away returns to risk.
Other comments claimed for taxpayers the
same ability as the Commissioner to make
periodic adjustments to implement the
CWI principle where subsequent results
diverge from original expectations. Com-
ments also addressed the exceptions and
means for taxpayers to demonstrate their
resultswerearm’slengthsoastoavoid
periodic adjustments.
The Treasury Department and the IRS
reaffirm that the CWI principle is consis-
tent, and periodic adjustments are to be
administered consistently, with the arm’s
length standard. Congress adopted the
CWI principle in 1986 out of concern
about related-party long-term transfers of
high-profit potential intangibles for rela-
tively insignificant lump sum or royalty
consideration justified by reference to pu-
tatively comparable transactions between
unrelated parties that differed significantly
in terms of the division of functionality
and risks when compared to the transfers
at issue. See H.R. Rep. 99–426, at 424–25
(1985). See also Notice 88–123 (the White
Paper), 1988–2 C.B. 458, 472–74, 477–80.
Congress intended that taxpayers be able
to “use certainbona fidecost-sharing ar-
rangements as an appropriate method of
allocating income attributable to intan-
gibles among related parties, if and to
the extent such agreements are consistent
with the purposes of this provision that
the income allocated among the parties
reasonably reflect the actual economic
activity undertaken by each.” H.R. Conf.
Rep. No. 99–841, at II–638 (1986). See
Treas. Reg. §601.601(d)(2)(ii)(b).
Accordingly, the temporary regulations
continue to provide for periodic adjust-
ments along lines similar to those in the in-
tangible transfer section of the regulations,
as adapted for the cost sharing context.
Compare Treas. Reg. §1.482–4(f)(2) (Pe-
riodic adjustments). The temporary reg-
ulations, however, adopt a smaller peri-
odic return ratio range than the 2005 pro-
posed regulations. Setting a Periodic Trig-
ger to occur if the actually experienced re-
turn ratio falls outside the periodic return
ratio range of between .667 and 1.5 (or
between 0.8 and 1.25, if the taxpayer has
not substantially complied with the docu-
mentation requirements of Temp. Treas.
Reg. §1.482–7T(k)) is intended to iso-
late situations in which actual results sug-
gest the potential of an absence of arm’s
length pricing as of the date of the PCT.
The Treasury Department and the IRS con-
sider that the periodic return ratio range
under the temporary regulations more real-
istically targets the threshold at which peri-
odic adjustment scrutiny is appropriate. In
determining whether to make any periodic
adjustments, the Commissioner considers
whether the outcome as adjusted more re-
liably reflects an arm’s length result under
all the relevant facts and circumstances.
The temporary regulations also make
conforming changes to the determination
of periodic adjustments, in the event of a
Periodic Trigger, in light of other changes
in the temporary regulations, for example,
in the RPSM and form of payment provi-
sions.
2.Advance Pricing Agreement
In addition, the Treasury Department
and the IRS intend to issue by revenue pro-
cedure separate published guidance that
provides an exception to periodic adjust-
ments, similar to exceptions provided in
Temp. Treas. Reg. §1.482–7T(i)(6)(vi),
in the context of an advance pricing agree-
2009–7 I.R.B.468February 17, 2009

ment (APA) entered into pursuant to Rev.
Proc. 2006–9, 2006–1 C.B. 278 (as it may
be amended or superseded by subsequent
administrative pronouncement). The guid-
ance would provide that no periodic ad-
justments will be made in any year based
on a Trigger PCT that is a covered trans-
action under the APA. See Treas. Reg.
§601.601(d)(2)(ii)(b).
An APA process generally is contempo-
raneous with a taxpayer’s original transac-
tions and involves transparency concern-
ing a taxpayer’s upfront efforts to conform
to the arm’s length standard. Thus, the
APA process may overcome the asymme-
try in information addressed by the peri-
odic adjustment provisions, eliminating a
primary basis for a CWI adjustment. See
generally 70 FR 51128–51130 (preamble
to 2005 proposed regulations).
The Treasury Department and the
IRS considered the possibility of a fur-
ther exception to periodic adjustments
based on documentation that a tax-
payer would maintain contemporane-
ously with a PCT. Compare Treas. Reg.
§1.6662–6(d)(2)(iii). Such an exception
was not incorporated into the temporary
regulations in light of the concern that
documentationpreparedonlybythetax-
payer would not benefit from a similar
degree of contemporaneous transparency
and explanation as involved in an APA.
The Treasury Department and the IRS
continue to consider this matter and solicit
comments on whether and how a docu-
mentation exception could be adapted to
the purposes of the CWI principle.
F.Terminology and Table of Definitions
— Temp. Treas. Reg. §1.482–7T(j)(1)
For ease of reference, a comprehensive
table of terms is provided. The table sets
forth, alphabetically, technical terms used
in the regulations, any applicable abbrevia-
tions, definitions (if not elsewhere defined
in the regulations), and cross references to
relevant portions of the regulations where
the terms are defined or used.
G.Administrative and Transition Rules —
Temp. Treas. Reg. §1.482–7T(m)
The 2005 proposed regulations in-
cluded transition rules for existing quali-
fied cost sharing arrangements so as not
to disturb taxpayers’ reliance on the prior
regulations, while providing for appro-
priate prospective application of the new
regulations. Grandfather treatment would
have been terminated in certain events,
including the occasion of a Periodic Trig-
ger as the result of a subsequent PCT
occurring after the regulations’ effective
date, a material change in the scope of the
arrangement, such as a material expan-
sion of the activities undertaken beyond
the scope of the intangible development
area, or a 50 percent or greater change in
the ownership of interests in cost shared
intangibles.
Commentators objected to the grandfa-
ther termination events, in particular in the
case of a subsequent Periodic Trigger or a
50 percent change of ownership, as defeat-
ing taxpayers’ legitimate expectation un-
der the prior regulations.
The temporary regulations do not ter-
minate grandfather treatment upon a 50
percent change of ownership or on account
of a subsequent Periodic Trigger or a ma-
terial change in scope of the arrangement.
The temporary regulations instead adopt
a targeted provision that applies the tem-
porary regulations’ periodic adjustment
rules to PCTs that occur on or after the
date of a material change in the scope of
the grandfathered CSA. A material change
in scope would include a material expan-
sion of the activities undertaken beyond
the scope of the intangible development
area, as described in former Treas. Reg.
§1.482–7(b)(4)(iv). For this purpose, a
contraction of the scope of a CSA, absent
a material expansion into one or more
lines of research and development beyond
the scope of the intangible development
area, does not constitute a material change
in scope of the CSA. Whether a material
change in scope has occurred is deter-
mined on a cumulative basis. Therefore,
a series of expansions, any one of which
is not a material expansion by itself, may
collectively constitute a material expan-
sion.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has been determined
also that section 553(b) of the Adminis-
trative Procedure Act(5 U.S.C. chapter 5)
does not apply to these regulations. For
the applicability of the Regulatory Flexi-
bility Act (5 U.S.C. chapter 6) refer to the
Special Analyses section of the preamble
to the cross-referenced notice of proposed
rulemaking published in this issue of the
Bulletin. Pursuant to section 7805(f) of the
Internal Revenue Code, these regulations
will be submitted to the Chief Counsel for
Advocacy of the Small Business Adminis-
tration for comment on its impact on small
business.
Drafting Information
The principal author of these tempo-
rary regulations is Kenneth P. Christman
of the Office of Chief Counsel (Interna-
tional). However, other personnel from the
Treasury Department and the IRS partici-
pated in their development.
*****
Amendment to the Regulations
Accordingly, 26 CFR parts 1, 301, and
602 are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.482–7A also issued under
26 U.S.C. 482. * * *
Par. 2. Section 1.367(a)–1 is added to
read as follows:
§1.367(a)–1 Transfers to foreign
corporations subject to section 367(a):
In general.
(a) through (d)(2) [Reserved].
(3) [Reserved] For further guidance, see
§1.367(a)–1T(d)(3).
(d)(4) through (g) [Reserved].
Par 3. Section 1.367(a)–1T is amended
by revising the second sentence of para-
graph (d)(3) to read as follows:
§1.367(a)–1T Transfers to foreign
corporations subject to section 367(a): In
general (temporary).
*****
(d) * * *
(3) * * * A person’s entering into a cost
sharing arrangement under §1.482–7T or
February 17, 20094692009–7 I.R.B.

acquiring rights to intangible property un-
der such an arrangement shall not be con-
sidered a transfer of property described in
section 367(a)(1). * * *
*****
Par. 4. Section 1.482–0 is amended by
adding the entries for §§1.482–1(b)(2)(iii),
1.482–2(e) and (f), 1.482–4(g) and (h) and
revising the entries for §1.482–7 to read as
follows:
§1.482–0 Outline of regulations under
section 482.
*****
§1.482–1 Allocation of income and
deductions among taxpayers.
*****
(b) * * *
(2)* * *
(iii) [Reserved]. For further guid-
ance, see §1.482–0T, the entry for
§1.482–1T(b)(2)(iii).
*****
§1.482–2 Determination of taxable
income in specific situations.
*****
(e) and (f) [Reserved]. For further
guidance, see §1.482–0T, the entries for
§1.482–2T(e) and (f).
*****
§1.482–4 Methods to determine taxable
income in connection with a transfer of
intangible property.
*****
(g)and(h)[Reserved]. Forfurther
guidance, see §1.482–0T, the entries for
§1.482–4T(g) and (h).
*****
§1.482–7 Methods to determine taxable
income in connection with a cost sharing
arrangement.
[Reserved]. For further guidance, see
§1.482–0T, the entries for §1.482–7T.
*****
Par. 5. Section 1.482–0T is amended as
follows:
1.Theentriesfor
§§1.482–1T(b)(2)(iii), (c), (d)(1), (d)(2),
(d)(3)(ii)(A), and (d)(3)(ii)B are revised.
2. A new entry for §1.482–1T(b)(2)(iii)
is added.
3. The entries for §1.482–2T(e) are re-
vised, and new entries for §1.482–2T(f)
are added.
4. The entries for §1.482–4T(f)(7) are
removed, and the entries for §1.482–4T(g)
and (h) are added.
5. The entries for §1.482–7T are added.
6. The entries for §1.482–9T(m)(3) and
(n) are revised.
The additions and revisions read as fol-
lows:
§1.482–0T Outline of regulations under
section 482 (temporary).
*****
§1.482–1T Allocation of income and
deductions among taxpayers (temporary).
*****
(b) * * *
(2)* * *
(ii) [Reserved]. For further guid-
ance, see §1.482–0, the entry for
§1.482–1(b)(2)(ii).
(iii) Coordination of methods applica-
ble to certain intangible development ar-
rangements.
(c) through (d)(3)(ii)(B) [Reserved].
For further guidance, see §1.482–0,
the entries for §1.482–1(c) through
(d)(3)(iii)(B).
*****
§1.482–2T Determination of taxable
income in specific situations (temporary).
*****
(e) Cost sharing arrangement.
(f) Effective/applicability Date.
(1) In general.
(2)Electiontoapplyparagraph(b)to
earlier taxable years.
(3) Expiration date.
*****
§1.482–4T Methods to determine taxable
income in connection with a transfer of
intangible property (temporary).
*****
(g) Coordination with rules governing
cost sharing arrangements.
(h) Effective/applicability date.
(1) In general.
(2) Election to apply regulation to ear-
lier taxable years.
(3) Expiration date.
*****
§1.482–7T Methods to determine taxable
income in connection with a cost sharing
arrangement (temporary).
(a) In general.
(1) RAB share method for cost sharing
transactions (CSTs).
(2) Methods for platform contribution
transactions (PCTs).
(3) Methods for other controlled trans-
actions.
(i) Contribution to a CSA by a con-
trolled taxpayer that is not a controlled par-
ticipant.
(ii) Transfer of interest in a cost shared
intangible.
(iii) Other controlled transactions in
connection with a CSA.
(iv) Controlled transactions in the ab-
sence of a CSA.
(4) Coordination with the arm’s length
standard.
(b) Cost sharing arrangement.
(1) Substantive requirements.
(i) CSTs.
(ii) PCTs.
(iii) Divisional interests.
(iv) Examples.
(2) Administrative requirements.
(3)DateofaPCT.
(4) Divisional interests.
(i) In general.
(ii) Territorial based divisional inter-
ests.
(iii) Field of use based divisional inter-
ests.
(iv) Other divisional bases.
(v) Examples.
(5) Treatment of certain arrangements
as CSAs.
(i) Situation in which Commissioner
must treat arrangement as a CSA.
(ii)SituationinwhichCommissioner
may treat arrangement as a CSA.
(iii) Examples.
(6) Entity classification of CSAs.
(c) Platform contributions.
(1) In general.
(2) Terms of platform contributions.
(i) Presumed to be exclusive.
(ii) Rebuttal of Exclusivity.
2009–7 I.R.B.470February 17, 2009

(iii) Proration of PCT Payments to the
extent allocable to other business activi-
ties.
(A) In general.
(B) Determining the proration of PCT
Payments.
(3) Categorization of the PCT.
(4) Certain make-or-sell rights ex-
cluded.
(i) In general.
(ii) Examples.
(5) Examples.
(d) Intangible development costs.
(1) Determining whether costs are
IDCs.
(i) Definition and scope of the IDA.
(ii) Reasonably anticipated cost shared
intangible.
(iii) Costs included in IDCs.
(iv) Examples.
(2) Allocation of costs.
(3) Stock-based compensation.
(i) In general.
(ii) Identification of stock-based com-
pensation with the IDA.
(iii) Measurement and timing of stock-
based compensation IDC.
(A) In general.
(1) Transfers to which section 421 ap-
plies.
(2) Deductions of foreign controlled
participants.
(3) Modification of stock option.
(4) Expiration or termination of CSA.
(B) Election with respect to options on
publicly traded stock.
(1) In general.
(2) Publicly traded stock.
(3) Generally accepted accounting prin-
ciples.
(4) Time and manner of making the
election.
(C) Consistency.
(4) IDC share.
(5) Examples.
(e) Reasonably anticipated benefits
share.
(1) Definition.
(i) In general.
(ii) Examples.
(2) Measure of benefits.
(i) In general.
(ii) Indirect bases for measuring antici-
pated benefits.
(A) Units used, produced, or sold.
(B) Sales.
(C) Operating profit.
(D) Other bases for measuring antici-
pated benefits.
(E) Examples.
(iii) Projections used to estimate bene-
fits.
(A) In general.
(B) Examples.
(f) Changes in participation under a
CSA.
(1) In general.
(2) Controlled transfer of interests.
(3) Capability variation.
(4) Arm’s length consideration for a
change in participation.
(5) Examples.
(g) Supplemental guidance on methods
applicable to PCTs.
(1) In general.
(2) Best method analysis applicable for
evaluation of a PCT pusuant to a CSA.
(i) In general.
(ii) Consistency with upfront contrac-
tual terms and risk allocations — the in-
vestor model.
(A) In general.
(B) Examples.
(iii) Consistency of evaluation with re-
alistic alternatives.
(A) In general.
(B) Examples.
(iv) Aggregation of transactions.
(v) Discount rate.
(A) In general.
(B) Considerations in best method anal-
ysis of discount rates.
(1) Discount rate variation between re-
alistic alternatives.
(2) Discount rate variation between
forms of payment.
(3) Post-tax rate.
(C) Example.
(vi) Financial projections.
(vii) Accounting principles.
(A) In general.
(B) Examples.
(viii) Valuations of subsequent PCTs.
(A)DateofsubsequentPCT.
(B) Best method analysis for subse-
quent PCT.
(ix) Arm’s length range.
(A) In general.
(B) Methods based on two or more in-
put parameters.
(C) Variable input parameters.
(D) Determination of arm’s length PCT
Payment.
(1) No variable input parameters.
(2) One variable input parameter.
(3) More than one variable input param-
eter.
(E) Adjustments.
(x) Valuation undertaken on a pre-tax
basis.
(3) Comparable uncontrolled transac-
tion method.
(4) Income method.
(i) In general.
(A) Equating cost sharing and licensing
alternatives.
(B) Cost sharing alternative.
(C) Licensing alternative.
(D) Only one controlled participant
with nonroutine platform contributions.
(E) Income method payment forms.
(F) Discount rates appropriate to cost
sharing and licensing alternatives.
(G) The effect of taxation on determin-
ing the arm’s length amount.
(ii) Evaluation of PCT Payor’s cost
sharing alternative.
(iii) Evaluation of PCT Payor’s licens-
ing alternatives.
(A) Evaluation based on CUT.
(B) Evaluation based on CPM.
(iv) Lump sum payment form.
(v) Best method analysis considera-
tions.
(vi) Routine platform and operating
contributions.
(vii) Examples.
(5) Acquisition Price Method.
(i) In general.
(ii) Determination of arm’s length
charge.
(iii) Adjusted acquisition price.
(iv) Best method analysis considera-
tion.
(v) Examples.
(6) Market capitalization method.
(i) In general.
(ii) Determination of arm’s length
charge.
(iii) Average market capitalization.
(iv) Adjusted average market capital-
ization.
(v) Best method analysis consideration.
(vi) Examples.
(7) Residual profit split method.
(i) In general.
(ii) Appropriate share of profits and
losses.
(iii) Profit split.
(A) In general.
(B) Determine nonroutine residual divi-
sional profit or loss.
February 17, 20094712009–7 I.R.B.

(C) Allocate nonroutine residual divi-
sional profit or loss.
(1) In general.
(2) Relative value determination.
(3) Determination of PCT Payments.
(4) Routine platform and operating con-
tributions.
(iv) Best method analysis considera-
tions.
(A) In general.
(B) Comparability.
(C) Data and assumptions.
(D) Other factors affecting reliability.
(v) Examples.
(8) Unspecified methods.
(h)Formofpaymentrules.
(1) CST Payments.
(2) PCT Payments.
(i) In general.
(ii) No PCT Payor stock.
(iii) Specified form of payment.
(A) In general.
(B) Contingent payments.
(C) Examples.
(iv) Conversion from fixed to contin-
gent form of payment.
(3) Coordination of best method rule
and form of payment.
(i) Allocations by the Commissioner in
connection with a CSA.
(1) In general.
(2) CST allocations.
(i) In general.
(ii) Adjustments to improve the relia-
bility of projections used to estimate RAB
shares.
(A) Unreliable projects.
(B) Foreign-to-foreign adjustments.
(C) Correlative adjustments to PCTs.
(D) Examples.
(iii) Timing of CST allocations.
(3) PCT allocations.
(4) Allocations regarding changes in
participation under CSA.
(5) Allocations when CSTs are consis-
tently and materially disproportionate to
RAB shares.
(6) Periodic adjustments.
(i) In general.
(ii) PRRR.
(iii) AERR.
(A) In general.
(B) PVTP.
(C) PVI.
(iv) ADR.
(A) In general.
(B) Publicly traded companies.
(C) Publicly traded.
(D) PCT Payor WACC.
(E) Generally accepted accounting
principles.
(v) Determination of periodic adjust-
ments.
(A) In general.
(B) Adjusted RPSM as of Determina-
tion Date.
(vi) Exceptions to periodic adjustments.
(A) Controlled participants establish
periodic adjustment not warranted.
(1) Transactions involving the same
platform contribution as in the Trigger
PCT.
(2) Results not reasonably anticipated.
(3) Reduced AERR does not cause Pe-
riodic Trigger.
(4) Increased AERR does not cause Pe-
riodic Trigger.
(B) Circumstances in which Periodic
Trigger deemed not to occur.
(1) 10-year period.
(2) 5-year period.
(vii) Examples.
(j) Definitions and special rules.
(1) Definitions.
(i) In general.
(ii) Examples.
(2) Special rules.
(i) Consolidated group.
(ii) Trade or business.
(iii) Partnership.
(3) Character.
(i) CST Payments.
(ii) PCT Payments.
(iii) Examples.
(k) CSA administrative requirements.
(1) CSA contractual requirements.
(i) In general.
(ii) Contractual provisions.
(iii) Meaning of contemporaneous.
(A) In general.
(B) Example.
(iv) Interpretation of contractual provi-
sions.
(A) In general.
(B) Examples.
(2) CSA documentation requirements.
(i) In general.
(ii) Additional CSA documentation re-
quirements.
(iii) Coordination rules and production
of documents.
(A) Coordination with penalty regula-
tions.
(B) Production of documentation.
(3) CSA accounting requirements.
(i) In general.
(ii) Reliance on financial accounting.
(4) CSA reporting requirements.
(i) CSA Statement.
(ii) Content of CSA Statement.
(iii) Time for filing CSA Statement.
(A) 90-day rule.
(B) Annual return requirement.
(1) In general.
(2) Special filing rule for annual return
requirement.
(iv) Examples.
(l) Effective/applicability date.
(m) Transition rule.
(1) In general.
(2) Transitional modification of appli-
cable provisions.
(3) Special rule for certain periodic ad-
justments.
(n) Expiration date.
*****
§1.482–9T Methods to determine taxable
income in connection with a controlled
services transaction (temporary).
*****
(m)***
(3) Coordination with rules governing
cost sharing arrangements.
***
(n) Effective/applicability dates.
Par. 6. Section 1.482–1 is amended
by revising the last sentence of paragraph
(c)(1) to read as follows:
§1.482–1 Allocation of income and
deductions among taxpayers
.
*****
(c) * * *
(1) * * * See §1.482–7T for the appli-
cable methods in the case of a cost sharing
arrangement.
*****
Par. 7. Section 1.482–1T is amended
by:
1. Revising paragraphs (b)(2)(i),
(b)(2)(ii), (c), (d)(1), (d)(2), (d)(3)(i),
(d)(3)(ii) and (j)(6)(iii).
2. Adding a new paragraph (b)(2)(iii).
3. Adding a new sentence to the end of
paragraph (j)(6)(i).
The additions and revisions read as fol-
lows:
2009–7 I.R.B.472February 17, 2009

§1.482–1T Allocation of income and
deductions among taxpayers (temporary).
*****
(b) * * *
(2)Arm’s length methods—(i)Meth-
ods. Sections 1.482–2 through 1.482–6,
1.482–7T, and 1.482–9T provide specific
methods to be used to evaluate whether
transactions between or among members
of the controlled group satisfy the arm’s
lengthstandard,andiftheydonot,tode-
termine the arm’s length result. Section
1.482–1 and this section provide general
principles applicable in determining arm’s
length results of such controlled trans-
actions, but do not provide methods, for
which reference must be made to those
other sections in accordance with para-
graphs (b)(2)(ii) and (iii) of this section.
Section 1.482–7T provides the specific
methods to be used to evaluate whether
a cost sharing arrangement as defined in
§1.482–7T produces results consistent
with an arm’s length result.
(ii) [Reserved]. For further guidance,
see §1.482–1(c) through (d)(3)(ii)(C)Ex-
ample 1and2.
(iii)Coordination of methods applica-
ble to certain intangible development ar-
rangements. Section 1.482–7T provides
the specific methods to be used to de-
termine arm’s length results of controlled
transactions in connection with a cost shar-
ing arrangement as defined in §1.482–7T.
Sections 1.482–4 and 1.482–9T, as appro-
priate, provide the specific methods to be
used to determine arm’s length results of
arrangements, including partnerships, for
sharing the costs and risks of developing
intangibles, other than a cost sharing ar-
rangement covered by§1.482–7T. See also
§§1.482–4T(g) (Coordination with rules
governing cost sharing arrangements) and
1.482–9T(m)(3) (Coordination with rules
governing cost sharing arrangements).
(c) through (d)(3)(ii)(C)Examples 1
and2. [Reserved]. For further guidance,
see §1.482–1(c) through (d)(3)(ii)(C)Ex-
ample 1and2.
*****
(j) * * *
(6) * * *
(i) * * * The provision of paragraph
(b)(2)(iii) of this section is generally appli-
cable on January 5, 2009.
*****
(iii) Except as noted in the succeeding
sentence, the applicability of §1.482–1T
expires on or before July 31, 2009. The
applicability of paragraph (b)(2)(iii) of this
section expires on or before December 30,
2011.
*****
Par. 8. Section 1.482–2T is amended as
follows:
1. Paragraph (e) is redesignated as para-
graph (f) and newly-designated paragraph
(f) is revised.
2. New paragraph (e) is added.
The addition and revision reads as fol-
lows:
§1.482–2T Determination of taxable
income in specific situations (temporary)..
*****
(e)Cost sharing arrangement.For
rules governing allocations under section
482 to reflect an arm’s length considera-
tion for controlled transactions involving a
cost sharing arrangement, see §1.482–7T.
(f)Effective/applicability date—(1)In
general. The provision of paragraph (b) of
this section is generally applicable for tax
years beginning after December 31, 2006.
The provision of paragraph (e) of this sec-
tion is generally applicable on January 5,
2009.
(2)Election to apply paragraph (b)
to earlier taxable years.Apersonmay
elect to apply the provisions of paragraph
(b) of this section to earlier taxable years
in accordance with the rules set forth in
§1.482–9T(n)(2).
(3)Expiration date. The applicability
of paragraph (b) of this section expires on
or before July 31, 2009. The applicability
of paragraph (e) of this section expires on
or before December 30, 2011.
Par. 9. Section 1.482–4T is amended as
follows:
1. Paragraph (f)(3)(i)(B) is revised.
2. Paragraph (f)(7) is removed.
3. New paragraphs (g) and (h) are
added.
The additions and revision reads as fol-
lows:
§1.482–4T Methods to determine taxable
income in connection with a transfer of
intangible property (temporary).
*****
(f) * * *
(3) * * *
(i) * * *
(B)Cost sharing arrangements.The
rules in this paragraph (f)(3) regarding
ownership with respect to cost shared in-
tangibles and cost sharing arrangements
will apply only as provided in §1.482–7T.
*****
(g)Coordination with rules govern-
ing cost sharing arrangements
. Section
1.482–7T provides the specific methods to
be used to determine arm’s length results
of controlled transactions in connection
with a cost sharing arrangement. This sec-
tion provides the specific methods to be
used to determine arm’s length results of
a transfer of intangible property, including
in an arrangement forsharing the costs
and risks of developing intangibles other
than a cost sharing arrangement covered
by §1.482–7T. In the case of such an ar-
rangement, consideration of the principles,
methods, comparability, and reliability
considerations set forth in §1.482–7T is
relevant in determining the best method,
including an unspecified method, under
this section, as appropriately adjusted in
light of the differences in the facts and
circumstances between such arrangement
and a cost sharing arrangement.
(h)Effective/applicability date—(1)In
general. Except as provided in the suc-
ceeding sentence, the provisions of para-
graphs (f)(3) and (4) of this section are
generally applicable for taxable years be-
ginning after December 31, 2006. The pro-
visions of paragraphs (f)(3)(i)(B) and (g)
of this section are generally applicable on
January 5, 2009.
(2)Election to apply regulation to ear-
lier taxable years. A person may elect to
apply the provisions of paragraphs (f)(3)
and (4) of this section to earlier taxable
years in accordance with the rules set forth
in §1.482–9T(n)(2).
(3)Expiration date. The applicability
of this section expires on or before Decem-
ber 30, 2011.
Par. 10. Section 1.482–5 is amended
by revising the last sentence of paragraph
(c)(2)(iv) to read as follows:
§1.48
2–5 Comparable profits method.
*****
(c) * * *
(2) * * *
February 17, 20094732009–7 I.R.B.

(iv) * * * As another example, it may be
appropriate to adjust the operating profit
of a party to account for material differ-
ences in the utilization of or accounting
for stock-based compensation (as defined
by §1.482–7T(d)(3)(i)) among the tested
party and comparable parties.
*****
Par. 11. Section 1.482–7 is redesig-
nated §1.482–7A, and an undesignated
centerheading preceding §1.482–7A is
added to read as follows:
Regulations applicable on or before
January 4, 2009.
Par. 12. Section 1.482–7T is added to
read as follows:
§1.482–7T Methods to determine taxable
income in connection with a cost sharing
arrangement (temporary).
(a)In general. The arm’s length
amount charged in a controlled transaction
reasonably anticipated to contribute to
developing intangibles pursuant to a cost
sharing arrangement (CSA), as described
in paragraph (b) of this section, must be
determined under a method described in
this section. Each method must be ap-
plied in accordance with the provisions of
§1.482–1, except as those provisions are
modified in this section.
(1)RAB share method for cost shar-
ing transactions (CSTs). See paragraph
(b)(1)(i) of this section regarding the re-
quirement that controlled participants, as
defined in section (j)(1)(i) of this section,
share intangible development costs (IDCs)
in proportion to their shares of reason-
ably anticipated benefits (RAB shares)
by entering into costsharing transactions
(CSTs).
(2)Methods for platform contribution
transactions (PCTs). The arm’s length
amount charged in a platform contribu-
tion transaction (PCT) described in para-
graph (b)(1)(ii) of this section must be de-
termined under the method or methods ap-
plicable under theother section or sec-
tions of the section 482 regulations, as sup-
plemented by paragraph (g) of this sec-
tion. See §1.482–1(b)(2)(ii) (Selection of
category of method applicable to transac-
tion), §1.482–1T(b)(2)(iii) (Coordination
of methods applicable to certain intangi-
ble development arrangements), and para-
graph (g) of this section (Supplemental
guidance on methods applicable to PCTs).
(3)Methods for other controlled trans-
actions—(i)Contribution to a CSA by a
controlled taxpayer that is not a controlled
participant. If a controlled taxpayer that
is not a controlled participant contributes
to developing a cost shared intangible,
as defined in section (j)(1)(i) of this sec-
tion, it must receive consideration from
the controlled participants under the rules
of §1.482–4T(f)(4) (Contribution to the
value of an intangible owned by another).
Such consideration will be treated as an
intangible development cost for purposes
of paragraph (d) of this section.
(ii)Transfer of interest in a cost shared
intangible. If at any time (during the term,
or upon or after the termination, of a CSA)
a controlled participant transfers an inter-
est in a cost shared intangible to another
controlled taxpayer, the controlled partici-
pant must receive an arm’s length amount
of consideration from the transferee un-
der the rules of §§1.482–1 and 1.482–4
through 1.482–6 as supplemented by para-
graph (f)(4) of this section regarding arm’s
length consideration for a change in par-
ticipation. For this purpose, a capability
variation described inparagraph (f)(3) of
this section is considered to be a controlled
transfer of interests in cost shared intangi-
bles.
(iii)Other controlled transactions in
connection with a CSA. Controlled trans-
actions between controlled participants
that are not PCTs or CSTs (for example,
provision of a cross operating contribu-
tion, as defined in paragraph (j)(1)(i) of
this section, or make-or-sell rights) require
arm’s length consideration from the latter
controlled participant under the rules of
§§1.482–1, 1.482–4 through 1.482–6, and
1.482–9T as supplemented by paragraph
(g)(2)(iv) of this section.
(iv)Controlled transactions in the ab-
sence of a CSA. If a controlled transac-
tion is reasonably anticipated to contribute
to developing intangibles pursuant to an
arrangement that is not a CSA described
in paragraph (b)(1) or (5) of this section,
whether the results of any such controlled
transaction are consistent with an arm’s
length result must be determined under the
applicable rules of the other sections of
the regulations under section 482. For
example, an arrangement for developing
intangibles in which one controlled tax-
payer’s costs of developing the intangi-
bles significantly exceeds its share of rea-
sonably anticipated benefits from exploit-
ing the developed intangibles would not in
substance be a CSA, as described in para-
graphs (b)(1)(i) through (iii) of this section
or paragraph (b)(5)(i) of this section. In
such a case, unless the rules of this sec-
tion are applicable by reason of paragraph
(b)(5) of this section, the arrangement must
be analyzed under other applicable sec-
tions of regulations under section 482 to
determine whether it achieves arm’s length
results, and if not, to determine any alloca-
tions by the Commissioner that are consis-
tent with such other regulations under sec-
tion 482. See §§1.482–1(b)(2)(ii) (Selec-
tion of category of method applicable to
transaction) and 1.482–1T(b)(2)(iii) (Co-
ordination of methods applicable to certain
intangible development arrangements).
(4)Coordination with the arm’s length
standard. A CSA produces results that
are consistent with an arm’s length result
within the meaning of §1.482–1(b)(1) if,
and only if, each controlled participant’s
IDC share (as determined under paragraph
(d)(4) of this section) equals its RAB
share, each controlled participant com-
pensates its RAB share of the value of all
platform contributionsby other controlled
participants, and all other requirements of
this section are satisfied.
(b)Cost sharing arrangement.Acost
sharing arrangement is an arrangement
by which controlled participants share the
costs and risks of developing cost shared
intangibles in proportion to their RAB
shares. An arrangement is a CSA if and
only if the requirements of paragraphs
(b)(1) through (4) of this section are met.
(1)Substantive requirements—(i)
CSTs. All controlled participants must
commit to, and in fact, engage in cost shar-
ing transactions. In CSTs, the controlled
participants make payments to each other
(CST Payments) as appropriate, so that in
each taxable year each controlled partic-
ipant’s IDC share is in proportion to its
respective RAB share.
(ii)PCTs. All controlled participants
must commit to, and in fact, engage in
platform contributions transactions to the
extent that there are platform contributions
pursuant to paragraph (c) of this section.
In a PCT, each other controlled participant
(PCT Payor) is obligated to, and must in
fact, make arm’s length payments (PCT
Payments) to each controlled participant
(PCT Payee) that provides a platform con-
2009–7 I.R.B.474February 17, 2009

tribution. For guidance on determining
such arm’s length obligation, see para-
graph (g) of this section.
(iii)Divisional interests.Each
controlled participant must receive a
non-overlapping interest in the cost shared
intangibles without further obligation to
compensate another controlled participant
for such interest.
(iv)Examples. The following examples
illustrate the principles of this paragraph
(b)(1):
Example 1. Company A and Company B, who
are members of the same controlled group, execute
an agreement to jointly develop vaccine X and own
the exclusive rights to commercially exploit vaccine
X in their respective territories, which together com-
prise the whole world. The agreement provides that
they will share some, but not all, of the costs for
developing Vaccine X in proportion to RAB share.
Such agreement is not a CSA because Company A
and Company B have not agreed to share all of the
IDCs in proportion to their respective RAB shares.
Example 2. Company A and Company B agree
to share all the costs of developing Vaccine X. The
agreement also provides for employing certain re-
sources and capabilities of Company A in this pro-
gram including a skilled research team and certain
research facilities, and provides for Company B to
make payments to Company A in this respect. How-
ever, the agreement expressly provides that the pro-
gram will not employ, and so Company B is expressly
relieved of the payments in regard to, certain software
developed by Company A as a medical research tool
to model certain cellular processes expected to be im-
plicated in the operation of Vaccine X even though
such software would reasonably be anticipated to be
relevant to developing Vaccine X and, thus, would be
a platform contribution. See paragraph (c) of this sec-
tion. Such agreement is not a CSA because Company
A and Company B have not engaged in a necessary
PCT for purposes of developing Vaccine X.
Example 3. Companies C and D, who are mem-
bers of the same controlled group, enter into a CSA.
In the first year of the CSA, C and D conduct the in-
tangible development activity, as described in para-
graph (d)(1) of this section. The total IDCs in re-
gard to such activity are $3,000,000 of which C and
D pay $2,000,000 and $1,000,000, respectively, di-
rectly to third parties. As between C and D, how-
ever, their CSA specifies that they will share all IDCs
in accordance with their RAB shares (as described
in paragraph (e)(1) of this section), which are 60%
for C and 40% for D. It follows that C should bear
$1,800,000 of the total IDCs (60% of total IDCs of
$3,000,000) and D should bear $1,200,000 of the total
IDCs (40% of total IDCs of $3,000,000). D makes a
CST payment to C of $200,000, that is, the amount by
which D’s share of IDCs in accordance with its RAB
share exceeds the amount of IDCs initially borne by
D ($1,200,000 - $1,000,000), and which also equals
the amount by which the total IDCs initially borne by
C exceeds its share of IDCS in accordance with its
RAB share ($2,000,000 - $1,800,000). As a result of
D’s CST payment to C, the IDC shares of C and D are
in proportion to their respective RAB shares.
(2)Administrative requirements.The
CSA must meet the requirements of para-
graph (k) of this section.
(3)Date of a PCT. The controlled par-
ticipants must enter into a PCT as of the
earliest date on or after the CSA is entered
into on which a platform contribution is
reasonably anticipated to contribute to de-
veloping cost shared intangibles.
(4)Divisional interests—(i)In general.
Pursuant to paragraph (b)(1)(iii) of this
section, each controlled participant must
receive a non-overlapping interest in the
cost shared intangibles without further
obligation to compensate another con-
trolled participant for such interest. Each
controlled participant must be entitled to
the perpetual and exclusive right to the
profits from transactions of any member
of the controlled group that includes the
controlled participant with uncontrolled
taxpayers to the extent that such profits
are attributable to such interest in the cost
shared intangibles.
(ii)Territorial based divisional inter-
ests. The CSA may divide all interests
in cost shared intangibles on a territorial
basis as follows. The entire world must be
divided into two or more non-overlapping
geographic territories. Each controlled
participant must receive at least one such
territory, and in the aggregate all the par-
ticipants must receive all such territories.
Each controlled participant will be as-
signed the perpetual and exclusive right to
exploit the cost shared intangibles through
the use, consumption, or disposition of
property or services in its territories. Thus,
compensation will be required if other
members of the controlled group exploit
the cost shared intangibles in such terri-
tory.
(iii)Field of use based divisional inter-
ests. The CSA may divide all interests in
cost shared intangibles on the basis of all
uses (whether or not known at the time of
the division) to which cost shared intangi-
bles are to be put as follows. All antici-
pated uses of cost shared intangibles must
be identified. Each controlled participant
must be assigned at least one such antici-
pated use, and in the aggregate all the par-
ticipants must be assigned all such antic-
ipated uses. Each controlled participant
will be assigned the perpetual and exclu-
sive right to exploit the cost shared intan-
gibles through the use or uses assigned to it
and one controlled participant must be as-
signed the exclusive and perpetual right to
exploit cost shared intangibles through any
unanticipated uses.
(iv)Other divisional bases.(A)Inthe
event that the CSA does not divide inter-
ests in the cost shared intangibles on the
basis of exclusive territories or fields of
use as described in paragraphs (b)(4)(ii)
and (iii) of this section, the CSA may
adopt some other basis on which to divide
all interests in the cost shared intangibles
among the controlled participants, pro-
vided that each of the following criteria is
met:
(1) The basis clearly and unambigu-
ously divides all interests in cost shared
intangibles among the controlled partici-
pants.
(2) The consistent use of such basis
for the division of all interests in the cost
shared intangibles can be dependably ver-
ified from the records maintained by the
controlled participants.
(3) The rights of the controlled partici-
pants to exploit cost shared intangibles are
non-overlapping, exclusive, and perpetual.
(4) The resulting benefits associated
with each controlled participant’s interest
in cost shared intangibles are predictable
with reasonable reliability.
(B) See paragraph (f)(3) of this sec-
tion for rules regarding the requirement
of arm’s length consideration for changes
in participation in CSAs involving divi-
sions of interest described in this para-
graph (b)(4)(iv).
(v)Examples. The following examples
illustrate the principles of this paragraph
(b)(4):
Example 1. Companies P and S, both members
of the same controlled group, enter into a CSA to de-
velop product Z. Under the CSA, P receives the in-
terest in product Z in the United States and S receives
the interest in product Z in the rest of the world, as
described in paragraph (b)(4)(ii) of this section. Both
P and S have plants for manufacturing product Z lo-
cated in their respective geographic territories. How-
ever, for commercial reasons, product Z is neverthe-
less manufactured by P in the United States for sale to
customers in certain locations just outside the United
States in close proximity to P’s U.S. manufacturing
plant. Because S owns the territorial rights outside
the United States, P must compensate S to ensure that
S realizes all the cost shared intangible profits from
P’s sales of product Z in S’s territory. The pricing
of such compensation must also ensure that P real-
izes an appropriate return for its manufacturing ef-
forts. Benefits projected with respect to such sales
will be included for purposes of estimating S’s, but
not P’s, RAB share.
February 17, 20094752009–7 I.R.B.

Example 2. ThefactsarethesameasinExam-
ple 1except that P and S agree to divide their inter-
est in product Z based on site of manufacturing. P
will have exclusive and perpetual rights in product
Z manufactured in facilities owned by P. S will have
exclusive and perpetual rights to product Z manufac-
tured in facilities owned by S. P and S agree that nei-
ther will license manufacturing rights in product Z to
any related or unrelated party. Both P and S maintain
books and records that allow production at all sites
to be verified. Both own facilities that will manu-
facture product Z and the relative capacities of these
sites are known. All facilities are currently operating
at near capacity and are expected to continue to oper-
ate at near capacity when product Z enters production
so that it will not be feasible to shift production be-
tween P’s and S’s facilities. P and S have no plans
to build new facilities and the lead time required to
plan and build a manufacturing facility precludes the
possibility that P or S will build a new facility during
the period for which sales of Product Z are expected.
Based on these facts, this basis for the division of in-
terests in Product Z is a division described in para-
graph (b)(4)(iv) of this section. The basis for the di-
vision of interest is unambiguous and clearly defined
and its use can be dependably verified. P and S both
have non-overlapping, exclusive and perpetual rights
in Product Z. The division of interest results in the
participant’s relative benefits being predictable with
reasonable reliability.
Example 3. The facts are the same as inExample
2except that P’s and S’s manufacturing facilities are
not expected to operate at full capacity when product
Z enters production. Production of Product Z can be
shifted at any time between sites owned by P and sites
owned by S, although neither P nor S intends to shift
production as a result of the agreement. The division
of interests in Product Z between P and S based on
manufacturing site is not a division described in para-
graph (b)(4)(iv) of this section because their relative
shares of benefits are not predictable with reasonable
reliability. The fact that neither P nor S intends to
shift production is irrelevant.
(5)Treatment of certain arrangements
as CSAs—(i)Situation in which Commis-
sioner must treat arrangement as a CSA.
The Commissioner must apply the rules of
this section to an arrangement among con-
trolled taxpayers if the administrative re-
quirements of paragraph (b)(2) of this sec-
tion are met with respect to such arrange-
ment and the controlled taxpayers reason-
ably concluded that such arrangement was
a CSA meeting the requirements of para-
graphs (b)(1), (3), and (4) of this section.
(ii)Situation in which Commissioner
may treat arrangement as a CSA.Forar-
rangements among controlled taxpayers
not described in paragraph (b)(5)(i) of this
section, the Commissioner may apply the
provisions of this section if the Commis-
sioner concludes that the administrative
requirements of paragraph (b)(2) of this
section are met, and, notwithstanding
technical failure to meet the substantive
requirements of paragraph (b)(1), (3), or
(4) of this section, the rules of this section
will provide the most reliable measure of
an arm’s length result. See §1.482–1(c)(1)
(the best method rule). For purposes of
applying this paragraph (b)(5)(ii), any
such arrangement shall be interpreted by
reference to paragraph (k)(1)(iv) of this
section.
(iii)Examples. The following examples
illustrate the principles of this paragraph
(b)(5). In the examples, assume that Com-
panies P and S are both members of the
same controlled group.
Example 1. (i) P owns the patent on a formula for
a capsulated pain reliever, P-Cap. P reasonably antic-
ipates, pending further research and experimentation,
that the P-Cap formula could form the platform for a
formula for P-Ves, an effervescent version of P-Cap.
P also owns proprietary software that it reasonably
anticipates to be critical to the research efforts. P and
S execute a contract that purports to be a CSA by
which they agree to proportionally share the costs and
risks of developing a formula for P-Ves. The agree-
ment reflects the various contractual requirements de-
scribed in paragraph (k)(1) of this section and P and
S comply with the documentation, accounting, and
reporting requirements of paragraphs (k)(2) through
(4) of this section. Both the patent rights for P-Cap
and the software are reasonably anticipated to con-
tribute to the development of P-Ves and therefore are
platform contributions for which compensation is due
from S as part of PCTs. Though P and S enter into and
implement a PCT for the P-Cap patent rights that sat-
isfies the arm’s length standard, they fail to enter into
a PCT for the software.
(ii) In this case, P and S have substantially com-
plied with the contractual requirements of paragraph
(k)(1) of this section and the documentation, account-
ing, and reporting requirements of paragraphs (k)(2)
through (4) of this section and therefore have met the
administrative requirements of paragraph (b)(2) of
this section. However, because they did not enter into
a PCT, as required under paragraphs (b)(1)(ii) and
(b)(3) of this section, for the software that was rea-
sonably anticipated to contribute to the development
of P-Ves (see paragraph (c) of this section), they can-
not reasonably conclude that their arrangement was a
CSA. Accordingly, the Commissioner is not required
under paragraph (b)(5)(i) of this section to apply the
rules of this section to their arrangement.
(iii) Nevertheless, the arrangement between P and
S closely resembles a CSA. If the Commissioner con-
cludes that the rules of this section provide the most
reliable measure of an arm’s length result for such ar-
rangement, then pursuant to paragraph (b)(5)(ii) of
this section, the Commissioner may apply the rules
of this section and treat P and S as entering into a
PCT for the software in accordance with the require-
ments of paragraph (b)(1)(ii) of this section, and make
any appropriate allocations under paragraph (i) of this
section. Alternatively, the Commissioner may con-
clude that the rules of this section do not provide the
most reliable measure of an arm’s length result. In
such case, the arrangement would be analyzed under
the methods under other sections of the 482 regula-
tions to determine whetherthe arrangement reaches
an arm’s length result.
Example 2. The facts are the same asExample
1except that P and S do enter into and implement a
PCT for the software as required under this paragraph
(b). The Commissioner determines that the PCT Pay-
ments for the software were not arm’s length; never-
theless, under the facts and circumstances at the time
they entered into the CSA and PCTs, P and S rea-
sonably concluded their arrangement to be a CSA.
Because P and S have met the requirements of para-
graph (b)(2) of this section and reasonably concluded
their arrangement is a CSA, pursuant to paragraph
(b)(5)(i) of this section, the Commissioner must ap-
ply the rules of this section to their arrangement. Ac-
cordingly, the Commissioner treats the arrangement
as a CSA and makes adjustments to the PCT Pay-
ments as appropriate under this section to achieve an
arm’s length result for the PCT for the software.
Example 3. (i) The facts are the same asExam-
ple 1except that P and S do enter into a PCT for the
software as required under this paragraph (b). The
agreement entered into by P and S provides for a fixed
consideration of $50 million per year for four years,
payable at the end of each year. This agreement sat-
isfies the arm’s length standard. However, S actually
pays P consideration at the end of each year in the
form of four annual royalties equal to two percent of
sales. While such royalties at the time of the PCT
were expected to be $50 million per year, actual sales
during the first year were less than anticipated and the
first royalty payment was only $25 million.
(ii) In this case, P and S failed to implement the
terms of their agreement. Under these circumstances,
P and S could not reasonably conclude that their
arrangement was a CSA, as described in paragraph
(b)(1) of this section. Accordingly, the Commis-
sioner is not required under paragraph (b)(5)(i) of
this section to apply the rules of this section to their
arrangement.
(iii) Nevertheless, the arrangement between P
and S closely resembles a CSA. If the Commissioner
concludes that that the rules of this section provide
the most reliable measure of an arm’s length result
for such arrangement, then pursuant to paragraph
(b)(5)(ii) of this section, the Commissioner may
apply the rules of this section and make any appro-
priate allocations under paragraph (i) of this section.
Alternatively, the Commissioner may conclude that
the rules of this section do not provide the most
reliable measure of an arm’s length result. In such
case, the arrangement would be analyzed under the
methods under other sections of the 482 regulations
to determine whether the arrangement reaches an
arm’s length result.
Example 4. (i) The facts are the same as inExam-
ple 1except that P does not own proprietary software
and P and S use a method for determining the arm’s
length amount of the PCT Payment for the P-Cap
patent rights different from the method used inEx-
ample 1.
(ii) P and S determine that the arm’s length
amount of the PCT Payments for the P-Cap patent is
$10 million. However, the IRS determines the best
method for determining the arm’s length amount of
the PCT Payments for the P-Cap patent rights and
under such method the arm’s length amount is $100
million. To determine this $10 million present value,
P and S assumed a useful life of eight years for
2009–7 I.R.B.476February 17, 2009

the platform contribution, because the P-Cap patent
rights will expire after eight years. However, use
of the P-Cap patent rights in research is expected to
lead to benefits attributable to exploitation of the cost
shared intangibles extending many years beyond the
expiration of the P-Cap patent, because use of the
P-Cap patent rights will let P and S bring P-Ves to
market before the competition, and because P and
S expect to apply for additional patents covering
P-Ves, which would bar competitors from selling that
product for many future years. The assumption by
P and S of a useful life for the platform contribution
that is less than the anticipated period of exploitation
of the cost shared intangibles is contrary to paragraph
(g)(2)(ii) of this section, and reduces the reliability
ofthemethodusedbyPandS.
(iii) The method used by P and S employs a de-
clining royalty. The royalty starts at 8% of sales,
based on an application of the CUT method in which
the purported CUTs all involve licenses to manufac-
ture and sell the current generation of P-Cap, and de-
clines to 0% over eight years, declining by 1% each
year. Such make-or-sell rights are fundamentally dif-
ferent from use of the P-Cap patent rights to gen-
erate a new product. This difference raises the is-
sue of whether the make-or-sell rights are sufficiently
comparable to the rights that are the subject of the
PCT Payment. See §1.482–4(c)(4). While a royalty
rate for make-or-sell rights can form the basis for a
reliable determination of an arm’s length PCT Pay-
ment in the CUT-based implementation of the income
method described in paragraph (g)(4) of this section,
under that method such royalty rate does not decline
to zero. Therefore, the use of a declining royalty rate
based on an initial rate for make-or-sell rights further
reduces the reliability of the method used by P and S.
(iv) Sales of the next-generation product are not
anticipated until after seven years, at which point the
royalty rate will have declined to 1%. The tempo-
ral mismatch between the period of the royalty rate
decline and the period of exploitation raises further
concerns about the method’s reliability.
(v) For the reasons given in paragraphs (ii)
through (iv) of thisExample 4, the method used by P
and S is so unreliable and so contrary to provisions
of this section that P and S could not reasonably
conclude that they had contracted to make arm’s
length PCT Payments as required by paragraphs
(b)(1)(ii) and (b)(3) of this section, and thus could
not reasonably conclude that their arrangement was a
CSA. Accordingly, the Commissioner is not required
under paragraph (b)(5)(i) of this section to apply the
rules of this section to their arrangement.
(vi) Nevertheless, the arrangement between P
and S closely resembles a CSA. If the Commissioner
concludes that that the rules of this section provide
the most reliable measure of an arm’s length result
for such arrangement, then pursuant to paragraph
(b)(5)(ii) of this section, the Commissioner may ap-
ply the rules of this section and make any appropriate
allocations under paragraph (i) of this section. Al-
ternatively, the Commissioner may conclude that the
rules of this section do not provide the most reliable
measure of an arm’s length result. In such case, the
arrangement would be analyzed under the methods
under other section 482 regulations to determine
whether the arrangement reaches an arm’s length
result.
(6)Entity classification of CSAs.See
§301.7701–1(c) of this chapter for the clas-
sification of CSAs for purposes of the In-
ternal Revenue Code.
(c)Platform contributions-(1)In gen-
eral. A platform contribution is any re-
source, capability, or right that a controlled
participant has developed, maintained, or
acquired externally to the intangible devel-
opment activity (whether prior to or dur-
ing the course of the CSA) that is rea-
sonably anticipated to contribute to devel-
oping cost shared intangibles. The deter-
mination whether a resource, capability,
or right is reasonably anticipated to con-
tribute to developing cost shared intangi-
bles is ongoing and based on the best avail-
able information. Therefore, a resource,
capability, or right reasonably determined
not to be a platform contribution as of an
earlier point in time, may be reasonably de-
termined to be a platform contribution at
a later point in time. The PCT obligation
regarding a resource or capability or right
once determined to be a platform contribu-
tion does not terminate merely because it
may later be determined that such resource
or capability or right has not contributed,
and no longer is reasonably anticipated to
contribute, to developing cost shared in-
tangibles. Notwithstanding the other pro-
visions of this paragraph (c), platform con-
tributions do not include rights in land or
depreciable tangible property, and do not
include rights in other resources acquired
by IDCs. See paragraph (d)(1) of this sec-
tion.
(2)Terms of platform contribu-
tions—(i)Presumed to be exclusive.For
purposes of a PCT, the PCT Payee’s provi-
sion of a platform contribution is presumed
to be exclusive. Thus, it is presumed that
the platform resource, capability, or right
is not reasonably anticipated to be com-
mitted to any business activities other than
the CSA Activity, as defined in paragraph
(j)(1)(i) of this section, whether carried
out by the controlled participants, other
controlled taxpayers, or uncontrolled tax-
payers.
(ii)Rebuttal of exclusivity.Thecon-
trolled participants may rebut the pre-
sumption set forth in paragraph (c)(2)(i)
of this section to the satisfaction of the
Commissioner. For example, if the plat-
form resource is a research tool, then the
controlled participants could rebut the
presumption by establishing to the satis-
faction of the Commissioner that, as of
the date of the PCT, the tool is reasonably
anticipated not only to contribute to the
CSA Activity but also to be licensed to an
uncontrolled taxpayer. In such case, the
PCT Payments may need to be prorated as
described in paragraph (c)(2)(iii) of this
section.
(iii)Proration of PCT Payments to the
extent allocable to other business activi-
ties—(A)In general. Some transfer pric-
ingmethodsemployedtodeterminethe
arm’s length amount of the PCT Payments
do so by considering the overall value of
the platform contributions as opposed to,
for example, the value of the anticipated
use of the platform contributions in the
CSA Activity. Such a transfer pricing
method is consistent with the presumption
that the platform contribution is exclusive
(that is, that the resources, capabilities or
rights that are the subject of a platform
contribution are reasonably anticipated to
contribute only to the CSA Activity). See
paragraph (c)(2)(i) of this section (Terms
of platform contributions — Presumed to
be exclusive). The PCT Payments deter-
mined under such transfer pricing method
mayhavetobeproratedifthecontrolled
participants can rebut the presumption that
the platform contribution is exclusive to
the satisfaction of the Commissioner as
provided in paragraph (c)(2)(ii) of this sec-
tion. In the case of a platform contribution
that also contributes to lines of business of
a PCT Payor that are not reasonably antic-
ipated to involve exploitation of the cost
shared intangibles, the need for explicit
proration may in some cases be avoided
through aggregation of transactions. See
paragraph (g)(2)(iv) of this section (Ag-
gregation of transactions).
(B)Determining the proration of PCT
Payments. Proration will be done on a
reasonable basis in proportion to the rel-
ative economic value, as of the date of
the PCT, reasonably anticipated to be de-
rived from the platform contribution by the
CSA Activity as compared to the value
reasonably anticipated to be derived from
the platform contribution by other busi-
ness activities. In the case of an aggre-
gate valuation done under the principles
of paragraph (g)(2)(iv) of this section that
addresses payment for resources, capabil-
ities, or rights used for business activities
other than the CSA Activity (for example,
the right to exploit an existing intangible
February 17, 20094772009–7 I.R.B.

without further development), the prora-
tion of the aggregate payments may have
to reflect the economic value attributable
to such resources, capabilities, or rights
as well. For purposes of the best method
rule under §1.482–1(c), the reliability of
the analysis under a method that requires
proration pursuant to this paragraph is re-
duced relative to the reliability of an anal-
ysis under a method that does not require
proration.
(3)Categorization of the PCT. For pur-
poses of §1.482–1(b)(2)(ii) and paragraph
(a)(2) of this section, a PCT must be identi-
fied by the controlled participants as a par-
ticular type of transaction (for example, a
license for royalty payments). See para-
graph (k)(2)(ii)(H) of this section. Such
designation must be consistent with the
actual conduct of the controlled partici-
pants. If the conduct is consistent with
different, economically equivalent types
of transaction, then the controlled partici-
pants may designate the PCT as being any
of such types of transaction. If the con-
trolled participants fail to make such des-
ignation in their documentation, the Com-
missioner may make a designation con-
sistent with the principles of paragraph
(k)(1)(iv) of this section.
(4)Certain make-or-sell rights ex-
cluded—(i)In general. Any right to ex-
ploit an existing intangible without further
development, such as the right to make,
replicate, license or sell existing products,
does not constitute a platform contribution
to a CSA, and the arm’s length compen-
sation for such rights (make-or-sell rights)
does not satisfy the compensation obliga-
tion under a PCT.
(ii)Examples. The following examples
illustrate the principles of this paragraph
(c)(4):
Example 1.P and S, which are members of the
same controlled group, execute a CSA. Under the
CSA,PandSwillbeartheirRABsharesofIDCs
for developing the second generation of ABC, a com-
puter software program. Prior to that arrangement,
P had incurred substantial costs and risks to develop
ABC. Concurrent with entering into the arrangement,
P (as the licensor) executes a license with S (as the li-
censee) by which S may make and sell copies of the
existing ABC. Such make-or-sell rights do not consti-
tute a platform contribution to the CSA. The rules of
§§1.482–1 and 1.482–4 through 1.482–6 must be ap-
plied to determine the arm’s length consideration in
connection with the make-or-sell licensing arrange-
ment. In certain circumstances, this determination
of the arm’s length consideration may be done on
an aggregate basis with the evaluation of compensa-
tion obligations pursuant to the PCTs entered into by
P and S in connection with the CSA. See paragraph
(g)(2)(iv) of this section.
Example 2. (i) P, a software company, has devel-
oped and currently exploits software program ABC.
P and S enter into a CSA to develop future genera-
tions of ABC. The ABC source code is the platform
on which future generations of ABC will be built and
is therefore a platform contribution of P for which
compensation is due from S pursuant to a PCT. Con-
current with entering into the CSA, P licenses to S the
make-or-sell rights for the current version of ABC.
P has entered into similar licenses with uncontrolled
parties calling for sales-based royalty payments at a
rate of 20%. The current version of ABC has an ex-
pected product life of three years. P and S enter into
a contingent payment agreement to cover both the
PCT Payments due from S for P’s platform contri-
bution and payments due from S for the make-or-sell
license. Based on the uncontrolled make-or-sell li-
censes,PandSagreeonasales-basedroyaltyrateof
20% in Year 1 that declines on a straight line basis to
0% over the 3 year product life of ABC.
(ii) The make-or-sell rights for the current version
of ABC are not platform contributions, though para-
graph (g)(2)(iv) of this section provides for the possi-
bility that the most reliable determination of an arm’s
length charge for the platform contribution and the
make-or-sell license may be one that values the two
transactions in the aggregate. A contingent payment
schedule based on the uncontrolled make-or-sell li-
censes may provide an arm’s length charge for the
separate make-or-sell license between P and S, pro-
vided the royalty rates in the uncontrolled licenses
similarly decline, but as a measure of the aggregate
PCT and license payments it does not account for
the arm’s length value of P’s platform contributions
which include the rights in the source code and future
development rights in ABC.
(5)Examples. The following examples
illustrate the principles of this paragraph
(c). In each example, Companies P and S
are members of the same controlled group,
and execute a CSA providing that each
will have the exclusive right to exploit cost
shared intangibles in its own territory. See
paragraph (b)(4)(ii) of this section (Terri-
torial based divisional interests).
Example 1. Company P has developed and cur-
rently markets version 1.0 of a new software appli-
cation XYZ. Company P and Company S execute a
CSA under which they will share the IDCs for de-
veloping future versions of XYZ. Version 1.0 is rea-
sonably anticipated to contribute to the development
of future versions of XYZ and therefore Company
P’s rights in version 1.0 constitute a platform contri-
bution from Company P that must be compensated
by Company S pursuant to a PCT. Pursuant to para-
graph (c)(3) of this section, the controlled partici-
pants designate the platform contribution as a transfer
of intangibles that would otherwise be governed by
§1.482–4, if entered into by controlled parties. Ac-
cordingly, pursuant to paragraph (a)(2) of this sec-
tion, the applicable method for determining the arm’s
length value of the compensation obligation under the
PCT between Company P and Company S will be
governed by §1.482–4 as supplemented by paragraph
(g) of this section. Absent a showing to the contrary
by P and S, the platform contribution in this case is
presumed to be the exclusive provision of the bene-
fit of all rights in version 1.0, other than the rights
described in paragraph (c)(4) of this section (Certain
make-or-sell rights excluded). This includes the right
to use version 1.0 for purposes of research and the
exclusive right in S’s territory to exploit any future
products that incorporated the technology of version
1.0, and would cover a term extending as long as the
controlled participants were to exploit future versions
of XYZ or any other product based on the version 1.0
platform. The compensation obligation of Company
S pursuant to the PCT will reflect the full value of
the platform contribution, as limited by Company S’s
RAB share.
Example 2. Company P and Company S execute
a CSA under which they will share the IDCs for de-
veloping Vaccine Z. Company P will commit to the
project its research team that has successfully devel-
oped a number of other vaccines. The expertise and
existing integration of the research team is a unique
resource or capability of Company P which is reason-
ably anticipated to contribute to the development of
Vaccine Z. Therefore, P’s provision of the capabilities
of the research team constitute a platform contribu-
tion for which compensation is due from Company S
as part of a PCT. Pursuant to paragraph (c)(3) of this
section, the controlled parties designate the platform
contribution as a provision of services that would oth-
erwise be governed by §1.482–9T(a) if entered into
by controlled parties. Accordingly, pursuant to para-
graph (a)(2) of this section, the applicable method for
determining the arm’s length value of the compensa-
tion obligation under the PCT between Company P
and Company S will be governed by §1.482–9T(a) as
supplemented by paragraph (g) of this section. Ab-
sent a showing to the contrary by P and S, the plat-
form contribution in this case is presumed to be the
exclusive provision of the benefits by Company P of
its research team to the development of Vaccine Z.
Because the IDCs include the ongoing compensation
of the researchers, the compensation obligation un-
der the PCT is only for the value of the commitment
of the research team by Company P to the CSA’s de-
velopment efforts net of such researcher compensa-
tion. The value of the compensation obligation of
Company S for the PCT will reflect the full value of
the provision of services, as limited by Company S’s
RAB share.
(d)Intangible development costs—(1)
Determining whether costs are IDCs.
Costs included in IDCs are determined by
reference to the scope of the intangible
development activity (IDA).
(i)Definition and scope of the IDA.For
purposes of this section, the IDA means
the activity under the CSA of developing
or attempting to developreasonably antici-
pated cost shared intangibles. The scope of
the IDA includes all of the controlled par-
ticipants’ activities that could reasonably
be anticipated to contribute to developing
the reasonably anticipated cost shared in-
tangibles. The IDA cannot be described
merely by a list of particular resources,
capabilities, or rights that will be used in
2009–7 I.R.B.478February 17, 2009

the CSA, because such a list would not
identify reasonably anticipated cost shared
intangibles. Also, the scope of the IDA
may change as the nature or identity of the
reasonably anticipated cost shared intan-
gibles changes or the nature of the activ-
ities necessary for their development be-
come clearer. For example, the relevance
of certain ongoing work to developing rea-
sonably anticipated cost shared intangibles
or the need for additional work may only
become clear over time.
(ii)Reasonably anticipated cost shared
intangible. For purposes of this section,
reasonably anticipated cost shared in-
tangiblemeans any intangible, within
the meaning of §1.482–4(b), that, at the
applicable point in time, the controlled
participants intend to develop under the
CSA. Reasonably anticipated cost shared
intangibles may change over the course
of the CSA. The controlled participants
may at any time change the reasonably
anticipated cost shared intangibles but
must document any such change pursuant
to paragraph (k)(2)(ii)(A)(1)ofthissec-
tion. Removal of reasonably anticipated
cost shared intangibles does not affect the
controlled participants’ interests in cost
shared intangibles already developed un-
der the CSA. In addition, the reasonably
anticipated cost shared intangibles auto-
matically expand to include the intended
result of any further development of a
cost shared intangible already developed
under the CSA, or applications of such
an intangible. However, the controlled
participants may override this automatic
expansion in a particular case if they
separately remove specified further devel-
opment of such intangible (or specified
applications of such intangible) from the
IDA, and document such separate removal
pursuant to paragraph (k)(2)(ii)(A)(3)of
this section.
(iii)Costs included in IDCs. For pur-
posesofthissection,IDCsmean all costs,
in cash or in kind (including stock-based
compensation, as described in paragraph
(d)(3) of this section), but excluding ac-
quisition costs for land or depreciable
property, in the ordinary course of busi-
ness after the formation of a CSA that,
based on analysis of the facts and circum-
stances, are directly identified with, or are
reasonably allocable to, the IDA. Thus,
IDCs include costs incurred in attempting
to develop reasonably anticipated cost
shared intangibles regardless of whether
such costs ultimately lead to development
of those intangibles, other intangibles de-
veloped unexpectedly, or no intangibles.
IDCs shall also include the arm’s length
rental charge for the use of any land or
depreciable tangible property (as deter-
mined under §1.482–2(c) (Use of tangible
property)) directly identified with, or rea-
sonably allocable to, the IDA. Reference
to generally accepted accounting princi-
ples or Federal income tax accounting
rules may provide a useful starting point
but will not be conclusive regarding inclu-
sion of costs in IDCs. IDCs do not include
interest expense, foreign income taxes
(as defined in §1.901–2(a)), or domestic
income taxes.
(iv)Examples. The following examples
illustrate the principles of this paragraph
(d)(1):
Example 1. A contract that purports to be a CSA
provides that the IDA to which the agreement applies
consists of all research and development activity con-
ducted at laboratories A, B, and C but not at other fa-
cilities maintained by the controlled participants. The
contract does not describe the reasonably anticipated
cost shared intangibles with respect to which research
and development is to be undertaken. The contract
fails to meet the requirements set forth in paragraph
(k)(1)(ii)(B) of this section because it fails to ade-
quately describe the scope of the IDA to be under-
taken.
Example 2. A contract that purports to be a CSA
provides that the IDA to which the agreement ap-
plies consists of all research and development activ-
ity conducted by any of the controlled participants
with the goal of developing a cure for a particular dis-
ease. Such a cure is thus a reasonably anticipated cost
shared intangible. The contract also contains a provi-
sion that the IDA will exclude any activity that builds
on the results of the controlled participants’ prior re-
search concerning Enzyme X even though such ac-
tivity could reasonably be anticipated to contribute
to developing such cure. The contract fails to meet
the requirement set forth in paragraph (d)(1)(i) of this
section that the scope of the IDA include all of the
controlled participants’ activities that could reason-
ably be anticipated to contribute to developing rea-
sonably anticipated cost shared intangibles.
(2)Allocation of costs.Ifaparticular
cost is directly identified with, or reason-
ably allocable to, a function the results of
which will benefit both the IDA and other
business activities, the cost must be allo-
cated on a reasonable basis between the
IDA and such other business activities in
proportion to the relative economic value
that the IDA and such other business ac-
tivities are anticipated to derive from such
results.
(3)Stock-based compensation—(i)In
general. As used in this section, the term
stock-based compensationmeans any
compensation provided by a controlled
participant to an employee or independent
contractor in the form of equity instru-
ments, options to acquire stock (stock
options), or rights with respect to (or deter-
mined by reference to) equity instruments
or stock options, including but not limited
topropertytowhichsection83applies
and stock options to which section 421
applies, regardless of whether ultimately
settled in the form of cash, stock, or other
property.
(ii)Identification of stock-based com-
pensation with the IDA. The determination
of whether stock-based compensation is
directly identified with, or reasonably
allocable to, the IDA is made as of the
date that the stock-based compensation
is granted. Accordingly, all stock-based
compensation that is granted during the
term of the CSA and, at date of grant,
is directly identified with, or reasonably
allocable to, the IDA is included as an
IDC under paragraph (d)(1) of this sec-
tion. In the case of a repricing or other
modification of a stock option, the deter-
mination of whether the repricing or other
modification constitutes the grant of a new
stock option for purposes of this paragraph
(d)(3)(ii) will be made in accordance with
the rules of section 424(h) and related
regulations.
(iii)Measurement and timing of stock-
based compensation IDC—(A)In general.
Except as otherwise provided in this para-
graph (d)(3)(iii), the cost attributable to
stock-based compensation is equal to the
amount allowable to the controlled partic-
ipant as a deduction for federal income tax
purposes with respect to that stock-based
compensation (for example, under section
83(h)) and is taken into account as an IDC
under this section for the taxable year for
which the deduction is allowable.
(1)Transfers to which section 421 ap-
plies. Solely for purposes of this paragraph
(d)(3)(iii)(A), section 421 does not apply
to the transfer of stock pursuant to the ex-
ercise of an option that meets the require-
ments of section 422(a) or 423(a).
(2)Deductions of foreign controlled
participants. Solely for purposes of this
paragraph (d)(3)(iii)(A), an amount is
treated as an allowable deduction of a
foreign controlled participant to the extent
February 17, 20094792009–7 I.R.B.

that a deduction would be allowable to a
United States taxpayer.
(3)Modification of stock option.
Solely for purposes of this paragraph
(d)(3)(iii)(A), if the repricing or other
modification of a stock option is deter-
mined, under paragraph (d)(3)(ii) of this
section, to constitute the grant of a new
stock option not identified with, or reason-
ably allocable to, the IDA, the stock option
that is repriced or otherwise modified will
be treated as being exercised immediately
before the modification, provided that the
stockoptionisthenexercisableandthe
fair market value of the underlying stock
then exceeds the price at which the stock
option is exercisable. Accordingly, the
amount of the deduction that would be al-
lowable (or treated as allowable under this
paragraph (d)(3)(iii)(A)) to the controlled
participant upon exercise of the stock op-
tion immediately before the modification
must be taken into account as an IDC as
of the date of the modification.
(4)Expiration or termination of CSA.
Solely for purposes of this paragraph
(d)(3)(iii)(A), if an item of stock-based
compensation identified with, or reason-
ably allocable to, the IDA is not exercised
during the term of a CSA, that item of
stock-based compensation will be treated
as being exercised immediately before the
expiration or termination of the CSA, pro-
vided that the stock-based compensation
is then exercisable and the fair market
value of the underlying stock then exceeds
the price at which the stock-based com-
pensation is exercisable. Accordingly, the
amount of the deduction that would be
allowable (or treated as allowable under
this paragraph (d)(3)(iii)(A)) to the con-
trolled participant upon exercise of the
stock-based compensation must be taken
into account as an IDC as of the date of
the expiration or termination of the CSA.
(B)Election with respect to options
on publicly traded stock—(1)In general.
With respect to stock-based compensa-
tion in the form of options on publicly
traded stock, the controlled participants in
a CSA may elect to take into account all
IDCs attributable to those stock options
in the same amount, and as of the same
time, as the fair value of the stock options
reflected as a charge against income in
audited financial statements or disclosed
in footnotes to such financial statements,
provided that such statements are prepared
in accordance with United States generally
accepted accounting principles by or on
behalf of the company issuing the publicly
traded stock.
(2)Publicly traded stock.Asusedin
this paragraph (d)(3)(iii)(B), the termpub-
licly traded stockmeans stock that is regu-
larly traded on an established United States
securities market and is issued by a com-
pany whose financial statements are pre-
pared in accordance with United States
generally accepted accounting principles
for the taxable year.
(3)Generally accepted accounting
principles. For purposes of this paragraph
(d)(3)(iii)(B), a financial statement pre-
pared in accordance with a comprehensive
body of generally accepted accounting
principles other than United States gen-
erally accepted accounting principles is
considered to be prepared in accordance
with United States generally accepted ac-
counting principles provided that either—
(i) The fair value of the stock options
under consideration is reflected in the rec-
onciliation between such other accounting
principles and United States generally ac-
cepted accounting principles required to be
incorporated into the financial statement
by the securities laws governing compa-
nies whose stock is regularly traded on
United States securities markets; or
(ii) In the absence of a reconciliation
between such other accounting principles
and United States generally accepted ac-
counting principles that reflects the fair
value of the stock options under consider-
ation, such other accounting principles re-
quire that the fair value of the stock op-
tions under consideration be reflected as
a charge against income in audited finan-
cial statements or disclosed in footnotes to
such statements.
(4)Time and manner of making the
election. The election described in this
paragraph (d)(3)(iii)(B) is made by an
explicit reference to the election in the
written contract required by paragraph
(k)(1) of this section or in a written amend-
ment to the CSA entered into with the
consent of the Commissioner pursuant to
paragraph (d)(3)(iii)(C) of this section. In
the case of a CSA in existence on August
26, 2003, the election by written amend-
ment to the CSA may be made without
the consent of the Commissioner if such
amendment is entered into not later than
the latest due date (with regard to exten-
sions) of a federal income tax return of any
controlled participant for the first taxable
year beginning after August 26, 2003.
(C)Consistency. Generally, all con-
trolled participants in a CSA taking op-
tions on publicly traded stock into account
under paragraph (d)(3)(ii), (d)(3)(iii)(A),
or (d)(3)(iii)(B) of this section must use
that same method of identification, mea-
surement and timing for all options on
publicly traded stock with respect to that
CSA. Controlled participants may change
their method only with the consent of
the Commissioner and only with respect
to stock options granted during taxable
years subsequent to the taxable year in
which the Commissioner’s consent is ob-
tained. All controlled participants in the
CSA must join in requests for the Com-
missioner’s consent under this paragraph
(d)(3)(iii)(C). Thus, for example, if the
controlled participants make the election
described in paragraph (d)(3)(iii)(B) of
this section upon the formation of the
CSA, the election may be revoked only
with the consent of the Commissioner, and
the consent will apply only to stock op-
tions granted in taxable years subsequent
to the taxable year in which consent is
obtained. Similarly, if controlled partici-
pants already have granted stock options
that have been or will be taken into ac-
count under the general rule of paragraph
(d)(3)(iii)(A) of this section, then except in
cases specified in the last sentence of para-
graph (d)(3)(iii)(B)(4)ofthissection,the
controlled participants may make the elec-
tion described in paragraph (d)(3)(iii)(B)
of this section only with the consent of the
Commissioner, and the consent will apply
only to stock options granted in taxable
years subsequent to the taxable year in
which consent is obtained.
(4)IDC share. A controlled partici-
pant’s IDC share for a taxable year is equal
to the controlled participant’s cost contri-
bution for the taxable year, divided by the
sum of all IDCs for the taxable year. A
controlled participant’s cost contribution
for a taxable year means all of the IDCs ini-
tially borne by the controlled participant,
plus all of the CST Payments that the par-
ticipant makes to other controlled partici-
pants, minus all of the CST Payments that
the participant receives from other con-
trolled participants.
(5)Examples. The following examples
illustrate this paragraph (d):
2009–7 I.R.B.480February 17, 2009

Example 1. Foreign parent (FP) and its U.S. sub-
sidiary(USS)enterintoaCSAtodevelopabetter
mousetrap. USS and FP share the costs of FP’s R&D
facility that will be exclusively dedicated to this re-
search, the salaries of the researchers at the facility,
and overhead costs attributable to the project. They
also share the cost of a conference facility that is at
the disposal of the senior executive management of
each company. Based on the facts and circumstances,
the cost of the conference facility cannot be directly
identified with, and is not reasonably allocable to, the
IDA. In this case, the cost of the conference facility
must be excluded from the amount of IDCs.
Example 2. U.S. parent (USP) and its foreign sub-
sidiary (FS) enter into a CSA to develop intangibles
for producing a new device. USP and FS share the
costs of an R&D facility, the salaries of the facil-
ity’s researchers, and overhead costs attributable to
the project. Although USP also incurs costs related
to field testing of the device, USP does not include
those costs in the IDCs that USP and FS will share
under the CSA. The Commissioner may determine,
based on the facts and circumstances, that the costs
of field testing are IDCs that the controlled partici-
pants must share.
Example 3. U.S. parent (USP) and its foreign
subsidiary (FS) enter into a CSA to develop a new
process patent. USP assigns certain employees to per-
form solely R&D to develop a new mathematical al-
gorithm to perform certain calculations. That algo-
rithm will be used both to develop the new process
patent and to develop a new design patent the devel-
opment of which is outside the scope of the CSA.
During years covered by the CSA, USP compensates
such employees with cash salaries, stock-based com-
pensation, or a combination of both. USP and FS
anticipate that the economic value attributable to the
R&D will be derived from the process patent and
the design patent in a relative proportion of 75% and
25%, respectively. Applying the principles of para-
graph (d)(2) of this section, 75% of the compensation
of such employees must be allocated to the develop-
ment of the new process patent and, thus, treated as
IDCs. With respect to the cash salary compensation,
the IDC is 75% of the face value of the cash. With
respect to the stock-based compensation, the IDC is
75% of the value of the stock-based compensation as
determined under paragraph (d)(3)(iii) of this section.
Example 4. Foreign parent (FP) and its U.S. sub-
sidiary (USS) enter into a CSA to develop a new com-
puter source code. FP has an executive officer who
oversees a research facility and employees dedicated
solely to the IDA. The executive officer also over-
sees other research facilities and employees unrelated
to the IDA, and performs certain corporate overhead
functions. The full amount of the costs of the research
facility and employees dedicated solely to the IDA
can be directly identified with the IDA and, there-
fore, are IDCs. In addition, based on the executive
officer’s records of time worked on various matters,
the controlled participants reasonably allocate 20%
of the executive officer’s compensation to supervi-
sion of the facility and employees dedicated to the
IDA, 50% of the executive officer’s compensation
to supervision of the facilities and employees unre-
lated to the IDA, and 30% of the executive officer’s
compensation to corporate overhead functions. The
controlled participants also reasonably determine that
the results of the executive officer’s corporate over-
head functions yield equal economic benefit to the
IDA and the other business activities of FP. Apply-
ing the principles of paragraph (d)(1) of this section,
the executive officer’s compensation allocated to su-
pervising the facility and employees dedicated to the
IDA (amounting to 20% of the executive officer’s to-
tal compensation) must be treated as IDCs. Apply-
ing the principles of paragraph (d)(2) of this section,
half of the executive officer’s compensation allocated
to corporate overhead functions (that is, half of 30%
of the executive officer’s total compensation), must
be treated as IDCs. Therefore, a total of 35% (20%
plus 15%) of the executive officer’s total compensa-
tion must be treated as IDCs.
(e)Reasonably anticipated benefits
share—(1)Definition—(i)In general.A
controlled participant’s share of reason-
ably anticipated benefits is equal to its
reasonably anticipated benefits divided
by the sum of the reasonably anticipated
benefits, as defined in paragraph (j)(1)(i)
of this section, of all the controlled par-
ticipants. RAB shares must be updated to
account for changes in economic condi-
tions, the business operations and practices
of the participants, and the ongoing de-
velopment of intangibles under the CSA.
For purposes of determining RAB shares
at any given time, reasonably anticipated
benefits must be estimated over the entire
period, past and future, of exploitation
of the cost shared intangibles, and must
reflect appropriate updates to take into
account the most reliable data regarding
past and projected future results available
at such time. A controlled participant’s
RAB share must be determined by using
the most reliable estimate. In determining
which of two or more available estimates
is most reliable, the quality of the data
and assumptions used in the analysis must
be taken into account, consistent with
§1.482–1(c)(2)(ii) (Data and assump-
tions). Thus, the reliability of an estimate
will depend largely on the completeness
and accuracy of the data, the soundness
of the assumptions, and the relative ef-
fects of particular deficiencies in data or
assumptions on different estimates. If two
estimates are equally reliable, no adjust-
ment should be made based on differences
between the estimates. The following
factors will be particularly relevant in de-
termining the reliability of an estimate of
RAB shares:
(A) The basis used for measuring bene-
fits, as described in paragraph (e)(2)(ii) of
this section.
(B) The projections used to esti-
mate benefits, as described in paragraph
(e)(2)(iii) of this section.
(ii)Example. The following example
illustrates the principles of this paragraph
(e)(1):
Example. (i) USP and FS plan to conduct re-
search to develop Product Lines A and B. USP and FS
reasonably anticipate respective benefits from Prod-
uct Line A of 100X and 200X and respective bene-
fits from Product Line B, respectively, of 300X and
400X. USP and FS thus reasonably anticipate com-
bined benefits from Product Lines A and B of 400X
and 600X, respectively.
(ii) USP and FS could enter into a separate CSA to
develop Product Line A with respective RAB shares
of 33
1
/3percent and 66
2
/3percent (reflecting a ratio
of 100X to 200X), and into a separate CSA to de-
velop Product Line B with respective RAB shares of
42
6
/7percent and 57
1
/7percent (reflecting a ratio of
300X to 400X). Alternatively, USP and FS could en-
ter into a single CSA to develop both Product Lines
A and B with respective RAB shares of 40 percent
and 60 percent (in the ratio of 400X to 600X). If the
separate CSAs are chosen, then any costs for activi-
ties that contribute to developing both Product Line
A and Product Line B will constitute IDCs of the re-
spective CSAs as required by paragraphs (d)(1) and
(d)(2) of this section.
(2)Measure of benefits—(i)In general.
In order to estimate a controlled partic-
ipant’s RAB share, the amount of each
controlled participant’s reasonably antici-
pated benefits must be measured on a ba-
sis that is consistent for all such partici-
pants. See paragraph (e)(2)(ii)(E)Exam-
ple 9of this section. If a controlled par-
ticipant transfers a cost shared intangible
to another controlled taxpayer, other than
by way of a transfer described in para-
graph (f) of this section, that controlled
participant’s benefits from the transferred
intangible must be measured by reference
to the transferee’s benefits, disregarding
any consideration paid by the transferee to
the controlled participant (such as a roy-
alty pursuant to a license agreement). Rea-
sonably anticipated benefits are measured
either on a direct basis, by reference to
estimated benefits to be generated by the
use of cost shared intangibles (generally
based on additional revenues plus cost sav-
ings less any additional costs incurred), or
on an indirect basis, by reference to cer-
tain measurements that reasonably can be
assumed to relate to benefits to be gen-
erated. Such indirect bases of measure-
ment of anticipated benefits are described
in paragraph (e)(2)(ii) of this section. A
controlled participant’s reasonably antici-
pated benefits must be measured on the ba-
February 17, 20094812009–7 I.R.B.

sis, whether direct or indirect, that most
reliably determines RAB shares. In de-
termining which of two bases of measure-
ment is most reliable, the factors set forth
in §1.482–1(c)(2)(ii) (Data and assump-
tions) must be taken into account. It nor-
mally will be expected that the basis that
provided the most reliable estimate for a
particular year will continue to provide the
most reliable estimate in subsequent years,
absent a material change in the factors that
affect the reliability of the estimate. Re-
gardless of whether a direct or indirect ba-
sis of measurement is used, adjustments
may be required to account for material
differences in the activities that controlled
participants undertake to exploit their in-
terests in cost shared intangibles. SeeEx-
amples 4and7of paragraph (e)(2)(ii)(E)
of this section.
(ii)Indirect bases for measuring antic-
ipated benefits. Indirect bases for measur-
ing anticipated benefits from participation
in a CSA include the following:
(A)Units used, produced, or sold.
Units of items used, produced, or sold by
each controlled participant in the business
activities in which cost shared intangibles
are exploited may be used as an indirect
basis for measuring its anticipated ben-
efits. This basis of measurement will
more reliably determine RAB shares to
the extent that each controlled participant
is expected to have a similar increase in
net profit or decrease in net loss attribut-
able to the cost shared intangibles per unit
of the item or items used, produced, or
sold. This circumstance is most likely to
arise when the cost shared intangibles are
exploited by the controlled participants in
the use, production, or sale of substantially
uniform items under similar economic
conditions.
(B)Sales. Sales by each controlled par-
ticipant in the business activities in which
cost shared intangibles are exploited may
be used as an indirect basis for measur-
ing its anticipated benefits. This basis of
measurement will more reliably determine
RAB shares to the extent that each con-
trolled participant is expected to have a
similar increase in net profit or decrease in
net loss attributable to cost shared intangi-
bles per dollar of sales. This circumstance
is most likely to arise if the costs of exploit-
ing cost shared intangibles are not substan-
tial relative to the revenues generated, or if
the principal effect of using cost shared in-
tangibles is to increase the controlled par-
ticipants’ revenues (for example, through
a price premium on the products they sell)
without affecting their costs substantially.
Sales by each controlled participant are un-
likely to provide a reliable basis for mea-
suring RAB shares unless each controlled
participant operates at the same market
level (for example, manufacturing, distri-
bution, etc.).
(C)Operating profit. Operating profit
of each controlled participant from the ac-
tivities in which cost shared intangibles are
exploited, as determined before any ex-
pense (including amortization) on account
of IDCs, may be used as an indirect basis
for measuring anticipated benefits. This
basis of measurement will more reliably
determine RAB shares to the extent that
such profit is largely attributable to the use
of cost shared intangibles, or if the share
of profits attributable to the use of cost
shared intangibles is expected to be sim-
ilar for each controlled participant. This
circumstance is most likely to arise when
cost shared intangibles are closely asso-
ciated with the activity that generates the
profit and the activity could not be carried
on or would generate little profit without
use of those intangibles.
(D)Other bases for measuring antic-
ipated benefits. Other bases for measur-
ing anticipated benefits may in some cir-
cumstances be appropriate, but only to the
extent that there is expected to be a rea-
sonably identifiable relationship between
the basis of measurement used and addi-
tional income generated or costs saved by
the use of cost shared intangibles. For ex-
ample, a division of costs based on em-
ployee compensation would be considered
unreliable unless there were a relationship
between the amount of compensation and
the expected additional income generated
or costs saved by the controlled partici-
pants from using the cost shared intangi-
bles.
(E)Examples. The following examples
illustrates this paragraph (e)(2)(ii):
Example 1. Controlled parties A and B enter into
a CSA to develop product and process intangibles for
already existing Product P. Without such intangibles,
A and B would each reasonably anticipate revenue,
in present value terms, of $100M from sales of Prod-
uct P until it becomes obsolete. With the intangibles,
A and B each reasonably anticipate selling the same
number of units each year, butreasonably anticipate
that the price will be higher. Because the particu-
lar product intangible is more highly regarded in A’s
market, A reasonably anticipates an increase of $20M
in present value revenue from the product intangible,
while B reasonably anticipates an increase of only
$10M in present value from the product intangible.
Further, A and B each reasonably anticipate spending
an additional amount equal to $5M in present value
in production costs to include the feature embodying
the product intangible. Finally, A and B each rea-
sonablyanticipatesavinganamountequalto$2Min
present value in production costs by using the process
intangible. A and B reasonably anticipate no other
economic effects from exploiting the cost shared in-
tangibles. A’s reasonably anticipated benefits from
exploiting the cost shared intangibles equal its rea-
sonably anticipated increase in revenue ($20M) plus
its reasonably anticipated cost savings ($2M) less its
reasonably anticipated increased costs ($5M), which
equals $17M. Similarly, B’s reasonably anticipated
benefits from exploiting the cost shared intangibles
equal its reasonably anticipated increase in revenue
($10M) plus its reasonably anticipated cost savings
($2M) less its reasonably anticipated increased costs
($5M), which equals $7M. Thus A’s reasonably an-
ticipated benefits are $17M and B’s reasonably antic-
ipated benefits are $7M.
Example 2. Foreign Parent (FP) and U.S. Sub-
sidiary (USS) both produce a feedstock for the manu-
facture of various high-performance plastic products.
Producing the feedstock requires large amounts of
electricity, which accounts for a significant portion
of its production cost. FP and USS enter into a CSA
to develop a new process that will reduce the amount
of electricity required to produce a unit of the feed-
stock. FP and USS currently both incur an electricity
cost of $2 per unit of feedstock produced and rates
for each are expected to remain similar in the future.
The new process, if it is successful, will reduce the
amount of electricity required by each company to
produce a unit of the feedstock by 50%. Switching to
the new process would not require FP or USS to in-
cur significant investment or other costs. Therefore,
the cost savings each company is expected to achieve
after implementing the new process are $1 per unit of
feedstock produced. Under the CSA, FP and USS di-
vide the costs of developing the new process based on
the units of the feedstock each is anticipated to pro-
duce in the future. In this case, units produced is the
most reliable basis for measuring RAB shares and di-
viding the IDCs because each controlled participant is
expected to have a similar $1 (50% of current charge
of $2) decrease in costs per unit of the feedstock pro-
duced.
Example 3. ThefactsarethesameasinExam-
ple 2, except that currently USS pays $3 per unit of
feedstock produced for electricity while FP pays $6
per unit of feedstock produced. In this case, units
produced is not the most reliable basis for measuring
RAB shares and dividing the IDCs because the par-
ticipants do not expect to have a similar decrease in
costs per unit of the feedstock produced. The Com-
missioner determines that the most reliable measure
of RAB shares may be based on units of the feed-
stock produced if FP’s units are weighted relative to
USS’s units by a factor of 2. This reflects the fact
that FP pays twice as much as USS for electricity
and, therefore, FP’s savings of $3 per unit of the feed-
stock (50% reduction of current charge of $6) would
be twice USS’s savings of $1.50 per unit of feedstock
2009–7 I.R.B.482February 17, 2009

(50% reduction of current charge of $3) from any new
process eventually developed.
Example 4. The facts are the same as inEx-
ample 3, except that to supply the particular needs
of the U.S. market USS manufactures the feedstock
with somewhat different properties than FP’s feed-
stock. This requires USS to employ a somewhat dif-
ferent production process than does FP. Because of
this difference, USS would incur significant construc-
tion costs in order to adopt any new process that may
be developed under the cost sharing agreement. In
this case, units produced is not the most reliable ba-
sis for measuring RAB shares. In order to reliably
determine RAB shares, the Commissioner measures
the reasonably anticipated benefits of USS and FP on
a direct basis. USS’s reasonably anticipated benefits
are its reasonably anticipated total savings in elec-
tricity costs, less its reasonably anticipated costs of
adopting the new process. FS’s reasonably antici-
pated benefits are its reasonably anticipated total sav-
ings in electricity costs.
Example 5. U.S. Parent (USP) and Foreign Sub-
sidiary (FS) enter into a CSA to develop new anes-
thetic drugs. USP obtains the right to market any
resulting drugs in the United States and FS obtains
the right to market any resulting drugs in the rest of
the world. USP and FS determine RAB shares on
the basis of their respective total anticipated operating
profit from all drugs under development. USP antic-
ipates that it will receive a much higher profit than
FS per unit sold because the price of the drugs is not
regulated in the United States, whereas the price of
the drugs is regulated in many non-U.S. jurisdictions.
In both controlled participants’ territories, the antici-
pated operating profits are almost entirely attributable
to the use of the cost shared intangibles. In this case,
the controlled participants’ basis for measuring RAB
shares is the most reliable.
Example 6. (i) Foreign Parent (FP) and U.S. Sub-
sidiary (USS) manufacture and sell fertilizers. They
enter into a CSA to develop a new pellet form of a
common agricultural fertilizer that is currently avail-
able only in powder form. Under the CSA, USS ob-
tains the rights to produce and sell the new form of
fertilizer for the U.S. market while FP obtains the
rights to produce and sell the new form of fertilizer
in the rest of the world. The costs of developing the
new form of fertilizer are divided on the basis of the
anticipated sales of fertilizer in the controlled partic-
ipants’ respective markets.
(ii) If the research and development is successful,
the pellet form will deliver the fertilizer more effi-
ciently to crops and less fertilizer will be required to
achieve the same effect on crop growth. The pellet
form of fertilizer can be expected to sell at a price
premium over the powder form of fertilizer based on
the savings in the amount of fertilizer that needs to be
used. This price premium will be a similar premium
per dollar of sales in each territory. If the research
and development is successful, the costs of producing
pellet fertilizer are expected to be approximately the
same as the costs of producing powder fertilizer and
the same for both FP and USS. Both FP and USS op-
erate at approximately the same market levels, selling
their fertilizers largely to independent distributors.
(iii) In this case, the controlled participants’ basis
for measuring RAB shares is the most reliable.
Example 7. ThefactsarethesameasinExam-
ple 6, except that FP distributes its fertilizers directly
while USS sells to independent distributors. In this
case, sales of USS and FP are not the most reliable
basis for measuring RAB shares unless adjustments
aremadetoaccountforthedifferenceinmarketlev-
els at which the sales occur.
Example 8. Foreign Parent (FP) and U.S. Sub-
sidiary (USS) enter into a CSA to develop materials
that will be used to train all new entry-level employ-
ees. FP and USS determine that the new materials
will save approximately ten hours of training time per
employee. Because their entry-level employees are
paid on differing wage scales, FP and USS decide that
they should not measure benefits based on the num-
ber of entry-level employees hired by each. Rather,
they measure benefits based on compensation paid to
the entry-level employees hired by each. In this case,
the basis used for measuring RAB shares is the most
reliable because there is a direct relationship between
compensation paid to new entry-level employees and
costs saved by FP and USS from the use of the new
training materials.
Example 9. U.S. Parent (USP), Foreign Sub-
sidiary 1 (FS1), and Foreign Subsidiary 2 (FS2) enter
into a CSA to develop computer software that each
will market and install oncustomers’ computer sys-
tems. The controlled participants measure benefits
on the basis of projected sales by USP, FS1, and
FS2 of the software in their respective geographic
areas. However, FS1 plans not only to sell but also
to license the software tounrelated customers, and
FS1’s licensing income(which is a percentage of
the licensees’ sales) is not counted in the projected
benefits. In this case, the basis used for measuring
the benefits of each controlled participant is not the
most reliable because all of the benefits received by
controlled participants are not taken into account.
In order to reliably determine RAB shares, FS1’s
projected benefits from licensing must be included
in the measurement on a basis that is the same as
that used to measure its own and the other controlled
participants’ projected benefits from sales (for exam-
ple, all controlled participants might measure their
benefits on the basis of operating profit).
(iii)Projections used to estimate ben-
efits—(A)In general. The reliability of
an estimate of RAB shares also depends
upon the reliability of projections used in
making the estimate. Projections required
for this purpose generally include a deter-
mination of the time period between the
inception of the research and development
activities under the CSA and the receipt
of benefits, a projection of the time over
which benefits will be received, and a
projection of the benefits anticipated for
each year in which it is anticipated that
the cost shared intangible will generate
benefits. A projection of the relevant basis
for measuring anticipated benefits may
require a projection of the factors that
underlie it. For example, a projection of
operating profits may require a projection
of sales, cost of sales, operating expenses,
and other factors that affect operating
profits. If it is anticipated that there will
be significant variation among controlled
participants in the timing of their receipt of
benefits, and consequently benefit shares
are expected to vary significantly over the
years in which benefits will be received,
it normally will be necessary to use the
present value of the projected benefits
to reliably determine RAB shares. See
paragraph (g)(2)(v) of this section for best
method considerations regarding discount
rates used for this purpose. If it is not
anticipated that benefit shares will signif-
icantly change over time, current annual
benefit shares may provide a reliable pro-
jection of RAB shares. This circumstance
is most likely to occur when the CSA is a
long-term arrangement, the arrangement
covers a wide variety of intangibles, the
composition of the cost shared intangibles
is unlikely to change, the cost shared in-
tangibles are unlikely to generate unusual
profits, and each controlled participant’s
share of the market is stable.
(B)Examples. The following examples
illustrate the principles of this paragraph
(e)(2)(iii):
Example 1. (i) Foreign Parent (FP) and U.S. Sub-
sidiary (USS) enter into a CSA to develop a new
car model. The controlled participants plan to spend
four years developing the new model and four years
producing and selling the new model. USS and FP
project total sales of $4 billion and $2 billion, respec-
tively, over the planned four years of exploitation of
the new model. The controlled participants deter-
mine RAB shares for each year of 66
2
/3%forUSS
and 33
1
/3% for FP, based on projected total sales.
(ii) USS typically begins producing and selling
new car models a year after FP begins producing and
selling new car models. In order to reflect USS’s
one-year lag in introducing new car models, a more
reliable projection of each participant’s RAB share
would be based on a projection of all four years of
sales for each participant, discounted to present value.
Example 2. U.S. Parent (USP) and Foreign Sub-
sidiary (FS) enter into a CSA to develop new and im-
proved household cleaning products. Both controlled
participants have sold household cleaning products
for many years and have stable worldwide market
shares. The products under development are unlikely
to produce unusual profits for either controlled par-
ticipant. The controlled participants determine RAB
shares on the basis of each controlled participant’s
current sales of household cleaning products. In this
case, the controlled participants’ RAB shares are re-
liably projected by current sales of cleaning products.
Example 3.ThefactsarethesameasinExample
2, except that FS’s market share is rapidly expanding
because of the business failure of a competitor in its
geographic area. The controlled participants’ RAB
shares are not reliably projected by current sales of
cleaning products. FS’s benefit projections should
take into account its growth in market share.
Example 4. Foreign Parent (FP) and U.S. Sub-
sidiary (USS) enter into a CSA to develop synthetic
February 17, 20094832009–7 I.R.B.

fertilizers and insecticides. FP and USS share costs
on the basis of each controlled participant’s current
sales of fertilizers and insecticides. The market
shares of the controlled participants have been stable
for fertilizers, but FP’s market share for insecticides
has been expanding. The controlled participants’
projections of RAB shares are reliable with regard
to fertilizers, but not reliable with regard to insec-
ticides; a more reliable projection of RAB shares
would take into account the expanding market share
for insecticides.
(f)Changes in participation under a
CSA—(1)In general. A change in partic-
ipation under a CSA occurs when there is
either a controlled transfer of interests or a
capability variation. A change in partici-
pation requires arm’s length consideration
under paragraph (a)(3)(ii) of this section,
and as more fully described in this para-
graph (f).
(2)Controlled transfer of interests.
A controlled transfer of interests occurs
when a participant in a CSA transfers all
or part of its interests in cost shared in-
tangibles under the CSA in a controlled
transaction, and the transferee assumes
the associated obligations under the CSA.
After the controlled transfer of interests
occurs, the CSA will still exist if at least
two controlled participants still have inter-
ests in the cost shared intangibles. In such
a case, the transferee will be treated as
succeeding to the transferor’s prior history
under the CSA as pertains to the trans-
ferred interests, including the transferor’s
cost contributions, benefits derived, and
PCT Payments attributable to such rights
or obligations. A transfer that would oth-
erwise constitute a controlled transfer of
interests for purposes of this paragraph
(f)(2) shall not constitute a controlled
transfer of interests if it also constitutes a
capability variation for purposes of para-
graph (f)(3) of this section.
(3)Capability variation. A capability
variation occurs when, in a CSA in which
interests in cost shared intangibles are di-
vided as described in paragraph (b)(4)(iv)
of this section, the controlled participants’
division of interests or their relative ca-
pabilities or capacities to benefit from the
cost shared intangibles are materially al-
tered. For purposes of paragraph (a)(3)(ii)
of this section, a capability variation is
considered to be a controlled transfer of
interests in cost shared intangibles, in
which any controlled participant whose
RAB share decreases as a result of the
capability variation is a transferor, and any
controlled participant whose RAB share
thus increases is the transferee of the in-
terests in cost shared intangibles.
(4)Arm’s length consideration for a
change in participation. In the event of a
change in participation, the arm’s length
amount of consideration from the trans-
feree, under the rules of §§1.482–1 and
1.482–4 through 1.482–6 and paragraph
(a)(3)(ii) of this section, will be deter-
mined consistent with the reasonably an-
ticipated incremental change in the returns
to the transferee and transferor resulting
from such change in participation. Such
changes in returns will themselves depend
on the reasonably anticipated incremental
changes in the benefits from exploiting
the cost shared intangibles, IDCs borne,
and PCT Payments (if any). However,
any arm’s length consideration required
under this paragraph (f)(4) with respect
to a capability variation shall be reduced
as necessary to prevent duplication of
an adjustment already performed under
paragraph (i)(2)(ii)(A) of this section that
resulted from the same capability varia-
tion. If an adjustment has been performed
already under this paragraph (f)(4) with
respect to a capability variation, then for
purposes of any adjustment to be per-
formed under paragraph (i)(2)(ii)(A) of
this section, the controlled participants’
projected benefit shares referred to in
paragraph (i)(2)(ii)(A) of this section shall
be considered to be the controlled partic-
ipants’ respective RAB shares after the
capability variation occurred.
(5)Examples. The following examples
illustrate the principles of this paragraph
(f):
Example 1. X, Y, and Z are the only controlled
participants in a CSA. The CSA divides interests in
cost shared intangibles on a territorial basis as de-
scribed in paragraph (b)(4)(ii) of this section. X is
assigned the territories of the Americas, Y is assigned
the territory of the UK and Australia, and Z is as-
signed the rest of the world. When the CSA is formed,
X has a platform contribution T. Under the PCTs for
T, Y and Z are each obligated to pay X royalties equal
to five percent of their respective sales. Aside from T,
there are no platform contributions. Two years after
the formation of the CSA, Y transfers to Z its inter-
est in cost shared intangibles relating to the UK ter-
ritory, and the associated obligations, in a controlled
transfer of interests described in paragraph (f)(2) of
this section. At that time the reasonably anticipated
benefits from exploiting cost shared intangibles in the
UK have a present value of $11M, the reasonably an-
ticipated IDCs to be borne relating to the UK terri-
tory have a present value of $3M, and the reasonably
anticipated PCT Payments to be made to X relating
to sales in the UK territory have a present value of
$2M. As arm’s length consideration for the change in
participation due to the controlled transfer of inter-
ests, Z must pay Y compensation with an anticipated
present value of $11M, less $3M, less $2M, which
equals $6M.
Example 2.AsinExample 2of paragraph
(b)(4)(v) of this section, companies P and S, both
members of the same controlled group, enter into a
CSA to develop product Z. P and S agree to divide
their interest in product Z based on site of manufac-
turing. P will have exclusive and perpetual rights in
product Z manufactured in facilities owned by P. S
will have exclusive and perpetual rights to product
Z manufactured in facilities owned by S. P and S
agree that neither will license manufacturing rights
in product Z to any related or unrelated party. Both
P and S maintain books and records that allow pro-
duction at all sites to be verified. Both own facilities
that will manufacture product Z and the relative
capacities of these sites are known. All facilities are
currently operating at nearcapacity and are expected
to continue to operate at near capacity when product
Z enters production so that it will not be feasible
to shift production between P’s and S’s facilities. P
and S have no plans to build new facilities and the
lead time required to plan and build a manufacturing
facility precludes the possibility that P or S will build
a new facility during the period for which sales of
Product Z are expected. When the CSA is formed,
P has a platform contribution T. Under the PCT
for T, S is obligated to pay P sales-based royalties
according to a certain formula. Aside from T, there
are no other platform contributions. Two years after
the formation of the CSA, owing to a change in plans
not reasonably foreseeable at the time the CSA was
entered into, S acquires additional facilities F for the
manufacture of Product Z. Such acquisition consti-
tutes a capability variation described in paragraph
(f)(3) of this section. Under this capability variation,
S’s RAB share increases from 50% to 60%. Accord-
ingly, there is a compensable change in participation
under paragraph (f)(3) of this section.
(g)Supplemental guidance on methods
applicable to PCTs—(1)In general.This
paragraph (g) provides supplemental guid-
ance on applying the methods listed in this
paragraph (g)(1) for purposes of evaluat-
ing the arm’s length amount charged in a
PCT. Each method will yield a value for
the compensation obligation of each PCT
Payor consistent with the product of the
combined pre-tax value to all controlled
participants of the platform contribution
that is the subject of the PCT and the PCT
Payor’s RAB share. The methods are—
(i) The comparable uncontrolled trans-
action method described in §1.482–4(c), or
the comparable uncontrolled services price
method described in §1.482–9T(c), as fur-
ther described in paragraph (g)(3) of this
section;
(ii) The income method, described in
paragraph (g)(4) of this section;
2009–7 I.R.B.484February 17, 2009

(iii) The acquisition price method, de-
scribed in paragraph (g)(5) of this section;
(iv) The market capitalization method,
described in paragraph (g)(6) of this sec-
tion;
(v) The residual profit split method, de-
scribed in paragraph (g)(7) of this section;
and
(vi) Unspecified methods, described in
paragraph (g)(8) of this section.
(2)Best method analysis applicable for
evaluation of a PCT pursuant to a CSA—
(i)In general. Each method must be ap-
plied in accordance with the provisions of
§1.482–1, including the best method rule
of §1.482–1(c), the comparability analysis
of §1.482–1(d), and the arm’s length range
of §1.482–1(e), except as those provisions
are modified in this paragraph (g).
(ii)Consistency with upfront contrac-
tual terms and risk allocation — the in-
vestor model—(A)In general. Although
all of the factors entering into a best
method analysis described in §1.482–1(c)
and (d) must be considered, specific fac-
tors may be particularly relevant in the
context of a CSA. In particular, the rel-
ative reliability of an application of any
method depends on the degree of consis-
tency of the analysis with the applicable
contractual terms and allocation of risk
under the CSA and this section among the
controlled participants as of the date of
the PCT, unless a change in such terms
or allocation has been made in return for
arm’s length consideration. In this regard,
a CSA involves an upfront division of
the risks as to both reasonably anticipated
obligations and reasonably anticipated
benefits over the reasonably anticipated
term of the CSA Activity. Accordingly,
the relative reliability of an application
of a method also depends on the degree
of consistency of the analysis with the
assumption that, as of the date of the PCT,
each controlled participant’s aggregate net
investment in the CSA Activity (attribut-
able to platform contributions, operating
contributions, as such term is defined in
paragraph (j)(1)(i) of this section, oper-
ating cost contributions, as such term is
defined in paragraph (j)(1)(i) of this sec-
tion, and cost contributions) is reasonably
anticipated to earn a rate of return equal
to the appropriate discount rate for the
controlled participant’s CSA Activity over
the entire period of such CSA Activity.
If the cost shared intangibles themselves
are reasonably anticipated to contribute
to developing other intangibles, then the
period described in the preceding sentence
includes the period, reasonably anticipated
as of the date of the PCT, of developing
and exploiting such indirectly benefited
intangibles.
(B)Example. The following example
illustrates the principles of this paragraph
(g)(2)(ii):
Example. (i) P, a U.S. corporation, has developed
a software program, DEF, which applies certain algo-
rithms to reconstruct complete DNA sequences from
partially-observed DNA sequences. S is a wholly-
owned foreign subsidiary of P. On the first day of Year
1, P and S enter into a CSA to develop a new gener-
ation of genetic tests, GHI, based in part on the use
of DEF. DEF is therefore a platform contribution of
P for which compensation is due from S pursuant to a
PCT. S makes no platform contributions to the CSA.
Sales of GHI are projected to commence two years
after the inception of the CSA and then to continue
for eight more years. Based on industry experience,
P and S are confident that GHI will be replaced by a
new type of genetic testing based on technology un-
related to DEF or GHI and that, at that point, GHI
will have no further value. P and S project that that
replacement will occur at the end of Year 10.
(ii) For purposes of valuing the PCT for P’s
platform contribution of DEF to the CSA, P and
S apply a type of residual profit split method that
is not described in paragraph (g)(7) of this section
and which, accordingly, constitutes an unspecified
method. See paragraph (g)(7)(i) (last sentence) of
this section. The principles of this paragraph (g)(2)
apply to any method for valuing a PCT, including the
unspecified method used by P and S.
(iii) Under the method employed by P and S, in
each year, a portion of the income from sales of GHI
in S’s territory is allocated to certain routine contri-
butions made by S. The residual of the profit or loss
from GHI sales in S’s territory after the routine allo-
cation step is divided between P and Spro ratato
their capital stocks allocable to S’s territory. Each
controlled participant’s capital stock is computed by
capitalizing, applying a capital growth factor to, and
amortizing its historical expenditures regarding DEF
allocable to S’s territory (in the case of P), or its on-
going cost contributions towards developing GHI (in
the case of S). The amortization of the capital stocks
is effected on a straight-line basis over an assumed
four-year life for the relevant expenditures. The cap-
ital stocks are grown using an assumed growth factor
that P and S consider to be appropriate.
(iv) The assumption that all expenditures amor-
tize on a straight-line basis over four years does not
appropriately reflect the principle that as of the date
of the PCT regarding DEF, every contribution to the
development of GHI, including DEF, is reasonably
anticipated to have value throughout the entire period
of exploitation of GHI which is projected to continue
through Year 10. Under this method as applied by P
and S, the share of the residual profit in S’s territory
that is allocated to P as a PCT Payment from S will
decrease every year. After Year 4, P’s capital stock
in DEF will necessarily be $0, so that P will receive
none of the residual profit or loss from GHI sales in
S’s territory after Year 4 as a PCT Payment.
(v) As a result of this limitation of the PCT
Payments to be made by S, the anticipated return
to S’s aggregate investment in the CSA, over the
whole period of S’s CSA Activity, is at a rate that
is significantly higher than the appropriate discount
rate for S’s CSA Activity (as determined by a reliable
method). This discrepancy is not consistent with the
investor model principle that S should anticipate a
rate of return to its aggregate investment in the CSA,
over the whole period of its CSA Activity, equal to
the appropriate discount rate for its CSA Activity.
The inconsistency of the method with the investor
model materially lessens its reliability for purposes
of a best method analysis. See §1.482–1(c)(2)(ii)(B).
(iii)Consistency of evaluation with
realistic alternatives—(A)In general.
The relative reliability of an application
of a method also depends on the degree
of consistency of the analysis with the
assumption that uncontrolled taxpayers
dealing at arm’s length would have eval-
uated the terms of the transaction, and
only entered into such transaction, if no
alternative is preferable. This condition
is not met, therefore, where for any con-
trolled participant the total anticipated
present value of its income attributable to
its entering into the CSA, as of the date
of the PCT, is less than the total antic-
ipated present value of its income that
could be achieved through an alternative
arrangement realistically available to that
controlled participant. In principle, this
comparison is made on a post-tax basis
but, in many cases, a comparison made
on a pre-tax basis will yield equivalent
results. See also paragraph (g)(2)(v)(B)(1)
of this section (Discount rate variation
between realistic alternatives).
(B)Examples. The following examples
illustrate the principles of this paragraph
(g)(2)(iii):
Example 1. (i) P, a corporation, and S, a wholly-
owned subsidiary of P, enter into a CSA to develop
a personal transportation device (the product). Un-
der the arrangement, P will undertake all of the R&D,
and manufacture and market the product in Country
X. S will make CST Payments to P for its appropriate
share of P’s R&D costs, and manufacture and market
the product in the rest of the world. P owns existing
patents and trade secrets that are reasonably antici-
pated to contribute to the development of the product.
Therefore the rights in the patents and trade secrets
are platform contributions for which compensation is
due from S as part of a PCT.
(ii) S’s manufacturing and distribution activities
under the CSA will be routine in nature, and identical
to the activities it would undertake if it alternatively
licensed the product from P.
(iii) Reasonably reliable estimates indicate that P
could develop the product without assistance from
February 17, 20094852009–7 I.R.B.

S and license the product outside of Country X for
a royalty of 20% of sales. Based on reliable finan-
cial projections that include all future development
costs and licensing revenue that are allocable to the
non-Country X market, and using a discount rate ap-
propriate for the riskiness of P’s role as a licensor
(see paragraph (g)(2)(v) of this section), the post-tax
present value of this licensing alternative to P for the
non-Country X market (measured as of the date of
the PCT) would be $500 million. Thus, based on this
realistic alternative, the anticipated post-tax present
value under the CSA to P in the non-Country X mar-
ket (measured as of the date of the PCT), taking into
account anticipated development costs allocable to
the non-Country X market, and anticipated CST Pay-
ments and PCT Payments from S, and using a dis-
count rate appropriate for the riskiness of P’s role as
a participant in the CSA, should not be less than $500
million.
Example 2. (i)ThefactsarethesameasinEx-
ample 1, except that there are no reliable estimates
of the value to P from the licensing alternative to the
CSA. Further, reasonably reliable estimates indicate
that an arm’s length return for S’s routine manufactur-
ing and distribution activities is a 10% mark-up on to-
tal costs of goods sold plus operating expenses related
to those activities. Finally, the Commissioner deter-
mines that the respective activities undertaken by P
and S (other than licensing payments, CST Payments,
and PCT Payments) would be identical regardless of
whether the arrangement was undertaken as a CSA
(CSA Scenario) or as a long-term licensing arrange-
ment (Licensing Scenario). In particular, in both Sce-
narios, P would perform all research activities and S
would undertake routine manufacturing and distribu-
tion activities associated with its territory.
(ii) P undertakes an economic analysis that de-
rives S’s cost contributions under the CSA, based on
reliable financial projections. Based on this and fur-
ther economic analysis, P determines S’s PCT Pay-
ment as a certain lump sum amount to be paid as of
thedateofthePCT(DateD).
(iii) Based on reliable financial projections that
include S’s cost contributions and that incorporate S’s
PCT Payment, as computed by P, and using a discount
rate appropriate for the riskiness of S’s role as a CSA
participant (see paragraph (g)(2)(v) of this section),
the anticipated post-tax net present value to S in the
CSA Scenario (measured as of Date D) is $800 mil-
lion. Further, based on these same reliable projec-
tions (but incorporating S’s licensing payments in-
stead of S’s cost contributions and PCT Payment),
and using a discount rate appropriate for the riskiness
of S’s role as a long-term licensee, the anticipated
post-tax net present value to S in the Licensing Sce-
nario (measured as of Date D) is $100 million. Thus,
S’s anticipated post-tax net present value is $700 mil-
lion greater in the CSA Scenario than in the Licens-
ing Scenario. This result suggests that P’s anticipated
post-tax present value must be significantly less un-
der the CSA Scenario than under the Licensing Sce-
nario. This means that the reliability of P’s analysis
as described in paragraph (ii) of thisExample 2is re-
duced, since P would not be expected to enter into a
cost sharing arrangement if its alternative of being a
long-term licensor is preferable.
Example 3. (i) The facts are the same as in para-
graphs (i) and (ii) ofExample 2. In addition, based
on reliable financial projections that include S’s cost
contributions and S’s PCT Payment, and using a dis-
count rate appropriate for the riskiness of S’s role as a
CSA participant, the anticipated post-tax net present
value to S under the CSA (measured as of the date of
the PCT) is $50 million. Also, instead of entering the
CSA, S has the realistic alternative of manufacturing
and distributing product Z unrelated to the personal
transportation device, with the same anticipated 10%
mark-up on total costs that it would anticipate for its
routine activities inExample 2. Under its realistic al-
ternative, at a discount rate appropriate for the risk-
iness of S’s role with respect to product Z, S antici-
pates a present value of $100 million.
(ii) Because the lump sum PCT Payment made by
S results in S having a considerably lower anticipated
net present value than S could achieve through an
alternative arrangement realistically available to it,
the reliability of P’s calculation of the lump sum PCT
Payment is reduced.
(iv)Aggregation of transactions.The
combined effect of multiple contempo-
raneous transactions, consisting either
of multiple PCTs, or of one or more
PCT and one or more other transactions
in connection with a CSA that are not
governed by this section (such as trans-
actions involving cross operating con-
tributions or make-or-sell rights), may
require evaluation in accordance with
the principles of aggregation described
in §1.482–1(f)(2)(i). In such cases, it
may be that the multiple transactions are
reasonably anticipated, as of the date of
the PCT(s), to be so interrelated that the
method that provides the most reliable
measure of an arm’s length charge is a
method under this section applied on an
aggregate basis for the PCT(s) and other
transactions. A section 482 adjustment
may be made by comparing the aggregate
arm’s length charge so determined to the
aggregate paymentsactually made for the
multiple transactions. In such a case, it
generally will not be necessary to allo-
cate separately the aggregate arm’s length
charge as between various PCTs or as be-
tween PCTs and such other transactions.
However, such an allocation may be nec-
essary for other purposes, such as applying
paragraph (i)(6) (Periodic adjustments) of
this section. An aggregate determination
of the arm’s length charge for multiple
transactions will often yield a payment
for a controlled participant that is equal
to the aggregate value of the platform
contributions and other resources, capa-
bilities, and rights covered by the multiple
transactions multiplied by that controlled
participant’s RAB share. Because RAB
shares only include benefits from cost
shared intangibles, the reliability of an
aggregate determination of payments for
multiple transactions may be reduced to
the extent that it includes transactions cov-
ering resources, capabilities, and rights
for which the controlled participants’ ex-
pected benefit shares differ substantially
from their RAB shares.
(v)Discount rate—(A)In general.The
best method analysis in connection with
certain methods or forms of payment may
depend on a rate or rates of return used
to convert projected results of transactions
to present value, or to otherwise convert
monetary amounts at one or more points in
time to equivalent amounts at a different
point or points in time. For this purpose,
a discount rate or rates should be used
that most reliably reflect the market-corre-
lated risks of activities or transactions and
should be applied to the best estimates of
the relevant projected results, based on all
the information potentially available at the
time for which the present value calcula-
tion is to be performed. Depending on
the particular facts and circumstances, the
market-correlated risk involved and thus,
the discount rate, may differ among a com-
pany’s various activities or transactions.
Normally, discount rates are most reliably
determined by reference to market infor-
mation.
(B)Considerations in best method
analysis of discount rate—(1)Discount
rate variation between realistic alterna-
tives. Realistic alternatives may involve
varying risk exposure and, thus, may be
more reliably evaluated using different
discount rates. In some circumstances, a
party may have less risk as a licensee of
intangibles needed in its operations, and so
require a lower discount rate, than it would
have by entering into a CSA to develop
such intangibles, which may involve the
party’s assumption of additional risk in
funding its cost contributions to the IDA.
Similarly, self-development of intangibles
and licensing out may be riskier for the
licensor, and so require a higher discount
rate,thanenteringintoaCSAtodevelop
such intangibles, which would relieve the
licensor of the obligation to fund a portion
of the IDCs of the IDA.
(2)Discount rate variation between
forms of payment. Certain forms of pay-
ment may involve different risks than
others. For example, ordinarily a royalty
computed on a profits base would be more
volatile, and so require a higher discount
2009–7 I.R.B.486February 17, 2009

rate to discount projected payments to
present value, than a royalty computed on
a sales base.
(3)Post-tax rate. In general, discount
rate estimates that may be inferred from
the operations of the capital markets are
post-tax discount rates. Therefore, an anal-
ysis would in principle apply post-tax dis-
count rates to income net of expense items
including taxes (post-tax income). How-
ever, in certain circumstances the result of
applying a post-tax discount rate to post-
tax income is equivalent to the product
of—
(i) The result of applying a post-tax dis-
count rate to income net of expense items
other than taxes (pre-tax income); and
(ii) The difference of one minus the tax
rate.
Therefore, in such circumstances, cal-
culation of pre-tax income, rather than
post-tax income, may be sufficient. See,
for example, paragraph (g)(4)(i)(G) of this
section.
(C)Example. The following example
illustrates the principles of this paragraph
(g)(2)(v):
Example. (i) P and S form a CSA to develop in-
tangible X, which will be used in product Y. P will
develop X, and S will make CST Payments as its cost
contributions. At the start of the CSA, P has a plat-
form contribution, for which S commits to make a
PCT Payment of 5% of its sales of product Y. As
part of the evaluation of whether that PCT Payment is
arm’s length, the Commissioner considers whether P
had a more favorable realistic alternative (see para-
graph (g)(2)(iii) of this section). Specifically, the
Commissioner compares P’s anticipated post-tax dis-
counted present value of the financial projections un-
der the CSA (taking into account S’s PCT Payment
of 5% of its sales of product Y) with P’s anticipated
post-tax discounted present value of the financial pro-
jections under a reasonably available alternative Li-
censing Arrangement that consists of developing in-
tangible X on its own and then licensing X to S or to
an uncontrolled party similar to S. In undertaking the
analysis, the Commissioner determines that, because
it would be funding the entire development of the in-
tangible, P undertakes greater risks in the licensing
scenario than in the cost sharing scenario (in the cost
sharing scenario P would be funding only part of the
development of the intangible).
(ii) The Commissioner determines that, as be-
tween the two scenarios, all of the components of
P’s anticipated financial flows are identical, except
for the CST and PCT Payments under the CSA,
compared to the licensing payments under the Li-
censing Alternative. Accordingly, the Commissioner
concludes that the differences in market-correlated
risks between the two scenarios, and therefore the
differences in discount rates between the two scenar-
ios, relate to the differences in these components of
the financial projections.
(vi)Financial projections. The reliabil-
ity of an estimate of the value of a platform
or operating contribution in connection
with a PCT will often depend upon the
reliability of projections used in making
the estimate. Such projections should
reflect the best estimates of the items pro-
jected (normally reflecting a probability
weighted average of possible outcomes).
Projections necessary for this purpose may
include a projection of sales, IDCs, costs
of developing operating contributions,
routine operating expenses, and costs of
sales. Some method applications directly
estimate projections of items attributable
to separate development and exploitation
by the controlled participants within their
respective divisions. Other method ap-
plications indirectlyestimate projections
of items from the perspective of the con-
trolled group as a whole, rather than from
the perspective of a particular participant,
and then apportion the items so estimated
on some assumed basis. For example, in
some applications, sales might be directly
projected by division, but worldwide pro-
jections of other items such as operating
expenses might be apportioned among di-
visions in the same ratio as the divisions’
respective sales. Which approach is more
reliable depends on which provides the
most reliable measure of an arm’s length
result, considering the competing perspec-
tives under the facts and circumstances
in light of the completeness and accu-
racy of the underlying data, the reliability
of the assumptions, and the sensitivity
of the results to possible deficiencies in
the data and assumptions. For these pur-
poses, projections that have been prepared
for non-tax purposesare generally more
reliable than projections that have been
prepared solely for purposes of meeting
the requirements in this paragraph (g).
(vii)Accounting principles—(A)In
general. Allocations or other valuations
done for accountingpurposes may provide
a useful starting point but will not be con-
clusive for purposes of the best method
analysis in evaluating the arm’s length
charge in a PCT, particularly where the
accounting treatment of an asset is incon-
sistent with its economic value.
(B)Examples. The following examples
illustrate the principles of this paragraph
(g)(2)(vii):
Example 1. (i) USP, a U.S. corporation and FSub,
a wholly-owned foreign subsidiary of USP, enter into
a CSA in Year 1 to develop software programs with
application in the medical field. Company X is an
uncontrolled software company located in the United
States that is engaged in developing software pro-
grams that could significantly enhance the programs
being developed by USP and FSub. Company X
is still in a startup phase, so it has no currently ex-
ploitable products or marketing intangibles and its
workforce consists of a team of software develop-
ers. Company X has negligible liabilities and tangible
property. In Year 2, USP purchases Company X as
part of an uncontrolled transaction in order to acquire
its in-process technology and workforce for purposes
of the development activities of the CSA. USP files
a consolidated return thatincludes Company X. For
accounting purposes, $50 million of the $100 million
acquisition price is allocated to the in-process tech-
nology and workforce, and the residual $50 million
is allocated to goodwill.
(ii) The in-process technology and workforce of
Company X acquired by USP are reasonably antici-
pated to contribute to developing cost shared intangi-
bles and therefore the rights in the in-process technol-
ogy and workforce of Company X are platform con-
tributions for which FSub must compensate USP as
part of a PCT. In determining whether to apply the
acquisition price or another method for purposes of
evaluating the arm’s length charge in the PCT, rel-
evant best method analysis considerations must be
weighed in light of the general principles of para-
graph (g)(2) of this section. The allocation for ac-
counting purposes raises an issue as to the reliability
of using the acquisition price method in this case be-
cause it suggests that a significant portion of the value
of Company X’s nonroutine contributions to USP’s
business activities is allocable to goodwill, which is
often difficult to value reliably and which, depending
on the facts and circumstances, might not be attribut-
able to platform contributions that are to be compen-
sated by PCTs. See paragraph (g)(5)(iv)(A) of this
section.
(iii) This paragraph (g)(2)(vii) provides that ac-
counting treatment may be a starting point, but is not
determinative for purposes of assessing or applying
methods to evaluate the arm’s length charge in a PCT.
The facts here reveal that Company X has nothing of
economic value aside from its in-process technology
and assembled workforce. The $50 million of the ac-
quisition price allocated to goodwill for accounting
purposes, therefore, is economically attributable to
either of, or both, the in-process technology and the
workforce. That moots the potential issue under the
acquisition price method of the reliability of valua-
tion of assets not to be compensated by PCTs, since
there are no such assets. Assuming the acquisition
price method is otherwise the most reliable method,
the aggregate value of Company X’s in-process tech-
nology and workforce is the full acquisition price of
$100 million (subject to possible adjustment for dif-
ferences in tax liabilities of the type described in para-
graph (g)(5)(ii) of this section). Accordingly, the ag-
gregate value of the arm’s length PCT Payments due
from FSub to USP for the platform contributions con-
sisting of the rights in Company X’s in-process tech-
nology and workforce will equal $100 million (sub-
ject to adjustment as per paragraph (g)(5)(ii) of this
section) multiplied by FSub’s RAB share.
Example 2. (i) The facts are the same as inExam-
ple 1, except that Company X is a mature software
February 17, 20094872009–7 I.R.B.

business in the United States with a successful cur-
rent generation of software that it markets under a
recognized trademark, in addition to having the re-
search team and new generation software in process
that could significantly enhance the programs being
developed under USP’s and FSub’s CSA. USP con-
tinues Company X’s existing business and integrates
the research team and the in-process technology into
the efforts under its CSA with FSub. For accounting
purposes, the $100 million price for acquiring Com-
pany X is allocated $50 million to existing software
and trademark, $25 million to in-process technology
and research workforce, and the residual $25 million
to goodwill and going concern value.
(ii) In this case an analysis of the facts indicates
a likelihood that, consistent with the allocation un-
der the accounting treatment (although not necessar-
ily in the same amount), a significant amount of the
nonroutine contributions to the USP’s business ac-
tivities consist of goodwill and going concern value
economically attributable to the existing U.S. soft-
ware business rather than to the platform contribu-
tions consisting of the rights in the in-process tech-
nology and research workforce. In addition, an anal-
ysis of the facts indicates that a significant amount of
the nonroutine contributions to USP’s business activ-
ities consist of the make-or-sell rights under the ex-
isting software and trademark, which are not platform
contributions and might be difficult to value. Accord-
ingly, further consideration must be given to the ex-
tent to which these circumstances reduce the relative
reliability of the acquisition price method in compar-
ison to other potentially applicable methods for eval-
uating the PCT Payment.
Example 3. (i) USP, a U.S. corporation, and FSub,
a wholly-owned foreign subsidiary of USP, enter into
a CSA in Year 1 to develop Product A. Company Y
is an uncontrolled corporation that owns Technology
X, which is critical to the development of Product
A. Company Y currently markets Product B, which
is dependent on Technology X. USP is solely inter-
ested in acquiring Technology X, but is only able to
do so through the acquisition of Company Y in its en-
tirety for $200 million in an uncontrolled transaction
in Year 2. For accounting purposes, the acquisition
price is allocated as follows: $120 million to Product
B and the underlying Technology X, $30 million to
trademark and other marketing intangibles, and the
residual $50 million to goodwill and going concern
value. After the acquisition of Company Y, Technol-
ogy X is used to develop Product A. No other part
of Company Y is used in any manner. Immediately
after the acquisition, product B is discontinued, and,
therefore, the accompanying marketing intangibles
become worthless. None of the previous employees
of Company Y is retained.
(ii) The Technology X of Company Y acquired by
USP is reasonably anticipated to contribute to devel-
oping cost shared intangibles and is therefore a plat-
form contribution for which FSub must compensate
USP as part of a PCT. Although for accounting pur-
poses a significant portion of the acquisition price of
Company Y was allocated to items other than Tech-
nology X, the facts demonstrate that USP had no in-
tention of using and therefore placed no economic
value on any part of Company Y other than Technol-
ogy X. If USP was willing to pay $200 million for
Company Y solely for purposes of acquiring Tech-
nology X, then assuming the acquisition price method
is otherwise the most reliable method, the value of
Technology X is the full $200 million acquisition
price. Accordingly, the value of the arm’s length PCT
Payment due from FSub to USP for the platform con-
tribution consisting of the rights in Technology X will
equal the product of $200 million (subject to adjust-
ment as described in paragraph (g)(5)(ii) of this sec-
tion) and FSub’s RAB share.
(viii)Valuations of subsequent
PCTs—(A)Date of subsequent PCT.The
date of a PCT may occur subsequent to
the inception of the CSA. For example,
an intangible initially developed outside
the IDA may only subsequently become
a platform contribution because that later
time is the earliest date on which it is
reasonably anticipated to contribute to
developing cost shared intangibles within
the IDA. In such case, the date of the
PCT, and the analysis of the arm’s length
amount charged in the subsequent PCT, is
as of such later time.
(B)Best method analysis for subse-
quent PCT. In cases where PCTs occur on
different dates, the determination of the
arm’s length amount charged, respectively,
in the prior and subsequent PCTs must
be coordinated in a manner that provides
the most reliable measure of an arm’s
length result. In some circumstances, a
subsequent PCT may be reliably evaluated
independently of other PCTs, as may be
possible for example, under the acquisition
price method. In other circumstances, the
results of prior and subsequent PCTs may
be interrelated and so a subsequent PCT
may be most reliably evaluated under the
residual profit split method of paragraph
(g)(7) of this section. In those cases, for
purposes of allocating the present value
of nonroutine residual divisional profit
or loss, and so determining the present
value of the subsequent PCT Payments, in
accordance with paragraph (g)(7)(iii)(C)
of this section, the PCT Payor’s interest
in cost shared intangibles, both already
developed and in process, are treated as
additional PCT Payoroperating contribu-
tions as of the date of the subsequent PCT.
(ix)Arm’s length range—(A)In gen-
eral. The guidance in §1.482–1(e) re-
garding determination of an arm’s length
range, as modified by this section, applies
in evaluating the arm’s length amount
charged in a PCT under a transfer pricing
method provided in this section (appli-
cable method). Section 1.482–1(e)(2)(i)
provides that the arm’s length range is
ordinarily determined by applying a single
pricing method selected under the best
method rule to two or more uncontrolled
transactions of similar comparability and
reliability although use of more than one
method may be appropriate for the pur-
poses described in §1.482–1(c)(2)(iii).
The rules provided in §1.482–1(e) and this
section for determining an arm’s length
range shall not override the rules provided
in paragraph (i)(6) of this section for pe-
riodic adjustments by the Commissioner.
The provisions in paragraphs (g)(2)(ix)(C)
and (D) of this section apply only to ap-
plicable methods that are based on two
or more input parameters as described in
paragraph (g)(2)(ix)(B) of this section.
For an example of how the rules of this
section for determining an arm’s length
range of PCT Payments are applied, see
paragraph (g)(4)(vii) of this section.
(B)Methods based on two or more in-
put parameters. An applicable method
may determine PCT Payments based on
calculations involving two or more param-
eters whose values depend on the facts and
circumstances of the case (input parame-
ters). For some input parameters (market-
based input parameters), the value is most
reliably determined by reference to data
that derives from uncontrolled transactions
(market data). For example, the value of
the return to a controlled participant’s rou-
tine contributions, as such term is defined
in paragraph (j)(1)(i) of this section, to the
CSA Activity (which value is used as an
input parameter in the income method de-
scribed in paragraph (g)(4) of this section)
may in some cases be most reliably deter-
mined by reference to the profit level of
a company with rights, resources, and ca-
pabilities comparable to those routine con-
tributions. See §1.482–5. As another ex-
ample, the value for the discount rate that
reflects the riskiness of a controlled par-
ticipant’s role in the CSA (which value is
used as an input parameter in the income
method described in paragraph (g)(4) of
this section) may in some cases be most re-
liably determined by reference to the stock
beta of a company whose overall risk is
comparable to the riskiness of the con-
trolled participant’s role in the CSA.
(C)Variable input parameters.For
some market-based input parameters
(variable input parameters), the param-
eter’s value is most reliably determined
by considering two or more observa-
tions of market data that have, or with
2009–7 I.R.B.488February 17, 2009

adjustment can be brought to, a similar
reliability and comparability, as described
in §1.482–1(e)(2)(ii) (for example, profit
levels or stock betas of two or more com-
panies). See paragraph (g)(2)(ix)(B) of
this section.
(D)Determination of arm’s length PCT
Payment. For purposes of applying this
paragraph (g)(2)(ix), each input parameter
is assigned a single most reliable value,
unless it is a variable input parameter as
described in paragraph (g)(2)(ix)(C) of this
section. The determination of the arm’s
length payment depends on the number of
variable input parameters.
(1)No variable input parameters.If
there are no variable input parameters,
the arm’s length PCT Payment is a single
value determined by using the single most
reliable value determined for each input
parameter.
(2)One variable input parameter.If
there is exactly one variable input param-
eter, then under the applicable method,
the arm’s length range of PCT Payments
is the interquartile range, as described in
§1.482–1(e)(2)(iii)(C), of the set of PCT
Payment values calculated by selecting—
(i) Iteratively, the value of the vari-
able input parameter that is based on each
observation as described in paragraph
(g)(2)(ix)(C) of this section; and
(ii) The single most reliable values for
each other input parameter.
(3)More than one variable input pa-
rameter. If there are two or more vari-
able input parameters, then under the ap-
plicable method, thearm’s length range of
PCT Payments is the interquartile range, as
described in §1.482–1(e)(2)(iii)(C), of the
set of PCT Payment values calculated iter-
atively using every possible combination
of permitted choices of values for the in-
put parameters. For input parameters other
than a variable input parameter, the only
such permitted choice is the single most
reliable value. For variable input param-
eters, such permitted choices include any
value that is—
(i) Based on one of the observations
described in paragraph (g)(2)(ix)(C) of this
section; and
(ii) Within the interquartile range (as
described in §1.482–1(e)(2)(iii)(C)) of the
set of all values so based.
(E)Adjustments.Section
1.482–1(e)(3), applied as modified by this
paragraph (g)(2)(ix), determines when the
Commissioner may make an adjustment
to a PCT Payment due to the taxpayer’s
results being outside the arm’s length
range. Adjustment will be to the median,
as defined in §1.482–1(e)(3). Thus, the
Commissioner is not requiredtoestablish
an arm’s length range prior to making an
allocation under section 482.
(x)Valuation undertaken on a pre-tax
basis. PCT Payments in general may in-
crease the PCT Payee’s tax liability and
decrease the PCT Payor’s tax liability.
The arm’s length amount of a PCT Pay-
ment determined under the methods in
this paragraph (g) is the value of the PCT
Payment itself, without regard to such
tax effects. Therefore, the methods under
this section must be applied, with suitable
adjustments if needed, to determine the
PCT Payments on a pre-tax basis. See
paragraphs (g)(2)(v)(B)(3), (g)(4)(i)(G),
(g)(5)(ii), and (g)(6)(ii) of this section.
(3)Comparable uncontrolled transac-
tion method. The comparable uncontrolled
transaction (CUT) method described in
§1.482–4(c), and the comparable uncon-
trolled services price (CUSP) method
described in §1.482–9T(c), may be applied
to evaluate whether the amount charged
in a PCT is arm’s length by reference to
the amount charged in a comparable un-
controlled transaction. Although all of
the factors entering into a best method
analysis described in §1.482–1(c) and (d)
must be considered, comparability and re-
liability under this method are particularly
dependent on similarity of contractual
terms, degree to which allocation of risks
is proportional to reasonably anticipated
benefits from exploiting the results of
intangible development, similar period
of commitment as to the sharing of in-
tangible development risks, and similar
scope, uncertainty, and profit potential of
the subject intangible development, in-
cluding a similar allocation of the risks
of any existing resources, capabilities, or
rights,aswellasoftherisksofdeveloping
other resources, capabilities, or rights that
would be reasonably anticipated to con-
tribute to exploitation within the parties’
divisions, that is consistent with the actual
allocation of risks between the controlled
participants as provided in the CSA in ac-
cordance with this section. When applied
in the manner described in §1.482–4(c) or
1.482–9T(c), the CUT or CUSP method
will typically yield an arm’s length total
value for the platform contribution that is
the subject of the PCT. That value must
then be multiplied by each PCT Payor’s
respective RAB share in order to deter-
mine the arm’s length PCT Payment due
from each PCT Payor. The reliability of
a CUT or CUSP that yields a value for
the platform contribution only in the PCT
Payor’s division will be reduced to the
extent that value is not consistent with the
total worldwide value of the platform con-
tribution multiplied by the PCT Payor’s
RAB share.
(4)Income method—(i)In gen-
eral—(A)Equating cost sharing and li-
censing alternatives. The income method
evaluates whether the amount charged in
a PCT is arm’s length by reference to a
controlled participant’s best realistic al-
ternative to entering into a CSA. Under
this method, the arm’s length charge for a
PCT Payment will be an amount such that
a controlled participant’s present value, as
of the date of the PCT, of its cost sharing
alternative of entering into a CSA equals
the present value of its best realistic al-
ternative. In general, the best realistic
alternative of the PCT Payor to entering
into the CSA would be to license intangi-
bles to be developed by an uncontrolled
licensor that undertakes the commitment
to bear the entire risk of intangible devel-
opment that would otherwise have been
shared under the CSA. Similarly, the best
realistic alternative of the PCT Payee to
entering into the CSA would be to under-
take the commitment to bear the entire
risk of intangible development that would
otherwise have been shared under the
CSA and license the resulting intangibles
to an uncontrolled licensee. Paragraphs
(g)(4)(ii) through (iv) of this section de-
scribe specific applications of the income
method, but do not exclude other possible
applications of this method.
(B)Cost sharing alternative.ThePCT
Payor’s cost sharing alternative corre-
sponds to the actual CSA in accordance
with this section, with the PCT Payor’s
obligation to make the PCT Payments to
be determined and its commitment for the
duration of the IDA to bear cost contribu-
tions.
(C)Licensing alternative. The licens-
ing alternative is derived on the basis of
a functional and risk analysis of the cost
sharing alternative, but with a shift of the
risk of cost contributions to the licensor.
February 17, 20094892009–7 I.R.B.

Accordingly, the PCT Payor’s licensing
alternative consists of entering into a li-
cense with an uncontrolled party, for a
term extending for what would be the du-
ration of the CSA Activity, to license the
make-or-sell rights in to-be-developed re-
sources, capabilities,orrightsoftheli-
censor. Under such license, the licensor
would undertake the commitment to bear
the entire risk of intangible development
that would otherwise have been shared un-
der the CSA. Apart from any difference in
the allocation of the risks of the IDA, the li-
censing alternative should assume contrac-
tual provisions with regard to non-over-
lapping divisional intangible interests, and
with regard to allocations of other risks,
that are consistent with the actual CSA in
accordance with this section. For exam-
ple, the analysis under the licensing alter-
native should assume a similar allocation
of the risks of any existing resources, capa-
bilities, or rights, as well as of the risks of
developing other resources, capabilities, or
rights that would be reasonably anticipated
to contribute to exploitation within the par-
ties’ divisions, that is consistent with the
actual allocation of risks between the con-
trolled participants as provided in the CSA
in accordance withthis section.
(D)Only one controlled participant
with nonroutine platform contributions.
This method involves only one of the con-
trolled participants providing nonroutine
platform contributions as the PCT Payee.
For a method under which more than
one controlled participant may be a PCT
Payee, see the application of the residual
profit method pursuant to paragraph (g)(7)
of this section.
(E)Income method payment forms.The
income method may be applied to deter-
mine PCT Payments in any form of pay-
ment (for example, lump sum, royalty on
sales, or royalty on divisional profit). For
converting to another form of payment, see
generally §1.482–7T(h) (Form of payment
rules).
(F)Discount rates appropriate to cost
sharing and licensing alternatives.
(1) The present value of the cost sharing
and licensing alternatives, respectively,
should be determined using the appro-
priate discount rates in accordance with
paragraph (g)(2)(v) of this section. See,
for example, §1.482–7T(g)(2)(v)(B)(1)
(Discount rate variation between realistic
alternatives). In circumstances where the
market-correlated risks as between the
cost sharing and licensing alternatives are
not materially different, a reliable analysis
maybepossiblebyusingthesamedis-
count rate with respect to both alternatives.
(2) The discount rate for the cost shar-
ing alternative will generally depend on
the form of PCT Payments assumed (for
example, lump sum, royalty on sales, roy-
alty on divisional profit).
(G)The effect of taxation on determin-
ing the arm’s length amount.Inprinciple,
the present values of the cost sharing
and licensing alternatives should be de-
termined by applying post-tax discount
rates to post-tax income (including the
post-tax value to the controlled participant
of the PCT Payments). If such approach
is adopted, then the post-tax value of the
PCT Payments must be appropriately ad-
justed in order to determine the arm’s
length amount of the PCT Payments on
a pre-tax basis. See paragraph (g)(2)(x)
of this section. In certain circumstances,
post-tax income may be derived as the
product of the result of applying a post-tax
discount rate to pre-tax income, and a fac-
tor equal to one minus the tax rate. See
paragraph (g)(2)(v)(B)(3)ofthissection.
Moreover, to the extent that a controlled
participant’s tax rate is not materially af-
fected by whether it enters into the cost
sharing or licensing alternative (or reli-
able adjustments may be made for varying
tax rates), the factor (that is, one minus
the tax rate) may be cancelled from both
sides of the equation of the cost sharing
and licensing alternative present values.
Accordingly, in such circumstance it is
sufficient to apply post-tax discount rates
to projections of pre-tax income for the
purpose of equating the cost sharing and
licensing alternatives. The specific appli-
cations of the income method described in
paragraphs (g)(4)(ii) through (iv) of this
section and the examples set forth in para-
graph (g)(4)(vii) of this section assume
that such circumstance applies.
(ii)Evaluation of PCT Payor’s cost
sharing alternative. The present value of
the PCT Payor’s cost sharing alternative
is the present value of the stream of the
reasonably anticipated residuals over the
duration of the CSA Activity of divisional
profits or losses, minus operating cost
contributions, minus cost contributions,
minus PCT Payments.
(iii)Evaluation of PCT Payor’s licens-
ing alternative—(A)Evaluation based
on CUT. The present value of the PCT
Payor’s licensing alternative may be de-
termined using the comparable uncon-
trolled transaction method, as described in
§1.482–4(c)(1) and (2). In this case, the
present value of the PCT Payor’s licens-
ing alternative is the present value of the
stream, over what would be the duration
of the CSA Activity under the cost sharing
alternative, of the reasonably anticipated
residuals of the divisional profits or losses
that would be achieved under the cost
sharing alternative, minus operating cost
contributions that would be made under
the cost sharing alternative, minus the
licensing payments as determined under
the comparable uncontrolled transaction
method.
(B)Evaluation based on CPM.The
present value of the PCT Payor’s licensing
alternative may be determined using the
comparable profits method, as described
in §1.482–5. In this case, the present value
of the licensing alternative is determined
as in paragraph (g)(4)(iii)(A) of this sec-
tion, except that the PCT Payor’s licensing
payments, as defined in paragraph (j)(1)(i)
of this section, are determined to be a lump
sum, as of the date of the PCT, equal to
the present value (using the discount rate
appropriate for the licensing alternative)
of the stream, over what would be the du-
ration of the CSA Activity under the cost
sharing alternative, of the reasonably an-
ticipated residuals of the divisional profits
or losses that would be achieved under the
cost sharing alternative, minus operating
cost contributions that would be made
under the cost sharing alternative, minus
market returns for routine contributions,
as defined in paragraph (j)(1)(i) of this
section.
(iv)Lump sum payment form.Where
the form of PCT Payment is a lump sum as
of the date of the PCT, then, based on para-
graphs (g)(4)(i) through (iii) of this sec-
tion, the PCT Payment equals the differ-
ence between—
(A) The present value, using the dis-
count rate appropriate for the cost sharing
alternative, of the stream of the reasonably
anticipated residuals over the duration of
the CSA Activity of divisional profits or
losses, minus cost contributions and oper-
ating cost contributions; and
2009–7 I.R.B.490February 17, 2009

(B) The present value of the licensing
alternative.
(v)Best method analysis considera-
tions. (A) Whether results derived from
this method are the most reliable measure
of an arm’s length result is determined
using the factors described under the best
method rule in §1.482–1(c). Thus, com-
parability and the quality of data, the
reliability of the assumptions, and the
sensitivity of the results to possible defi-
ciencies in the data and assumptions, must
be considered in determining whether this
method provides the most reliable mea-
sure of an arm’s length result.
(B) This method will be more reliable
to the extent that the controlled partici-
pants’ respective tax rates are not mate-
rially affected by whether they enter into
the cost sharing or licensing alternative.
Even if this assumption of invariant tax
rates across alternatives does not hold, this
method may still be reliable to the extent
that reliable adjustments can be made to re-
flect the variation in tax rates.
(C) If the licensing alternative is eval-
uated using the comparable uncontrolled
transactions method, as described in para-
graph (g)(4)(iii)(A) of this section, any ad-
ditional comparabilityand reliability con-
siderations stated in §1.482–4(c)(2) may
apply.
(D) If the licensing alternative is evalu-
ated using the comparable profits method,
as described in paragraph (g)(4)(iii)(B) of
this section, any additional comparabil-
ity and reliability considerations stated in
§1.482–5(c) may apply.
(E) This method may be used even if
the PCT Payor furnishes significant oper-
ating contributions, or commits to assume
the risk of significant operating cost con-
tributions, to the PCT Payor’s division.
However, in such a case, any compara-
ble uncontrolled transactions described in
paragraph (g)(4)(iii)(A) of this section,
and any comparable transactions used
under §1.482–5(c) as described in para-
graphs (g)(4)(iii)(B) of this section, should
be consistent with such contributions (or
reliable adjustments must be made for
material differences).
(vi)Routine platform and operating
contributions. For purposes of this para-
graph (g)(4), any routine contributions that
are platform or operating contributions,
the valuation and PCT Payments for which
are determined and made independently
of the income method, are treated simi-
larly to cost contributions and operating
cost contributions, respectively. Accord-
ingly, wherever used in this paragraph,
the term “routine contributions” shall not
include routine platform or operating con-
tributions, and wherever the terms “cost
contributions” and “operating cost con-
tributions” appear in this paragraph, they
shall include net routine platform contri-
butions and net routine operating contri-
butions, respectively. Net routine platform
contributions are the value of a controlled
participant’s total reasonably anticipated
routine platform contributions, plus its
reasonably anticipated PCT Payments to
other controlled participants in respect of
their routine platform contributions, minus
the reasonably anticipated PCT Payments
it is to receive from other controlled par-
ticipants in respect of its routine platform
contributions. Net routine operating con-
tributions are the value of a controlled
participant’s total reasonably anticipated
routine operating contributions, plus its
reasonably anticipated arm’s length com-
pensation to other controlled participants
in respect of their routine operating contri-
butions, minus the reasonably anticipated
arm’s length compensation it is to receive
from other controlled participants in re-
spect of its routine operating contributions.
(vii)Examples. The following exam-
ples illustrate the principles of this para-
graph (g)(4):
Example 1. (i) USP, a software company, has de-
veloped version 1.0 of a new software application that
it is currently marketing. In Year 1 USP enters into a
CSA with its wholly-owned foreign subsidiary, FS, to
develop future versions of the software application.
Under the CSA, USP will have the rights to exploit
the future versions in the United States, and FS will
have the rights to exploit them in the rest of the world.
The future rights in version 1.0, and USP’s develop-
ment team, are reasonably anticipated to contribute
to the development of future versions and therefore
the rights in version 1.0 are platform contributions
for which compensation is due from FS as part of a
PCT. USP does not transfer the current exploitation
rights in version 1.0 to FS. FS does not furnish any
platform contributions nor does it control any operat-
ing intangibles at the inception of the CSA that would
be relevant to the exploitation of version 1.0 or future
versions of the software. FS agrees to make PCT pay-
ments in the form of a single lump sum payment as
of the date of the PCT.
(ii) In evaluating the CSA, the Commissioner
concludes that the cost sharing alternative represents
a riskier alternative for FS than the licensing alter-
native because, in cost sharing, FS will take on the
additional risks associated with CST Payments and
of making the PCT payments as a single lump sum.
Consequently, the Commissioner concludes that
the appropriate discount rate to apply in assessing
the licensing alternative, based on discount rates
of comparable uncontrolled companies undertaking
comparable licensing transactions, would be 13%
per year, whereas the appropriate discount rate to
apply in assessing the cost sharing alternative would
be 15% per year. FS undertakes financial projections
and anticipates making no sales during the first two
years of the CSA in its territory with sales in Years
3 through Year 8 rapidly increasing to $200 million,
$400 million, $600 million, $650 million, $700 mil-
lion and $750 million, respectively. After year 8,
sales in the rest of the world are expected to remain
at $750 millionper annumfor the foreseeable future.
Costs including routine costs and operating cost
contributions are anticipated to equal 60% of gross
sales from Year 3, onwards. FS anticipates its cost
contributions will equal $50 million per year for the
first four years of the CSA and equal 10% of gross
sales in each year, thereafter. The Commissioner ac-
cepts the financial projections undertaken by FS. The
Commissioner determines that the arm’s length rate
USP would have charged an uncontrolled licensee
for a license of future versions of the software had
USP further developed version 1.0 on its own is 35%
of the sales price, as determined under the compara-
ble uncontrolled transaction method in §1.482–4(c).
FS also determines that the tax rate applicable to it
will be the same in the licensing alternative as in the
CSA.
(iii) Based on these projections and applying
the appropriate discount rate, the Commissioner
determines that under the cost sharing alternative,
the present value of its divisional profits (after sub-
tracting the present value of the anticipated operating
cost contributions and cost contributions) would be
$867 million (for simplicity of calculation in this
example, all financial flows are assumed to occur at
the beginning of each period). Under the licensing
alternative, the present value of the divisional profits
and losses minus the operating cost contributions
would be $1.592 billion, and the present value of the
licensing payments would be $1.393 billion. There-
fore, the total value of the licensing alternative would
be $199 million. In order for the present value of
the cost sharing alternative to equal the present value
of the licensing alternative, the present value of the
PCT payments must equal $668 million; the arm’s
length lump sum PCT payment therefore equals $668
million.
Example 2.Arm’s length range. (i) The facts are
thesameasinExample 1. The licensing discount rate
(13%) and the CUT licensing rate (35%) used by the
Commissioner as input parameters in applying the in-
come method are the median values of comparable
uncontrolled discount rates and license rates, respec-
tively. The observations that are in the interquartile
range of the respective input parameters are as fol-
lows:
February 17, 20094912009–7 I.R.B.

Observations that are within
interquartile range
Comparable uncontrolled
discount rate
111%
212%
3 (Median)13%
4
15%
5
17%
Obse
rvations that are within
interquartile range
Comp
arable uncontrolled
licensing rate
130%
232%
3 (Median)
35%
437%
5
40%
(ii) The Commissioner concludes that these esti-
mates of the appropriate arm’s length discount rates
and licensing rates are independent of each other. Ac-
cordingly, the Commissioner undertakes 25 different
applications of the income method, using each com-
bination of the discount rate and licensing rate pa-
rameters. In undertaking this analysis, the Commis-
sioner assumes that the ratio of the median discount
rate for the cost sharing alternative to the median dis-
count rate for the licensing alternative (that is, 15%
to 13%) is maintained. The results of the 25 applica-
tions of the income method, sorted in ascending order
of calculated PCT payment, are as follows:
Income method
application number:
Comparable
uncontrolled
licensing discount rate
Comparable
uncontrolled CSA
discount rate
Comparable
uncontrolled
licensing rate
Calculated lump sum
PCT Payment
Interquartile range of
PCT payments
117%19.6%30%291
217%19.6%32%347
3
15%
17.3%30%367
417%19.6%
35%
431
515%
17.3%32%433
613%
15%
30%469
7
17%19.6%37%487LQ = 487
8
15%
17.3%
35%532
912%13.8%30%
535
1013%
15%
32%
549
1117%19.6%40%
571
12
15%
17.3%37%
598
1311%12.7%30%614Median = 614
1412%13.8%32%623
15
13%
15%35%
668
16
15%
17.3%40%697
1711%12.7%32%712
1813%
15%
37%748
1912%13.8%
35%755UQ = 755
2012%13.8%37%844
2111%12.7%
35%
860
2213%
15%
40%867
2009–7 I.R.B.492February 17, 2009

Income method
application number:
Comparable
uncontrolled
licensing discount rate
Comparable
uncontrolled CSA
discount rate
Comparable
uncontrolled
licensing rate
Calculated lump sum
PCT Payment
Interquartile range of
PCT payments
2311%12.7%37%
959
2412%13.8%40%976
25
11%12.7%40%1,107
(iii) Accordingly, the Commissioner determines
that a taxpayer will not be subject to adjustment if its
initial (ex ante) determination of the PCT payment is
between $487 million and $755 million. In the event
that the taxpayer’s determination of the appropriate
PCT payment falls outside this range, the adjustment
made by the Commissioner will ordinarily be to $614.
Example 3. (i) USP, a U.S. software company,
has developed version 1.0 of a new software appli-
cation, employed to store and retrieve complex data
sets in certain types of storage media. Version 1.0
is currently being marketed. In Year 1, USP enters
into a CSA with its wholly-owned foreign subsidiary,
FS, to develop future versions of the software appli-
cation. Under the CSA, USP will have the exclusive
rights to exploit the future versions in the U.S., and
FS will have the exclusive rights to exploit them in
the rest of the world. USP’s rights in version 1.0, and
its development team, arereasonably anticipated to
contribute to the development of future versions of
the software application and, therefore, the rights in
version 1.0 are platform contributions for which com-
pensation is due from FS as part of a PCT. USP also
transfers the current exploitation rights in version 1.0
to FS and the arm’s length amount of the compensa-
tion for such transfer is determined in the aggregate
with the arm’s length PCT Payments in thisExam-
ple 3. FS does not furnish any platform contribu-
tions to the CSA nor does it control any operating
intangibles at the inception of the CSA that would
be relevant to the exploitation of version 1.0 or fu-
ture versions of the software. It is reasonably an-
ticipated that FS will have gross sales of $1000X in
its territory for 5 years attributable to its exploitation
of version 1.0 and the cost shared intangibles, after
which time the software application will be rendered
obsolete and unmarketable by the obsolescence of the
storage medium technology to which it relates. FS’s
costs reasonably attributable to the CSA, other than
cost contributions and operating cost contributions,
are anticipated to be $250X per year. Certain oper-
ating cost contributions that will be borne by FS are
reasonably anticipated to equal $200Xper annumfor
5 years. In addition, FS is reasonably anticipated to
pay cost contributions of $200X per year as a con-
trolled participant in the CSA.
(ii) FS concludes that its realistic alternative
would be to license software from an uncontrolled
licensor that would undertake the commitment to
bear the entire risk of software development. Ap-
plying CPM using the profit levels experienced by
uncontrolled licensees with contractual provisions
and allocations of risk that are comparable to those
of FS’s licensing alternative, FS determines that it
could, as a licensee, reasonably expect a (pre-tax)
routine return equal to 14% of gross sales or $140X
per year for 5 years. The remaining net revenue
would be paid to the uncontrolled licensor as a li-
cense fee of $410X per year. FS determines that the
discount rate that would be applied to determine the
present value of income and costs attributable to its
participation in the licensing alternative would be
12.5% as compared to the 15% discount rate that
would be applicable in determining the present valu-
able of the net income attributable to its participation
in the CSA (reflecting the increased risk borne by
FS in bearing a share of the R&D costs in the cost
sharing alternative and the fact that FS intends to pay
the PCT payment as a single lump sum). FS also
determines that the tax rate applicable to it will be
the same in the licensing alternative as in the CSA.
(iii) On these facts, the present value to FS of
entering into the cost sharing alternative equals the
present value of the divisional profits ($1,000X minus
$250X) minus operating cost contributions ($200X)
minus cost contributions ($200X) minus PCT Pay-
ments, determined over 5 years by discounting at a
discount rate of 15%(for simplicity of calculation in
this example, all financialflows are assumed to occur
at the beginning of each period). Thus, the present
value of the residuals, prior to subtracting the value
of the PCT Payments, is $1349X.
(iv) On these facts, the present value to FS of en-
tering into the licensing alternative would be $561X
determined by discounting, over 5 years, divisional
profits ($1,000X minus $250X) minus operating
cost contributions ($200X) and licensing payments
($410X) at a discount rate of 12.5%per annum.
The present value of the cost sharing alternative
must also equal $561X but equals $1349X prior to
subtracting the present value of the PCT payments.
Consequently, the PCT payments must have a present
value of $788X. Thus, the arm’s length lump sum
PCT payment made at the time of the PCT will equal
$788X.
(5)Acquisition price method—(i)In
general. The acquisition price method
applies the comparable uncontrolled trans-
action method of §1.482–4(c), or the
comparable uncontrolled services price
method described in §1.482–9T(c), to
evaluate whether the amount charged in
a PCT, or group of PCTs, is arm’s length
by reference to the amount charged (the
acquisition price) for the stock or asset
purchase of an entire organization or por-
tion thereof (the target) in an uncontrolled
transaction. The acquisition price method
is ordinarily used where substantially all
the target’s nonroutine contributions, as
such term is defined in paragraph (j)(1)(i)
of this section, made to the PCT Payee’s
business activities are covered by a PCT
or group of PCTs.
(ii)Determination of arm’s length
charge. Under this method, the arm’s
length charge for a PCT or group of PCTs
covering resources, capabilities, and rights
of the target is equal to the adjusted ac-
quisition price, as divided among the
controlled participants according to their
respective RAB shares. However, an ad-
ditional adjustment may be necessary to
reflect the fact that PCT Payee’s tax liabil-
ity attributable to the purchase from target
may differ from the tax liability attribut-
able to the PCT Payments. See paragraph
(g)(2)(x) of this section.
(iii)Adjusted acquisition price.Thead-
justed acquisition price is the acquisition
price of the target increased by the value of
the target’s liabilities on the date of the ac-
quisition, other than liabilities not assumed
in the case of an asset purchase, and de-
creased by the value of the target’s tangi-
ble property on that date and by the value
on that date of any other resources, capa-
bilities, and rights not covered by a PCT or
group of PCTs.
(iv)Best method analysis considera-
tions. The comparabilityand reliability
considerations stated in §1.482–4(c)(2) ap-
ply. Consistent with those considerations,
the reliability of applying the acquisition
price method as a measure of the arm’s
length charge for the PCT Payment nor-
mally is reduced if—
(A) A substantial portion of the tar-
get’s nonroutine contributions to the PCT
Payee’s business activities is not required
to be covered by a PCT or group of PCTs,
and that portion of the nonroutine contri-
butions cannot reliably be valued;
(B) A substantial portion of the target’s
assets consists of tangible property that
cannot reliably be valued; or
(C) The date on which the target is ac-
quired and the date of the PCT are not con-
temporaneous.
(v)Example. The following example
illustrates the principles of this paragraph
(g)(5):
Example.USP, a U.S. corporation, and its newly
incorporated, wholly-owned foreign subsidiary (FS)
enter into a CSA at the start of Year 1 to develop
Group Z products. Under the CSA, USP and FS will
have the exclusive rights to exploit the Group Z prod-
February 17, 20094932009–7 I.R.B.

ucts in the U.S. and the rest of the world, respec-
tively. At the start of Year 2, USP acquires Company
X for cash consideration worth $110 million. At this
time USP’s RAB share is 60% and FS’s RAB share is
40%. Company X joins in the filing of a U.S. con-
solidated income tax return with USP. Under para-
graph (j)(2)(i) of this section, Company X and USP
are treated as one taxpayer for purposes of this sec-
tion. Accordingly, the rights in any of Company X’s
resources and capabilities that are reasonably antic-
ipated to contribute to the development activities of
the CSA will be considered platform contributions
furnished by USP. Company X’s resources and ca-
pabilities consist of its workforce, certain technol-
ogy intangibles, $15 million of tangible property and
other assets and $5 million in liabilities. The tech-
nology intangibles, as well as Company X’s work-
force, are reasonably anticipated to contribute to the
development of the Group Z products under the CSA
and, therefore, the rights in the technology intangi-
bles and the workforce are platform contributions for
which FS must make a PCT Payment to USP. None
of Company X’s existing intangible assets or any of
its workforce are anticipated to contribute to activi-
ties outside the CSA. For purposes of this example, it
is assumed that no additional adjustment on account
of tax liabilities (as described in paragraph (g)(5)(ii)
of this section) is needed. Applying the acquisition
price method, the value of USP’s platform contribu-
tions is the adjusted acquisition price of $100 million
($110 million acquisition price plus $5 million liabil-
ities less $15 million tangible property and other as-
sets). FS must make a PCT Payment to USP for these
platform contributions with a reasonably anticipated
present value of $40 million, which is the product of
$100 million (the value of the platform contributions)
and 40% (FS’s RAB share at the time of the PCT).
(6)Market capitalization method—(i)
In general. The market capitalization
method applies the comparable uncon-
trolled transaction method of §1.482–4(c),
or the comparable uncontrolled services
price method described in §1.482–9T(c),
to evaluate whether the amount charged in
a PCT, or group of PCTs, is arm’s length
by reference to the average market capi-
talization of a controlled participant (PCT
Payee) whose stock is regularly traded
on an established securities market. The
market capitalization method is ordinarily
used where substantially all of the PCT
Payee’s nonroutine contributions to the
PCT Payee’s business are covered by a
PCT or group of PCTs.
(ii)Determination of arm’s length
charge. Under the market capitalization
method, the arm’s length charge for a PCT
or group of PCTs covering resources, ca-
pabilities, and rights of the PCT Payee is
equal to the adjusted average market capi-
talization, as divided among the controlled
participants according to their respective
RAB shares. An increase to reflect the fact
that a PCT Payment may increase the PCT
Payee’s tax liability and decrease the PCT
Payor’s tax liability may be warranted.
See paragraph (g)(2)(x) of this section.
(iii)Average market capitalization.The
average market capitalization is the av-
erage of the daily market capitalizations
of the PCT Payee over a period of time
beginning 60 days before the date of the
PCT and ending on the date of the PCT.
The daily market capitalization of the PCT
Payee is calculated on each day its stock
is actively traded as the total number of
shares outstanding multiplied by the ad-
justed closing price of the stock on that
day. The adjusted closing price is the daily
closing price of the stock, after adjust-
ments for stock-based transactions (divi-
dends and stock splits) and other pending
corporate (combination and spin-off) re-
structuring transactions for which reliable
arm’s length adjustments can be made.
(iv)Adjusted average market capital-
ization. The adjusted average market cap-
italization is the average market capital-
ization of the PCT Payee increased by the
value of the PCT Payee’s liabilities on the
date of the PCT and decreased by the value
on such date of the PCT Payee’s tangible
property and of any other resources, capa-
bilities, or rights of the PCT Payee not cov-
ered by a PCT or group of PCTs.
(v)Best method analysis considera-
tions. The comparability and reliability
considerations stated in §1.482–4(c)(2) ap-
ply. Consistent with those considerations,
the reliability of applying the comparable
uncontrolled transaction method using the
adjusted market capitalization of a com-
pany as a measure of the arm’s length
charge for the PCT Payment normally is
reduced if—
(A) A substantial portion of the PCT
Payee’s nonroutine contributions to its
business activities is not required to be
covered by a PCT or group of PCTs, and
that portion of the nonroutine contribu-
tions cannot reliably be valued;
(B) A substantial portion of the PCT
Payee’s assets consists of tangible property
that cannot reliably be valued; or
(C) Facts and circumstances demon-
strate the likelihood of a material diver-
gence between the average market capi-
talization of the PCT Payee and the value
of its resources, capabilities, and rights
for which reliable adjustments cannot be
made.
(vi)Examples. The following examples
illustrate the principles of this paragraph
(g)(6):
Example 1. (i) USP, a publicly traded U.S. com-
pany, and its newly incorporated wholly-owned for-
eign subsidiary (FS) enter into a CSA on Date 1 to de-
velop software. At that time USP has in-process soft-
ware but has no software ready for the market. Under
the CSA, USP and FS will have the exclusive rights
to exploit the software developed under the CSA in
the United States and the rest of the world, respec-
tively. On Date 1, USP’s RAB share is 70% and FS’s
RAB share is 30%. USP’s assembled team of re-
searchers and its in-process software are reasonably
anticipated to contribute to the development of the
software under the CSA. Therefore, the rights in the
research team and in-process software are platform
contributions for which compensation is due from FS.
Further, these rights are not reasonably anticipated to
contribute to any business activity other than the CSA
Activity.
(ii) On Date 1, USP had an average market capi-
talization of $205 million, tangible property and other
assets that can be reliably valued worth $5 million,
and no liabilities. Aside from those assets, USP had
no assets other than its research team and in-process
software. Applying the market capitalization method,
the value of USP’s platform contributions is $200
million ($205 million average market capitalization
of USP less $5 million of tangible property and other
assets). The arm’s length value of the PCT Payments
FS must make to USP for the platform contributions,
before any adjustment on account of tax liability as
described in paragraph (g)(2)(ii) of this section, is
$60 million, which is the product of $200 million (the
value of the platform contributions) and 30% (FS’s
RAB share on Date 1).
Example 2.Aggregation with make-or-sell rights.
(i) The facts are the same as inExample 1, except
that on Date 1 USP also has existing software ready
for the market. USP separately enters into a license
agreement with FS for make-or-sell rights for all ex-
isting software outside the United States. No market-
inghasoccurred,andUSPhasnomarketingintan-
gibles. This license of current make-or-sell rights is
a transaction governed by §1.482–4. However, af-
ter analysis, it is determined that the arm’s length
PCT Payments and the arm’s length payments for
the make-or-sell license may be most reliably deter-
mined in the aggregate using the market capitaliza-
tion method, under principles described in paragraph
(g)(2)(iv) of this section, and it is further determined
that those principles are most reliably implemented
by computing the aggregate arm’s length charge as
the product of the aggregate value of the existing and
in-process software and FS’s RAB share on Date 1.
(ii) Applying the market capitalization method,
the aggregate value of USP’s platform contributions
and the make-or-sell rights in its existing software is
$250 million ($255 million average market capital-
ization of USP less $5 million of tangible property
and other assets). The total arm’s length value of the
PCT Payments and license payments FS must make
to USP for the platform contributions and current
make-or-sell rights, before any adjustment on account
of tax liability as described in paragraph (g)(2)(ii)
of this section, is $75 million, which is the product
of $250 million (the value of the platform contribu-
2009–7 I.R.B.494February 17, 2009

tions and the make-or-sell rights) and 30% (FS’s RAB
share on Date 1).
Example 3.Reduced reliability. The facts are the
same as inExample 1except that USP also has sig-
nificant nonroutine assets that will be used solely in a
nascent business division that is unrelated to the sub-
ject of the CSA and that cannot themselves be reliably
valued. Those nonroutine contributions are not plat-
form contributions and accordingly are not required
to be covered by a PCT. The reliability of using the
market capitalization method to determine the value
of USP’s platform contributions to the CSA is sig-
nificantly reduced in this case because that method
would require adjusting USP’s average market cap-
italization to account for the significant nonroutine
contributions that are not required to be covered by
aPCT.
(7)Residual profit split method—(i)In
general. The residual profit split method
evaluates whether the allocation of com-
bined operating profit or loss attributable
to one or more platform contributions sub-
ject to a PCT is arm’s length by reference
to the relative value of each controlled
participant’s contribution to that combined
operating profit or loss. The combined
operating profit or loss must be derived
from the most narrowly identifiable busi-
ness activity (relevant business activity) of
the controlled participants for which data
are available that include the CSA Ac-
tivity. The residual profit split method
may not be used where only one controlled
participant makes significant nonroutine
contributions (including platform or oper-
ating contributions) to the CSA Activity.
The provisions of §1.482–6 shall apply to
CSAs only to the extent provided and as
modified in this paragraph (g)(7). Any
other application to a CSA of a residual
profit method not described in paragraphs
(g)(7)(ii) and (iii) will constitute an un-
specified method for purposes of sections
482 and 6662(e) and the regulations under
those sections.
(ii)Appropriate share of profits and
losses. The relative value of each con-
trolled participant’s contribution to the
success of the relevant business activ-
ity must be determined in a manner that
reflects the functions performed, risks as-
sumed, and resources employed by each
participant in the relevant business ac-
tivity, consistent with the best method
analysis described in §1.482–1(c) and (d).
Such an allocation is intended to corre-
spond to the division of profit or loss that
would result from an arrangement between
uncontrolled taxpayers, each performing
functions similar to those of the various
controlled participants engaged in the rele-
vant business activity. The profit allocated
to any particular controlled participant is
not necessarily limited to the total operat-
ing profit of the group from the relevant
business activity. For example, in a given
year, one controlled participant may earn a
profit while another controlled participant
incurs a loss. In addition, it may not be as-
sumed that the combined operating profit
or loss from the relevant business activity
should be shared equally, or in any other
arbitrary proportion.
(iii)Profit split—(A)In general.Un-
der the residual profit split method, the
present value of each controlled partic-
ipant’s residual divisional profit or loss
attributable to nonroutine contributions
(nonroutine residual divisional profit or
loss) is allocated between the controlled
participants that eachfurnish significant
nonroutine contributions (including plat-
form or operating contributions) to the
relevant business activity in that division.
(B)Determine nonroutine residual di-
visional profit or loss. The present value
of each controlled participant’s nonroutine
residual divisional profit or loss must be
determined to reflect the most reliable
measure of an arm’s length result. The
present value of nonroutine residual di-
visional profit or loss equals the present
value of the stream of the reasonably an-
ticipated residuals over the duration of the
CSA Activity of divisional profit or loss,
minus market returns for routine contribu-
tions, minus operating cost contributions,
minus cost contributions, using a discount
rate appropriate to such residuals in ac-
cordance with paragraph (g)(2)(v) of this
section.
(C)Allocate nonroutine residual divi-
sional profit or loss—(1)In general.The
present value of nonroutine residual di-
visional profit or loss in each controlled
participant’s division must be allocated
among all of the controlled participants
based upon the relative values, deter-
mined as of the date of the PCTs, of the
PCT Payor’s as compared to the PCT
Payee’s nonroutine contributions to the
PCT Payor’s division. For this purpose,
the PCT Payor’s nonroutine contribution
consists of the sum of the PCT Payor’s
nonroutine operating contributions and
thePCTPayor’sRABshareofthePCT
Payor’s nonroutine platform contributions.
For this purpose, the PCT Payee’s non-
routine contribution consists of the PCT
Payor’s RAB share of the PCT Payee’s
nonroutine platform contributions.
(2)Relative value determination.The
relative values of the controlled partici-
pants’ nonroutine contributions must be
determined so as to reflect the most re-
liable measure of an arm’s length result.
Relative values may be measured by exter-
nal market benchmarks that reflect the fair
market value of such nonroutine contribu-
tions. Alternatively, the relative value of
nonroutine contributions may be estimated
by the capitalized cost of developing the
nonroutine contributions and updates, as
appropriately grown or discounted so that
all contributions may be valued on a com-
parable dollar basis as of the same date.
If the nonroutine contributions by a con-
trolled participant are also used in other
business activities (such as the exploitation
of make-or-sell rights described in para-
graph (c)(4) of this section), an allocation
of the value of the nonroutine contribu-
tions must be made on a reasonable basis
among all the business activities in which
they are used in proportion to the relative
economic value that the relevant business
activity and such other business activities
are anticipated to derive over time as the
result of such nonroutine contributions.
(3)Determination of PCT Payments.
Any amount of the present value of a con-
trolled participant’s nonroutine residual di-
visional profit or loss that is allocated to
another controlled participant represents
the present value of the PCT Payments due
to that other controlled participant for its
platform contributions to the relevant busi-
ness activity in the relevant division. For
purposes of paragraph (j)(3)(ii) of this sec-
tion, the present value of a PCT Payor’s
PCT Payments under this paragraph shall
be deemed reduced to the extent of the
present value of any PCT Payments owed
to it from other controlled participants un-
der this paragraph (g)(7). The resulting
remainder may be converted to a fixed
or contingent formof payment in accor-
dance with paragraph (h) (Form of pay-
ment rules) of this section.
(4)Routine platform and operating
contributions. For purposes of this para-
graph (g)(7), any routine platform or
operating contributions, the valuation and
PCT Payments for which are determined
and made independently of the residual
profit split method, are treated similarly
February 17, 20094952009–7 I.R.B.

to cost contributions and operating cost
contributions, respectively. Accordingly,
wherever used in this paragraph (g)(7),
the term “routine contributions” shall not
include routine platform or operating con-
tributions, and wherever the terms “cost
contributions” and “operating cost contri-
butions” appear in this paragraph (g)(7),
they shall include net routine platform
contributions and net routine operating
contributions, respectively, as defined in
paragraph (g)(4)(vi) of this section.
(iv)Best method analysis considera-
tions—(A)In general. Whether results
derived from this method are the most
reliable measure of the arm’s length result
is determined using the factors described
under the best method rule in §1.482–1(c).
Thus, comparability and quality of data,
reliability of assumptions, and sensitivity
of results to possible deficiencies in the
data and assumptions, must be consid-
ered in determining whether this method
provides the most reliable measure of an
arm’s length result. The application of
these factors to the residual profit split in
the context of the relevant business ac-
tivity of developing and exploiting cost
shared intangibles is discussed in para-
graphs (g)(7)(iv)(B), (C) and (D) of this
section.
(B)Comparability. The derivation of
the present value of nonroutine residual
divisional profit or loss includes a carve-
out on account of market returns for rou-
tine contributions. Thus, the compara-
bility considerationsthat are relevant for
that purpose include those that are rele-
vant for the methods that are used to de-
termine market returns for the routine con-
tributions.
(C)Data and assumptions.Therelia-
bility of the results derived from the resid-
ual profit split is affected by the quality of
the data and assumptions used to apply this
method. In particular, the following fac-
tors must be considered:
(1) The reliability of the allocation of
costs, income, and assets between the rel-
evant business activity and the controlled
participants’ other activities that will af-
fect the reliability of the determination of
the divisional profit or loss and its allo-
cation among the controlled participants.
See §1.482–6(c)(2)(ii)(C)(1).
(2) The degree of consistency between
the controlled participants and uncon-
trolled taxpayers inaccounting practices
that materially affect the items that deter-
mine the amount and allocation of operat-
ing profit or loss affects the reliability of
the result. See §1.482–6(c)(2)(ii)(C)(2).
(3) The reliability of the data used and
the assumptions made in estimating the
relative value of the nonroutine contribu-
tions by the controlled participants. In par-
ticular, if capitalized costs of development
are used to estimate the relative value of
nonroutine contributions, the reliability of
the results is reduced relative to the relia-
bility of other methods that do not require
such an estimate. This is because, in any
given case, the costs of developing a non-
routine contribution may not be related to
its market value and because the calcula-
tion of the capitalized costs of develop-
ment may require the allocation of indirect
costs between the relevant business activ-
ity and the controlled participant’s other
activities, which may affect the reliability
of the analysis.
(D)Other factors affecting reliability.
Like the methods described in §§1.482–3
through 1.482–5 and §1.482–9T(c), the
carveout on account of market returns for
routine contributions relies exclusively
on external market benchmarks. As indi-
cated in §1.482–1(c)(2)(i), as the degree
of comparability between the controlled
participants and uncontrolled transactions
increases, the relative weight accorded the
analysis under this method will increase.
In addition, to the extent the allocation
of nonroutine residual divisional profit or
loss is not based on external market bench-
marks, the reliability of the analysis will be
decreased in relationto an analysis under a
method that relies on market benchmarks.
Finally, the reliability of the analysis un-
der this method may be enhanced by the
fact that all the controlled participants are
evaluated under the residual profit split.
However, the reliability of the results of an
analysis based on information from all the
controlled participants is affected by the
reliability of the data and the assumptions
pertaining to each controlled participant.
Thus, if the data and assumptions are sig-
nificantly more reliable with respect to
one of the controlled participants than with
respect to the others, a different method,
focusing solely on the results of that party,
may yield more reliable results.
(v)Examples. The following examples
illustrate the principles of this paragraph
(g)(7):
Example 1.(i) USP, a U.S. electronic data storage
company, has partially developed technology for a
type of extremely small compact storage devices
(nanodisks) which are expected to provide a signifi-
cant increase in data storage capacity in various types
of portable devices such as cell phones, MP3 players,
laptop computers and digital cameras. At the same
time, USP’s wholly-owned subsidiary, FS, has de-
veloped significant marketing intangibles outside the
United States in the form of customer lists, ongoing
relations with various OEMs, and trademarks that are
well recognized by consumers due to a long history
of marketing successful data storage devices and
other hardware used in various types of consumer
electronics. At the beginning of Year 1, USP enters
into a CSA with FS to develop nanodisk technologies
for eventual commercial exploitation. Under the
CSA, USP will have the right to exploit nanodisks
in the United States, while FS will have the right
to exploit nanodisks in the rest of the world. The
partially developed nanodisk technologies owned by
USP are reasonably anticipated to contribute to the
development of commercially exploitable nanodisks
and therefore the rights in the nanodisk technologies
constitute platform contributions of USP for which
compensation is due under PCTs. FS does not own
any intangible assets that constitute platform contri-
butions for the CSA. Due to the fact that nanodisk
technologies have yet to be incorporated into any
commercially available product, neither USP nor FS
transfers rights to make or sell current products in
conjunctionwiththeCSA.
(ii) Because only in FS’s territory do both con-
trolled participants make significant nonroutine con-
tributions, USP and FS determine that they need to
determine the relative value of their respective con-
tributions to operating profit or loss attributable to the
CSA only in FS’s territory (that is, to FS’s divisional
profit or loss). FS anticipates making no nanodisk
sales during the first year of the CSA in its territory
with revenues in Years 2 reaching $200 million. Rev-
enues through Year 5 are reasonably anticipated to in-
crease by 50% per year. The annual growth rate for
revenues is then expected to decline to 30%per an-
numin Years 6 and 7, 20%per annumin Years 8 and
9 and 10%per annumin Year 10. Revenues are then
expected to start to decline; declining 10% in Year
11 and 5% per annum, thereafter. The routine costs
(costs other than cost contributions, operating cost
contributions, routine platform and operating contri-
butions, and nonroutine contributions) that are alloca-
ble to this revenue in calculating FS’s divisional profit
or loss, are anticipated to equal 45% of gross sales
from Year 2, onwards. FS undertakes routine distri-
bution activities in its markets that constitute routine
contributions to the relevant business activity of ex-
ploiting nanodisk technologies. USP and FS estimate
that the total market return on these routine contri-
butions will amount to 6% of the routine costs. FS
anticipates that its operating cost contributions will
equal $40 million per annum for the first two years of
the CSA and $65 and $70 million in Years 3 and 4.
Thereafter, operating cost contributions are expected
to equal 7% of revenue in each year. FS expects its
cost contributions to be $60 million in Year 1, rise to
$100 million in Years 2 and 3, and then decline again
to $60 million. Thereafter, FS’s cost contributions are
expected to equal 10% of revenues.
2009–7 I.R.B.496February 17, 2009

(iii) USP and FS determine the present value of
the stream of the reasonably anticipated residuals in
FS’s territory over the duration of the CSA Activity
of the divisional profit or loss (revenues minus rou-
tine costs), minus the market returns for routine con-
tributions, the operating cost contributions, and the
cost contributions. USP and FS determine, based on
the considerations discussed in paragraph (g)(2)(v)
of this section, that the appropriate discount rate is
17.5%per annum(for simplicity of calculation in this
example, all financial flows are assumed to occur at
the beginning of each period). Therefore, the present
value of the nonroutine residual divisional profit is
$1.319 billion.
(iv) After analysis, USP and FS determine that
the relative value of the nanodisk technologies con-
tributed by USP to CSA (giving effect only to its
value in FS’s territory) is roughly 150% of the value
of FS’s marketing intangibles (which only have
value in FS’s territory). Consequently, 60% of the
nonroutine residual divisional profit is attributable to
USP’s platform contribution. Therefore, FS’s PCT
payments should have an expected present value
equal to $792 million (.6 x $1.319 billion).
Example 2. (i) USP is a U.S. automobile man-
ufacturing company that has completed significant
research on the development of diesel-electric hy-
brid engines that, if they could be successfully man-
ufactured, would result in providing a significant in-
creased fuel economy for a wide variety of motor ve-
hicles. Successful commercialization of the diesel-
electric hybrid engine will require the development
of a new class of advanced battery that will be light,
relatively cheap to manufacture and yet capable of
holding a substantial electric charge. FS, a foreign
subsidiary of USP, has completed significant research
on developing lithium-ion batteries that appear likely
to have the requisite characteristics. At the beginning
of Year 1, USP enters into a CSA with FS to further
develop diesel-electric hybrid engines and lithium-
ion battery technologies for eventual commercial ex-
ploitation. Under the CSA, USP will have the right to
exploit the diesel-electric hybrid engine and lithium-
ion battery technologies in the United States, while
FS will have the right to exploit such technologies in
the rest of the world. The partially developed diesel-
electric hybrid engine and lithium-ion battery tech-
nologies owned by USP and FS, respectively, are rea-
sonably anticipated to contribute to the development
of commercially exploitable automobile engines and
therefore the rights in both these technologies con-
stitute platform contributions of USP and of FS for
which compensation is due under PCTs. At the time
of inception of the CSA, USP owns operating intangi-
bles in the form of self-developed marketing intangi-
bles which have significant value in the United States,
but not in the rest of the world, and that are rele-
vant to exploiting the cost shared intangibles. Sim-
ilarly, FS owns self-developed marketing intangibles
which have significant value in the rest of the world,
but not in the United States, and that are relevant
to exploiting the cost shared intangibles. Although
the new class of diesel-electric hybrid engine using
lithium-ion batteries is not yet ready for commercial
exploitation, components based on this technology
are beginning to be incorporated in current-genera-
tion gasoline-electric hybrid engines and the rights to
make and sell such products are transferred from USP
to FS andvice-versain conjunction with the inception
of the CSA.
(ii) USP’s estimated RAB share is 66.7 percent.
During year 1, it is anticipated that sales in USP’s ter-
ritory will be $1000X in Year 1. Sales in FS’s terri-
tory are anticipated to be $500X. Thereafter, as rev-
enue from the use of components in gasoline-electric
hybrids is supplemented by revenues from the pro-
duction of complete diesel-electric hybrid engines us-
ing lithium-ion battery technology, anticipated sales
in both territories will increase rapidly at a rate of
50% per annum through Year 4. Anticipated sales
are then anticipated to increase at a rate of 40%per
annumfor another 4 years. Sales are then anticipated
to increase at a rate of 30%per annumthrough year
10. Thereafter, sales are anticipated to decrease at
arateof5%per annumfor the foreseeable future
as new automotive drivetrain technologies displace
diesel-electric hybrid engines and lithium-ion batter-
ies. Total operating expenses attributable to product
exploitation (including operating cost contributions)
equal 40% of sales per year for both USP and FS. USP
and FS estimate that the total market return on their
routine contributions to the CSA will amount to 6% of
the operating expenses. USP is expected to bear
2
/3s
of the total cost contributions for the foreseeable fu-
ture. Cost contributions are expected to total $375X
in Year 1 (of which $250X are borne by USP) and in-
crease at a rate of 25%per annumthrough Year 6. In
Years 7 through 10, cost contributions are expected
to increase 10% a year. Thereafter, cost contributions
are expected to decrease by 5% a year for the foresee-
able future.
(iii) USP and FS determine the present value of
the stream of the reasonably anticipated divisional
profit or loss (revenues minus operating costs), minus
the market returns for routine contributions, minus
cost contributions. USP and FS determine, based on
the considerations discussed in paragraph (g)(2)(v) of
this section, that the appropriate discount rate is 12%
per year. Therefore, the present value of the non-
routine residual divisional profit in USP’s territory
is $41,115X and in CFC’s territory is $20,557X (for
simplicity of calculation in this example, all financial
flows are assumed to occur at the beginning of each
period).
(iv) After analysis, USP and FS determine that,
in the United States the relative value of the tech-
nologies contributed by USP and FS to the CSA and
of the operating intangibles used by USP in the ex-
ploitation of the cost shared intangibles (reported as
equaling 100 in total), equals: USP’s platform contri-
bution (59.5); FS’s platform contribution (25.5); and
USP’s operating intangibles (15). Consequently, the
present value of the arm’s length amount of the PCT
payments that USP should pay to FS for FS’s plat-
form contribution is $10,484X (.255 X $41,115X).
Similarly, USP and FS determine that, in the rest of
the world, the relative value of the technologies con-
tributed by USP and FS to the CSA and of the op-
erating intangibles used by FS in the exploitation of
the cost shared intangibles can be divided as follows:
USP’s platform contribution (63); FS’s platform con-
tribution (27); and FS’s operating intangibles (10).
Consequently, the present value of the arm’s length
amount of the PCT payments that FS should pay to
USP for USP’s platform contribution is $12,951X
(.63 X $20,557X). Therefore, FS is required to make
a net payment to USP with a present value of $2,467X
($12,951X - 10,484X).
(8)Unspecified methods. Methods not
specified in paragraphs (g)(3) through (7)
of this section may be used to evaluate
whether the amount charged for a PCT is
arm’s length. Any method used under this
paragraph (g)(8) must be applied in accor-
dance with the provisions of §1.482–1 and
of paragraph (g)(2) of this section. Consis-
tent with the specified methods, an unspec-
ified method should take into account the
general principle that uncontrolled taxpay-
ers evaluate the terms of a transaction by
considering the realistic alternatives to that
transaction, and only enter into a particu-
lar transaction if none of the alternatives is
preferable to it. Therefore, in establishing
whether a PCT achieved an arm’s length
result, an unspecified method should pro-
vide information on the prices or profits
that the controlled participant could have
realized by choosing a realistic alternative
to the CSA. See paragraph (k)(2)(ii)(J) of
this section. As with any method, an un-
specified method will not be applied unless
it provides the most reliable measure of
an arm’s length resultunder the principles
of the best method rule. See §1.482–1(c)
(Best method rule). In accordance with
§1.482–1(d) (Comparability), to the extent
that an unspecified method relies on inter-
nal data rather than uncontrolled compara-
bles, its reliability will be reduced. Sim-
ilarly, the reliability of a method will be
affected by the reliability of the data and
assumptions used to apply the method, in-
cluding any projections used.
(h)Form of payment rules—(1)CST
Payments. CST Payments may not be paid
in shares of stock in the payor (or stock in
any member of the controlled group that
includes the controlled participants).
(2)PCT Payments—(i)In general.The
consideration under a PCT for a platform
contribution may take one or a combina-
tion of both of the following forms:
(A) Payments of a fixed amount (fixed
payments), either paid in a lump sum pay-
ment or in installment payments spread
over a specified period, with interest cal-
culated in accordance with §1.482–2(a)
(Loans or advances).
(B) Payments contingent on the ex-
ploitation of cost shared intangibles by the
PCT Payor (contingent payments).
(ii)No PCT Payor Stock.PCTPay-
ments may not be paid in shares of stock in
February 17, 20094972009–7 I.R.B.

the PCT Payor (or stock in any member of
the controlled group that includes the con-
trolled participants).
(iii)Specified form of payment—(A)In
general. The form of payment selected
(subject to the rules of this paragraph (h))
for any PCT, including, in the case of
contingent payments, the contingent base
and structure of the payments as set forth
in paragraph (h)(2)(iii)(B) of this section,
must be specified no later than the due
date of the applicable tax return (includ-
ing extensions) for the later of the taxable
year of the PCT Payor or PCT Payee that
includes the date of that PCT.
(B)Contingent payments. In accor-
dance with paragraph (k)(1)(iv)(A) of this
section, a provision of a written contract
described in paragraph (k)(1) of this sec-
tion, or of the additional documentation
described in paragraph (k)(2) of this sec-
tion, that provides for payments for a PCT
(or group of PCTs) to be contingent on
the exploitation of cost shared intangibles
will be respected as consistent with eco-
nomic substance only if the allocation be-
tween the controlled participants of the
risks attendant on such form of payment
is determinable before the outcomes of
such allocation that would have materi-
ally affected the PCT pricing are known or
reasonably knowable. A contingent pay-
ment provision must clearly and unam-
biguously specify the basis on which the
contingent payment obligations are to be
determined. In particular, the contingent
payment provisionmust clearly and un-
ambiguously specify the events that give
rise to an obligation to make PCT Pay-
ments, the royalty base (such as sales or
revenues), and the computation used to
determine the PCT Payments. The roy-
alty base specified must be one that per-
mits verification of its proper use by refer-
ence to books and records maintained by
the controlled participants in the normal
course of business (for example, books and
records maintained for financial account-
ing or business management purposes).
(C)Examples. The following examples
illustrate the principles of this paragraph
(h)(2)(iii).
Example 1. A CSA provides that PCT payments
with respect to a particular platform contribution shall
be contingent payments equal to 15% of the revenues
from sales of products that incorporate cost shared in-
tangibles. The terms further permit (but do not re-
quire) the controlled participants to adjust such con-
tingent payments in accordance with a formula set
forth in the arrangement so that the 15% rate is subject
to adjustment by the controlled participants at their
discretion on an after-the-fact, uncompensated basis.
The Commissioner may impute payment terms that
are consistent with economic substance with respect
to the platform contribution because the contingent
payment provision does not specify the computation
used to determine the PCT Payments.
Example 2. Taxpayer, an automobile manu-
facturer, is a controlled participant in a CSA that
involves research and development to perfect cer-
tain manufacturing techniques necessary to the
actual manufacture of a state-of-the-art, hybrid fuel
injection system known as DRL337. The arrange-
ment involves the platform contribution of a design
patent covering DRL337. Pursuant to paragraph
(h)(2)(iii)(B) of this section, the CSA provides for
PCT payments with respect to the platform contribu-
tion of the patent in the form of royalties contingent
on sales of automobiles that contain the DRL337
system. However, Taxpayer’s system of book- and
record-keeping does notenable Taxpayer to track
which automobile sales involve automobiles that
contain the DRL337 system. Because Taxpayer has
not complied with paragraph (h)(2)(iii)(B) of this
section, the Commissioner may impute payment
terms that are consistent with economic substance
and susceptible to verification by the Commissioner.
(iv)Conversion from fixed to contingent
form of payment. Withregardtoacon-
version of a fixed present value to a con-
tingent form of payment, see paragraphs
(g)(2)(v) (Discount rate) and (g)(2)(vi) (Fi-
nancial projections) of this section.
(3)Coordination of best method rule
and form of payment. A method described
in paragraph (g)(1) of this section eval-
uates the arm’s length amount charged
in a PCT in terms of a form of payment
(method payment form). For example, the
method payment form for the acquisition
price method described in paragraph (g)(5)
of this section, and for the market capi-
talization method described in paragraph
(g)(6) of this section, is fixed payment.
Applications of the income method pro-
vide different method payment forms. See
paragraphs (g)(4)(i)(E) and (g)(4)(iv) of
this section. The method payment form
may not necessarily correspond to the
form of payment specified pursuant to
paragraphs (h)(2)(iii) and (k)(2)(ii)(I) of
this section (specified payment form). The
determination under §1.482–1(c) of the
method that provides the most reliable
measure of an arm’s length result is to
be made without regard to whether the
respective method payment forms under
the competing methods correspond to the
specified payment form. If the method
payment form of the method determined
under §1.482–1(c) to provide the most
reliable measure of an arm’s length result
differs from the specified payment form,
then the conversion from such method
payment form to such specified payment
form will be made to the satisfaction of
the Commissioner.
(i)Allocations by the Commissioner in
connection with a CSA—(1)In general.
The Commissioner may make allocations
to adjust the results of a controlled transac-
tion in connection with a CSA so that the
results are consistent with an arm’s length
result, in accordance with the provisions of
this paragraph (i).
(2)CST allocations—(i)In general.
The Commissioner may make allocations
to adjust the results of a CST so that the
results are consistent with an arm’s length
result, including any allocations to make
each controlled participant’s IDC share, as
determined under paragraph (d)(4) of this
section, equal to that participant’s RAB
share, as determined under paragraph
(e)(1) of this section. Such allocations
may result from, for purposes of CST de-
terminations, adjustments to—
(A) Redetermine IDCs by adding any
costs (or cost categories) that are directly
identified with, or arereasonably allocable
to, the IDA, or by removing any costs (or
cost categories) that are not IDCs;
(B) Reallocate costs between the IDA
and other business activities;
(C) Improve the reliability of the se-
lection or application of the basis used
for measuring benefits for purposes of
estimating a controlled participant’s RAB
share;
(D) Improve the reliability of the pro-
jections used to estimate RAB shares,
including adjustments described in para-
graph (i)(2)(ii) of this section; and
(E) Allocate among the controlled par-
ticipants any unallocated interests in cost
shared intangibles.
(ii)Adjustments to improve the relia-
bility of projections used to estimate RAB
shares—(A)Unreliable projections.A
significant divergence between projected
benefit shares and benefit shares adjusted
to take into account any available actual
benefits to date (adjusted benefit shares)
may indicate that the projections were not
reliable for purposes of estimating RAB
shares. In such a case, the Commissioner
may use adjusted benefit shares as the
most reliable measure of RAB shares and
adjust IDC shares accordingly. The pro-
2009–7 I.R.B.498February 17, 2009

jected benefit shares will not be considered
unreliable, as applied in a given taxable
year, based on a divergence from adjusted
benefit shares for every controlled partic-
ipant that is less than or equal to 20% of
the participant’s projected benefits share.
Further, the Commissioner will not make
an allocation based on such divergence if
the difference is due to an extraordinary
event, beyond the control of the controlled
participants, which could not reasonably
have been anticipated at the time that costs
were shared. The Commissioner generally
may adjust projections of benefits used to
calculate benefit shares in accordance with
the provisions of §1.482–1. In particular,
if benefits are projected over a period of
years, and the projections for initial years
of the period prove to be unreliable, this
may indicate that the projections for the
remaining years of the period are also un-
reliable and thus should be adjusted. For
purposes of this paragraph (i)(2)(ii)(A),
all controlled participants that are not U.S.
persons are treated as a single controlled
participant. Therefore, an adjustment
basedonanunreliableprojectionofRAB
shares will be made to the IDC shares
of foreign controlled participants only if
there is a matching adjustment to the IDC
shares of controlled participants that are
U.S. persons. Nothing in this paragraph
(i)(2)(ii)(A) prevents the Commissioner
from making an allocation if a taxpayer
did not use the most reliable basis for mea-
suring anticipated benefits. For example,
if the taxpayer measures its anticipated
benefits based on units sold, and the Com-
missioner determines that another basis
is more reliable for measuring anticipated
benefits, then the fact that actual units
sold were within 20% of the projected unit
sales will not preclude an allocation under
this section.
(B)Foreign-to-foreign adjustments.
Adjustments to IDC shares based on an
unreliable projection also may be made
among foreign controlled participants if
the variation between actual and projected
benefits has the effect of substantially re-
ducing U.S. tax.
(C)Correlative adjustments to PCTs.
Correlative adjustments will be made to
any PCT Payments of a fixed amount that
were determined based on RAB shares that
are subsequently adjusted on a finding that
they were based on unreliable projections.
No correlative adjustments will be made
to contingent PCT Payments regardless of
whether RAB shares were used as a param-
eter in the valuation of those payments.
(D)Examples. The following examples
illustrate the principles of this paragraph
(i)(2)(ii):
Example 1. U.S. Parent (USP) and Foreign Sub-
sidiary (FS) enter into a CSA to develop new food
products, dividing costs on the basis of projected
sales two years in the future. In Year 1, USP and
FS project that their sales in Year 3 will be equal,
and they divide costs accordingly. In Year 3, the
Commissioner examines the controlled participants’
method for dividing costs. USP and FS actually ac-
counted for 42% and 58% of total sales, respectively.
The Commissioner agrees that sales two years in the
future provide a reliable basis for estimating bene-
fit shares. Because the differences between USP’s
and FS’s adjusted and projected benefit shares are
less than 20% of their projected benefit shares, the
projection of future benefits for Year 3 is reliable.
Example 2. The facts are the same as inExam-
ple 1, except that in Year 3 USP and FS actually
accounted for 35% and 65% of total sales, respec-
tively. The divergence between USP’s projected and
adjusted benefit shares is greater than 20% of USP’s
projected benefit share and is not due to an extra-
ordinary event beyond the control of the controlled
participants. The Commissioner concludes that the
projected benefit shares were unreliable, and uses ad-
justed benefit shares as the basis for an adjustment to
the cost shares borne by USP and FS.
Example 3. U.S. Parent (USP), a U.S. corpo-
ration, and its foreign subsidiary (FS) enter into a
CSA in Year 1. They project that they will begin
to receive benefits from cost shared intangibles in
Years 4 through 6, and that USP will receive 60%
of total benefits and FS 40% of total benefits. In
Years 4 through 6, USP and FS actually receive
50% each of the total benefits. In evaluating the
reliability of the controlled participants’ projections,
the Commissioner compares the adjusted benefit
shares to the projected benefit shares. Although
USP’s adjusted benefit share (50%) is within 20%
of its projected benefit share (60%), FS’s adjusted
benefit share (50%) is not within 20% of its projected
benefit share (40%). Based on this discrepancy, the
Commissioner may conclude that the controlled par-
ticipants’ projections were unreliable and may use
adjusted benefit shares as the basis for an adjustment
to the cost shares borne by USP and FS.
Example 4. Three controlled taxpayers, USP,
FS1, and FS2 enter into a CSA. FS1 and FS2 are for-
eign. USP is a domestic corporation that controls all
the stock of FS1 and FS2. The controlled participants
project that they will share the total benefits of the
cost shared intangibles in the following percentages:
USP 50%; FS1 30%; and FS2 20%. Adjusted benefit
shares are as follows: USP 45%; FS1 25%; and FS2
30%. In evaluating the reliability of the controlled
participants’ projections, the Commissioner com-
pares these adjusted benefit shares to the projected
benefit shares. For this purpose, FS1 and FS2 are
treated as a single controlled participant. The ad-
justed benefit share received by USP (45%) is within
20% of its projected benefit share (50%). In addition,
the non-US controlled participant’ adjusted benefit
share (55%) is also within 20% of their projected
benefit share (50%). Therefore, the Commissioner
concludes that the controlled participant’s projec-
tions of future benefits were reliable, despite the fact
that FS2’s adjusted benefit share (30%) is not within
20% of its projected benefit share (20%).
Example 5. ThefactsarethesameasinExam-
ple 4. In addition, the Commissioner determines that
FS2 has significant operating losses and has no earn-
ings and profits, and that FS1 is profitable and has
earnings and profits. Based on all the evidence, the
Commissioner concludes that the controlled partici-
pants arranged that FS1 would bear a larger cost share
than appropriate in order to reduce FS1’s earnings
and profits and thereby reduce inclusions USP oth-
erwise would be deemed to have on account of FS1
under subpart F. Pursuant to paragraph (i)(2)(ii)(B) of
this section, the Commissioner may make an adjust-
ment solely to the cost shares borne by FS1 and FS2
because FS2’s projection of future benefits was un-
reliable and the variation between adjusted and pro-
jected benefits had the effect of substantially reducing
USP’s U.S. income tax liability (on account of FS1
subpart F income).
Example 6. (i)(A) Foreign Parent (FP) and U.S.
Subsidiary (USS) enter into a CSA in 1996 to de-
velop a new treatment for baldness. USS’s interest in
any treatment developed is the right to produce and
sell the treatment in the U.S. market while FP retains
rights to produce and sell the treatment in the rest of
the world. USS and FP measure their anticipated ben-
efits from the CSA based on their respective projected
future sales of the baldness treatment. The following
sales projections are used:
Sales
[In millions of dollars]
Year
USS
FP
1
5
10
22020
33030
44040
5
4040
February 17, 20094992009–7 I.R.B.

Sales
[In millions of dollars]
Year
USS
FP
64040
7
4040
82020
91010
10
55
(B) In Year 1, the first year of sales, USS is pro-
jected to have lower sales than FP due to lags in U.S.
regulatory approval for the baldness treatment. In
each subsequent year, USS and FP are projected to
have equal sales. Sales are projected to build over
the first three years of the period, level off for several
years, and then decline over the final years of the pe-
riod as new and improved baldness treatments reach
the market.
(ii) To account for USS’s lag in sales in the Year 1,
the present discounted value of sales over the period
is used as the basis for measuring benefits. Based on
the risk associated with this venture, a discount rate of
10 percent is selected. The present discounted value
of projected sales is determined to be approximately
$154.4 million for USS and $158.9 million for FP. On
this basis USS and FP are projected to obtain approx-
imately 49.3% and 50.7% of the benefit, respectively,
and the costs of developing the baldness treatment are
shared accordingly.
(iii) (A) In Year 6, the Commissioner examines
the CSA. USS and FP have obtained the following
sales results through Year 5:
Sales
[In millions of dollars]
YearUSSFP
1017
217
35
3
25
41
43841
5
3941
(B) USS’s sales initially grew more slowly than
projected while FP’s sales grew more quickly. In
each of the first three years of the period, the share
of total sales of at least one of the parties diverged
by over 20% from its projected share of sales. How-
ever, by Year 5 both parties’ sales had leveled off at
approximately their projected values. Taking into ac-
count this leveling off of sales and all the facts and
circumstances, the Commissioner determines that it
is appropriate to use the original projections for the
remaining years of sales. Combining the actual re-
sults through Year 5 with the projections for subse-
quent years, and using a discount rate of 10%, the
present discounted value of sales is approximately
$141.6 million for USS and $187.3 million for FP.
This result implies that USS and FP obtain approxi-
mately 43.1% and 56.9%, respectively, of the antici-
pated benefits from the baldness treatment. Because
these adjusted benefit shares are within 20% of the
benefit shares calculated based on the original sales
projections, the Commissioner determines that, based
on the difference between adjusted and projected ben-
efit shares, the original projections were not unreli-
able. No adjustment is made based on the difference
between adjusted and projected benefit shares.
Example 7. (i) The facts are the same as inExam-
ple 6, except that the actual sales results through Year
5 are as follows:
Sales
[In millions of dollars]
YearUSSFP
1017
217
35
3
25
44
434
54
5
36
55
(ii) Based on the discrepancy between the projec-
tions and the actual results and on consideration of all
the facts, the Commissioner determines that for the remaining years the following sales projections are
more reliable than the original projections:
Sales
[In millions of dollars]
YearUSSFP
636
55
7
36
55
81828
9914
10
4.5
7
2009–7 I.R.B.500February 17, 2009

(iii) Combining the actual results through Year 5
with the projections for subsequent years, and using
a discount rate of 10%, the present discounted value
of sales is approximately $131.2 million for USS and
$229.4 million for FP. This result implies that USS
and FP obtain approximately 35.4% and 63.6%, re-
spectively, of the anticipated benefits from the bald-
ness treatment. These adjusted benefit shares diverge
by greater than 20% from the benefit shares calcu-
lated based on the original sales projections, and the
Commissioner determines that, based on the differ-
ence between adjusted and projected benefit shares,
the original projections were unreliable. The Com-
missioner adjusts cost shares for each of the taxable
years under examination to conform them to the re-
calculated shares of anticipated benefits.
(iii)Timing of CST allocations.Ifthe
Commissioner makes an allocation to ad-
just the results of a CST, the allocation
must be reflected for tax purposes in the
year in which the IDCs were incurred.
When a CST payment is owed by one con-
trolled participant to another controlled
participant, the Commissioner may make
appropriate allocations to reflect an arm’s
length rate of interest for the time value of
money, consistent with the provisions of
§1.482–2(a) (Loans or advances).
(3)PCT allocations. The Commis-
sioner may make allocations to adjust the
results of a PCT so that the results are
consistent with an arm’s length result in
accordance with the provisions of the ap-
plicable sections of the regulations under
section 482, as determined pursuant to
paragraph (a)(2) of this section.
(4)Allocations regarding changes in
participation under a CSA. The Commis-
sioner may make allocations to adjust the
results of any controlled transaction de-
scribed in paragraph (f) of this section if
the controlled participants do not reflect
arm’s length results in relation to any such
transaction.
(5)Allocations when CSTs are consis-
tently and materially disproportionate to
RAB shares. If a controlled participant
bears IDC shares that are consistently
and materially greater or lesser than its
RAB share, then the Commissioner may
conclude that the economic substance of
the arrangement between the controlled
participants is inconsistent with the terms
of the CSA. In such a case, the Com-
missioner may disregard such terms and
impute an agreement that is consistent
with the controlled participants’ course
of conduct, under which a controlled par-
ticipant that bore a disproportionately
greater IDC share received additional
interests in the cost shared intangibles.
See §1.482–1(d)(3)(ii)(B) (Identifying
contractual terms) and §1.482–4(f)(3)(ii)
(Identification of owner). Such additional
interests will consist of partial undivided
interests in the other controlled partici-
pant’s interest in the cost shared intangible.
Accordingly, that controlled participant
must receive arm’s length consideration
from any controlled participant whose
IDC share is less than its RAB share over
time, under the provisions of §§1.482–1
and 1.482–4 through 1.482–6 to provide
compensation for the latter controlled par-
ticipants’ use of such partial undivided
interest.
(6)Periodic adjustments—(i)In gen-
eral. Subject to the exceptions in para-
graph (i)(6)(vi) of this section, the Com-
missioner may make periodic adjustments
for an open taxable year (the Adjustment
Year) and for all subsequent taxable years
for the duration of the CSA Activity with
respect to all PCT Payments, if the Com-
missioner determines that, for a particular
PCT (the Trigger PCT), a particular con-
trolled participant that owes or owed a
PCT Payment relating to that PCT (such
controlled participant being referred to
as the PCT Payor for purposes of this
paragraph (i)(6)) has realized an Actually
Experienced Return Ratio (AERR) that is
outside the Periodic Return Ratio Range
(PRRR). The satisfaction of the condi-
tion stated in the preceding sentence is
referred to as a Periodic Trigger. See para-
graphs (i)(6)(ii) through (vi) of this section
regarding the PRRR, the AERR, and peri-
odic adjustments. In determining whether
to make such adjustments, the Commis-
sioner may consider whether the outcome
as adjusted more reliably reflects an arm’s
length result under all the relevant facts
and circumstances, including any informa-
tion known as of the Determination Date.
The Determination Date is the date of the
relevant determination by the Commis-
sioner. The failure of the Commissioner
to determine for an earlier taxable year
that a PCT Payment was not arm’s length
will not preclude the Commissioner from
making a periodic adjustment for a subse-
quent year. A periodic adjustment under
this paragraph (i)(6) may be made without
regard to whether the taxable year of the
Trigger PCT or any other PCT remains
open for statute of limitations purposes or
whether a periodic adjustment has previ-
ously been made with respect to any PCT
payment.
(ii)PRRR. Except as provided in the
next sentence, thePRRRwill consist of re-
turn ratios that are not less than .667 nor
more than 1.5. Alternatively, if the con-
trolled participants have not substantially
complied with the documentation require-
ments referenced in paragraph (k) of this
section, as modified, if applicable, by para-
graphs (m)(2) and (3) of this section, the
PRRR will consist of return ratios that are
not less than .8 nor more than 1.25.
(iii)AERR—(A)In general.The
AERRis the Present Value of Total Profits
(PVTP) divided by the Present Value of
Investment (PVI). In computing PVTP
and PVI, present values are computed us-
ing the Applicable Discount Rate (ADR),
and all information available as of the
Determination Date is taken into account.
(B)PVTP.ThePVTPis the present
value, as of the CSA Start Date, as de-
fined in section (j)(1)(i) of this section,of
the PCT Payor’s actually experienced divi-
sional profits or losses from the CSA Start
Date through the end of the Adjustment
Year.
(C)PVI.ThePVIis the present value, as
of the CSA Start Date, of the PCT Payor’s
investment associated with the CSA Activ-
ity, defined as the sum of its cost contribu-
tions and its PCT Payments, from the CSA
Start Date through the end of the Adjust-
ment Year. For purposes of computing the
PVI, PCT Payments means all PCT Pay-
ments due from a PCT Payor before net-
ting against PCT Payments due from other
controlled participants pursuant to para-
graph (j)(3)(ii) of this section.
(iv)ADR—(A)In general. Except as
provided in paragraph (i)(6)(iv)(B) of this
section, the ADR is the discount rate pur-
suant to paragraph (g)(2)(v) of this section,
subject to such adjustments as the Com-
missioner determines appropriate.
(B)Publicly traded companies.Ifthe
PCT Payor meets the conditions of para-
graph (i)(6)(iv)(C) of this section, the ADR
isthePCTPayorWACCasofthedateof
the Trigger PCT. However, if the Commis-
sioner determines, or the controlled partic-
ipants establish to the satisfaction of the
Commissioner, that a discount rate other
than the PCT Payor WACC better reflects
thedegreeofriskoftheCSAActivityasof
such date, the ADR is such other discount
rate.
February 17, 20095012009–7 I.R.B.

(C)Publicly traded.APCTPayor
meets the conditions of this paragraph
(i)(6)(iv)(C) if—
(1) Stock of the PCT Payor is publicly
traded; or
(2) Stock of the PCT Payor is not pub-
licly traded, provided —
(i) The PCT Payor is included in a group
of companies for which consolidated fi-
nancial statements are prepared; and
(ii) A publicly traded company in such
group owns, directly or indirectly, stock
in PCT Payor. Stock of a company is
publicly traded within the meaning of this
paragraph (i)(6)(iv)(C) if such stock is
regularlytradedonanestablishedUnited
States securities market and the company
issues financial statements prepared in
accordance with United States generally
accepted accounting principles for the tax-
able year.
(D)PCT Payor WACC.ThePCT Payor
WACCis the WACC, as defined in para-
graph (j)(1)(i) of this section, of the PCT
Payor or the publiclytraded company de-
scribed in paragraph (i)(6)(iv)(C)(2)(ii)of
this section, as the case may be.
(E)Generally accepted accounting
principles. For purposes of paragraph
(i)(6)(iv)(C) of this section, a financial
statement prepared in accordance with
a comprehensive body of generally ac-
cepted accounting principles other than
United States generally accepted account-
ing principles is considered to be prepared
in accordance with United States generally
accepted accounting principles provided
that the amounts of debt, equity, and
interest expense are reflected in any rec-
onciliation betweensuch other accounting
principles and United States generally ac-
cepted accounting principles required to
be incorporated into the financial state-
ment by the securities laws governing
companies whose stock is regularly traded
on United States securities markets.
(v)Determination of periodic adjust-
ments. In the event of a Periodic Trigger,
subject to paragraph (i)(6)(vi) of this
section, the Commissioner may make pe-
riodic adjustments with respect to all PCT
Payments between all PCT Payors and
PCT Payees for the Adjustment Year and
all subsequent years for the duration of
the CSA Activity pursuant to the residual
profit split method as provided in para-
graph (g)(7) of this section, subject to the
further modifications in this paragraph
(i)(6)(v). A periodic adjustment may be
made for a particular taxable year without
regard to whether the taxable years of the
Trigger PCT or other PCTs remain open
for statute of limitation purposes.
(A)In general. Periodic adjustments
are determined by the following steps:
(1) First, determine the present value,
as of the date of the Trigger PCT, of
the PCT Payments under paragraph
(g)(7)(iii)(C)(3) of this section pursuant
to the Adjusted RPSM as defined in para-
graph (i)(6)(v)(B) of this section (first step
result).
(2) Second, convert the first step re-
sult into a stream of contingent payments
on a base of reasonably anticipated divi-
sional profits or losses over the entire dura-
tion of the CSA Activity, using a level roy-
alty rate (second step rate). See paragraph
(h)(2)(iv) of this section (Conversion from
fixed to contingent form of payment). This
conversion is made based on all informa-
tion known as of the Determination Date.
(3) Third, apply the second step rate to
the actual divisional profit or loss for tax-
able years preceding and including the Ad-
justment Year to yield a stream of con-
tingent payments forsuch years, and con-
vert such stream to a present value as of
the CSA Start Date under the principles of
paragraph (g)(2)(v) of this section (third
step result). For this purpose, the second
step rate applied to a loss for a particular
year will yield a negative contingent pay-
ment for that year.
(4) Fourth, convert any actual PCT Pay-
ments up through the Adjustment Year to
a present value as of the CSA Start Date
under the principles of paragraph (g)(2)(v)
of this section. Then subtract such amount
from the third step result. Determine the
nominal amount in the Adjustment Year
that would have a present value as of the
CSA Start Date equal to the present value
determined in the previous sentence to de-
termine the periodic adjustment in the Ad-
justment Year.
(5) Fifth, apply the second step rate to
the actual divisional profit or loss for each
taxable year after the Adjustment Year up
to and including the taxable year that in-
cludes the Determination Date to yield a
stream of contingent payments for such
years. For this purpose, the second step
rate applied to a loss will yield a negative
contingent payment for that year. Then
subtract from each such payment any ac-
tual PCT Payment made for the same year
to determine the periodic adjustment for
such taxable year.
(6) For each taxable year subsequent
to the year that includes the Determina-
tion Date, the periodic adjustment for such
taxable year (which is in lieu of any PCT
Payment that would otherwise be payable
for that year under the taxpayer’s position)
equals the second step rate applied to the
actual divisional profit or loss for that year.
For this purpose, the second step rate ap-
plied to a loss for a particular year will
yield a negative contingent payment for
that year.
(7) If the periodic adjustment for any
taxable year is a positive amount, then it
is an additional PCT Payment owed from
the PCT Payor to the PCT Payee for such
year. If the periodic adjustment for any
taxable year is a negative amount, then it
is an additional PCT Payment owed by the
PCT Payee to the PCT Payor for such year.
(B)Adjusted RPSM as of Determina-
tion Date. The Adjusted RPSM is the
residual profit split method pursuant to
paragraph (g)(7) of this section applied to
determine the present value, as of the date
of the Trigger PCT, of the PCT Payments
under paragraph (g)(7)(iii)(C)(3)ofthis
section, with the following modifications.
(1) Actual results up through the Deter-
mination Date shall be substituted for what
otherwise were the projected results over
such period, as reasonably anticipated as
ofthedateoftheTriggerPCT.
(2) Projected results for the balance of
the CSA Activity after the Determination
Date, as reasonably anticipated as of the
Determination Date, shall be substituted
for what otherwise were the projected re-
sults over such period, as reasonably an-
ticipated as of the date of the Trigger PCT.
(3) The requirement in paragraph
(g)(7)(i) of this section, that at least two
controlled participants make significant
nonroutine contributions, does not apply.
(vi)Exceptions to periodic adjust-
ments—(A)Controlled participants estab-
lish periodic adjustment not warranted.
No periodic adjustment will be made un-
der paragraphs (i)(6)(i) and (i)(6)(v) of
this section if the controlled participants
establish to the satisfaction of the Commis-
sioner that all the conditions described in
one of paragraphs (i)(6)(vi)(A)(1) through
(4) of this section apply with respect to the
Trigger PCT.
2009–7 I.R.B.502February 17, 2009

(1)Transactions involving the same
platform contribution as in the Trigger
PCT.
(i) The same platform contribution is
furnished to an uncontrolled taxpayer un-
der substantially the same circumstances
as those of the relevant Trigger PCT and
with a similar form of payment as the Trig-
ger PCT;
(ii)Thistransactionservesasthebasis
for the application of the comparable un-
controlled transaction method described in
paragraph (g)(3) of this section, in the first
year and all subsequent years in which sub-
stantial PCT Payments relating to the Trig-
ger PCT were required to be paid; and
(iii) The amount of those PCT Pay-
ments in that first year was arm’s length.
(2)Results not reasonably anticipated.
The differential between the AERR and
the nearest bound of the PRRR is due to
extraordinary events beyond the control of
the controlled participants that could not
reasonably have been anticipated as of the
date of the Trigger PCT.
(3)Reduced AERR does not cause Peri-
odic Trigger. The Periodic Trigger would
not have occurred had the PCT Payor’s
divisional profits or losses used to calcu-
late its PVTP excluded those profits or
losses attributable to the PCT Payor’s rou-
tine contributions to its exploitation of cost
shared intangibles, attributable to its op-
erating cost contributions, and attributable
to its nonroutine contributions to the CSA
Activity.
(4)Increased AERR does not cause Pe-
riodic Trigger—(i) The Periodic Trigger
would not have occurred had the divisional
profits or losses of the PCT Payor used to
calculate its PVTP included its reasonably
anticipated divisional profits or losses af-
ter the Adjustment Year from the CSA Ac-
tivity, including fromits routine contribu-
tions, its operating cost contributions, and
its nonroutine contributions to that activ-
ity, and had the cost contributions and PCT
Payments of the PCT Payor used to cal-
culate its PVI included its reasonably an-
ticipated cost contributions and PCT Pay-
ments after the Adjustment Year. The rea-
sonably anticipated amounts in the previ-
ous sentence are determined based on all
information available as of the Determina-
tion Date.
(ii) For purposes of this paragraph
(i)(6)(vi)(A)(4), the controlled partic-
ipants may, if they wish, assume that
the average yearly divisional profits or
losses for all taxable years prior to and
including the Adjustment Year, in which
there has been substantial exploitation of
cost shared intangibles resulting from the
CSA (exploitation years), will continue
to be earned in each year over a period
of years equal to 15 minus the number of
exploitation years prior to and including
the Determination Date.
(B)Circumstances in which Periodic
Trigger deemed not to occur.NoPeriodic
Trigger will be deemed to have occurred
at the times and in the circumstances de-
scribed in paragraph (i)(6)(vi)(B)(1)or(2)
of this section.
(1)10-year period. In any year subse-
quent to the 10-year period beginning with
the first taxable year in which there is sub-
stantial exploitation of cost shared intangi-
bles resulting from the CSA, if the AERR
determined is within the PRRR for each
year of such 10-year period.
(2)5-year period. In any year of the
5-year period beginning with the first tax-
able year in which there is substantial ex-
ploitation of cost shared intangibles result-
ing from the CSA, if the AERR falls below
the lower bound of the PRRR.
(vii)Examples. The following exam-
ples illustrate the rules of this paragraph
(i)(6):
Example 1. (i) At the beginning of Year 1, USP,
a publicly traded U.S. company, and FS, its wholly-
owned foreign subsidiary, enter into a CSA to develop
new technology for cell phones. USP has a platform
contribution, the rights for an in-process technology
that when developed will improve the clarity of calls,
for which compensation is due from FS. FS has no
platform contributions to the CSA, no operating con-
tributions, and no operating cost contributions. USP
and FS agree to fixed PCT payments of $40 million in
Year 1 and $10 million per year for Years 2 through
10. At the beginning of Year 1, the weighted aver-
age cost of capital of the controlled group that in-
cludes USP and FS is 15%. In Year 9, the Commis-
sioner audits Years 5 through 7 of the CSA and con-
siders whether any periodic adjustments should be
made. USP and FS have substantially complied with
the documentation requirements of paragraph (k) of
this section.
(ii) FS experiences the results reported in the fol-
lowing table from its participation in the CSA through
Year 7. In the table, all present values (PV) are re-
ported as of the CSA Start Date, which is the same as
the date of the PCT (and reflect a 15% discount rate as
discussed in paragraph (iii) of thisExample 1). Thus,
in any year the present value of the cumulative invest-
ment is PVI and of the cumulative divisional profit or
loss is PVTP. All amounts in this table and the tables
that follow are reported in millions of dollars and cost
contributions are referred to as “CCs” (for simplicity
of calculation in thisExample 1, all financial flows
are assumed to occur at the beginning of the year).
abcdefgh
YearSales
Non-CC
CostsCCs
PCT
Payments
Investment
(d+e)
Divisional Profit
or Loss
(b-c)
AERR
(PVTP/PVI)
(g/f)
100
15
40
55
0
2 0 0 171027 0
3 0 0 181028 0
468066220103018
5
836718221032118
61,023680241034343
7
1,079747271037332
PV through Year 5925
84669 69138 79
.58
PV through Year 614341,1848174
155250
1.62
PV through Year 71900
1,507
93781713932.31
February 17, 20095032009–7 I.R.B.

(iii) Because USP is publicly traded in the United
States and is a member of the controlled group to
which FS (the PCT Payor) belongs, for purposes of
calculating the AERR for FS, the present values of
its PVTP and PVI are determined using an ADR of
15%, the weighted average cost of capital of the con-
trolled group. (It is assumed that no other rate was de-
termined or established, under paragraph (i)(6)(iv)(B)
of this section, to better reflect the relevant degree of
risk.) At a 15% discount rate, the PVTP, calculated as
of Year 1, and based on actual profits realized by FS
through Year 7 from exploiting the new cell phone
technology developed by the CSA, is $393 million.
The PVI, based on FS’s cost contributions and its PCT
Payments, is $171 million. The AERR for FS is equal
to its PVTP divided by its PVI, $393 million/$171
million, or 2.31. There is a Periodic Trigger because
FS’s AERR of 2.31 falls outside the PRRR of .67 to
1.5, the applicable PRRR for controlled participants
complying with the documentation requirements of
this section.
(iv) At the time of the Determination Date, it is
determined that the first Adjustment Year in which
a Periodic Trigger occurred was Year 6, when the
AERR of FS was determined to be 1.62. It is also
determined that for Year 6 none of the exceptions to
periodic adjustments described in paragraph (i)(6)(vi)
of this section applies. The Commissioner exercises
its discretion under paragraph (i)(6)(i) of this sec-
tion to make periodic adjustments using Year 6 as the
Adjustment Year. Therefore, the arm’s length PCT
Payments from FS to USP shall be determined for
each taxable year using the adjusted residual profit
split method described in paragraphs (g)(7)(v)(B) and
(i)(6)(v)(B) of this section. Periodic adjustments will
be made for each year to the extent the PCT Pay-
ments actually made by FS differ from the PCT Pay-
ment calculation under the adjusted residual profit
split method.
(v) It is determined, as of the Determination Date,
that the cost shared intangibles will be exploited
through Year 10. FS’s return for routine functions
(determined by the Commissioner, based on the re-
turn for comparable routine functions undertaken by
comparable uncontrolled companies, to be 10% of
non-CC costs), and its actual and projected results,
are described in the following table.
abcdefg
YearSalesNon-CC Costs
Divisio
nal
profits or loss
(b-c)CCs
Routine
Return
Residua
l
Profit
(d-e-f)
1 000
15
0
-15
2000170-17
3000180-18
4680662182066-68
5
836718118227224
61,0236803432468
251
7
1,07974733227
75
230
81,1388223162982
205
91,2008943063289
185
10
1.265
974291
35
97
159
Cumulative PV
through
Year 10
as of CSA Start Date
3,080
2,385695
124238332
(vi) The periodic adjustments are calculated in
a series of steps set out in paragraph (i)(6)(v)(A) of
this section. First, a lump sum for the PCT Payment
is determined using the adjusted residual profit split
method. Under the method, based on the consider-
ations discussed in paragraph (g)(2)(v) of this sec-
tion, the appropriate discount rate is 15% per year.
The non-routine residual divisional profit or loss de-
scribed in paragraph (g)(7)(iii)(B) of this section is
$332 million. Further under paragraph (g)(7)(iii)(C)
of this section, the entire nonroutine residual divi-
sional profit constitutes the PCT Payment because
only USP has nonroutine contributions.
(vii) In step two, the first step result ($332 mil-
lion) is converted into a level royalty rate based on
the reasonably anticipated divisional profits or losses
of the CSA Activity, the PV of which is reported in
the table above (net PV of divisional profit or loss
for Years 1 through 10 is $695 million). Conse-
quently, the step two result is a level royalty rate of
47.8% ($332/$694) of the divisional profit in Years
1 through 10.
(viii) In step three, the Commissioner calculates
the PCT Payments due through Year 6 by applying the
step two royalty rate to the actual divisional profits for
each year and then determines the aggregate PV of
these PCT Payments as of the CSA Start Date ($120
million as reported in the following table). In step
four, the PCT Payments actually made through Year 6
are similarly converted to PV as of the CSA Start Date
($74 million) and subtracted from the amount deter-
mined in step three ($120 million - $74 million = $46
million). That difference of $46 million, representing
a net PV as of the CSA Start Date, is then converted
to a nominal amount, as of the Adjustment Year, of
equivalent present value (again using a discount rate
of 15%). That nominal amount is $93 million (not
shown in the table), and is the periodic adjustment in
Year 6.
abcde
YearDivisional ProfitRoyalty Rate
Nominal Royalty Due under
adjusted RPSM
(b
*
c)
Nominal Payments
made
Year 1047.8%
$0$40
Year 2047.8%
$0$10
Year 3047.8%
$0$10
Year 41847.8%
$9$10
2009–7 I.R.B.504February 17, 2009

abcde
YearDivisional ProfitRoyalty Rate
Nominal Royalty Due under
adjusted RPSM
(b
*
c)
Nominal Payments
made
Year 5
11847.8%
$56$10
Year 634347.8%
$164$10
Cumulative PV as of Year 1
$120$74
(ix) Under step five, the royalties due from FS to
USP for Year 7 (the year after the Adjustment Year)
through Year 9 (the year including the Determina-
tion Date) are determined. (These determinations are
made for Years 8 and 9 after the divisional profit for
those years becomes available.) For each year, the pe-
riodic adjustment is a PCT Payment due in addition
to the $10 million PCT Payment that must otherwise
be paid under the CSA as described in paragraph (i)
of thisExample 1. That periodic adjustment is calcu-
lated as the product of the step two royalty rate and the
divisional profit, minus the $10 million that was oth-
erwise paid for that year. The calculations are shown
in the following table:
ab c dEf
YearDivisional profitRoyalty rateRoyalty due (b*c)
PCT Payments
otherwise paidPeriodic adjustment (d-e)
7
33247.8%
$159$10$149
831647.8%
$151$10$141
930647.8%
$146$10$136
(x) Under step six, the periodic adjustment for
Year 10 (the only exploitation year after the year con-
taining the Determination Date) will be determined
by applying the step two royalty rate to the divisional
profit. This periodic adjustment is a PCT Payment
payable from FS to USP, and is in lieu of the $10
payment otherwise due. The calculations are shown
in the following table, based on a divisional profit of
$291 million. USP and FS experienced the following
results in Year 10.
YearDivisional profitRoyalty rateRoyalty due
PCT Payment called
for under
original agreement
but not
madePeriodic adjustment
1029147.8%
$139$10 (not paid)$139
Example 2. ThefactsarethesameasExample
1(i) through (iii). At the time of the Determination
Date, it is determined that the first Adjustment Year in
which a Periodic Trigger occurred was Year 6, when
the AERR of FS was determined to be 1.62. Upon
further investigation as to what may have caused the
high return in FS’s market, the Commissioner learns
that, in Years 4 through 6, USP’s leading competitors
experienced severe, unforeseen disruptions in their
supply chains resulting in a significant increase in
USP’s and FS’s market share for cell phones. Fur-
ther analysis determines that without this unforeseen
occurrence the Periodic Trigger would not have oc-
curred. Based on paragraph (i)(6)(vi)(A)(2)ofthis
section, the Commissioner determines to his satisfac-
tion that no adjustments are warranted.
(j)Definitions and special rules—(1)Defini-
tions—(i)In general. For purposes of this section—
TermDefinitionMain Cross References
Acquisition price
§1.482–7T(g)(5)(i)
Adjusted acquisition price
§1.482–7T(g)(5)(iii)
Adjusted average market capitalization§1.482–7T(g)(6)(iv)
Adjusted benefit shares§1.482–7T(i)(2)(ii)(A)
Adjusted RPSM§1.482–7T(i)(6)(v)(B)
Adjustment Year§1.482–7T(i)(6)(i)
ADR
§1.482–7T(i)(6)(iv)
AERR
§1.482–7T(i)(6)(iii)
Applicable Method§1.482–7T(g)(2)(ix)(A)
Average market capitalization§1.482–7T(g)(6)(iii)
February 17, 20095052009–7 I.R.B.

TermDefinitionMain Cross References
BenefitsBenefitsmean the sum of additional revenue
generated, plus cost savings, minus any cost
increases from exploiting cost shared intangibles.
§1.482–7T(e)(1)(i)
Capability variation§1.482–7T(f)(3)
Change in participation under a CSA§1.482–7T(f)
Consolidated group§1.482–7T(j)(2)(i)
Contingent payments§1.482–7T(h)(2)(i)(B)
Controlled participantControlled participantmeans a controlled taxpayer,
as defined under §1.482–1(i)(5), that is a party to
the contractual agreement that underlies the CSA,
and that reasonably anticipates that it will derive
benefits, as defined in paragraph (e)(1)(i) of this
section, from exploiting one or more cost shared
intangibles.
§1.482–7T(a)(1)
Controlled transfer of interests§1.482–7T(f)(2)
Cost contribution§1.482–7T(d)(4)
Cost shared intangibleCost shared intangiblemeans any intangible, within
the meaning of §1.482–4(b), that is developed by
the IDA, including any portion of such intangible
that reflects a platform contribution. Therefore, an
intangible developed by the IDA is a cost shared
intangible even though the intangible was not
always or was never a reasonably anticipated cost
shared intangible.
§1.482–7T(b)
Cost sharing alternative§1.482–7T(g)(4)(i)(B)
Cost sharing arrangement or CSA§1.482–7T(a), (b)
Cost sharing transactions or CSTs§1.482–7T(a)(1), (b)(1)(i)
Cross operating contributionsAcross operating contributionis any resource
or capability or right, other than a platform
contribution, that a controlled participant has
developed, maintained, or acquired prior to the
CSA Start Date that is reasonably anticipated to
contribute to the CSA Activity within another
controlled participant’s division.
§1.482–7T(a)(3)(iii), (g)(2)(iv)
CSA ActivityCSA Activityis the activity of developing and
exploiting cost shared intangibles.
§1.482–7T(c)(2)(i)
CSA Start DateThe earliest date that any IDC described in
paragraph (d)(1) of this section occurred.
§1.482–7T(i)(6)(iii)(B)
CST Payments§1.482–7T(b)(1)
Date of PCT§1.482–7T(b)(3)
Determination Date§1.482–7T(i)(6)(i)
DivisionDivisionmeans the territory or other division that
serves as the basis of the division of interests under
the CSA in the cost shared intangibles pursuant to
§1.482–7T(b)(4).
See definitions of divisional profit or loss, operating
contribution, and operating cost contribution
Divisional interest§1.482–7T(b)(1)(iii), (b)(4)
Divisional profit or lossDivisional profit or lossmeans the operating profit
or loss as separately earned by each controlled
participant in its division from the CSA Activity,
determined before any expense (including
amortization) on account of cost contributions,
operating cost contributions, routine platform and
operating contributions, nonroutine contributions
(including platform and operating contributions),
and tax.
§1.482–7T(g)(4)(iii)
Fixed payments§1.482–7T(h)(2)(i)(A)
2009–7 I.R.B.506February 17, 2009

TermDefinitionMain Cross References
IDC share§1.482–7T(d)(4)
Input parameters
§1.482–7T(g)(2)(ix)(B)
Intangible development activity or IDA§1.482–7T(d)(1)
Intangible development costs or IDCs§1.482–7T(a)(1), (d)(1)
Licensing alternative§1.482–7T(g)(4)(i)(C)
Licensing paymentsLicensing paymentsmeans payments pursuant to the
licensing obligations under the licensing alternative.
§1.482–7T(g)(4)(iii)
Make-or-sell rights§1.482–7T(c)(4), (g)(2)(iv)
Market-based input parameter§1.482–7T(g)(2)(ix)(B)
Market returns for routine contributionsMarket returns for routine contributionsmeans
returns determined by reference to the returns
achieved by uncontrolled taxpayers engaged in
activities similar to the relevant business activity
in the controlled participant’s division, consistent
with the methods described in §§1.482–3, 1.482–4,
1.482–5, or §1.482–9T(c).
§1.482–7T(g)(4), (g)(7)
Method payment form§1.482–7T(h)(3)
Nonroutine contributionsNonroutine contributionsmeans a controlled
participant’s contributions to the relevant business
activities that are not routine contributions.
Nonroutine contributions ordinarily include both
nonroutine platform contributions and nonroutine
operating contributions used by controlled
participants in the commercial exploitation of
their interests in the cost shared intangibles (for
example, marketing intangibles used by a controlled
participant in its division to sell products that are
based on the cost shared intangible).
§1.482–7T(g)
Nonroutine residual divisional profit or loss§1.482–7T(g)(7)(iii)
Operating contributionsAnoperating contributionis any resource
or capability or right, other than a platform
contribution, that a controlled participant has
developed, maintained, or acquired prior to the
CSA Start Date that is reasonably anticipated to
contribute to the CSA Activity within the controlled
participant’s division.
§1.482–7T(g)(2)(ii), (g)(4)(v)(E), (g)(7)(iii)(A)
&(C)
Operating cost contributionsOperating cost contributionsmeansallcostsin
the ordinary course of business on or after the
CSA Start Date that, based on analysis of the
facts and circumstances, are directly identified
with, or are reasonably allocable to, developing
resources, capabilities, or rights (other than
reasonably anticipated cost shared intangibles) that
are reasonably anticipated to contribute to the CSA
Activity within the controlled participant’s division.
§1.482–7T(g)(2)(ii), (g)(4)(iii), (g)(7)(iii)(B)
PCT Payee§1.482–7T(b)(1)(ii)
PCT Payment§1.482–7T(b)(1)(ii)
PCT Payor§1.482–7T(b)(1)(ii), (i)(6)(i)
PCT Payor WACC§1.482–7T(i)(6)(iv)(D)
Periodic adjustments§1.482–7T(i)(6)(i)
Periodic Trigger§1.482–7T(i)(6)(i)
Platform contribution transaction or PCT§1.482–7T(a)(2), (b)(1)(ii)
Platform contributions§1.482–7T(c)(1)
Post-tax income§1.482–7T(g)(2)(v)(B)(3), (g)(4)(i)(G)
February 17, 20095072009–7 I.R.B.

TermDefinitionMain Cross References
Pre-tax income§1.482–7T(g)(2)(v)(B)(3), (g)(4)(i)(G)
Projected benefit shares§1.482–7T(i)(2)(ii)(A)
PRRR
§1.482–7T(i)(6)(ii)
PVI
§1.482–7T(i)(6)(iii)(C)
PVTP
§1.482–7T(i)(6)(iii)(B)
Reasonably anticipated benefitsA controlled participant’sreasonably anticipated
benefitsmean the benefits that reasonably may be
anticipated to be derived from exploiting cost shared
intangibles. For purposes of this definition, benefits
mean the sum of additional revenue generated,
plus cost savings, minus any cost increases from
exploiting cost shared intangibles.
§1.482–7T(e)(1)
Reasonably anticipated benefits or RAB shares§1.482–7T(a)(1), (e)(1)
Reasonably anticipated cost shared intangible§1.482–7T(d)(1)(ii)
Relevant business activity§1.482–7T(g)(7)(i)
Routine contributionsRoutine contributionsmeans a controlled
participant’s contributions to the relevant business
activities that are of the same or similar kind to
those made by uncontrolled taxpayers involved in
similar business activities for which it is possible
to identify market returns. Routine contributions
ordinarily include contributions of tangible property,
services and intangibles that are generally owned by
uncontrolled taxpayers engaged in similar activities.
A functional analysis is required to identify these
contributions according to the functionsperformed,
risksassumed,andresourcesemployedbyeachof
the controlled participants.
§1.482–7T(g)(4), (g)(7)
Routine platform and operating contributions, and
net routine platform and operating contributions
§1.482–7T(g)(4)(vi), 1.482–7(g)(7)(iii)(C)(4)
Specified payment form§1.482–7T(h)(3)
Stock-based compensation§1.482–7T(d)(3)
Stock options§1.482–7T(d)(3)(i)
Subsequent PCT§1.482–7T(g)(2)(viii)
Target
§1.482–7T(g)(5)(i)
Trigger PCT§1.482–7T(i)(6)(i)
Variable input parameter§1.482–7T(g)(2)(ix)(C)
WACCWACCmeans weighted average cost of capital.§1.482–7T(i)(6)(iv)(D)
(ii)Examples. The following examples illustrate
certain definitions in paragraph (j)(1)(i) of this sec-
tion:
Example 1.Controlled participant. Foreign Par-
ent (FP) is a foreign corporation engaged in the ex-
traction of a natural resource. FP has a U.S. sub-
sidiary (USS) to which FP sells supplies of this re-
source for sale in the United States. FP enters into
a CSA with USS to develop a new machine to ex-
tract the natural resource. The machine uses a new
extraction process that will be patented in the United
States and in other countries. The CSA provides that
USS will receive the rights to exploit the machine in
the extraction of the natural resource in the United
States, and FP will receive the rights in the rest of the
world. This resource does not, however, exist in the
United States. Despite the fact that USS has received
the right to exploit this process in the United States,
USS is not a controlled participant because it will not
derive a benefit from exploiting the intangible devel-
oped under the CSA.
Example 2.Controlled participants. (i) U.S. Par-
ent (USP), one foreign subsidiary (FS), and a second
foreign subsidiary constituting the group’s research
arm (R+D) enter into a CSA to develop manufactur-
ing intangibles for a new product line A. USP and FS
are assigned the exclusive rights to exploit the intan-
gibles respectively in the United States and the rest
of the world, where each presently manufactures and
sells various existing product lines. R+D is not as-
signed any rights to exploit the intangibles. R+D’s
activity consists solely in carrying out research for the
group. It is reliably projected that the RAB shares of
USP and FS will be 66
2
/3%and33
1
/3%, respectively,
and the parties’ agreement provides that USP and FS
will reimburse 66
2
/3%and33
1
/3%, respectively, of the
IDCs incurred by R+D with respect to the new intan-
gible.
(ii) R+D does not qualify as a controlled partici-
pant within the meaning of paragraph (j)(1)(i) of this
section, because it will not derive any benefits from
exploiting cost shared intangibles. Therefore, R+D is
treated as a service provider for purposes of this sec-
tion and must receive arm’s length consideration for
the assistance it is deemed to provide to USP and FS,
under the rules of paragraph (a)(3) of this section and
§§1.482–4(f)(3)(iii), 1.482–4T(f)(4), and 1.482–9T,
as appropriate. Such consideration must be treated
asIDCsincurredbyUSPandFSinproportionto
their RAB shares (that is, 66
2
/3% and 33
1
/3%, respec-
tively). R+D will not be considered to bear any share
of the IDCs under the arrangement.
Example 3.Cost shared intangible, reasonably
anticipated cost shared intangible. U.S. Parent
2009–7 I.R.B.508February 17, 2009

(USP) has developed and currently exploits an an-
tihistamine, XY, which is manufactured in tablet
form. USP enters into a CSA with its wholly-owned
foreign subsidiary (FS) to develop XYZ, a new im-
proved version of XY that will be manufactured as
a nasal spray. Work under the CSA is fully devoted
to developing XYZ, and XYZ is developed. During
the development period, XYZ is a reasonably antic-
ipated cost shared intangible under the CSA. Once
developed, XYZ is a cost shared intangible under the
CSA.
Example 4.Cost shared intangible. The facts are
thesameasinExample 3, except that in the course of
developing XYZ, the controlled participants by acci-
dent discover ABC, a cure for disease D. ABC is a
cost shared intangible under the CSA.
Example 5.Reasonably anticipated benefits.
Controlled parties A and B enter into a cost sharing
arrangement to develop product and process intan-
gibles for an already existing Product P. Without
such intangibles, A and B would each reasonably
anticipate revenue, in present value terms, of $100M
from sales of Product P until it became obsolete.
With the intangibles, A and B each reasonably antic-
ipate selling the same number of units each year, but
reasonably anticipate that the price will be higher.
Because the particular product intangible is more
highly regarded in A’s market, A reasonably antici-
pates an increase of $20M in present value revenue
from the product intangible, while B reasonably
anticipates only an increase of $10M. Further, A
and B each reasonably anticipate spending an extra
$5M present value in production costs to include the
feature embodying the product intangible. Finally, A
and B each reasonably anticipate saving $2M present
value in production costs by using the process in-
tangible. A and B reasonably anticipate no other
economic effects from exploiting the cost shared
intangibles. A’s reasonably anticipated benefits from
exploiting the cost shared intangibles equal its rea-
sonably anticipated increase in revenue ($20M) plus
its reasonably anticipatedcost savings ($2M) minus
its reasonably anticipatedincreased costs ($5M),
which equals $17M. Similarly, B’s reasonably an-
ticipated benefits from exploiting the cost shared
intangibles equal its reasonably anticipated increase
in revenue ($10M) plus its reasonably anticipated
cost savings ($2M) minusits reasonably anticipated
increased costs ($5M), which equals $7M. Thus A’s
reasonably anticipated benefits are $17M and B’s
reasonably anticipated benefits are $7M.
(2)Special rules—(i)Consolidated
group. For purposes of this section, all
members of the same consolidated group
shall be treated as one taxpayer. For these
purposes, the termconsolidated group
means all members of a group of con-
trolled entities created or organized within
a single country and subjected to an in-
come tax by such country on the basis of
their combined income.
(ii)Trade or business.Aparticipant
that is a foreign corporation or nonresi-
dent alien individual will not be treated
as engaged in a trade or business within
the United States solely by reason of its
participation in a CSA. See generally
§1.864–2(a).
(iii)Partnership. A CSA, or an arrange-
ment to which the Commissioner applies
the rules of this section, will not be treated
as a partnership to which the rules of sub-
chapter K of the Internal Revenue Code
apply. See §301.7701–1(c) of this chapter.
(3)Character—(i)CST Payments.CST
Payments generally will be considered the
payor’s costs of developing intangibles
at the location where such development
is conducted. For these purposes, IDCs
borne directly by a controlled participant
that are deductible are deemed to be re-
duced to the extent of any CST Payments
owed to it by other controlled participants
pursuant to the CSA. Each cost shar-
ing payment received by a payee will be
treated as coming pro rata from payments
made by all payors and will be applied pro
rata against the deductions for the taxable
year that the payeeis allowed in connec-
tion with the IDCs. Payments received in
excess of such deductions will be treated
as in consideration for use of the land and
tangible property furnished for purposes
of the CSA by the payee. For purposes of
the research credit determined under sec-
tion 41, CST Payments among controlled
participants will be treated as provided
for intra-group transactions in §1.41–6(i).
Any payment made or received by a tax-
payer pursuant to an arrangement that
the Commissioner determines not to be a
CSA will be subject to the provisions of
§§1.482–1, 1.482–4 through 1.482–6 and
1.482–9T. Any payment that in substance
constitutes a cost sharing payment will be
treated as such for purposes of this section,
regardless of its characterization under
foreign law.
(ii)PCT Payments. A PCT Payor’s pay-
ment required under paragraph (b)(1)(ii)
of this section is deemed to be reduced to
the extent of any payments owed to it un-
der such paragraph from other controlled
participants. Each PCT Payment received
by a PCT Payee will be treated as com-
ing pro rata out of payments made by all
PCT Payors. PCT Payments will be char-
acterized consistently with the designation
of the type of transaction pursuant to para-
graphs (c)(3) and (k)(2)(ii)(H) of this sec-
tion. Depending on such designation, such
payments will be treated as either consid-
eration for a transfer of an interest in intan-
gible property or for services.
(iii)Examples. The following examples
illustrate this paragraph (j)(3):
Example 1. U.S. Parent (USP) and its wholly
owned Foreign Subsidiary (FS) form a CSA to de-
velop a miniature widget, the Small R. Based on RAB
shares, USP agrees to bear 40% and FS to bear 60%
of the costs incurred during the term of the agreement.
The principal IDCs are operating costs incurred by FS
in Country Z of 100X annually, and costs incurred
by USP in the United States also of 100X annually.
Of the total costs of 200X, USP’s share is 80X and
FS’s share is 120X so that FS must make a payment
to USP of 20X. The payment will be treated as a reim-
bursement of 20X of USP’s costs in the United States.
Accordingly, USP’s Form 1120 will reflect an 80X
deduction on account of activities performed in the
United States for purposes of allocation and appor-
tionment of the deduction to source. The Form 5471
“Information Return of U.S. Persons With Respect to
Certain Foreign Corporations” for FS will reflect a
100X deduction on account of activities performed
in Country Z and a 20X deduction on account of ac-
tivities performed in the United States.
Example 2.ThefactsarethesameasinExample
1, except that the 100X of costs borne by USP consist
of 5X of costs incurred by USP in the United States
and 95X of arm’s length rental charge, as described
in paragraph (d)(1)(iii) of this section, for the use of a
facility in the United States. The depreciation deduc-
tion attributable to the U.S. facility is 7X. The 20X
net payment by FS to USP will first be applied in re-
duction pro rata of the 5X deduction for costs and the
7X depreciation deduction attributable to the U.S. fa-
cility. The 8X remainder will be treated as rent for
the U.S. facility.
Example 3. (i) Four members A, B, C, and D of
a controlled group form a CSA to develop the next
generation technology for their business. Based on
RAB shares, the participants agree to bear shares of
the costs incurred during the term of the agreement in
the following percentages: A 40%; B 15%; C 25%;
and D 20%. The arm’s length values of the platform
contributions they respectively own are in the follow-
ing amounts for the taxable year: A 80X; B 40X; C
30X; and D 30X. The provisional (before offsets) and
final PCT Payments among A, B, C, and D are shown
in the table as follows:
February 17, 20095092009–7 I.R.B.

(All amounts stated in X’s)
A
B
C
D
Payments ...............
<40><21>
<37.5>
<30>
Receipts . . . . . . . . . . . . . . . .4834
22.5
24
Final...................813
<15>
<6>
(ii) The
first row/first column shows
A’s prov
isional PCT Payment equal to the
product
of 100X (sum of 40X, 30X, and
30X) and
A’s RAB share of 40%. The
second
row/first column shows A’s pro-
vision
al PCT receipts equal to the sum
of the p
roducts of 80X and B’s, C’s, and
D’s RAB
shares (15%, 25%, and 20%, re-
specti
vely). The other entries in the first
two ro
ws of the table are similarly com-
puted
. The last row shows the final PCT
recei
pts/payments after offsets. Thus, for
the ta
xable year, A and B are treated as re-
ceiv
ing the 8X and 13X, respectively, pro
rata
out of payments by C and D of 15X
and 6
X, respectively.
(k)C
SA administrative requirements.
Acon
trolled participant meets the require-
ment
s of this paragraph if it substantially
comp
lies, respectively, with the CSA
con
tractual, documentation, accounting,
and
reporting requirements of paragraphs
(k)
(1), (k)(2), (k)(3), and (k)(4) of this
sec
tion.
(1)
CSA contractual requirements—(i)
In g
eneral. A CSA must be recorded in
wri
ting in a contract that is contemporane-
ou
s with the formation (and any revision)
of
the CSA and that includes the contrac-
tu
al provisions described in this paragraph
(k
)(1).
(i
i)Contractual provisions. The written
co
ntract described in this paragraph (k)(1)
mu
st include provisions that—
(A
) List the controlled participants and
an
y other members of the controlled group
th
at are reasonably anticipated to benefit
f
rom the use of the cost shared intangibles,
i
ncluding the address of each domestic en-
t
ity and the country of organization of each
f
oreign entity;
(
B) Describe the scope of the IDA to
b
e undertaken and each reasonably antic-
i
pated cost shared intangible or class of
reasonably anticipated cost shared intangi-
bles;
(C) Specify the functions and risks that
each controlled participant will undertake
in connection with the CSA;
(D) Divide among the controlled partic-
ipants all divisional interests in cost shared
intangi
bles and specify each controlled
partici
pant’s divisional interest in the cost
shared i
ntangibles, as described in para-
graphs (
b)(1)(iii) and (b)(4) of this section,
that it
will own and exploit without any
furthe
r obligation to compensate any other
contro
lled participant for such interest;
(E) Pro
vide a method to calculate the
contro
lled participants’ RAB shares, based
on fact
ors that can reasonably be expected
to ref
lect the participants’ shares of antici-
pated
benefits, and require that such RAB
share
s must be updated, as described in
parag
raph (e)(1) of this section (see also
parag
raph (k)(2)(ii)(F) of this section);
(F) En
umerate all categories of IDCs to
be sha
red under the CSA;
(G) Sp
ecify that the controlled par-
ticip
ant must use a consistent method of
acco
unting to determine IDCs and RAB
shar
es, as described in paragraphs (d) and
(e) o
f this section, respectively, and must
tran
slate foreign currencies on a consistent
basi
s;
(H) R
equire the controlled participant
to en
ter into CSTs covering all IDCs, as
des
cribed in paragraph (b)(1)(i) of this sec-
tio
n, in connection with the CSA;
(I)
Require the controlled participants
to e
nter into PCTs covering all platform
con
tributions, as described in paragraph
(b)
(1)(ii) of this section, in connection with
the
CSA;
(J)
Specify the form of payment due un-
der
each PCT (or group of PCTs) in exis-
te
nce at the formation (and any revision)
of
the CSA, including information and ex-
pl
anation that reasonably supports an anal-
ys
is of applicable provisions of paragraph
(h
)ofthissection;and
(K
) Specify the date on which the CSA
is
enteredintoandthedurationoftheCSA,
t
he conditions under which the CSA may
b
e modified or terminated, and the conse-
q
uences of a modification or termination
(
including consequences described under
t
he rules of paragraph (f) of this section).
(
iii)Meaning of contemporane-
o
us—(A)In general. For purposes of this
p
aragraph (k)(1), a written contractual
agreement is contemporaneous with the
formati
on (or revision) of a CSA if, and
only if,
the controlled participants record
the CSA,
in its entirety, in a document
that the
y sign and date no later than 60
days af
ter the first occurrence of any IDC
descri
bed in paragraph (d) of this section
to whic
h such agreement (or revision) is
to appl
y.
(B)Exa
mple. The following example
illust
rates the principles of this paragraph
(k)(1
)(iii):
Example. Companies A and B, both of which are
members of the same controlled group, commence an
IDA on
March 1, Year 1. Company A pays the first
IDCs in relation to the IDA, as cash salaries to A’s re-
search staff, for the staff’s work during the first week
of Mar
ch, Year 1. A and B, however, do not sign
and date any written contractual agreement until Au-
gust 1, Year 1, whereupon they execute a “Cost Shar-
ing A
greement” that purports to be “effective as of”
March 1 of Year 1. The arrangement fails the require-
ment that the participants record their arrangement in
awri
tten contractual agreement that is contempora-
neous with the formation of a CSA. The arrangement
has failed to meet the requirements set forth in para-
gra
ph (b)(2) of this section and, pursuant to paragraph
(b) of this section, cannot be a CSA.
(iv)Interpretation of contractual pro-
visions—(A)In generalThe provisions
of a written contract described in this
paragraph (k)(1) and of the additional
documentation described in paragraph
(k)(2) of this section must be clear and
unambiguous. The provisions will be in-
terpreted by reference to the economic
substance of the transaction and the actual
conduct of the controlled participants. See
§1.482–1(d)(3)(ii)(B) (discussing inter-
pretation of contractual terms in assessing
the comparability of controlled and un-
controlled transactions). Accordingly,
the Commissioner may impute contrac-
tual terms in a CSA consistent with the
economic substance of the CSA and may
disregard contractual terms that lack eco-
nomic substance. An allocation of risk
between controlled participants after the
outcome of such risk is known or reason-
ably knowable lacks economic substance.
See §1.482–1(d)(3)(iii)(B). A contractual
term that is disregarded due to a lack of
economic substance does not satisfy a
contractual requirement set forth in this
paragraph (k)(1) or documentation re-
2009–7 I.R.B.510February 17, 2009

quirement set forth in paragraph (k)(2) of
this section. See paragraph (b)(5) of this
section for the treatment of an arrange-
ment among controlled taxpayers that fails
to comply with the requirements of this
section.
(B)Examples. The following examples
illustrate the principles of this paragraph
(k)(1)(iv). In each example, it is assumed
that the Commissioner will exercise the
discretion granted pursuant to paragraph
(b)(5)(ii) of this section to apply the pro-
visions of this section to the arrangement
that purports to be a CSA.
Example 1. The contractual provisions recorded
upon formation of an arrangement that purports to be
a CSA provide that PCT payments with respect to a
particular platform contribution will consist of pay-
ments contingent on sales. Contrary to the contrac-
tual provisions, the PCT payments actually made are
contingent on profits. Because the controlled partic-
ipants’ actual conduct is different from the contrac-
tual terms, the Commissioner may determine, based
on the facts and circumstances, that—
(i) The actual payments have economic substance
and, therefore, impute payment terms in the CSA con-
sistent with the actual payments; or
(ii) The contract terms reflect the economic sub-
stance of the arrangement and, therefore, the actual
payments must be adjusted to conform to the terms.
Example 2. An arrangement that purports to be
a CSA provides that PCT payments with respect to
a particular platform contribution shall be contingent
payments equal to 10% of sales of products that in-
corporate cost shared intangibles. The contract terms
further provide that the controlled participants must
adjust such contingent payments in accordance with
a formula set forth in the terms. During the first three
years of the arrangement, the controlled participants
fail to make the adjustments required by the terms
with respect to the PCT payments. The Commis-
sioner may determine, based on the facts and circum-
stances, that—
(i) The contingent payment terms with respect to
the platform contribution do not have economic sub-
stance because the controlled participants did not act
in accordance with their upfront risk allocation; or
(ii) The contract terms reflect the economic sub-
stance of the arrangement and, therefore, the actual
payments must be adjusted to conform to the terms.
(2)CSA documentation require-
ments—(i)In general. The controlled
participants must timely update and main-
tain sufficient documentation to establish
that the participants have met the CSA
contractual requirements of paragraph
(k)(1) of this section and the additional
CSA documentation requirements of this
paragraph (k)(2).
(ii)Additional CSA documentation re-
quirements. The controlled participants to
a CSA must timely update and maintain
documentation sufficient to—
(A) Describe the current scope of the
IDA and identify—
(1) Any additions or subtractions from
the list of reasonably anticipated cost
shared intangibles reported pursuant to
paragraph (k)(1)(ii)(B) of this section;
(2) Any cost shared intangible, together
with each controlled participant’s interest
therein; and
(3) Any further development of intan-
gibles already developed under the CSA
or of specified applications of such intan-
gibles which has been removed from the
IDA (see paragraphs (d)(1)(ii) and (j)(1)(i)
of this section (definitions of reasonably
anticipated cost shared intangible, cost
shared intangible)) and the steps (includ-
ing any accounting classifications and
allocations) taken to implement such re-
moval.
(B) Establish that each controlled par-
ticipant reasonably anticipates that it will
derive benefits from exploiting cost shared
intangibles;
(C) Describe the functions and risks that
each controlled participant has undertaken
during the term of the CSA;
(D) Provide an overview of each con-
trolled participant’sbusiness segments, in-
cluding an analysis of the economic and le-
gal factors that affect CST and PCT pric-
ing;
(E) Establish the amount of each con-
trolled participant’s IDCs for each taxable
year under the CSA, including all IDCs
attributable to stock-based compensation,
as described in paragraph (d)(3) of this
section (including the method of measure-
ment and timing used in determining such
IDCs, and the data, as of the date of grant,
used to identify stock-based compensation
with the IDA);
(F) Describe the method used to es-
timate each controlled participant’s RAB
share for each year during the course of the
CSA, including—
(1) All projections used to estimate ben-
efits;
(2) All updates of the RAB shares in
accordance with paragraph (e)(1) of this
section; and
(3) An explanation of why that method
was selected and why the method provides
the most reliable measure for estimating
RAB shares;
(G) Describe all platform contributions;
(H) Designate the type of transaction
involved for each PCT or group of PCTs;
(I) Specify, within the time period pro-
vided in paragraph (h)(2)(iii) of this sec-
tion, the form of payment due under each
PCT or group of PCTs, including informa-
tion and explanation that reasonably sup-
ports an analysis of applicable provisions
of paragraph (h) of this section;
(J) Describe and explain the method se-
lected to determine the arm’s length pay-
ment due under each PCT, including—
(1) An explanation of why the method
selected constitutes the best method, as de-
scribed in §1.482–1(c)(2), for measuring
an arm’s length result;
(2) The economic analyses, data, and
projections relied upon in developing and
selecting the best method, including the
source of the data and projections used;
(3) Each alternative method that was
considered, and the reason or reasons that
the alternative method was not selected;
(4) Any data that the controlled partic-
ipant obtains, after the CSA takes effect,
that would help determine if the controlled
participant’s method selected has been ap-
plied in a reasonable manner;
(5) The discount rate or rates, where
applicable, used for purposes of evaluat-
ing PCT Payments, including information
and explanation that reasonably supports
an analysis of applicable provisions of
paragraph (g)(2)(v) of this section;
(6) The estimated arm’s length values of
any platform contributions as of the dates
of the relevant PCTs, in accordance with
paragraph (g)(2)(ii) of this section;
(7) A discussion, where applicable, of
why transactions were or were not aggre-
gated under the principles of paragraph
(g)(2)(iv) of this section;
(8) The method payment form and any
conversion made from the method pay-
ment form to the specified payment form,
as described in paragraph (h)(3) of this sec-
tion; and
(9) If applicable under paragraph
(i)(6)(iv) of this section, the WACC of
the parent of the controlled group that
includes the controlled participants.
(iii)Coordination rules and pro-
duction of documents
—(A)Coordi-
nation with penalty regulations.See
§1.6662–6(d)(2)(iii)(D) regarding coordi-
nation of the rules of this paragraph (k)
with the documentation requirements for
purposes of the accuracy-related penalty
under section 6662(e) and (h).
February 17, 20095112009–7 I.R.B.

(B)Production of documentation. Each
controlled participant must provide to the
Commissioner, within 30 days of a request,
the items described in this paragraph (k)(2)
and paragraph (k)(3)of this section. The
time for compliance described in this para-
graph (k)(2)(iii)(B) may be extended at the
discretion of the Commissioner.
(3)CSA accounting requirements—(i)
In general. The controlled participants
must maintain books and records (and re-
lated or underlying data and information)
that are sufficient to—
(A) Establish that the controlled partic-
ipants have used (and are using) a consis-
tent method of accounting to measure costs
and benefits;
(B) Permit verification that the amount
of any contingent PCT Payments due have
been (and are being) properly determined;
(C) Translate foreign currencies on a
consistent basis; and
(D) To the extent that the method of ac-
counting used materially differs from U.S.
generally accepted accounting principles,
explain any such material differences.
(ii)Reliance on financial accounting.
For purposes of this section, the controlled
participants may not rely solely upon fi-
nancial accounting to establish satisfac-
tion of the accounting requirements of this
paragraph (k)(3) of this section. Rather,
the method of accounting must clearly re-
flect income.Thor Power Tools Co. v.
Commissioner, 439 U.S. 522 (1979).
(4)CSA reporting requirements—(i)
CSA Statement. Each controlled partici-
pant must file with the Internal Revenue
Service, in the manner described in this
paragraph (k)(4), a “Statement of Con-
trolled Participant to §1.482–7T Cost
Sharing Arrangement” (CSA Statement)
that complies with the requirements of this
paragraph (k)(4).
(ii)Content of CSA Statement.The
CSA Statement of each controlled partic-
ipant must—
(A) State that the participant is a con-
trolled participant in a CSA;
(B) Provide the controlled participant’s
taxpayer identification number;
(C) List the other controlled partici-
pants in the CSA, the country of organ-
ization of each such participant, and the
taxpayer identification number of each
such participant;
(D) Specify the earliest date that any
IDC described in paragraph (d)(1) of this
section occurred; and
(E) Indicate the date on which the con-
trolled participants formed (or revised) the
CSA and, if different from such date, the
date on which the controlled participants
recorded the CSA (or any revision) con-
temporaneously in accordance with para-
graphs (k)(1)(i) and (iii) of this section.
(iii)Time for filing CSA Statement—(A)
90-day ruleEach controlled participant
must file its original CSA Statement
with the Internal Revenue Service Ogden
Campus, no later than 90 days after the
first occurrence of an IDC to which the
newly-formed CSA applies, as described
in paragraph (k)(1)(iii)(A) of this section,
or, in the case of a taxpayer that became
a controlled participant after the forma-
tion of the CSA, no later than 90 days
after such taxpayer became a controlled
participant. A CSA Statement filed in ac-
cordance with this paragraph (k)(4)(iii)(A)
must be dated and signed, under penalties
of perjury, by an officer of the controlled
participant who is duly authorized (under
local law) to sign the statement on behalf
of the controlled participant.
(B)Annual return requirement—(1)In
general. Each controlled participant must
attach to its U.S. income tax return, for
each taxable year for the duration of the
CSA, a copy of the original CSA Statement
that the controlled participant filed in ac-
cordance with the 90-day rule of paragraph
(k)(4)(iii)(A) of this section. In addition,
the controlled participant must update the
information reflected on the original CSA
Statement annually by attaching a sched-
ule that documents changes in such infor-
mation over time.
(2)Special filing rule for annual return
requirement. If a controlled participant is
notrequiredtofileaU.S.incometaxre-
turn, the participant must ensure that the
copy or copies of the CSA Statement and
any updates are attached to Schedule M of
any Form 5471, any Form 5472,“Infor-
mation Return of a 25% Foreign Owned
U.S. Corporation, or a Foreign Corpora-
tion Engaged in a U.S. Trade or Business”
any Form 8865,“Return of U.S. Persons
With Respect to Certain Foreign Partner-
ships”, filed with respect to that partici-
pant.
(iv)Examples.The following examples
illustrate this paragraph (k)(4). In each
example, Companies A and B are members
of the same controlled group.
Example 1. AandB,bothofwhichfileU.S.
tax returns, agree to share the costs of developing a
new chemical formula in accordance with the provi-
sions of this section. On March 30, Year 1, A and
B record their agreement in a written contract styled,
“Cost Sharing Agreement.” The contract applies by
its terms to IDCs occurring after March 1, Year 1.
The first IDCs to which the CSA applies occurred
on March 15, Year 1. To comply with paragraph
(k)(4)(iii)(A) of this section, A and B individually
must file separate CSA Statements no later than 90
days after March 15, Year 1 (June 13, Year 1). Fur-
ther, to comply with paragraph (k)(4)(iii)(B) of this
section, A and B must attach copies of their respec-
tive CSA Statements to their respective Year 1 U.S.
income tax returns.
Example 2. ThefactsarethesameasinExam-
ple 1, except that a year has passed and C, which
files a U.S. tax return, joined the CSA on May 9,
Year 2. To comply with the annual filing requirement
described in paragraph (k)(4)(iii)(B) of this section,
A and B must each attach copies of their respective
CSA Statements (as filed for Year 1) to their respec-
tive Year 2 income tax returns, along with a schedule
updated appropriately to reflect the changes in infor-
mation described in paragraph (k)(4)(ii) of this sec-
tion resulting from the addition of C to the CSA. To
comply with both the 90-day rule described in para-
graph (k)(4)(iii)(A) of this section and the annual fil-
ing requirement described in paragraph (k)(4)(iii)(B)
of this section, C must file a CSA Statement no later
than 90 days after May 9, Year 2 (August 7, Year 2),
and must attach a copy of such CSA Statement to its
Year 2 income tax return.
(l)Effective/applicability date.This
section applies on January 5, 2009.
(m)Transition rule—(1)In general.An
arrangement in existence on January 5,
2009, will be considered a CSA, as de-
scribed under paragraph (b) of this section,
if, prior to such date, it was a qualified
cost sharing arrangement under the provi-
sions of §1.482–7 (as contained in the 26
CFR part 1 edition revised as of January
1, 1996, hereafter referred to as “former
§1.482–7”), but only if the written con-
tract, as described in paragraph (k)(1) of
this section, is amended, if necessary, to
conform with, and only if the activities
of the controlled participants substantially
comply with, the provisions of this sec-
tion, as modified by paragraphs (m)(2) and
(m)(3) of this section, by July 6, 2009.
(2)Transitional modification of appli-
cable provisions. For purposes of this
paragraph (m), conformity and substantial
compliance with the provisions of this sec-
tion shall be determined with the following
modifications:
(i) CSTs and PCTs occurring prior to
January 5, 2009, shall be subject to the
2009–7 I.R.B.512February 17, 2009

provisions of former §1.482–7 rather than
this section.
(ii) Except to the extent provided in
paragraph (m)(3) of this section, PCTs
that occur under a CSA that was a qual-
ified cost sharing arrangement under the
provisions of former §1.482–7 and re-
mained in effect on January 5, 2009, shall
be subject to the periodic adjustment rules
of §1.482–4(f)(2) rather than the rules of
paragraph (i)(6) of this section.
(iii) Paragraphs (b)(1)(iii) and (b)(4) of
this section shall not apply.
(iv) Paragraph (k)(1)(ii)(D) of this sec-
tion shall not apply.
(v) Paragraphs (k)(1)(ii)(H) and
(k)(1)(ii)(I) of this section shall be con-
strued as applying only to transactions
entered into on or after January 5, 2009.
(vi) The deadline for recordation of the
revised written contractual agreement pur-
suant to paragraph (k)(1)(iii) of this section
shall be no later than July 6, 2009.
(vii) Paragraphs (k)(2)(ii)(G) through
(J) of this section shall be construed as ap-
plying only with reference to PCTs entered
into on or after January 5, 2009.
(viii) Paragraph (k)(4)(iii)(A) of this
section shall be construed as requiring a
CSA Statement with respect to the revised
written contractual agreement described
in paragraph (m)(2)(vi) of this section no
later than September 2, 2009.
(ix) Paragraph (k)(4)(iii)(B) of this sec-
tion shall be construed as only applying
for taxable years ending after the filing of
the CSA Statement described in paragraph
(m)(2)(viii) of this section.
(3)Special rule for certain periodic ad-
justments. The periodic adjustment rules
in paragraph (i)(6) of this section (rather
than the rules of §1.482–4(f)(2)) shall ap-
ply to PCTs that occur on or after the date
of a material change in the scope of the
CSA from its scope as of January 5, 2009.
A material change in scope would include
a material expansion of the activities un-
dertaken beyond the scope of the intangi-
ble development area, as described in for-
mer §1.482–7(b)(4)(iv). For this purpose,
a contraction of the scope of a CSA, ab-
sent a material expansion into one or more
lines of research and development beyond
the scope of the intangible development
area, does not constitute a material change
in scope of the CSA. Whether a mate-
rial change in scope has occurred is deter-
mined on a cumulative basis. Therefore,
a series of expansions, any one of which is
not a material expansion by itself, may col-
lectively constitute a material expansion.
(n)Expiration date. The applicability
of this section expires on or before Decem-
ber 30, 2011.
Par. 13. Section 1.482–8 is amended
by revising paragraph (b)Examples 10,11,
and12and addingExamples 13,14,15,
16,17and18at the end of paragraph (b)
to read as follows:
§1.482–8 Examples of the best method
rule.
*****
(b) * * *
Examples 10through18. [Reserved].
For further guidance,see §1.482–8T(b)
Examples 10through18.
Par. 14. Section 1.482–8T is amended
by:
1. AddingExamples13,14,15,16,17
and18at the end of paragraph (b).
2. Revising paragraph (c).
The additions and revision reads as fol-
lows:
§1.482–8T Examples of the best method
rule (temporary).
*****
(b) * * *
Example 13.Preference for acquisition price
method. (i) USP develops, manufacturers, and
distributes pharmaceutical products. USP and FS,
USP’s wholly-owned subsidiary, enter into a CSA
to develop a new oncological drug, Oncol. Immedi-
ately prior to entering into the CSA, USP acquires
Company X, an unrelated U.S. pharmaceutical com-
pany. Company X is solely engaged in oncological
pharmaceutical research, and its only significant
resources and capabilities are its workforce and its
sole patent, which is associated with Compound X,
a promising molecular compound derived from a
rare plant, which USP reasonably anticipates will
contribute to developing Oncol. All of Company X
researchers will be engaged solely in research that
is reasonably anticipated to contribute to developing
Oncol as well. The rights in the Compound X and
the commitment of Company X’s researchers to the
development of Oncol are platform contributions for
which compensation is due from FS as part of a PCT.
(ii) In this case, the acquisition price method,
based on the lump sum price paid by USP for
CompanyX,islikelytoprovideamorereliable
measure of an arm’s length PCT Payment due to
USP than the application of any other method. See
§§1.482–4(c)(2) and 1.482–7T(g)(5)(iv)(A).
Example 14.Preference for market capitaliza-
tion method. (i) Company X is a publicly traded U.S.
company solely engaged in oncological pharmaceuti-
cal research and its only significant resources and ca-
pabilities are its workforce and its sole patent, which
is associated with Compound Y, a promising molecu-
lar compound derived from a rare plant. Company X
has no marketable products. Company X enters into
a CSA with FS, a newly-formed foreign subsidiary,
to develop a new oncological drug, Oncol, derived
from Compound Y. Compound Y is reasonably antic-
ipated to contribute to developing Oncol. All of Com-
pany X researchers will be engaged solely in research
that is reasonably anticipated to contribute to devel-
oping Oncol under the CSA. The rights in Compound
Y and the commitment of Company X’s researchers
are platform contributions for which compensation is
due from FS as part of a PCT.
(ii) In this case, given that Company X’s platform
contributions covered by PCTs relate to its entire eco-
nomic value, the application of the market capital-
ization method, based on the market capitalization of
Company X, provides a reliable measure of an arm’s
length result for Company X’s PCTs to the CSA. See
§§1.482–4(c)(2) and 1.482–7T(g)(6)(v)(A).
Example 15.Preference for market capitaliza-
tion method. (i) MicroDent, Inc. (MDI) is a publicly
traded company that developed a new dental surgi-
cal microscope ScopeX–1, which drastically shortens
many surgical procedures. On January 1 of Year 1,
MDI entered into a CSA with a wholly-owned foreign
subsidiary (FS) to develop ScopeX–2, the next gener-
ation of ScopeX–1. In the CSA, divisional interests
are divided on a territorialbasis. The rights associ-
ated with ScopeX–1, as well as MDI’s research capa-
bilities are reasonably anticipated to contribute to the
development of ScopeX–2 and are therefore platform
contributions for which compensation is due from FS
as part of a PCT. At the time of the PCT, MDI’s only
product was the ScopeX-I microscope, although MDI
was in the process of developing ScopeX–2. Concur-
rent with the CSA, MDI separately transfers exclu-
sive and perpetual exploitation rights associated with
ScopeX–1 to FS in the same territory as assigned to
FS in the CSA.
(ii) Although the transactions between MDI and
FS under the CSA are distinct from the transactions
between MDI and FS relating to the exploitation
rights for ScopeX–1, it is likely to be more reliable
to evaluate the combined effect of the transactions
than to evaluate them in isolation. This is because
the combined transactions between MDI and FS
relate to all of the economic value of MDI (that is,
the exploitation rights and research rights associated
with ScopeX–1, as well as the research capabilities
of MDI). In this case, application of the market cap-
italization method, based on the enterprise value of
MDIonJanuary1ofYear1,islikelytoprovidesa
reliable measure of an arm’s length payment for the
aggregated transactions. See §§1.482–4(c)(2) and
1.482–7T(g)(6)(v)(A).
(iii) Notwithstanding that the market capitaliza-
tion method provides the most reliable measure of
the aggregated transactions between MDI and FS,
see §1.482–7T(g)(2)(iv) for further considerations of
when further analysis may be required to distinguish
between the remuneration to MDI associated with
PCTs under the CSA (for research rights and capa-
bilities associated with ScopeX–1) and the remunera-
tion to MDI for the exploitation rights associated with
ScopeX–1.
Example 16.Income method (applied using
CPM) preferred to acquisition price method.The
factsarethesameasExample 13, except that the ac-
February 17, 20095132009–7 I.R.B.

quisition occurred significantly in advance of forma-
tion of the CSA, and reliable adjustments cannot be
made for this time difference. In addition, Company
X has other valuable molecular patents and associ-
ated research capabilities, apart from Compound X,
that are not reasonably anticipated to contribute to
the development of Oncol and that cannot be reliably
valued. The CSA divides divisional interests on a
territorial basis. Under the terms of the CSA, USP
will undertake all R&D (consisting of laboratory
research and clinical testing) and manufacturing
associated with Oncol, as well as the distribution
activities for its territory (the United States). FS will
distribute Oncol in its territory (the rest of the world).
FS’s distribution activities are routine in nature, and
the profitability from its activities may be reliably
determined from third-party comparables. FS does
not furnish any platform contributions. At the time
of the PCT, reliable (ex ante) financial projections
associated with the development of Oncol and its
separate exploitation in each of USP’s and FSub’s
assigned geographical territories are undertaken. In
this case, application of the income method using
CPM is likely to provide a more reliable measure
of an arm’s length result than application of the
acquisition price method based on the price paid by
USP for Company X. See §1.482–7T(g)(4)(v) and
(g)(5)(iv)(C).
Example 17.Evaluation of alternative methods.
(i) The facts are the same asExample 13, except
that the acquisition occurred sometime prior to the
CSA, and Company X has some areas of promising
research that are not reasonably anticipated to con-
tribute to developing Oncol. For purposes of this ex-
ample, the CSA is assumed to divide divisional in-
terests on a territorial basis. In general, the Com-
missioner determines that the acquisition price data
is useful in informing the arm’s length price, but not
necessarily determinative. Under the terms of the
CSA, USP will undertake all R&D (consisting of lab-
oratory research and clinical testing) and manufactur-
ing associated with Oncol, as well as the distribution
activities for its territory (the United States). FS will
distribute Oncol in its territory (the rest of the world).
FS’s distribution activities are routine in nature, and
the profitability from its activities may be reliably de-
termined from third-party comparables. At the time
of the PCT, financial projections associated with the
development of Oncol and itsseparate exploitation in
each of USP’s and FSub’s assigned geographical ter-
ritories are undertaken.
(ii) Under the facts, it is possible that the acquisi-
tion price method or the income method using CPM
might reasonably be applied. Whether the acquisi-
tion price method or the income method provides the
most reliable evidence of the arm’s length price of
USP’s contributions depends on a number of factors,
including the reliability of the financial projections,
the reliability of the discount rate chosen, and the ex-
tent to which the acquisition price of Company X can
be reliably adjusted to account for changes in value
over the time period between the acquisition and the
formation of the CSA and to account for the value of
the in-process research done by Company X that does
not constitute platform contributions to the CSA. See
§1.482–7T(g)(4)(v) and (g)(5)(iv)(A) and (C).
Example 18.Evaluation of alternative methods.
(i) The facts are the same asExample 17, except that
FS has a patent on Compound Y, which the parties
reasonably anticipate will be useful in mitigating po-
tential side effects associated with Compound X and
thereby contribute to the development of Oncol. The
rights in Compound Y constitute a platform contri-
bution for which compensation is due from USP as
part of a PCT. The value of FS’s platform contribution
cannot be reliably measured by market benchmarks.
(ii) Under the facts, it is possible that either the
acquisition price method and the income method to-
gether or the residual profit split method might rea-
sonably be applied to determine the arm’s length PCT
Payments due between USP and FS. Under the first
option the PCT Payment for the platform contribu-
tions related to Company X’s workforce and Com-
pound X would be determined using the acquisition
price method referring to the lump sum price paid by
USP for Company X. Because the value of these plat-
form contributions can be determined by reference
to a market benchmark, they are considered routine
platform contributions. Accordingly, under this op-
tion, the platform contribution related to Compound
Y would be the only nonroutine platform contribution
and the relevant PCT Payment is determined using
the income method. Under the second option, rather
than looking to the acquisition price for Company X,
all the platform contributions are considered nonrou-
tine and the RPSM is applied to determine the PCT
Payments for each platform contribution. Under ei-
ther option, the PCT Payments will be netted against
each other.
(iii) Whether the acquisition price method to-
gether with the income method or the residual profit
split method provides the most reliable evidence of
the arm’s length price of the platform contributions of
USP and FS depends on a number of factors, includ-
ing the reliability of the determination of the relative
values of the platform contributions for purposes of
the RPSM, and the extent to which the acquisition
price of Company X can be reliably adjusted to
account for changes in value over the time period
between the acquisition and the formation of the
CSA and to account for the value of the rights in the
in-process research done by Company X that does
not constitute platform contributions to the CSA. In
these circumstances, it is also relevant to consider
whether the results of each method are consistent
with each other, or whether one or both methods are
consistent with other potential methods that could
be applied. See §1.482–7T(g)(4)(v), (g)(5)(iv), and
(g)(7)(iv).
(c)Effective/applicability date—(1)In
general. Paragraphs (a) and (b)Examples
10through12of this section are generally
applicable for taxable years beginning af-
ter December 31, 2006. Paragraph (b)Ex-
amples 13through18of this section are
generally applicable on January 5, 2009.
(2)Election to apply regulation to ear-
lier taxable years. A person may elect to
apply the provisions of paragraph (b)Ex-
amples 10through12of this section to ear-
lier taxable years in accordance with rules
set forth in §1.482–9T(n)(2).
(3)Expiration date. The applicabil-
ity of paragraphs (a) and (b)Examples 10
through12of this section expires on or be-
fore July 31, 2009. The applicability of
paragraph (b)Examples 13through18of
this section expires on or before Decem-
ber 30, 2011.
Par. 15. Section 1.482–9T is amended
by revising paragraph (m)(3), the heading
for paragraph (n) and paragraph (n)(3) to
read as follows:
§1.482–9T Methods to determine taxable
income in connection with a controlled
services transaction (temporary).
*****
(m)***
(3)Coordination with rules govern-
ing cost sharing arrangements. Section
1.482–7T provides the specific methods to
be used to determine arm’s length results
of controlled transactions in connection
with a cost sharing arrangement. This sec-
tion provides the specific methods to be
used to determine arm’s length results of
a controlled service transaction, including
in an arrangement forsharing the costs
and risks of developing intangibles other
than a cost sharing arrangement covered
by §1.482–7T. In the case of such an ar-
rangement, consideration of the principles,
methods, comparability, and reliability
considerations set forth in §1.482–7T is
relevant in determining the best method,
including an unspecified method, under
this section, as appropriately adjusted in
light of the differences in the facts and
circumstances between such arrangement
and a cost sharing arrangement.
*****
(n)Effective/applicability dates.***
(3)Expiration dates. The applicability
of this section expires on July 31, 2009,
except paragraph (m)(3) of this section,
which expires on December 30, 2011.
Par. 16. Section 1.861–17 is amended
by revising paragraph (c)(3)(iv) to read as
follows:
§1.861–17 Allocation and apportionment
of research and experimental expenditures.
*****
(c) * * *
(3) * * *
(iv)Effect of cost sharing arrange-
ments. If the corporation controlled by the
taxpayer has entered into a cost sharing
arrangement, in accordance with the pro-
visions of §1.482–7T, with the taxpayer
2009–7 I.R.B.514February 17, 2009

for the purpose of developing intangible
property, then that corporation shall not
reasonably be expected to benefit from the
taxpayer’s share of the research expense.
*****
Par. 17. Section 1.6662–6 is amended
by:
1. Removing the third and fourth sen-
tences from paragraph (d)(2)(i)
2.Adding a new paragraph
(d)(2)(iii)(D).
The addition reads as follows:
§1.6662–6 Transaction between persons
described in section 482 and net section
482 transfer price adjustments.
*****
(d) * * *
(2) * * *
(iii) * * *
(D) Satisfaction of the docu-
mentation requirements described in
§1.482–7T(k)(2) for the purpose of com-
plying with the rules for CSAs under
§1.482–7T also satisfies all of the doc-
umentation requirements listed in para-
graph (d)(2)(iii)(B) of this section, except
the requirements listed in paragraphs
(d)(2)(iii)(B)(2)and(10) of this section,
with respect to CSTs and PCTs described
in §1.482–7T(b)(1)(i) and (ii), provided
that the documentation also satisfies the
requirements of paragraph (d)(2)(iii)(A)
of this section.
*****
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 18. The authority citation for part
301 continues to read in part as follows:
Authority: 26 U.S.C. 7805* * *
Par. 19. Section 301.7701–1 is
amended by revising paragraphs (c) and
(f) to read as follows:
§301.7701–1 Classification of
organizations for Federal tax purposes.
*****
(c)Cost sharing arrangements.Acost
sharing arrangement that is described in
§1.482–7T of this chapter, including any
arrangement that the Commissioner treats
as a CSA under §1.482–7T(b)(5) of this
chapter, is not recognized as a separate en-
tity for purposes of the Internal Revenue
Code. See §1.482–7T of this chapter for
the rules regarding CSAs.
*****
(f)Effective/applicability dates. Except
as provided in the following sentence, the
rules of this section are applicable as of
January 1, 1997. The rules of paragraph (c)
of this section are applicable on January 5,
2009.
PART 602—OMB CONTROL
NUMBER UNDER THE PAPERWORK
REDUCTION ACT
Par. 20. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805
Par. 21. In §602.101, paragraph (b) is
amended by adding the following entry in
numerical order to the table:
§602.101 OMB Control numbers.
*****
(b) * * *
CFR part or section where
identified and described
Current OMB
Control No.
*****
1.482–7T...........................................................
1545–1364
*****
Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.
Approved December 18, 2008.
Eric Solomon,
Assistant Secretary of
the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on December 31,
2008, 11:15 a.m., and published in the issue of the Federal
Register for January 5, 2009, 74 F.R. 236)
February 17, 20095152009–7 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Treatment of Corporations
Whose Instruments are
Acquired by the Treasury
Department Under Certain
Programs Pursuant to
the Emergency Economic
Stabilization Act of 2008
Notice 2009–14
This notice provides additional guid-
ance regarding the application of section
382 and other provisions of law to cor-
porations whose instruments are acquired
by the Treasury Department (Treasury)
pursuant to the Emergency Economic
Stabilization Act of 2008, P. L. 110–343
(EESA). This notice amplifies and super-
sedes Notice 2008–100, 2008–44 I.R.B.
1081, to address other EESA programs.
I. Purpose.
The Internal Revenue Service (Service)
and Treasury Department (Treasury) in-
tend to issue regulations implementing cer-
tain of the rules as described below. Pend-
ing the issuance of further guidance, tax-
payersmayrelyontherulessetforthin
this notice to the extent provided herein.
Section 101(a)(1) of EESA authorizes
the Secretary to establish the Troubled
Asset Relief Program (TARP). This notice
provides guidance to corporate issuers
with respect to five programs established
under EESA: (i) the Capital Purchase Pro-
gram for publicly-traded issuers (Public
CPP); (ii) the Capital Purchase Program
for private issuers (Private CPP); (iii) the
Capital Purchase Program for S corpo-
rations (S Corp CPP); (iv) the Targeted
Investment Program (TARP TIP); and
(v) the Automotive Industry Financing
Program (TARP Auto). Unless otherwise
specified below, a reference to “the Pro-
grams” shall include any of the various
EESA programs described in the preced-
ing sentence.
II. Background.
Section 382(a) of the Internal Revenue
Code (Code) provides that the taxable
income of a loss corporation for a year fol-
lowing an ownership change that may be
offset by pre-change losses cannot exceed
the section 382 limitation for such year.
An ownership change occurs with respect
to a corporation if it is a loss corporation
on a testing date and, immediately after the
close of the testing date, the percentage of
stock of the corporation owned by one or
more 5-percent shareholders has increased
by more than 50 percentage points over
the lowest percentage of stock of such
corporation owned by such sharehold-
ers at any time during the testing period.
See§ 1.382–2T(a)(1) of the Income Tax
Regulations. Section 382(m) of the Code
provides that the Secretary shall prescribe
such regulations as may be necessary or
appropriate to carry out the purposes of
sections 382 and 383.
Section 101(c)(5) of EESA provides
that the Secretary is authorized to issue
such regulations and other guidance as
may be necessary or appropriate to carry
out the purposes of EESA.
Except as otherwise provided, any def-
initions and terms used herein have the
samemeaningastheydoinsection382
of the Code and the regulations thereunder
or in EESA. Unless otherwise specified, a
reference herein to “section” is to the par-
ticular section of the Code or regulations
thereunder.
III. Guidance Regarding Corporations
Whose Instruments are Acquired by the
Treasury Pursuant to EESA
Taxpayersmayrelyontherulesde-
scribed in this Section III to the extent pro-
vided below.
RULES:
A.Treatment of indebtedness and pre-
ferred stock acquired by Treasury.For
all Federal income tax purposes, any in-
strument issued to Treasury pursuant to
the Programs, whether owned by Treasury
or subsequent holders, shall be treated as
an instrument of indebtedness if denom-
inated as such, and as stock described in
section 1504(a)(4) if denominated as pre-
ferred stock. Any amount received by an
issuer under the Programs shall be treated
as received, in its entirety, as consideration
in exchange for the instruments issued. No
such instrument shall be treated as stock
forpurposesofsection382whileheldby
Treasury or by other holders, except that
preferred stock will be treated as stock for
purposes of section 382(e)(1).
B.Treatment of warrants acquired
by Treasury. For all Federal income tax
purposes, any warrant to purchase stock
acquired by Treasury pursuant to the Pub-
licCPP,TARPTIP,andTARPAuto,
whether owned by Treasury or subsequent
holders, shall be treated as an option (and
not as stock). While held by Treasury,
such warrant will not be deemed exercised
under § 1.382–4(d)(2). For all Federal
income tax purposes, any warrant to pur-
chase stock acquired by Treasury pursuant
to the Private CPP shall be treated as
an ownership interest in the underlying
stock, which shall be treated as preferred
stock described in section 1504(a)(4).
For all Federal income tax purposes, any
warrant acquired by Treasury pursuant
to the S Corp CPP shall be treated as
an ownership interest in the underlying
indebtedness.
C.Section 382 treatment of stock ac-
quired by Treasury. For purposes of sec-
tion 382, with respect to any stock (other
than preferred stock) acquired by Treasury
pursuant to the Programs (either directly or
upon the exercise of a warrant), the owner-
ship represented by such stock on any date
onwhichitisheldbyTreasuryshallnotbe
considered to have caused Treasury’s own-
ership in the issuing corporation to have in-
creased over its lowest percentage owned
on any earlier date. Except as described
below, such stock is considered outstand-
ing for purposes of determining the per-
centage of stock owned by other 5-percent
shareholders on a testing date.
D.Section 382 treatment of redemp-
tions of stock from Treasury. For purposes
of measuring shifts in ownership by any
5-percent shareholder on any testing date
occurring on or after the date on which the
issuing corporation redeems stock held by
Treasury that was acquired pursuant to the
Programs (either directly or upon the exer-
cise of a warrant), the stock so redeemed
shall be treated as if it had never been out-
standing.
E.Section 382(l)(1) not applicable with
respect to capital contributions made by
Treasury pursuant to the Programs.For
2009–7 I.R.B.516February 17, 2009

purposes of section 382(l)(1), any capital
contribution made by Treasury pursuant to
the Programs shall not be considered to
have been made as part of a plan a principal
purpose of which was to avoid or increase
any section 382 limitation.
IV. Reliance on Notice.
Taxpayersmayrelyontherulesde-
scribed in Section III. These rules will con-
tinue to apply unless and until there is
additional guidance.Any future contrary
guidance will not apply to instruments (i)
held by Treasury that were acquired pur-
suant to the Programs prior to the publi-
cation of that guidance, or (ii) issued to
Treasury pursuant to the Programs under
binding contracts entered into prior to the
publication of that guidance. In exercis-
ing its authority under EESA in this no-
tice, the Treasury and the Service do not
intend to suggest that similar Federal in-
come tax results would obtain with respect
to instruments similar to those described
herein that are not issued under the Pro-
grams. Accordingly, the Federal income
tax consequences of instruments not issued
under the Programs should continue to be
determined based upon specific facts and
circumstances.
The principal author of this notice is
Keith Stanley of the Office of Associate
Chief Counsel (Corporate). For further
information regarding this notice, contact
Keith Stanley at (202) 622–7750 (not a
toll-free call).
Note.This revenue procedure will be reproduced as the next revision of IRS Publication 1167, General Rules and Specifications for
Substitute Forms and Schedules.
Rev. Proc. 2009–17
TABLE OF CONTENTS
PART 1 – INTRODUCTION TO SUBSTITUTE FORMS
SECTION 1.1 – OVERVIEW OF REVENUE PROCEDURE 2009–17...................................................... 519
SECTION 1.2 – IRS CONTACTS..................................................................................... 520
SECTION 1.3 – WHAT’S NEW...................................................................................... 520
SECTION 1.4 – DEFINITIONS...................................................................................... 521
SECTION 1.5 – AGREEMENT...................................................................................... 523
PART 2 – GENERAL GUIDELINES FOR SUBMISSIONS AND APPROVALS
SECTION 2.1 – GENERAL SPECIFICATIONS FOR APPROVAL........................................................ 524
SECTION 2.2 – HIGHLIGHTS OF PERMITTED CHANGES AND REQUIREMENTS...................................... 525
SECTION 2.3 – VOUCHERS........................................................................................ 526
SECTION 2.4 – RESTRICTIONS ON CHANGES...................................................................... 528
SECTION 2.5 – GUIDELINES FOR OBTAINING IRS APPROVAL....................................................... 528
SECTION 2.6 – OFFICE OF MANAGEMENT AND BUDGET (OMB) REQUIREMENTS FOR ALL
SUBSTITUTE FORMS
................................................................................. 531
PART 3 – PHYSICAL ASPECTS AND REQUIREMENTS
SECTION 3.1 – GENERAL GUIDELINES FOR SUBSTITUTE FORMS................................................... 532
SECTION 3.2 – PAPER............................................................................................. 534
SECTION 3.3 – PRINTING......................................................................................... 535
SECTION 3.4 – MARGINS.......................................................................................... 537
SECTION 3.5 – EXAMPLES OF APPROVED FORMATS............................................................... 537
SECTION 3.6 – MISCELLANEOUS INFORMATION FOR SUBSTITUTE FORMS......................................... 538
February 17, 20095172009–7 I.R.B.

PART 4 – ADDITIONAL RESOURCES
SECTION 4.1 – GUIDANCE FROM OTHER REVENUE PROCEDURES.................................................. 539
SECTION 4.2 – ELECTRONIC TAX PRODUCTS...................................................................... 539
SECTION 4.3 – IRS TAX PRODUCTS ON DVD (PUBLICATION 1796).................................................... 540
PART 5 – REQUIREMENTS FOR SPECIFIC TAX RETURNS
SECTION 5.1 – TAX RETURNS (FORMS 1040, 1040A, 1120, ETC.)....................................................... 540
SECTION 5.2 – CHANGES PERMITTED TO GRAPHICS (FORMS 1040A AND 1040)...................................... 541
SECTION 5.3 – CHANGES PERMITTED TO FORM 1040A GRAPHICS.................................................. 542
SECTION 5.4 – CHANGES PERMITTED TO FORM 1040 GRAPHICS................................................... 543
PART 6 – FORMAT AND CONTENT OF SUBSTITUTE RETURNS
SECTION 6.1 – ACCEPTABLE FORMATS FOR SUBSTITUTE FORMS AND SCHEDULES................................. 544
SECTION 6.2 – ADDITIONAL INSTRUCTIONS FOR ALL FORMS...................................................... 545
PART 7 – MISCELLANEOUS FORMS AND PROGRAMS
SECTION 7.1 – SPECIFICATIONS FOR SUBSTITUTE SCHEDULES K-1................................................. 546
SECTION 7.2 – PROCEDURES FOR PRINTING IRS ENVELOPES...................................................... 551
SECTION 7.3 – GUIDELINES FOR SUBSTITUTE FORMS 8655......................................................... 553
PART 8 – ALTERNATIVE METHODS OF FILING
SECTION 8.1 – FORMS FOR ELECTRONICALLY FILED RETURNS.................................................... 554
SECTION 8.2 – EFFECT ON OTHER DOCUMENTS................................................................... 554
EXHIBITS
Exhibit A-1 – Schedule A (Preferred Format)........................................................................... 555
Exhibit A-2 – Schedule A (Acceptable Format).......................................................................... 556
Exhibit B-1 – Form 2106-EZ (Preferred Format)........................................................................ 557
Exhibit B-2 – Form 2106-EZ (Acceptable Format)....................................................................... 558
Exhibit C – Software Developers Voucher.............................................................................. 559
Exhibit D – Sample Check Sheet...................................................................................... 560
2009–7 I.R.B.518February 17, 2009

Part 1
Introduction to Substitute Forms
Section 1.1 – Overview of Revenue Procedure 2009–17
1.1.1
Purpose
The purpose of this revenue procedure is to provide guidelines and general requirements
for the development, printing, and approval of substitute tax forms. Approval will be based on
these guidelines. After review and approval,submitted forms will beaccepted as substitutes
for official IRS forms.
1.1.2
Unique Forms
Certain unique specialized forms require the use of other additional publications to supple-
ment this publication. See Part 4.
1.1.3
Scope
The IRS accepts quality substitute tax forms that are consistent with the official forms and
have no adverse impact on our processing. The IRS Substitute Forms Unit administers the for-
mal acceptance and processing of these forms nationwide. While this program deals primarily
with paper documents, it also reviews for approval other processing and filing forms such as
those used in electronic filing.
Only those substitute forms that comply fully with these requirements are acceptable. This
revenue procedure is updated as required to reflect pertinent tax year form changes and to meet
processing and/or legislative requirements.
1.1.4
Forms Covered by This Revenue
Procedure
The following types of forms are covered by this revenue procedure:
•IRS tax forms and their related schedules,
•Worksheets as they appear in instruction packages,
•Applications for permission to file returnselectronically and forms used as required docu-
mentation for electronically filed returns,
•Powers of Attorney,
•Over-the-counter estimated tax payment vouchers, and
•Forms and schedules relating to partnerships, exempt organizations, and employee plans.
1.1.5
Forms Not Covered by
This Revenue Procedure
The following types of forms are not covered by this revenue procedure:
•W-2 and W-3 (see Publication 1141 for information on these forms),
•W-2c and W-3c (see Publication 1223 for information on these forms),
•941andScheduleB(Form941)(seePublication4436forinformationontheseforms),
•1096, 1098 series, 1099 series, 5498 series, W-2G, and 1042-S (see Publication 1179 for
information on these forms),
•Federal Tax Deposit (FTD) coupons, which may not be reproduced,
•Forms 1040-ES (OCR) and 1041-ES (OCR), which may not be reproduced,
•Forms 5500, 5500-EZ, and associated schedules (see the Department of Labor website at
w
ww.dol.govfor information on these forms),
•Forms 5307, 8717, and 8905, bar-coded forms requiring separate approval,
•FinCEN forms, TD F 90-22 forms, and Form 8300,
•Requests for information or documentation initiated by the IRS,
•Forms used internally by the IRS,
•State tax forms,
February 17, 20095192009–7 I.R.B.

•Forms developed outside the IRS, and
•General Instructions and Specific Instructions (not reviewed by the Substitute Forms Pro-
gram Unit).
Section 1.2 – IRS Contacts
1.2.1
Where To Send
Substitute Forms
Send your substitute forms for approval to the following offices (do not send forms with
taxpayer data):
FormOffice and Address
All FinCEN family of forms, TD F 90-22
family of forms, and Form 8300
Enterprise Computing Center - Detroit
(ECC-D)
BSA Compliance Branch
P.O. Box 32063
Detroit, MI 48232-0063
5500, 5500-EZ, and Schedules A, C, D, E,
G, H, I, MB, R, SB, and SSA for Form 5500
Check EFAST information at the
Department of Labor’s website at
w
ww.efast.dol.gov
5307, 8717, and 8905
J
oanna.H.Weber@irs.gov
Software developer vouchers (See Sections
2.3.7 - 2.3.9)
Internal Revenue Service
Attn: Doris Bethea, C5-163
5000 Ellin Rd.
Lanham, MD 20706
D
oris.E.Bethea@irs.govor
B
renda.C.Martinez@irs.gov
All others (except W-2, W-2c, W-3, W-3c,
941, Schedule B (Form 941), 1096, 1098,
1099, 5498, W-2G, and 1042-S) covered by
this publication
Internal Revenue Service
Attn: Substitute Forms Program
SE:W:CAR:MP:T:T:SP
1111 Constitution Avenue, NW
Room 6526
Washington, DC 20224
In addition, the Substitute Forms Program Unit can be contacted via email at
S
ubstituteforms@irs.gov. Please include “PDF Submissions” on the subject line.
For questions about Forms W-2 and W-3, refer to IRS Publication 1141, General Rules and
Specifications for Substitute Forms W-2 and W-3. For Forms W-2c and W-3c, refer to IRS
Publication 1223, General Rules and Specifications for Substitute Forms W-2c and W-3c. For
Forms 941 and Schedule B (Form 941), refer to IRS Publication 4436, General Rules and Spec-
ifications for Substitute Form 941 and Schedule B (Form 941). For Forms 1096, 1098, 1099,
5498, W-2G, and 1042-S, refer toIRS Publication 1179, General Rules and Specifications for
Substitute Forms 1096, 1098, 1099, 5498, W-2G, and 1042-S.
Section 1.3 – What’s New
1.3.1
What’s New
The following changes have been made to the Revenue Procedure for tax year 2008.
•The table for “Where To Send Substitute Forms” (Section 1.2.1) has been updated.
2009–7 I.R.B.520February 17, 2009

•The Vouchers section (Section 2.3) has been updated to add some items and to add infor-
mation for an additional contact person.
•Section 4.1.1 listed updated titles to reflect that magnetic media are no longer accepted.
•Section 4.3 has been updated to highlight changes to Publication 1796 (IRS Tax Products
DVD).
•Sections 5.4.6 and 5.4.7 were updated to reflect changes to the 2008 Form 1040.
•Section 7.1 concerning Schedules K-1 was updated.
•Section 8.1.3 concerning electronic filing was updated.
•IRS website addresses were updated as needed.
•The Exhibits section has been changed and updated.
•We made editorial changes as needed.
Section 1.4 – Definitions
1.4.1
Substitute Form
A tax form (or related schedule) that differsinanywayfromtheofficialversionandis
intended to replace the form that is printed and distributed by the IRS. This term also covers
those approved substitute forms exhibited in this revenue procedure.
1.4.2
Printed/Preprinted
Form
A form produced using conventional printing processes, or a printed form which has been
reproduced by photocopying or a similar process.
1.4.3
Preprinted Pin-Fed
Form
A printed form that has marginal perforations for use with automated and high-speed print-
ing equipment.
1.4.4
Computer Prepared
Substitute Form
A preprinted form in which the taxpayer’s tax entry information has been inserted by a
computer, computer printer, or other computer-type equipment.
1.4.5
Computer Generated Substitute
Tax Return or Form
A tax return or form that is entirely designed and printed using a computer printer such as a
laser printer, etc., on plain white paper. This return or form must conform to the physical layout
of the corresponding IRS form, although the typeface may differ. The text should match the
text on the officially printed form as closely aspossible. Condensed text and abbreviations will
be considered on a case-by-case basis.
Exception.All jurats (perjury statements) must be reproduced verbatim.
1.4.6
Manually Prepared
Form
A preprinted reproduced form in which the taxpayer’s tax entry information is entered by
an individual using a pen, pencil, typewriter, or other non-automated equipment.
February 17, 20095212009–7 I.R.B.

1.4.7
Graphics
Parts of a printed tax form that are not tax amount entries or required text. Examples of
graphics are line numbers, captions, shadings,special indicators, borders, rules, and strokes
created by typesetting, photographics, photocomposition, etc.
1.4.8
Acceptable Reproduced
Form
A legible photocopy of an original form.
1.4.9
Supporting Statement
(Supplemental Schedule)
A document providing detailed information to support a line entry on an official or approved
substitute form and filed with (attached to) a tax return.
Note.A supporting statement is not a tax form and does not take the place of an official
form.
1.4.10
Specific Form Terms
The following specific terms are used throughout this revenue procedure in reference to all
substitute forms: format, sequence, line reference, item caption, and data entry field.
1.4.11
Format
The overall physical arrangement and general layout of a substitute form.
1.4.12
Sequence
Sequence is an integral part of the total format requirement. The substitute form should
show the same numeric and logical placement order of data, as shown on the official form.
1.4.13
Line Reference
The line numbers, letters, or alphanumericsused to identify each captioned line on an offi-
cial form. These line references are printedto the immediate left of each caption and/or data
entry field.
1.4.14
Item Caption
The text on each line of a form, which identifies the data required.
1.4.15
Data Entry Field
Designated areas for the entry of data such as dollar amounts, quantities, responses and
checkboxes.
1.4.16
Advance Draft
A draft version of a new or revised form may be posted to the IRS website for information
purposes. Substitute forms may be submitted based on these advance drafts, but any submit-
ter that receives forms approval based on these early drafts is responsible for monitoring and
revising forms to mirror any revisions in the final forms provided by the IRS.
2009–7 I.R.B.522February 17, 2009

1.4.17
Approval
Generally, approval could be in writing or assumed after 20 business days from our receipt
for forms that have not been substantially changed by the IRS. Also, this does not apply to
newly created or substantially revised IRS forms.
Section 1.5 – Agreement
1.5.1
Important Stipulation
of This Revenue Procedure
Any person or company who uses substitute forms and makes all or part of the changes
specified in this revenue procedure agrees to the following stipulations.
•The IRS presumes that any required changes are made in accordance with these procedures
and will not be disruptive to the processing of the tax return.
•Should any of the changes be disruptive to the IRS’s processing of the tax return, the person
or company agrees to accept the determination of the IRS as to whether the form may
continue to be filed.
•The person or company agrees to work with the IRS in correcting noted deficiencies. No-
tification of deficiencies may be made by any combination of fax, letter, email, or phone
contact and may include the request for the re-submission of unacceptable forms.
1.5.2
Response Policy
and Stipulations
The Substitute Forms Unit (theUnit) will email confirmation of receipt of your forms sub-
mission. Your submission can be consideredapproved if you do not receive a response from
the Unit within 20 business days of the receipt date. If the Unit anticipates problems in com-
pleting the review of your submission within the 20 business day period, the Unit will send an
interim email notifying you of the extended period for review.
Once the substitute forms have been approved by the Substitute Forms Unit, you can release
them after the final versions of the forms have been issued by the IRS. Before releasing the
forms, you are responsible for updating forms approved as draft and for making form changes
we requested.
The policy has the following stipulations.
•This 20-day policy applies to electronic submissions only. It does not apply to substitute
forms submitted for approval by paper or fax.
•The policy applies to submissions of 15 or fewer items. Submissions of more than 15 items
may require additional review time.
•If you send a large number of submissions within a short period of time, processing may
be delayed.
•Delays in processing could occur if the Unit finds significant errors in your submission.
The Unit will send you an interim email in this case.
•Any anticipated problems in processing your submission within the 20-day period will
generate an interim email on or about the 15th business day.
•If any significant inaccuracies are discovered after the 20-day period,the Unit reserves the
right to inform you and will require that changes be made to correct the inaccuracies.
•The policy does not apply to substantially revised forms or to new forms created by the
IRS for which you have already made an initial submission.
February 17, 20095232009–7 I.R.B.

Part 2
General Guidelines for Submissions and Approvals
Section 2.1 – General Specifications for Approval
2.1.1
Overview
If you produce any tax forms following the guidelines on only those changes specifically
outlined by the Substitute Forms Unit, you cangenerate your own substitute forms without
further approval. If your changes are more extensive, you must get IRS approval before using
substitute forms. More extensive changes can include the use of typefaces and sizes other than
those found on the official form and the condensing of line item descriptions to save space.
Note.The 20-day turnaround policy may not apply to extensive changes.
2.1.2
Email Submissions
The Substitute Forms Program accepts substitute forms submissions via email. The email
address isS
ubstituteforms@irs.gov. Please include the term “PDF Submissions” on the subject
line.
Follow these guidelines.
•Your submission should include all the forms you wish to submit in one attached pdf file.
Do not email each form individually.
•Small (fewer than 15 forms), rather than large, submissions should expedite processing. A
submission should contain a maximum of 15 forms.
•An approval check sheet listing the forms you are submitting should always be included in
the pdf file along with the forms. See a sample check sheet in Exhibit D.
•Optimize pdf files before submitting.
•The maximum allowable email attachment is 2.5 megabytes.
•The Substitute Forms Unit accepts zip files.
•To alleviate delays during the peak time of September through December, submit advance
draft forms as early as possible.
If the guidelines are not followed, you may need to resubmit.
Emailing pdf submissions will not expedite review and approval
. The pdf submissions will
be assigned a control number and put in queue along with mailed-i
n paper submissions. In
addition to submitting forms via email, you may send your submis
sions to:
Internal Revenue Service
SE:W:CAR:MP:T:T:SP
Attn: Substitute Forms Program
1111 Constitution Avenue, NW
Room 6526
Washington, DC 20224
2.1.3
Expediting the Process
Follow these basic guidelinesfor expediting the process.
•Always include a check sheet for the Substitute Forms Unit’s response.
2009–7 I.R.B.524February 17, 2009

•Follow Publication 1167 for general substitute form guidelines. Follow the specialized
publications produced by the Substitute Forms Unit for other specific forms.
•To spread out the workload, send in draft versions of substitute forms when they are posted.
Note.Be sure to make any changes to approved drafts before releasing final versions.
2.1.4
Schedules
Schedules are considered to be an integral part of a complete tax return. A schedule may be
included as part of a form or printed separately.
2.1.5
Examples of Schedules
That Must Be Submitted
with the Return
Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, is an ex-
ample of this situation. Its Schedules A through U have pages numbered as part of the basic
return. For Form 706 to be considered for approval, the entire form including Schedules A
through U must be submitted.
2.1.6
Examples of Schedules
That Can Be Submitted
Separately
However, Schedules 1, 2, and 3 of Form 1040A are examples of schedules that can be sub-
mitted separately. Although printed by the IRS as a supplement to Form 1040A, none of these
schedules are required to be filed with Form 1040A. These schedules may be separated from
Form 1040A and submitted as substitute forms.
2.1.7
Use and Distribution of
Unapproved Forms
The IRS is continuing a program to identify and contact tax return preparers, forms devel-
opers, and software publishers who use or distribute unapproved forms that do not conform to
this revenue procedure. The use of unapproved forms hinders the processing of the returns.
Section 2.2 – Highlights of Permitted Changes and Requirements
2.2.1
Methods of
Reproducing Internal
Revenue Service Forms
Official IRS tax forms are supplied by the IRS. These forms may be provided in the tax-
payer’s tax package or over-the-counter. Forms can also be picked up at many IRS offices,
post offices, or libraries, and are available on DVD and online atw
ww.irs.gov.
There are methods of reproducing IRS printed tax forms suitable for use as substitutes with-
out prior approval.
•You can photocopy most tax forms and use them instead of the official ones. The entire
substitute form, including entries, must be legible.
•You can reproduce any current tax form as cutsheets, snap sets, and marginally punched,
pin-fed forms as long as you use an official IRS version as the master copy.
•You can reproduce a form that requires a signature as a valid substitute form. Many tax
forms (including returns) have a taxpayer signature requirement as part of the form layout.
The jurat/perjury statement/signature line areas must be retained and worded exactly as on
the official form. The requirement for a signature, by itself, does not prohibit a tax form
from being properly computer-generated.
February 17, 20095252009–7 I.R.B.

Section 2.3 – Vouchers
2.3.1
Overview
All payment vouchers (Forms 940-V, 940-EZ(V), 941-V, 943-V, 945-V, 1040-V, and
2290-V) must be reproduced in conjunction with their forms. Substitute vouchers must be the
same size as the officially printed vouchers. Vouchers that are prepared for printing on a laser
printer may include a scan line.
2.3.2
Scan Line
Specifications
NNNNNNNNN AAXXXX NNN NNNNNNNNN
Item:AB CDEF G
A.Social Security Number/Employer Identification Number (SSN/EIN) has 9 numeric
(N) spaces.
B.Check Digits have 2 alpha (A) spaces.
C.Name Control has 4 alphanumeric (X) spaces.
D.Master File Tax (MFT) Code has 2 numeric (N) spaces (see below).
E.Taxpayer Identification Number (TIN) Type has 1 numeric (N) space (see below).
F.Tax Period has 6 numeric (N) spaces in year/month format (YYYYMM).
G.Transaction Code has 3 numeric (N) spaces.
2.3.3
MFT Code
Code Number for Forms:
•1040 (family) – 30,
•940/940-EZ – 10,
•941 – 01,
•943 – 11,
•944 – 14,
•945 – 16,
•2290 – 60, and
•4868 – 30.
2.3.4
TIN Type
Type Number for:
•Form 1040 (family), 4868 – 0, and
•Forms 940, 940-EZ, 941, 943, 944, 945, and 2290 – 2.
2.3.5
Voucher Size
The voucher size must be exactly 8.0′′x3.25′′(Forms 1040-ES and 1041-ES must be
7.625′′x3.0′′). The document scan line must be vertically positioned 0.25 inches from the
bottom of the scan line to the bottom of the voucher. The last character on the right of the scan
line must be placed 3.5 inches from the right leading edge of the document. The minimum
required horizontal clear space between characters is .014 inches. The line to be scanned must
have a clear band 0.25 inches in height from top to bottom of the scan line, and from border to
border of the document. “Clear band” means no printing except for dropout ink.
2009–7 I.R.B.526February 17, 2009

2.3.6
Print and Paper Weight
Vouchers must be imaged in black ink using OCR A, OCR B, or Courier 10. These fonts
may not be mixed in the scan line. The horizontal character pitch is 10 CPI. The preferred
paper weight is 20 to 24 pound OCR bond.
2.3.7
Specifications for Software
Developers
Certain vouchers may be reproduced for usein the IRS lockbox system. These include
the 1040-V, 1040-ES, the 940 family, and 2290 vouchers. Software developers must follow
these specific guidelines to produce scannable vouchers strictly for lockbox purposes. Also
see Exhibit C.
•The total depth must be 3.25 inches.
•The scan line must be .5 inches from the bottom edge and 1.75 inches from the left edge
of the voucher and left-justified.
•Software developers vouchers must be 8.5 inches wide (instead of 8 inches with a cut line).
Therefore, no vertical cut line is required.
•Scan line positioning must be exact.
•Do not use the over-the-counter format voucher and add the scan line to it.
•All scanned data must be in 12-point OCR A font.
•The 4-digit NACTP ID code should be placed under the payment indicator arrow.
•Windowed envelopes must not display the scanline in order to avoid disclosure and privacy
issues.
Note.All software developers must ensure that their software uses OCR A font so taxpayers
will be able to print the vouchers in the correct font.
2.3.8
Specific Line Positions
Follow these line specifications for entering taxpayer data in the lockbox vouchers.
Start Row
Start
ColumnWidth
End
Column
Line Specifications for
Taxpayer Data:
Taxpayer Name
56
63641
Taxpayer Address, Apt.
57
63641
Taxpayer City, State, ZIP
58
63641
Line Specifications for
Mail To Data:
Mail Address
57
433880
Mail City, State, ZIP
58
433880
Line Speci
fications for:
Scan Line6326n/an/a
February 17, 20095272009–7 I.R.B.

2.3.9
How to Get Approval
To receive approval, please send 25 vouchersamples yearly, by December 10, for testing to
the following address.
Internal Revenue Service
Attn: Doris Bethea, C5-163
5000 Ellin Rd.
Lanham, MD 20706
For further information, contact either Doris Bethea,D
oris.E.Bethea@irs.gov,at
202-283-0218 or Brenda Martinez,B
renda.C.Martinez@irs.gov, at 202-283-5789.
Section 2.4 – Restrictions on Changes
2.4.1
What You Cannot
Do to Forms Suitable
for Substitute
Tax Forms
You cannot, without prior IRS approval, change any IRS tax form or use your own (non-
approved) versions including graphics, unless specifically permitted by this revenue procedure.
See Sections 2.5.7 to 2.5.11.
You cannot adjust any of the graphics on Forms 1040, 1040A, and 1040EZ (except in those
areas specified in Part 5 of this revenue procedure) without prior approval from the IRS Sub-
stitute Forms Unit.
You cannot use your own preprinted label on tax returns filed with the IRS unless you fully
comply with the criteria specified in Section 3.6.3 on the use of pre-addressed IRS labels.
Note.The 20-day turnaround policy may not apply to extensive changes.
Section 2.5 – Guidelines for Obtaining IRS Approval
2.5.1
Basic Requirements
Preparers who submit substitute privately designed, privately printed, computer generated,
or computer prepared tax forms must develop these substitutes using the guidelines established
in this part. These forms, unless there is an exception outlined by the revenue procedure, must
be approved by the IRS before being filed.
2.5.2
Conditional Approval Based on
Advanced Drafts
The IRS cannot grant final approval of your substitute form until the official form has been
published. However, the IRS posts advance draft forms on its website at:
h
ttp://www.irs.gov/app/picklist/list/draftTaxForms.html
We encourage submission of proposed substitutes of these advance draft forms and will
grant conditional approval based solely on these early drafts. These advance drafts are subject
to significant change before forms are finalized. If these advance drafts are used as the basis
for your substitute forms, you will be responsible for subsequently updating your final forms
to agree with the final officialversion. These revisions need not be resubmitted for further
approval.
2009–7 I.R.B.528February 17, 2009

Note.Approval of forms based on advance drafts will not be granted after the final version
of an official form is published.
2.5.3
Submission Procedures
Follow these general guidelines when submitting substitute forms for approval.
•Any alteration of forms must bewithin the limits acceptable to the IRS. It is possible that,
from one filing period to another, a change in law or a change in internal need (processing,
audit, compliance, etc.) may change the allowable limits for the alteration of the official
form.
•When approval of any substitute form (other than those exceptions specified in Part 1,
Section 1.2 – IRS Contacts) is requested, a sample of the proposed substitute form should
be forwarded for consideration via email or by letter to the Substitute Forms Unit at the
address shown in Section 1.2.1.
•Schedules and forms (for example, Forms 3468, 4136, etc.) that can be used with more
than one type of return (for example, 1040, 1041, 1120, etc.) should be submitted only
once for approval, regardless of the number of different tax returns with which they may
be associated. Also, all pages of multi-page forms or returns should be submitted in the
same package.
2.5.4
Approving Offices
Because only the Substitute Forms Unit is authorized to approve substitute forms, unneces-
sary delays may occur if forms are sent to the wrong office. You may receive an interim letter
about the delay. The Substitute Forms Unit may then coordinate the response with the origina-
tor responsible for revising that particular form. Such coordination may include allowing the
originator to officially approve the form. No IRS office is authorized to allow deviations from
this revenue procedure.
2.5.5
IRS Review of
Software Programs, etc.
The IRS does not review or approve the logic of specific software programs, nor does the
IRS confirm the calculations on the forms produced by these programs. The accuracy of the
program remains the responsibility of the software package developer, distributor, or user.
The Substitute Forms Unit is primarily concerned with the pre-filing quality review of the
final forms that are expected tobe processed by IRS field offices. For this purpose, you should
submit forms without including any taxpayer information such as names, addresses, monetary
amounts, etc.
2.5.6
When To Send
Proposed Substitutes
Proposed substitutes, which are required to be submitted per this revenue procedure, should
be sent as much in advance of the filing period as possible. This is to allow adequate time for
analysis and response.
2.5.7
Accompanying
Statement
When submitting sample substitutes, you should include an accompanying statement that
lists each form number and its changes from the official form (position, arrangement, appear-
ance, line numbers, additions, deletions, etc.). With eachof the items you should include a
detailed reason for the change.
February 17, 20095292009–7 I.R.B.

When requesting approval, please include a check sheet. Check sheets expedite the approval
process. The check sheet may look like the example in Exhibit D displayed in the back of this
procedure or may be one of your own design. Please include your fax number on the check
sheet.
2.5.8
Approval/Non-
Approval Notice
The Substitute Forms Unit will fax the check sheet or an approval letter to the originator if
a fax number has been provided, unless:
•The requester has asked for an email response or for a formal letter, or
•Significant corrections to the submitted forms are required.
Notice of approval may impose qualificationsbefore using the substitutes. Notices of un-
approved forms may specify the changes required for approval and require re-submission of
the form(s) in question. When appropriate, you will be contacted by telephone.
2.5.9
Duration of
Approval
Most signature tax returns and many of their schedules and related forms have the tax (li-
ability) year printed in the upper right corner. Approvals for these annual forms are usually
good for one calendar year (January through December of the year of filing). Quarterly tax
forms in the 940 series and Form 720 require approval for any quarter in which the form has
been revised.
Because changes are usually made to an annual form every year, each new filing season
generally requires a new submission of a substitute form. Very rarely is updating the preprinted
year the only change made to an annual form.
2.5.10
Limited
Continued Use of an Approved
Change
Limited changes approved for one tax year may be allowed for the same form in the follow-
ing tax year. Examples are the use of abbreviated words, revised form spacing, compressed
text lines, and shortened captions, etc., which do not change the integrity of lines or text on th
e
official forms.
If substantial changes are made to the form, new substitutes must be submitted for approval.
If only minor editorial changes are made to the form, it is not subject to review. It is the re-
sponsibility of each vendor who has been granted permission to use substitute forms to monitor
and revise forms to mirror any revisions to official forms made by the Service. If there are any
questions, please contact the Substitute Forms Unit.
2.5.11
When Approval
Is Not Required
If you received approval for a specific change on a form last year, you may make the same
change this year if the item is still present on the official form.
•The new substitute form does not have to be submitted to the IRS and approval based on
that change is not required.
•However, the new substitute form must conform to the official current year IRS form in
other respects: date, Office of Management and Budget (OMB) approval number, attach-
ment sequence number, Paperwork Reduction Act Notice statement, arrangement, item
caption, line number, line reference, data sequence, etc.
•The new substitute form must also comply with changes to the guidelines in this revenue
procedure. The procedure may have eliminated, added to, or otherwise changed the guide-
line(s) that affected the change approved in the prior year.
•An approved change is authorized only for the period from a prior tax year substitute form
to a current tax year substitute form.
2009–7 I.R.B.530February 17, 2009

Exception.Forms with temporary, limited, or interim approvals (or with approvals that
state a change is not allowed in any other tax year) are subject to review in subsequent years.
2.5.12
Continuous-
Use Forms
Forms without preprinted tax years are called “continuous-use” forms. Continuous-use
forms are revised when a legislative change affects the form or a change will facilitate pro-
cessing. These forms frequently have revision dates that are valid for longer than one year.
2.5.13
IRS Website
Posting Schedule
A schedule of print dates (for annual and quarterly forms) and most current revision dates
(for continuous-use forms) are maintained on the IRS website. The Tax Products Posting
Schedule can be found atw
ww.irs.gov/formspubs/article/0,,id=103641,00.html. See Section
4.2.2.
2.5.14
Required Copies
Generally, you must send us one copy of each form being submitted for approval. However,
if you are producing forms for different computer systems (for example, IBM compatible vs.
Macintosh) or different types of printers (for example, laser vs. inkjet), and these forms differ
significantlyin appearance, submit one copy for each type of system or printer.
2.5.15
Requestor’s
Responsibility
Following receipt of an initial approval for a substitute forms package or a software output
program to print substitute forms, it is the responsibility of the originator (designer or distrib-
utor) to provide client firms or individualswith forms that meet the IRS’s requirements for
continuing acceptability.Examples of this responsibility include:
•Using the prescribed print paper, font size, legibility, state tax data deletion, etc., and
•Informing all users of substitute forms of thelegal requirements of the Paperwork Reduc-
tion Act Notice, which is generally found in the instructions for the official IRS forms.
2.5.16
Source Code
The Substitute Forms Unit will assign a unique source code to each firm that submits sub-
stitute paper forms for approval. This source code will be a permanent identifier that must be
used on every submission by a particular firm.
The source code consists of three alpha characters and should generally be printed at the
bottom left margin area on the first page of every approved substitute form.
Section 2.6 – Office of Management and Budget (OMB) Requirements for All Substitute Forms
2.6.1
OMB Requirements
for All Substitute Forms
There are legal requirements of the Paperwork Reduction Act of 1995 (The Act). Public
Law 104-13 requires the following.
•OMB approves all IRS tax forms that are subject to the Act.
•Each IRS form contains (in the upper right corner) the OMB number, if assigned.
•Each IRS form (or its instructions) states why the IRS needs the information, how it will
be used, and whether or not the information is required to be furnished to the IRS.
February 17, 20095312009–7 I.R.B.

This information must be provided to every user of official or substitute IRS forms or in-
structions.
2.6.2
Application of the Paperwork
Reduction Act
On forms that have been assigned OMB numbers:
•All substitute forms must contain in the upper right corner the OMB number that is on the
official form, and
•The required format is: OMB No. 1545-XXXX (Preferred) or OMB # 1545-XXXX (Ac-
ceptable).
2.6.3
Required
Explanation to Users
You must inform the users of your substitute forms of the IRS use and collection require-
ments stated in the instructions for official IRS forms.
•If you provide your users or customers with the official IRS instructions, each form must
retain either the Paperwork Reduction Act Notice (or Disclosure, Privacy Act, and Pa-
perwork Reduction Act Notice), or a reference to it as the IRS does on the official forms
(usually in the lower left corner of the forms).
•This notice reads, in part, “We ask for the information on this form to carry out the Internal
Revenue laws of the United States....”
Note.If no IRS instructions are provided to users of your forms, the exact text of the Paper-
work Reduction Act Notice (or Disclosure, Privacy Act, and PaperworkReduction Act Notice)
must be furnished separately or on the form.
2.6.4
Finding the OMB
Number and Paperwork
Reduction Act Notice
The OMB number and the Paperwork Reduction Act Notice, or references to it, may be
found printed on an official form (or its instructions). The number and the notice are included
on the official paper format and in other formats produced by the IRS (for example, DVD
(Publication 1796) or Internet download).
Part 3
Physical Aspects and Requirements
Section 3.1 – General Guidelines for Substitute Forms
3.1.1
General Information
The official form is the standard. Because a substitute form is a variation from the official
form, you should know the requirements of the official form for the year of use before you
modify it to meet your needs. The IRS provides several means of obtaining the most frequently
used tax forms. These include the Internet and DVD (see Part 4).
2009–7 I.R.B.532February 17, 2009

3.1.2
Design
Each form must follow the design of the official form as to format arrangement, item cap-
tion, line numbers, line references, and sequence.
3.1.3
State Tax
Information Prohibited
Generally, state tax information must not appearon the federal tax return, associated form,
or schedule that is filed with the IRS. Exceptions occur when amounts are claimed on, or re-
quired by, the federal return (for example, state and local income taxes, on Schedule A of Form
1040).
3.1.4
Vertical Alignment
of Amount Fields
IF a form is to be...THEN...
1.The entry column must have a vertical line or some
type of indicator in the amount field to separate dollars
from cents.
Manually prepared
2.The cents column must be at least 3/10′′wide.
1.Vertically align the amount entry fields where possible.
2.Use one of the following amount formats:
a) 0,000,000, or
Computer generated
b) 0,000,000.00.
1.You may remove the vertical line in the amount field
that separates dollars from cents.
2.Use one of the following amount formats:
a) 0,000,000, or
Computer prepared
b) 0,000,000.00.
3.1.5
Attachment
Sequence Number
Many individual income tax forms have a required “attachment sequence number” located
just below the year designation in the upper right corner of the form. The IRS uses this number
to indicate the order in which forms are to be attached to the tax return for processing. Some
of the attachment sequence numbers may change from year to year.
The following applies to computer prepared forms.
•The sequence number may be printed in no less than 12-point boldface type and centered
below the form’s year designation.
•The sequence number may alsobe placed following the year designation for the tax form
and separated with an asterisk.
•The actual number may be printed without labeling it the “Attachment Sequence Number.”
3.1.6
Assembly of Forms
When developing software or forms for use by others, please inform your customers/clients
that the order in which the forms are arranged may affect the processing of the package. A
return must be arranged inthe order indicated below.
February 17, 20095332009–7 I.R.B.

IF the form is...THEN the sequence is...
1040• Form 1040, and
• Schedules and forms in attachment sequence number order.
Anyothertaxreturn
(Form 1120, 1120S,
1065, 1041, etc.)
• The tax returns,
• Directly associated schedules (Schedule D, etc.),
• Directly associated forms,
• Additional schedules in alphabetical order, and
• Additional forms in numerical order.
Supporting statements should then follow in the same sequence as the forms they support.
Additional information required should be attached last.
In this way, the forms are received in the order in which they must be processed. If you do
not send returns to the IRS in order, processing may be delayed.
3.1.7
Paid Preparer’s
Information and
Signature Area
On Forms 1040EZ, 1040A, 1040, and 1120, etc., the “Paid Preparer’s Use Only” area may
not be rearranged or relocated. You may, however, add three extra lines to the paid preparer’s
address area without prior approval. This applies to other tax forms as well.
3.1.8
Some Common Reasons
for Requiring Changes to
Substitute Forms
Some reasons that substitute form submissions may require changes include the following.
•Failing to preprint certain amounts in entry spaces.
•Shading areas incorrectly.
•Failing to include a reference to the location of the Paperwork Reduction Act Notice.
•Not including parentheses for losses.
•Not including “Attach Statement” when appropriate.
•Including line references or entry spacesthat don’t match the official form.
•Printing text that is different from the official form.
•Altering the jurat.
Section 3.2 – Paper
3.2.1
Paper Content
The paper must be:
•Chemical wood writing paper that is equal to or better than the quality used for the official
form,
•At least 18 pound (17′′x22′′, 500 sheets), or
•At least 50 pound offset book (25′′x38′′, 500 sheets).
3.2.2
Paper with
Chemical Transfer
Properties
There are several kinds of paper prohibited for substitute forms. These are:
1. Carbon-bonded paper, and
2. Chemical transfer paper except when the following specifications are met:
2009–7 I.R.B.534February 17, 2009

a. Each ply within the chemical transfer set of forms must be labeled, and
b. Only the top ply (ply one and white in color), the one that contains chemical
on the back only (coated back), may be filed with the IRS.
3.2.3
Example
A set containing three plies would be constructed as follows:ply one (coated back), “Fed-
eral Return, File with IRS”; ply two (coated front and back), “Taxpayer’s copy”; and ply three
(coated front), “Preparer’s copy.”
The file designation, “Federal Return, File with IRS” for ply one, must be printed in the
bottom right margin (just below the last line of the form) in 12-point boldface type.
It is not mandatory, but recommended, that the file designation “Federal Return, File with
IRS” be printed in a contrasting ink for visual emphasis.
3.2.4
Carbon Paper
Do not attach an
y carbon paper to any return you file with the IRS.
3.2.5
Paper and Ink
Color
It is preferred that the color and opacity of paper substantially duplicates that of the original
form. This means that your substitute must be printed in black ink and may be on white or on
the colored paper the IRS form is printed on. Forms 1040A and 1040 substitute reproductions
may be in black ink without the colored shading. The only exception to this rule is Form
1041-ES, which should always be printed with a very light gray shading in the color screened
area. This is necessary to assist us in expeditiously separating this form from the very similar
Form 1040-ES.
3.2.6
Page Size
Substitute or reproduced forms and computer prepared/generated substitutes may be the
same size as the official form or they may be the standard commercial size (8
1
/2′′x11′′). The
thickness of the stock cannot be less than .003 inches.
Section 3.3 –
Printing
3.3.1
Printing Medium
The private printing of all substitute tax forms must be by conventional printing processes,
photocopying, computer graphics, or similar reproduction processes.
3.3.2
Legibility
All forms must have a high standard of legibility as to printing, reproduction, and fill-in
matter. Entries of taxpayer data may be no smaller than eight points. The IRS reserves the
right to reject those with poor legibility. The ink and printing method used must ensure that no
part of a form (including text, graphics, data entries, etc.) develops “smears” or similar quality
deterioration. This standard must be followedfor any subsequent copies or reproductions made
from an approved master substitute form, either during preparation or during IRS processing.
February 17, 20095352009–7 I.R.B.

3.3.3
Type Font
Many federal tax forms are printed using “Helvetica” as the basic type font. It is preferred
that you use this type font when composing substitute forms.
3.3.4
Print Spacing
Substitute forms should be printed using a 6 lines/inch vertical print option. They should
also be printed horizontally in 10 pitch pica (that is, 10 print characters per inch) or 12 pitch
elite (that is, 12 print positions per inch).
3.3.5
Image Size
The image size of a printed substitute form should be as close as possible to that of the
official form. You may omit any text on both computer prepared and computer generated forms
that is solely instructional.
3.3.6
Title Area Changes
To allow a large top margin for marginal printing and more lines per page, the title line(s)
for all substitute forms (not including the form’s year designation and sequence number, when
present), may be photographically reduced by40 percent or reset as one line of type. When
reset as one line, the type size may be no smaller than 14-point. You may omit “Department
of the Treasury, Internal Revenue Service” and all reference to instructions in the form’s title
area.
3.3.7
Remove
Government Printing
Office Symbol and IRS
Catalog Number
When privately printing substitute tax forms, the Government Printing Office (GPO) sym-
bol and/or jacket number must be removed. In the same place using the same type size, print
the Employer Identification Number (EIN) of the printer or designer or the IRS assigned source
code. (We prefer this last number be printed in the lower left area of the first page of each form.)
Also, remove the IRS CatalogNumber (Cat. No.) and the recycle symbol if the substitute is
not produced on recycled paper.
3.3.8
Printing on One
Side of Paper
While it is preferred that both sides of the paper be used for substitutes and reproduced
forms, resulting in the same page arrangement as that of the official form or schedule, the IRS
will accept your forms if only one side of the paper is used.
3.3.9
Photocopy
Equipment
The IRS does not undertake to approve or disapprove the specific equipment or process
used in reproducing official forms. Photocopies of forms must be entirely legible and satisfy
the conditions stated in this and other revenue procedures.
3.3.10
Reproductions
Reproductions of official forms and substitute forms that do not meet the requirements of
this revenue procedure may not be filed instead of the official forms. Illegible photocopies are
subject to being returned to the filer for re-submission of legible copies.
3.3.11
Removal of
Instructions
Generally, you may remove references to instructions. No prior approval is needed. How-
ever in some instances, you may be requestedto include references to instructions.
2009–7 I.R.B.536February 17, 2009

Exception.The words “For Paperwork Reduction Act Notice, see instructions” must be
retained or a similar statement indicating the location of the Notice must be provided on each
form.
Section 3.4 – Margins
3.4.1
Margin Size
The format of a reproduced tax form when printed on the page must have margins on all
sides at least as large as the margins on the official form. This allows room for IRS employees
to make necessary entries on the form during processing.
•A
1
/2-inch to
1
/4-inch margin must be maintained across the top, bottom, and both sides of
all substitute forms.
•The marginal, perforated strips containing pin-fed holes must be removed from all forms
priortofilingwiththeIRS.
3.4.2
Marginal Printing
Prior approval is not required for the marginal printing allowed when printed on an official
form or on a photocopy of an official form.
•With the exception of the actual tax forms (for example, Forms 1040, 1040A, 1040EZ,
1120, 940, 941, etc.), you may print in the left vertical margin and in the left half of the
bottom margin.
•Printing is never allowed in the top right margin of the tax form (for example, Forms 1040,
1040A, 1040EZ, 1120, 940, 941, etc.). The Service uses this area to imprint a Document
Locator Number for each return. There are no exceptions to this requirement.
Section 3.5 – Examples of Approved Formats
3.5.1
Examples of
Approved Formats From
the Exhibits
Two sets of exhibits (Exhibits A-1 and 2; B-1 and 2) at the end of this revenue procedure
are examples of how these guidelines may be used. Vertical spacing is six (6) lines to the inch.
A combination of upper-case and lower-case print font is acceptable in producing substitute
forms.
ThesamelogicmaybeappliedtoanyIRSformthat is normally reproducible as a substitute
form, with the exception of the tax return forms as discussed elsewhere.
Note.These exhibits may be from a prior year and are not to be used as current substitute
forms.
February 17, 20095372009–7 I.R.B.

Section 3.6 – Miscellaneous Information for Substitute Forms
3.6.1
Filing Substitute
Forms
To be acceptable for filing, a substitute form must print out in a format that will allow the
filer to follow the same instructions as for filing official forms. These instructions are in the
taxpayer’s tax package or in the related form instructions. The form must be legible, must be
on the appropriately sized paper, and must include a jurat where one appears on the published
form.
3.6.2
Caution to Software
Publishers
The IRS has received returns produced by software packages with approved output where
either the form heading was altered or the lines were spaced irregularly. This produces an
illegible or unrecognizable return or a return with the wrong number of pages. We realize
that many of these problems are caused by individual printer differences but they may delay
input of return data and, in some cases, generate correspondence to the taxpayer. Therefore,
in the instructions to the purchasers of your product, both individual and professional, please
stress that their returns will beprocessed more efficiently if they are properly formatted. This
includes:
•Having the correct form numbers and titles at the top of the return, and
•Submitting the same number of pages as if the form were an official IRS form with the line
items on the proper pages.
3.6.3
Use Pre-Addressed
IRS Label
If you are a practitioner filling out a return for a client or a software publisher who prints
instruction manuals, stress the use of the pre-addressed label provided in the tax package the
IRS sent to the taxpayer, when available. The use of this label (or its precisely duplicated label
information) is extremely important for the efficient, accurate, and economical processing of
a taxpayer’s return. Labeled returns indicate that a taxpayer is an established filer and permits
the IRS to automatically accelerate processing of those returns. This results in quicker refunds,
less manual review by IRS functions, and greater accuracy in names, addresses, and postal
deliveries.
3.6.4
Caution to
Producers of
Software Packages
If you are producing a software package that generates name and address data onto the tax
return, do not under any circumstances program either the IRS preprinted check digits or a
practitioner derived name control to appear on any return prepared and filed with the IRS.
3.6.5
Programming
to Print Forms
Whenever applicable:
•Use only the following label information format for single filers:
JOHN Q. PUBLIC
310 OAK DRIVE
HOMETOWN, STATE 94000
•Use only the following information for joint filers:
JOHN Q. PUBLIC
MARY I. PUBLIC
310 OAK DRIVE
HOMETOWN, STATE 94000
2009–7 I.R.B.538February 17, 2009

Part 4
Additional Resources
Section 4.1 – Guidance From Other Revenue Procedures
4.1.1
General
The IRS publications listed below provide guidance for substitute tax forms not covered
in this revenue procedure. These publicationsare available on the IRS website. Identify the
requested document by the IRS publication number.
•Publication 1141, General Rules and Specifications for Substitute Forms W-2 and W-3.
•Publication 1179, General Rules and Specifications for Substitute Forms 1096, 1098, 1099,
5498, W-2G, and 1042-S.
•Publication 1187, Specifications for Filing Forms 1042-S, Foreign Person’s U.S. Source
Income Subject to Withholding, Electronically.
•Publication 1220, Specifications for Filing Forms 1098, 1099, 5498, and W-2G Electroni-
cally.
•Publication 1223, General Rules and Specifications for Substitute Forms W-2c and W-3c.
•Publication 1239, Specifications for Filing Form 8027, Employer’s Annual Information
Return of Tip Income and Allocated Tips, Electronically.
•Publication 1345, Handbook for Authorized IRSe-fileProviders of Individual Income Tax
Returns.
•Publication 1345-A, Filing SeasonSupplement for Authorized IRSe-fileProviders.
•Publication 4436, General Rules and Specifications for Substitute Form 941 and Schedule
B (Form 941).
Section 4.2 – Electronic Tax Products
4.2.1
The IRS Website
Copies of tax forms with instructions, publications, draft forms, fillable forms, prior year
forms and publications, and other tax-related information may be found on the IRS website at
w
ww.irs.gov.
4.2.2
Tax Products
Posting Schedule
The IRS website provides a Tax Products Posting Schedule for the official forms released
for use by taxpayers. The schedule has three parts.
•Anticipated print dates of annual returns.
•Anticipated print dates of quarterly returns.
•Last revision dates and target print dates for continuous-use forms.
Thesiteaddressisw
ww.irs.gov/formspubs/article/0,,id=103641,00.html. The site will be
updated weekly during peak printing periodsand as necessary at other times. The planned
dates are subject to change.
February 17, 20095392009–7 I.R.B.

Section 4.3 – IRS Tax Products on DVD (Publication 1796)
4.3.1
Information
About IRS Tax
Products DVD
The DVD contains approximately 2,700 tax forms and publications for small businesses,
return preparers, and others whofrequently need current or prior year tax products. Most cur-
renttaxformsontheDVDmaybefilledinelectronically, then printed out for submission and
saved for recordkeeping. Other products on the DVD include the Internal Revenue Bulletins,
Tax Supplements, and Internet resources for the tax professional with links to the World Wide
Web.
4.3.2
System
Requirements and
How To Order the IRS Tax
Products DVD
For system requirements, contact the National Technical Information Service (NTIS) at
h
ttp://www.ntis.gov. Prices are subject to change.
The cost of the DVD if purchased from NTIS via the Internet at
w
ww.irs.gov/formspubs/article/0,,id=108660,00.htmlis $30 (with no handling fee).
If purchased using the following methods, thecost for each DVD is $30(plus a $5 handling
fee). These methods are:
•By phone – 1-877-CDFORMS (1-877-233-6767),
•By fax – 703-605-6900,
•By mail to:
National Technical Information Service
5285 Port Royal Road
Springfield, VA 22161
Part 5
Requirements for Specific Tax Returns
Section 5.1 – Tax Returns (Forms 1040, 1040A, 1120, etc.)
5.1.1
Acceptable Forms
Tax forms (such as Forms 1040, 1040A, and 1120) require a signature and establish tax
liability. Computer generated versions are acceptable under the following conditions.
•These substitute forms must be printed on plain white paper.
•Substitute forms must conform to the physical layout of the corresponding IRS form al-
though the typeface may differ. The text should match the text on the officially published
form as closely as possible. Condensed textand abbreviations will be considered on a
case-by-case basis.
Caution.All jurats (perjury statements) mustbe reproduced verbatim. No text can be
added, deleted, or changed in meaning.
•Various computer graphic print media such as laser printing, inkjet printing, etc., may be
used to produce the substitute forms.
•The substitute form must be the same number of pages and contain the same line text as
the official form.
•All substitute forms must be submitted for approval prior to their original use. You do not
need approval for a substitute form if its only change is the preprinted year and you had
received a prior year approval letter.
2009–7 I.R.B.540February 17, 2009

Exception.If the approval letter specifies a one time exception for your form, the next
year’s form must be approved.
5.1.2
Prohibited Forms
The following are prohibited.
•Computer generated tax forms (for example, Form 1040, etc.) on lined or color barred
paper.
•Tax forms that differ from the official IRS forms in a manner that makes them non-standard
or unable to process.
5.1.3
Changes
Permitted to Forms
1040 and 1040A
Certain changes (listed in Sections 5.2 through 5.4) are permitted to the graphics of the form
without prior approval, but these changes apply to only acceptable preprinted forms. Changes
not requiring prior approval are good only for the annual filing period, which is the current tax
year. Such changes are valid in subsequent years only if the official form does not change.
5.1.4
Other Changes
Not Listed
All changes not listed in Sections 5.2 through 5.4 require approval from the IRS before the
form can be filed.
Section 5.2 – Changes Permitted to Graphics (Forms 1040A and 1040)
5.2.1
Adjustments
You may make minor vertical and horizontal spacing adjustments to allow for computer or
word processing printing. This includes widening the amount columns or tax entry areas if the
adjustments comply with other provisions stated in revenue procedures. No prior approval is
needed for these changes.
5.2.2
Name and Address Area
The horizontal rules and instructions within the name and address area may be removed and
the entire area left blank. No line or instruction can remain in the area. However, the statement
regarding use of the IRS label should be retained. The heavy ruled border (when present) that
outlines the name, address area, and social security number must not be removed, relocated,
expanded, or contracted.
5.2.3
Required Format
When the name and address area is left blank, the following format must be used when
printing the taxpayer’s name and address. Otherwise, unless the taxpayer’s preprinted label is
affixed over the information entered in this area, the lines must be filled in as shown below.
•1st name line (35 characters maximum).
•2nd name line (35 characters maximum).
•In-care-of name line (35 characters maximum).
•City, state (25 characters maximum), one blank character, and ZIP code.
February 17, 20095412009–7 I.R.B.

5.2.4
Conventional
Name and
Address Data
When there is no in-care-of name line, the name and address will consist of only three lines
(singlefiler)orfourlines(jointfiler).Nameand address (joint filer) with no in-care-of name
line:
JOHN Z. JONES
MARY I. JONES
1234 ANYWHERE ST., APT. 111
ANYTOWN, STATE 12321
5.2.5
Example of
In-Care-Of
Name Line
Name and address (single filer) with in-care-of name line:
JOHN Z. JONES
C/O THOMAS A. JONES
4311 SOMEWHERE AVE.
SAMETOWN, STATE 54345
5.2.6
SSN and
Employer Identification
Number (EIN) Area
The vertical lines separating the format arrangement of the SSN/EIN may be removed.
When the vertical lines are removed, the SSNand EIN formats must be 000-00-0000 or
00-0000000, respectively.
5.2.7
Cents Column
•You may remove the vertical rule that separates the dollars from the cents.
•All entries in the amount column should have a decimal point following the whole dollar
amounts whether or not the vertical line that separates the dollars from the cents is present.
•You may omit printing the cents, but all amounts entered on the form must follow a con-
sistent format. You are strongly urged to round off the figures to whole dollar amounts,
following the official form instructions.
•When several amounts are summed together, the total should be rounded off after addition
(that is, individual amounts should not be rounded off for computation purposes).
•When printing money amounts, you must use one of the following formats:
(a) 0,000,000.;
(b) 0,000,000.00.
•When there is no entry for aline, leave the line blank.
5.2.8
“Paid Preparer’s
Use Only” Area
On all forms, the paid preparer’s information area may not be rearranged or relocated. You
may add three lines and remove the horizontal rules in the preparer’s address area.
Section 5.3 – Changes Permitted to Form 1040A Graphics
5.3.1
General
No prior approval is needed for the followingchanges (for use with computer prepared
forms only).
2009–7 I.R.B.542February 17, 2009

5.3.2
Line 4 of
Form 1040A
This line may be compressed horizontally (to allow for same line entry for the name of the
qualifying child) by using the following caption: “Head of household; child’s name” (name
field).
5.3.3
Other Lines
Any line with text that takes up two or more vertical lines may be compressed to one line
by using contractions, etc., and by removing instructional references.
5.3.4
Page 2 of
Form 1040A
All lines must be present and numbered in the order shown on the official form. These lines
mayalsobecompressed.
5.3.5
Color Screening
It is not necessary to duplicate the color screening used on the official form. A substitute
Form 1040A may be printed in black and white only with no color screening.
5.3.6
Other Changes
Prohibited
No other changes to the Form 1040A graphics are allowed without prior approval except
for the removal of instructions and references to instructions.
Section 5.4 – Changes Permitted to Form 1040 Graphics
5.4.1
General
No prior approval is needed for the followingchanges (for use with computer prepared
forms only). Specific line numbers in the following headings may have changed due to tax law
changes.
5.4.2
Line 4 of
Form 1040
This line may be compressed horizontally (to allow for a larger entry area for the name of
the qualifying child) by using the following caption: “Head of household; child’s name” (name
field).
5.4.3
Line 6c of
Form 1040
The vertical lines separatingcolumns (1) through (4) may be removed. The captions may
be shortened to allow a one line caption for each column.
5.4.4
Other Lines
Any other line with text that takes up two or more vertical lines may be compressed to one
line by using contractions, etc., and by removing instructional references.
February 17, 20095432009–7 I.R.B.

5.4.5
Line 21 – Other Income
The fill-in portion of this line may be expanded vertically to three lines. The amount entry
box must remain a single entry.
5.4.6
Line 44 of
Form 1040 – Tax
You may change the line caption to read “Tax” and computer print the words “Total includes
tax from” and either “Form(s) 8814” or “Form 4972.” If both forms are used, print both form
numbers. This specific line number may have changed.
5.4.7
Line 54 of
Form 1040 –
Other Credits
You may change the caption to read: “Other credits from Form” and computer print only
the form(s) that apply.
5.4.8
Color Screening
It is not necessary to duplicate the color screening used on the official form. A substitute
Form 1040 may be printed in black and white only with no color screening.
5.4.9
Other Changes
Prohibited
No other changes to the Form 1040 graphics arepermitted without prior approval except
for the removal of instructions and references to instructions.
Part 6
Format and Content of Substitute Returns
Section 6.1 – Acceptable Formats for Substitute Forms and Schedules
6.1.1
Exhibits and Use of Acceptable
Formats
Exhibits of acceptable formats for Schedule A, usually attached tothe Form 1040, and Form
2106-EZ are shown in the exhibits section of this revenue procedure.
•If your computer generated forms appear exactly like the exhibits, no prior authorization
is needed.
•You may computer generate forms not shown here, but you must design them by following
the manner and style of those in the exhibits section.
•Take care to observe other requirements and conditions in this revenue procedure. The IRS
encourages the submission of all proposed forms covered by this revenue procedure.
6.1.2
Instructions
The format of each substitute form or schedule must follow the format of the official form
or schedule as to item captions, line references, line numbers, sequence, form arrangement
and format, etc. Basically, try to make the form look like the official one, with readability and
consistency being primary factors. You may use periods and/or other similar special characters
to separate the various parts and sections of the form. Do not use alpha or numeric characters
for these purposes. All line numbers and items must be printed even though an amount is not
enteredontheline.
2009–7 I.R.B.544February 17, 2009

6.1.3
Line Numbers
When a line on an official form is designated by a number or a letter, that designation (ref-
erence code) must be used on a substitute form. The reference code must be printed to the left
of the text of each line and immediately preceding the data entry field, even if no reference
code precedes the data entry field on the officialform. If an entry field contains multiple lines
and shows the line references once on the left and right side of the form, use the same number
of line references on the substitute form.
In addition, the reference code that is immediately before the data field must either be fol-
lowed by a period or enclosed in parentheses. There also must be at least two blank spaces
between the period or the right parenthesis and the first digit of the data field. (See example
below.)
6.1.4
Decimal Points
A decimal point (that is, a period) should be used for each money amount regardless of
whether the amount is reported in dollars and cents or in whole dollars, or whether or not the
vertical line that separates the dollars from the cents is present. The decimal points must be
vertically aligned when possible.
Example:
5
STATE & LOCAL INC. TAXES...............
5.495.00
6 REAL ESTATE TAXES............................6.
7 PERSONAL PROPERTY TAXES............7.198.00
or
5
STATE & LOCAL INC. TAXES...............
(5)495.00
6 REAL ESTATE TAXES.............................(6)
7 PERSONAL PROPERTY TAXES.............(7)198.00
6.1.5
Multi-Page Forms
When submitting a multi-page form, send all its pages in the same package.
Exception.If you will not be producing certain pages, please note that in your cover letter.
Section 6.2 – Additional Instructions for All Forms
6.2.1
Use of Your
Own Internal Control
Numbers and
Identifying Symbols
You may show the computer prepared internal control numbers and identifying symbols on
the substitute if using such numbers or symbols is acceptable to the taxpayer and the taxpayer’s
representative. Such information must not be printed in the top
1
/2inch clear area of any form
or schedule requiring a signature. Except for the actual tax return form (Forms 1040, 1120,
940, 941, etc.), you may print in the left vertical and bottom left margins. The bottom left
margin you may use extends 3
1
/2inches from the left edge of the form.
6.2.2
Descriptions for
Captions, Lines, etc.
Descriptions for captions, lines, etc., appearing on the substitute forms may be limited to one
print line by using abbreviations and contractions, and by omitting articles, prepositions, etc.
However, sufficient key words must be retained to permit ready identification of the caption,
line, or item.
February 17, 20095452009–7 I.R.B.

6.2.3
Determining
Final Totals
Explanatory detail and/or intermediate calculations for determining final line totals may
be included on the substitute. We prefer that such calculations be submitted in the form of a
supporting statement. If intermediate calculations are included on the substitute, the line on
which they appear may not be numbered or lettered. Intermediate calculations may not be
printed in the right column. This column is reserved only for official numbered and lettered
lines that correspond to the ones on the official form. Generally, you may choose the format
for intermediate calculations or subtotalson supporting statements to be submitted.
6.2.4
Instructional
Text on the Official Form
Text on the official form, which is solely instructional (for example, “See instructions,”
etc.), may generally be omitted from the substitute form.
6.2.5
Mixing Forms
ontheSamePageProhibited
You may not show more than one form or schedule on the same printout page. Both sides
of the paper may be printed for multi-page official forms, butit is unacceptable to intermix
single page schedules of forms except for Schedules A and B (Form 1040), which are printed
back to back by the IRS.
For instance, Schedule E can be printed on both sides of the paper because the official form
is multi-page, with page 2 continued on the back. However, do not print Schedule E on the
front page and Schedule SE on the back, or Schedule A on the front and Form 8615 on the
back, etc. Both pages of a substitute form must match the official form. The back page may
be left blank if the back page of the official form contains only the instructions.
6.2.6
Identifying
Substitutes
Identify all computer prepared substitutes clearly. Print the form designation
1
/2inch from
the top margin and 1
1
/2inches from the left margin. Print thetitle centered on the first line of
print. Print the taxable year and, where applicable, the sequence number on the same line
1
/2
inch to 1 inch from the right margin. Includethe taxpayer’s name and SSN on all forms and
attachments. Also, print the OMB number as reflected on the official form.
6.2.7
Negative Amounts
Negative (or loss) amount entries should be enclosed in brackets or parentheses or include
a minus sign. This assists in accurate computation and input of form data. The IRS pre-prints
parentheses in negative data fields on many official forms. These parentheses should be re-
tained or inserted on printouts of affected substitute forms.
Part 7
Miscellaneous Forms and Programs
Section 7.1 – Specifications for Substitute Schedules K-1
2009–7 I.R.B.546February 17, 2009

7.1.1
Requirements
for Schedules K-1 That
Accompany
Forms 1041, 1065, 1065-B,
and 1120S
Because of significant changes to improve processing, prior approval is now required for
substitute Schedules K-1 that accompany Form1041 (for estates and trusts), Form 1065 (for
partnerships), Form 1065-B (for electing large partnerships), or Form 1120S (for S corpora-
tions). Substitute Schedules K-1 should be as close as possible to exact replicas of copies of
the official IRS schedules and follow the same process for submitting other substitute forms
and schedules. Before releasing their substitute forms, software vendors are responsible for
making any subsequent changes that have been made to the final official IRS forms after the
draft forms have been posted.
You must include all information on the form. Submit Schedules K-1 to the IRS
at
Substituteforms@irs.govwith “Attn: PDF Submissions” on the subject line or at:
Internal Revenue Service
Attn: Substitute Forms Program
SE:W:CAR:MP:T:T:SP
1111 Constitution Avenue, NW
Room 6526
Washington, D.C. 20224
Include the 6-digit form ID code in the upper right of Schedules K-1 of Forms 1041, 1065,
and 1120S.
•661108 for Form 1041,
•651108 for Form 1065, and
•671108 for Form 1120S.
Please allow white space around the 6-digit code.
Schedules K-1 that accompany Forms 1041, 1065, 1065-B, or 1120S must meet all specifi-
cations. The specifications include, but are not limited to, the following requirements.
•You will no longer be able to produce Schedules K-1 that contain only those lines or boxes
that taxpayers are required to use. All lines must be included.
•The words “*See attached statement for additional information.” must be preprinted in the
lower right hand side on Schedules K-1 of Forms 1041, 1065, and 1120S.
•All K-1s that are filed with the IRS should be printed on standard 8.5” x 11” paper (the
international standard (A4) of 8.27” x 11.69” may be substituted).
•Each recipient’s information must be on a separate sheet of paper. Therefore, you must
separate all continuously printed substitutes, by recipient, before filing with the IRS.
•No carbon copies or pressure-sensitive copies will be accepted.
•The Schedule K-1 must contain the name, address, and SSN or EIN of both the entity (es-
tate, trust, partnership, or S corporation) and the recipient (beneficiary, partner, or share-
holder).
•The Schedule K-1 must contain the tax year, the OMB number, the schedule number (K-1),
the related form number (1041, 1065, 1065-B, or 1120S), and the official schedule name
in substantially the same position and format as shown on the official IRS schedule.
•The Schedule K-1 must contain all the line items as shown on the official form, except for
the instructions, if any are printed on the back of the official Schedule K-1.
•The line items or boxes must be in the same order and arrangement as those on the official
form.
•The amount of each recipient’s share of each item must be shown. Furnishing a total amount
of each item and a percentage (or decimal equivalent) to be applied to such total amount
by the recipient does not satisfy the law and the specifications of this revenue procedure.
•State or local tax-related information maynot be included on the Schedules K-1 filed with
the IRS.
•The entity may have to pay a penalty if substitute Schedules K-1 are filed that do not con-
form to specifications.
February 17, 20095472009–7 I.R.B.

•Additionally, the IRS may consider the Schedules K-1 that do not conform to specifications
as not being able to be processed and may return Forms 1041, 1065, 1065-B, or 1120S to
the filer to be filed correctly.
Schedules K-1 that are 2-D bar-coded will continue to require prior approval from the IRS
(see Sections 7.1.3 through 7.1.5).
7.1.2
Special Requirements for
Recipient Copies of
Schedules K-1
Standardization for reporting informationis required for recipient copies of substitute
Schedules K-1 of Forms 1041, 1065, 1065-B, and 1120S. Uniform visual standards are
provided to increase compliance by allowing recipients and practitioners to more easily
recognize a substitute Schedule K-1. The entity must furnish to each recipient a copy of
Schedule K-1 that meets the following requirements.
•Include the 6-digit form ID code in the upper right of Schedules K-1 of Forms 1041, 1065,
and 1120S.
•661108 for Form 1041,
•651108 for Form 1065, and
•671108 for Form 1120S.
Please allow white space around the 6-digit code.
•You will no longer be able to produce Schedules K-1 that contain only those lines or boxes
that taxpayers are required to use. All lines must be included.
•Both pages 1 and 2 of Schedules K-1 of Forms 1065 and 1120S must be provided to each
recipient.
•The words “*See attached statement for additional information.” must be preprinted in the
lower right hand side on Schedules K-1 of Forms 1041, 1065, and 1120S.
•The Schedule K-1 must contain the name, address, and SSN or EIN of both the entity and
recipient.
•The Schedule K-1 must contain the tax year, the OMB number, the schedule number (K-1),
the related form number (1041, 1065, 1065-B, or 1120S), and the official schedule name
in substantially the same position and format as shown on the official IRS schedule.
•All applicable amounts and information required to be reported must be titled and numbered
in the same manner as shown on the officialIRS schedule. The line items or boxes must
be in the same order and arrangement and must be numbered like those on the official IRS
schedule.
•The Schedule K-1 must contain all items required for use by the recipient. The instructions
to the schedule must identify the line orbox number and code, if any, for each item as
shown in the official IRS schedule.
•The amount of each recipient’s share of each item must be shown. Furnishing a total amount
of each line item and a percentage (or decimal equivalent) to be applied to such total amount
by the recipient does not satisfy the law and the specifications of this revenue procedure.
•Instructions to the recipient that are substantially similar to those on or accompanying the
official IRS schedule must be provided to aid in the proper reporting of the items on the
recipient’s income tax return. Where items are not reported to a recipient because they do
not apply, the related instructions may be omitted.
•The quality of the ink or other material used to generate recipients’ schedules must produce
clearly legible documents. In general, black chemical transfer inks are preferred.
•In order to assure uniformity of substitute Schedules K-1, the paper size should be standard
8.5” x 11” (the international standard (A4) of 8.27” x 11.69” may be substituted.)
•The paper weight, paper color, font type, font size, font color, and page layout must be such
that the average recipient can easily decipher the information on each page.
•State or local tax-related information may be included on recipient copies of substitute
Schedules K-1. All non-tax-related information should be separated from the tax informa-
tion on the substitute schedule to avoid confusion for the recipient.
•The legend “Important Tax Return Document Enclosed” must appear in a bold and con-
spicuous manner on the outside of the envelope that contains the substitute recipient copy
of Schedule K-1.
2009–7 I.R.B.548February 17, 2009

•The entity may have to pay a penalty if a substitute Schedule K-1 furnished to any recipient
does not conform to the specifications of this revenue procedure and results in impeding
processing.
7.1.3
Requirem
ents
for Sched
ules K-1
with Two-
Dimensional
(2-D) Bar
Codes
In an effor
t to reduce the burden of manually transcribing tax documents, improve qual-
ity, and i
ncrease government efficiency, the IRS is pleased to provide specifications for 2-D
bar-code
d substitute Schedules K-1 for Forms 1041, 1065, and 1120S. The IRS encourages
voluntar
yparticipationinadding2-Dbarcoding.
Note.If software vendors do not want to produce bar-coded Schedules K-1, they may
produce the official IRS Schedules K-1 but cannot use the expedited process for approving
bar-coded K-1s and their parent returns as outlined in Section 7.1.6.
In addition to the requirements in Sections 7.1.1 and 7.1.2, the bar-coded Schedules K-1
must meet the following specifications.
•The bar code should print in the space labeled “For IRS Use Only” on each Schedule K-1.
The entire bar code must print within the “For IRS Use Only” box surrounded by a white
space of at least
1
/4inch.
•Bar codes must print in PDF 417 format.
•The bar codes must always be in the specifiedformat with every field represented by at
least a field delimiter (carriage return). Leaving out a field in a bar code will cause every
subsequent field to be misread.
•Be sure to include the 6-digit form ID code in the upper right of Schedules K-1 of Forms
1041, 1065, and 1120S.
•661108 for Form 1041,
•651108 for Form 1065, and
•671108 for Form 1120S.
Please allow white space around the 6-digit code.
7.1.4
2-D Bar Code
Specifications for Schedules K-1
Follow these general specifications for preparing all 2-D bar-coded Schedules K-1.
•Numeric fields –
•Do not include leading zeros (except Taxpayer Identification Numbers, Zip Codes, and
percentages).
•Do not use non-numeric characters except that the literal “STMT” can be put in money
fields.
•All money fields should be rounded to the nearest whole dollar amount – If a money
amount ends in 00 to 49 cents, drop the cents; if it ends in 50 to 99 cents, truncate the
cents and increment the dollar amount by one. Use the same rounding technique for
the bar-coded and the printed K-1s.
•All numeric-only fields are right justified (except Taxpayer Identification Numbers and
Zip Codes).
•All field lengths are expressed as maximum lengths. If the value in the field has fewer
positions or the software program does not support that many positions, put in the bar code
only those positions actually used.
•Alpha fields –
•Do not include leading blanks (left justified).
•Do not include trailing blanks.
February 17, 20095492009–7 I.R.B.

•Use uppercase alpha characters only.
•Variable fields –
•Do not include leading blanks (left justified).
•Do not include trailing blanks.
•Use uppercase alpha characters, numerics, and special characters as defined in each
field.
•Delimit each field with a carriage return.
•Express percentages as 6-digitnumbers without the percent sign. Left justify with leading
zeroes (for percentages less than 100%) and no decimal point (decimal point is assumed be-
tween 3rd and 4th positions). Examples: 25.32% expressed as “025320”; 105% expressed
as “105000”; 8.275% expressed as “008275”; 10.24674% express as “010247”.
•It is vital that the print routine reinitialize the bar code prior to printing each succeeding
K-1. Failure to do this will result in each K-1 for a parent return having the same bar code
as the document before it.
7.1.5
Approval
Process for
Bar-Coded Schedules K-1
Prior to releasing commercially available tax software that creates bar-coded Schedules K-1,
the printed schedule and the bar code must both be tested. Bar code testing must be done
using the final official IRS Schedule K-1. Bar code approval requests must be resubmitted for
any subsequent changes to the official IRS form that would affect the bar code. Below are
instructions and a sequence of events that will comprise the testing process.
•The IRS has released the final Schedule K-1 bar-code specifications by publishing them
on the IRS.gov website (seeh
ttp://www.irs.gov/efile/article/0,,id=129860,00.html).
•The IRS will publish a set of test documents that will be used to test the ability of tax
preparation software to create bar codes in the correct format.
•Software developers will submit two identical copies of the test documents – one to the
IRS and one to a contracted testing vendor.
•The IRS will use one set to ensure the printed schedules comply withstandard substitute
forms specifications.
•If the printed forms fail to meet the substitute form criteria, the IRS will inform the software
developer of the reason for noncompliance.
•The software developer must resubmit the Schedule(s) K-1 until they pass the substitute
forms criteria.
•The testing vendor will review the bar codes to ensure they meet the published bar-code
specifications.
•If the bar code(s) does not meet published specifications, the testing vendor will contact
the software developer directly informing them of the reason for noncompliance.
•Software developers must submit new bar-coded schedules until they pass the bar-code
test.
•When the bar code passes, the testing vendor will inform the IRS that the developer has
passed the bar-code test and the IRS will issue an overall approval for both the substitute
form and the bar code.
•After receiving this consolidated response, the software vendor is free to release software
for tax preparation as long as any subsequent revisions to the schedules do not change the
fields.
•Find the mailing address for the testing vendor below. Separate and simultaneous mailings
to the IRS and the vendor will reduce testing time.
7.1.6
Procedures
for Reducing Testing Time
In order to help provide incentives to the software development community to participate
in the Schedule K-1 2-D project, the IRS has committed to expediting the testing of bar-coded
Schedules K-1 and their associated parent returns. To receive this expedited service, follow
the instructions below.
2009–7 I.R.B.550February 17, 2009

•Mail the parent returns (Forms 1065, 1120S,1041) and associated bar-coded Schedule(s)
K-1 to the appropriate address below in a separate package from all other approval requests.
Internal Revenue Service
Attn: Bar-Coded K-1
SE:W:CAR:MP:T:T:SP
1111 Constitution Avenue, NW
Room 6526
Washington, D.C. 20224
•Mail one copy of the parent form(s) and Schedule(s) K-1 to the IRS and another copy to
the testing vendor at the address below.
Northrop Grumman Information Tech
Attn: Cecilia Siamundo, Quality Assurance Lead
1800 Alexander Bell Drive
Suite 300
Reston, VA 20191
Phone: 703-453-1200
•Include multiple email and phone contact points in the packages.
•While the IRS can expedite bar-coded Schedules K-1 and their associated parent returns,
it cannot expedite the approval of non-associated tax returns.
Section 7.2 – Procedures for Printing IRS Envelopes
7.2.1
Procedures for Printing IRS
Envelopes
Organizations are permitted to produce substitute tax return envelopes. Use of substitute
return envelopes that comply with the requirements set forth in this section will assist in de-
livery of mail by the U.S. Postal Service and facilitate internal sorting at the Internal Revenue
Service Centers.
Use the following 5-digit ZIP codes when mailing returns to the IRS Service Centers:
Service CenterZIP Code
Atlanta, GA39901
Kansas City, MO64999
Austin, TX73301
Philadelphia, PA
19255
Memphis, TN
37501
Andover, MA
05501
Cincinnati, OH
45999
Ogden, UT84201
Fresno, CA93888
February 17, 20095512009–7 I.R.B.

7.2.2
Sorting Returns
by Form Type
Sorting returns by form type is accomplished bythe preprinted bar codes on return envelopes
included in each specific type of form or package mailed to the taxpayers. The 32-bit bar code
on the left of the address on each envelope identifies the type of form the taxpayer is filing, and
it assists in consolidating like returns for processing. Failure to use the envelopes furnished by
the IRS results in additional processing time and effort, and possibly delays the timely deposit
of funds, processing of returns,and issuance of refund checks.
7.2.3
ZIP+4 or 9-Digit
ZIP Codes
The IRS will not furnish or sell bulk quantities of preprinted tax return envelopes to tax-
payers or tax practitioners. A suitable alternative has been developed that will accommodate
the sorting needs of both the IRS and the United States Postal Service (USPS). The alternative
is based on the use of ZIP+4, or 9-digit ZIP codes, for mailing various types of tax returns to
the IRS Service Centers. The IRS uses the last four digits to identify and sort the various form
types into separate groups for processing. Thelist of 4-digit extensions with the related form
designations is provided below.
ZIP+4Package
XXXXX-00021040
XXXXX-0005
941
XXXXX-0006940
XXXXX-0008943
XXXXX-0011
1065
XXXXX-00121120
XXXXX-00131120S
XXXXX-00141040EZ
XXXXX-0015
1040A
XXXXX-0027990
XXXXX-00312290
7.2.4
Guidelines for
Having Envelopes Preprinted
You may use the preparers’ company names, addresses, and logos as long as you do not
interfere with the clear areas. The government recommends that the envelope stocks have an
average opacity of not less than 89 percent andcontain a minimum of 50 percent waste paper.
Use of carbon based ink is essential for effective address and bar-code reading. Envelope
construction can be of side seam or diagonal seam design. The government recommends that
the size of the envelope should be 5
3
/4inches by 9 inches. Continuous pin-fed construction
is not desirable, but is permissible, if the glued edge is at the top. This requirement is firm
because mail opening equipment is designed to open the bottom edge of each envelope.
2009–7 I.R.B.552February 17, 2009

7.2.5
Envelopes/ZIP
Codes
The above procedures or guidelines are written for the user having envelopes preprinted.
Many practitioners may not wish to have large quantities of envelopes with differing ZIP
codes/form designations preprinted due to low volume, warehousing, waste, etc. In this case,
the practitioner can type or machine print the addresses with the appropriate ZIP codes to ac-
commodate sorting. If the requirements/guidelines outlined in this section cannot be met, then
use only the appropriate 5-digit service center ZIP code.
Section 7.3 – Guidelines for Substitute Forms 8655
7.3.1
Increased Standardization for
Forms 8655
Increased standardization for reporting information on substitute Forms 8655 is now re-
quired to aid in processing and for compliance purposes. Please follow the guidelines in Sec-
tion 7.3.2.
7.3.2
Requirements for Substitute
Forms 8655
Please follow these specific requirements when producing substitute Forms 8655.
•The first line of the title must be “Reporting Agent Authorization.”
•If you want to include a reference to “State Limited Power of Attorney,” it can be in paren-
theses under the title. “State” must be the first word within the parentheses.
•You must include “Form 8655” on the form.
•While the line numbers do not have to match the official form, the sequence of the infor-
mation must be in the same order.
•The size of any variable data must be printed in a font no smaller than 10-point.
•For adequate disclosure checks, the following must be included for each taxpayer:
(a) Name,
(b) EIN, and
(c) Address.
•At this time, Form 944 will not be required if Form 941 is checked. Only those forms that
the reporting agent company supports need to be listed.
•The jurat (perjury statement) must be identical with the exception of references to line
numbers.
•A contact name and number for the reporting agent is not required.
•You must include line 17, or the equivalent line, and it must include two checkboxes.
•Any state information included should be contained in a separate section of the substitute
form. Preferably this information will be in the same area as line 19 of the official form.
•All substitute Forms 8655 must be approved by the Substitute Forms Unit as outlined in
the Form 8655 specifications in Publication 1167.
•If you have not already been assigned a 3-letter source code, you will be given one when
your substitute form is submitted for approval. This source code should be included in the
lower left corner of the form.
•The 20-day assumed approval policy does not apply to Form 8655 approvals.
February 17, 20095532009–7 I.R.B.

Part 8
Alternative Methods of Filing
Section 8.1 – Forms for Electronically Filed Returns
8.1.1
Electronic Filing
Program
Electronic filing is a method by which authorized providers transmit tax return information
to an IRS Service Center in the format of the official IRS forms. The IRS accepts both refund
and balance due Form 1040, 1040A, 1040EZ, or 1040SS (PR) tax returns that are filed elec-
tronically.
8.1.2
Applying to
Participate in IRSe-file
Anyone wishing to participate in IRSe-fileof tax returns must submit ane-fileapplica-
tion. The application can be completed and submitted electronically on the IRS website at
w
ww.irs.govafter first registering for e-services on the website.
8.1.3
Obtaining the
Taxpayer Signature / Submission
of Required Paper Documents
Beginning in January 2009, Form 8453-OL, U.S. Individual Income Tax Declaration for
an IRS e-file Online Return, is obsolete andcan no longer be used as an IRS e-file signature
document. Taxpayers choosing to electronicallyprepare and file their return will be required
to use the Self-Select PIN method as their signature.
Electronic Return Originators (EROs) can e-file individual income tax returns only if the
returns are signed electronically using eitherthe Self-Select or Practitioner PIN method.
Taxpayers must use Form 8453, U.S. Individual Income Tax Transmittal for an IRS e-file
Return, to send supporting documents that are required to be submitted to the IRS.
For specific information about electronic filing, refer to Publication 1345, Handbook for
Authorized IRSe-fileProviders of Individual Income Tax Returns.
8.1.4
Guidelines for
Preparing Substitute Forms in the
Electronic Filing Program
A participant in the electronic filing program, who wants to develop a substitute form should
follow the guidelines throughout this publication and send a sample form for approval to the
Substitute Forms Unit at the address in Part 1. If you do not prepare Substitute Form 8453
using a font in which all IRS wording fitson a single page, the form will not be accepted.
Note.Use of unapproved forms could result in suspension of the participant from the elec-
tronic filing program.
Section 8.2 – Effect on Other Documents
8.2.1
Effect on Other
Documents
This revenue procedure supersedes Revenue Procedure 2007-68, 2007-49 I.R.B. 1093.
2009–7 I.R.B.554February 17, 2009

February 17, 20095552009–7 I.R.B.

2009–7 I.R.B.556February 17, 2009

February 17, 20095572009–7 I.R.B.

2009–7 I.R.B.558February 17, 2009

February 17, 20095592009–7 I.R.B.

2009–7 I.R.B.560February 17, 2009

Part IV. Items o
fGeneralInterest
Notice of Prop
osed
Rulemaking by
Cross-Refere
nce to
Temporary Re
gulations,
Notice of Pro
posed
Rulemaking
,andNotice
of Public He
aring
Section 482
: Methods to
Determine
Taxable Income
in Connect
ionWithaCost
Sharing A
rrangement
REG–14461
5–02
AGENCY: In
ternal Revenue Service
(IRS), Tre
asury.
ACTION: Not
ice of proposed rulemaking
by cross-r
eference to temporary regula-
tions, not
ice of proposed rulemaking, and
notice of p
ublic hearing.
SUMMARY: In
this issue of the Bulletin,
the IRS is i
ssuing temporary regulations
that provi
de further guidance and clarifica-
tion regar
ding methods under section 482
to determi
ne taxable income in connection
with a cos
t sharing arrangement in order to
address i
ssuesthathaveariseninadminis-
tering th
e current regulations. These tem-
porary re
gulations potentially affect con-
trolled t
axpayers within the meaning of
section
482 that enter into cost sharing ar-
rangeme
nts as defined therein. The text
of those
temporary regulations (T.D. 9441)
also ser
ves as the text of these proposed
regulat
ions. This document also provides
notice
of a public hearing on those pro-
posed r
egulations.
DATES: W
ritten or electronic comments
must be r
eceived by April 6, 2009. Out-
line of
topics to be discussed at the public
hearin
g scheduled for April 21, 2009 must
be rece
ived by April 6, 2009.
ADDRES
SES: Send submissions to:
CC:PA:
LPD:PR(REG–144615–02),
Room 52
03, Internal Revenue Service,
PO Box 7
604, Ben Franklin Station,
Washin
gton, DC 20044. Submissions may
be han
d-delivered Monday through Friday
betwe
en the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:
PR (REG–144615–02),
Courier’s Des
k, Internal Revenue
Service, 1111
Constitution Avenue, N.W.,
Washington DC
, or sent electronically,
viatheFedera
leRulemaking
Portal atwww
.regulations.gov(IRS
REG–144615–
02).
FOR FURTHER I
NFORMATION
CONTACT: Con
cerning the proposed
regulations
, Kenneth P. Christman, (202)
435–5265; c
oncerning submissions of
comments, t
he hearing, and/or to be placed
on the build
ing access list to attend the
hearings, O
luwafunmilayo Taylor, (202)
622–7180 (
not toll-free numbers).
SUPPLEMEN
TARY INFORMATION:
Paperwork
Reduction Act
The collec
tions of information con-
tained in t
his notice of proposed rulemak-
ing have be
en submitted to the Office of
Managemen
t and Budget.
An agency m
ay not conduct or sponsor,
and a perso
n is not required to respond
to, a coll
ection of information unless the
collecti
on of information displays a valid
control n
umber assigned by the Office of
Manageme
nt and Budget.
The colle
ction of information require-
ments are
in proposed §1.482–7(b)(2) and
(k). Res
ponses to the collections of infor-
mation a
re required by the IRS to monitor
complia
nce of controlled taxpayers with
the prov
isions applicable to cost sharing
arrange
ments.
Estimat
ed total annual reporting and/or
recordk
eeping burden: 9350 hours.
Estimat
ed average annual burden hours
per resp
ondent and/or recordkeeper: 18.7
hours.
Estimat
ed number of respondents
and/or
recordkeepers: 500.
Estimat
ed frequency of responses: On
Occasi
on and Annually.
Comment
s on the collection of infor-
mation
should be sent to theOffice of
Manage
ment and Budget,Attn: Desk
Office
r for the Department of the Trea-
sury, O
ffice of Information and Regulatory
Affair
s, Washington, DC 20503, with
copie
stotheInternal Revenue Service,
Attn:
IRS Reports Clearance Officer,
SE:W:
CAR:MP:T:T:SP, Washington, DC
20224. Commen
ts on the collection of
information s
hould be received by March
6, 2009.
Comments are s
pecifically requested
concerning:
Whether the pr
oposed collection of in-
formation is n
ecessary for the proper per-
formance of t
he functions of the IRS, in-
cluding whet
her the information will have
practical ut
ility;
The accuracy
of the estimated burden
associated w
ith the proposed collection of
information
(see above);
How the burde
n of complying with the
proposed col
lection of information may be
minimized,
including through the appli-
cation of au
tomated collection techniques
or other for
ms of information-technology;
and
Estimates o
f capital or start-up costs
and costs of
operation, maintenance, and
purchase o
f services to provide informa-
tion.
Books or re
cords relating to a collection
of informa
tion must be retained as long
as their co
ntents may become material in
the admini
stration of any internal revenue
law. Gener
ally, tax returns and tax return
informat
ion are confidential, as required
by 26 U.S.
C. 6103.
Backgrou
nd and Explanation of
Provisio
ns
Temporar
y regulations in this issue of
the Bulle
tin amend the Income Tax Regu-
lations (
26 CFR part 1) relating to section
482. The
temporary regulations provide
guidanc
e regarding methods under section
482tode
termine taxable income in con-
nection
with a cost sharing arrangement.
These te
mporary regulations potentially
affect
controlled taxpayers within the
meanin
g of section 482 that enter into cost
sharin
g arrangements as defined therein.
The tex
t of those temporary regulations
also se
rves as the text of these proposed
regul
ations. The preamble to the tempo-
rary r
egulations explains the amendments.
Speci
al Analyses
It has
been determined that this notice
of pro
posed rulemaking is not a significant
regul
atory action as defined in Executive
Order
12866. Therefore, a regulatory as-
February 17, 20095612009–7 I.R.B.

sessment is not required. It has been deter-
mined also that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations.
It is hereby certified that the collections of
information in these regulations will not
have a significant economic impact on a
substantial number of small entities. This
certification is based on the fact that this
rule applies to U.S. businesses and for-
eign affiliates that enter into cost sharing
arrangements. Few small entities are ex-
pected to enter into cost sharing arrange-
ments, as defined by these regulations. Ac-
cordingly, a Regulatory Flexibility Anal-
ysis under the Regulatory Flexibility Act
(5 U.S.C. chapter 6) is not required. Pur-
suant to section 7805(f), this notice of pro-
posed rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(a signed original and eight (8) copies)
or electronic comments that are submitted
timely to the IRS. The IRS and the Trea-
sury Department specifically request com-
ments on the clarity of the proposed rule
and how it may be made easier to under-
stand. All comments will be available for
public inspection and copying.
A public hearing has been scheduled for
April 21, 2009, beginning at 10 AM in the
IRS Auditorium, Internal Revenue Build-
ing, 1111 Constitution Avenue, NW, Wash-
ington, DC. Due to building security pro-
cedures, visitors must enter at the Consti-
tution Avenue entrance. In addition, all
visitors must presentphoto identification
to enter the building. Because of access
restrictions, visitors will not be admitted
beyond the immediate entrance area more
than 30 minutes before the hearing starts.
For information about having your name
placed on the building access list to attend
the hearing, see the “FOR FURTHER IN-
FORMATION CONTACT” section of this
preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written comments by April 6, 2009
and an outline of the topics to be discussed
and the time to be devoted to each topic
(signed original and eight (8) copies) by
April 6, 2009. A period of 10 minutes will
be allotted to each person for making com-
ments. An agenda showing the schedule
of the speakers will be prepared after the
deadline for receiving outlines has passed.
Copies of the agenda will be available free
of charge at the hearing.
Drafting Information
The principal author of these proposed
regulations is Kenneth P. Christman of the
Office of Chief Counsel (International).
However, other personnel from the Trea-
sury Department and the IRS participated
in their development.
*****
Proposed Amendment to the
Regulations
Accordingly, 26 CFR parts 1 and 301
are proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.367(a)–1 is revised to
read as follows:
§1.367(a)–1 Transfers to foreign
corporations subject to section 367(a):
In general.
(a) through (d)(2) [Reserved].
(3)Transfer. For purposes of section
367 and regulations thereunder, the term
transfermeans any transaction that con-
stitutes a transfer for purposes of section
332, 351,354,355, 356, or 361, as applica-
ble. A person’s entering into a cost shar-
ing arrangement under §1.482–7 or acquir-
ing rights to intangible property under such
an arrangement shall not be considered a
transfer of property described in section
367(a)(1). See §1.6038B–1T(b)(4) for the
date on which the transfer is considered to
be made.
(d)(4) through (g) [Reserved].
Par.3.Section 1.482–0 is
amended by revising the entries for
§§1.482–1(b)(2)(iii), 1.482–2(e) and (f),
1.482–4(g) and (h), 1.482–7, and 1.482–9
to read as follows:
§1.482–0 Outline of regulations under
section 482.
*****
§1.482–1 Allocation of income and
deductions among taxpayers.
*****
(b) * * *
(2)***
(iii) Coordination of methods applica-
ble to certain intangible development ar-
rangements.
§1.482–2 Determination of taxable
income in specific situations.
*****
(e) Cost sharing arrangement.
(f) Effective/applicability date.
(1) In general.
(2) Election to apply paragraph (b) to
earlier taxable years.
§1.482–4 Methods to determine taxable
income in connection with a transfer of
intangible property
*****
(g) Coordination with rules governing
cost sharing arrangements.
(h) Effective/applicability date.
(1) In general.
(2) Election to apply regulation to ear-
lier taxable years.
*****
§1.482–7 Methods to determine taxable
income in connection with a cost sharing
arrangement.
[The text of the proposed entries for
§1.482–7 is the same as the entries for
§1.482–7T in §1.482–0T published else-
where in this issue of the Bulletin].
*****
§1.482–9 Methods to determine taxable
income in connection with a controlled
services transaction.
*****
(a) through (m)(2) [Reserved].
(3) [The text of the proposed entry for
§1.482–9(m)(3) is the same as the entry for
§1.482–9T(m)(3) in §1.482–0T published
elsewhere in this issue of the Bulletin].
(m)(4) through (n)(3) [Reserved].
Par. 4. Section 1.482–1 is amended by:
2009–7 I.R.B.562February 17, 2009

1. Revising paragraph (b)(2)(i) and the
last sentence of paragraph (j)(6)(i).
2. Adding a new paragraph (b)(2)(iii).
The addition and revisions read as fol-
lows:
§1.482–1 Allocation of income and
deductions among taxpayers.
*****
(b) * * *
(2) * * *
(i) [The text of the proposed amend-
ment to §1.482–1(b)(2)(i) is the same as
the text of §1.482–1T(b)(2)(i) published
elsewhere in this issue of the Bulletin].
*****
(iii) [The text of the proposed
§1.482–1(b)(2)(iii) is the same as the text
of §1.482–1T(b)(2)(iii) published else-
where in this issue of the Bulletin].
*****
(j) * * *
(6) * * *
(i)***[Thetextoftheproposed
amendment to §1.482–1(j)(6)(i) is the
same as the text of the amendment to
§1.482–1T(j)(6)(i) published elsewhere in
this issue of the Bulletin].
Par. 5. Section 1.482–2 is amended as
follows:
1. Paragraph (e) is redesignated as para-
graph (f) and newly-designated paragraphs
(f)(1) and (f)(2) are revised.
2. New paragraph (e) is added.
The addition and revision reads as fol-
lows:
§1.482–2 Determination of taxable
income in specific situations.
*****
(e) [The text of proposed §1.482–2(e)
is the same as the text of §1.482–2T(e)
published elsewhere in this issue of the
Bulletin].
(f)***(1)[Thetextoftheproposed
amendment to §1.482–2(f)(1) is the same
as the text of §1.482–2T(f)(1) published
elsewhere in this issue of the Bulletin].
(2) [The text of the proposed amend-
ment to §1.482–2(f)(2) is the same as the
text of §1.482–2T(f)(2) published else-
whereinthisissueoftheBulletin].
*****
Par. 6. Section 1.482–4 is amended as
follows:
1. Paragraph (f)(3)(i)(B) is revised.
2. Paragraph (f)(7) is removed.
3. New paragraphs (g) and (h) are
added.
The additions and revision reads as fol-
lows:
§1.482–4 Methods to determine taxable
income in connection with a transfer of
intangible property.
*****
(f) * * *
(3) * * *
(i) * * *
(B) [The text of the proposed amend-
ment to §1.482–4(f)(3)(i)(B) is the same
as the text of §1.482–4T(f)(3)(i)(B) pub-
lished elsewhere in this issue of the Bul-
letin].
*****
(g) [The text of proposed §1.482–4(g)
is the same as the text of §1.482–4T(g)
published elsewhere in this issue of the
Bulletin].
(h) [The text of proposed §1.482–4(h)
is the same as the text of §1.482–4T(h)
published elsewhere in this issue of the
Bulletin].
Par. 7. Section 1.482–7 is revised to
read as follows:
§1.482–7 Methods to determine taxable
income in connection with a cost sharing
arrangement.
[The text of the proposed §1.482–7
is the same as the text of §1.482–7T(a)
through (m) published elsewhere in this
issue of the Bulletin].
Par. 8. Section 1.482–8 is amended by
revising paragraph (b)Examples 13,14,
15, 16, 17and18to read as follows:
§1.482–8 Examples of the best method
rule.
*****
(b) * * *
Examples 13 through 18.[Thetext
of the proposed §1.482–8(b)Examples
13through18is the same as the text of
§1.482–8T(b)Examples 13through18
published elsewhere in this issue of the
Bulletin].
*****
Par. 9. Section 1.482–9 is added to read
as follows:
§1.482–9 Methods to determine taxable
income in connection with a controlled
services transaction.
(a) through (m)(2) [Reserved].
(3) [The text of the proposed amend-
ment to §1.482–9(m)(3) is the same as the
text of §1.482–9T(m)(3) published else-
whereinthisissueoftheBulletin].
(m)(4) through (n)(3) [Reserved].
LindaE.Stiff,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on December 31,
2008, 11:15 a.m., and published in the issue of the Federal
Register for January 5, 2009, 74 F.R. 236)
February 17, 20095632009–7 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cases
in litigation, or the outcome of a Service
study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
2009–7 I.R.B.iFebruary 17, 2009

Numerical Finding List
1
Bulletins 2009–1 through 2009–7
Announcements:
2009-1, 2009-1 I.R.B.242
2009-2, 2009-5 I.R.B.424
2009-3, 2009-6 I.R.B.459
Notices:
2009-1, 2009-2 I.R.B.250
2009-2, 2009-4 I.R.B.344
2009-3, 2009-2 I.R.B.250
2009-4, 2009-2 I.R.B.251
2009-5, 2009-3 I.R.B.309
2009-6, 2009-3 I.R.B.311
2009-7, 2009-3 I.R.B.312
2009-8, 2009-4 I.R.B.347
2009-9, 2009-5 I.R.B.419
2009-10, 2009-5 I.R.B.419
2009-11, 2009-5 I.R.B.420
2009-12, 2009-6 I.R.B.446
2009-13, 2009-6 I.R.B.447
2009-14, 2009-7 I.R.B.516
2009-15, 2009-6 I.R.B.449
Proposed Regulations:
REG-144615-02, 2009-7 I.R.B.561
REG-148568-04, 2009-5 I.R.B.421
REG-160872-04, 2009-4 I.R.B.358
REG-158747-06, 2009-4 I.R.B.362
REG-150670-07, 2009-4 I.R.B.378
REG-113462-08, 2009-4 I.R.B.379
REG-150066-08, 2009-5 I.R.B.423
Revenue Procedures:
2009-1, 2009-1 I.R.B.1
2009-2, 2009-1 I.R.B.87
2009-3, 2009-1 I.R.B.107
2009-4, 2009-1 I.R.B.118
2009-5, 2009-1 I.R.B.161
2009-6, 2009-1 I.R.B.189
2009-7, 2009-1 I.R.B.226
2009-8, 2009-1 I.R.B.229
2009-9, 2009-2 I.R.B.256
2009-10, 2009-2 I.R.B.267
2009-11, 2009-3 I.R.B.313
2009-12, 2009-3 I.R.B.321
2009-13, 2009-3 I.R.B.323
2009-14, 2009-3 I.R.B.324
2009-15, 2009-4 I.R.B.356
2009-16, 2009-6 I.R.B.449
2009-17, 2009-7 I.R.B.517
Revenue Rulings:
2009-1, 2009-2 I.R.B.248
Revenue Rulings— Continued:
2009-2, 2009-2 I.R.B.245
2009-3, 2009-5 I.R.B.382
2009-4, 2009-5 I.R.B.408
2009-5, 2009-6 I.R.B.432
Treasury Decisions:
9434, 2009-4 I.R.B.339
9435, 2009-4 I.R.B.333
9436, 2009-3 I.R.B.268
9437, 2009-4 I.R.B.341
9438, 2009-5 I.R.B.387
9439, 2009-5 I.R.B.416
9440, 2009-5 I.R.B.409
9441, 2009-7 I.R.B.460
9442, 2009-6 I.R.B.434
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2008–27 through 2008–52 is in Internal Revenue Bulletin
2008–52, dated December 29, 2008.
February 17, 2009ii2009–7 I.R.B.

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2009–1 through 2009–7
Notices:
99-35
Obsoleted by
Notice 2009-15, 2009-6 I.R.B.449
2001-55
Modified by
Notice 2009-1, 2009-2 I.R.B.250
2002-27
Modified by
Notice 2009-9, 2009-5 I.R.B.419
2007-26
Modified by
Notice 2009-15, 2009-6 I.R.B.449
2007-54
Obsoleted by
T.D. 9436, 2009-3 I.R.B.268
2008-11
Obsoleted by
T.D. 9436, 2009-3 I.R.B.268
2008-12
Obsoleted by
T.D. 9436, 2009-3 I.R.B.268
Rev. Proc. 2009-11, 2009-3 I.R.B.313
2008-13
Obsoleted by
T.D. 9436, 2009-3 I.R.B.268
List of forms modified and superseded by
Rev. Proc. 2009-11, 2009-3 I.R.B.313
Modified and clarified by
Notice 2009-5, 2009-3 I.R.B.309
2008-46
Obsoleted by
T.D. 9436, 2009-3 I.R.B.268
Rev. Proc. 2009-11, 2009-3 I.R.B.313
2008-100
Amplified and superseded by
Notice 2009-14, 2009-7 I.R.B.516
Revenue Procedures:
2007-17
Superseded by
Rev. Proc. 2009-14, 2009-3 I.R.B.324
2007-68
Superseded by
Rev. Proc. 2009-17, 2009-7 I.R.B.517
2007-71
Modified by
Notice 2009-3, 2009-2 I.R.B.250
Revenue Procedures— Continued:
2008-1
Superseded by
Rev. Proc. 2009-1, 2009-1 I.R.B.1
2008-2
Superseded by
Rev. Proc. 2009-2, 2009-1 I.R.B.87
2008-3
Superseded by
Rev. Proc. 2009-3, 2009-1 I.R.B.107
2008-4
Superseded by
Rev. Proc. 2009-4, 2009-1 I.R.B.118
2008-5
Superseded by
Rev. Proc. 2009-5, 2009-1 I.R.B.161
2008-6
Superseded by
Rev. Proc. 2009-6, 2009-1 I.R.B.189
2008-7
Superseded by
Rev. Proc. 2009-7, 2009-1 I.R.B.226
2008-8
Superseded by
Rev. Proc. 2009-8, 2009-1 I.R.B.229
2008-9
Superseded by
Rev. Proc. 2009-9, 2009-2 I.R.B.256
2008-61
Superseded by
Rev. Proc. 2009-3, 2009-1 I.R.B.107
2008-65
Amplified and supplemented by
Rev. Proc. 2009-16, 2009-6 I.R.B.449
2008-68
Amplified and superseded by
Rev. Proc. 2009-15, 2009-4 I.R.B.356
Revenue Rulings:
65-286
Obsoleted by
T.D. 9435, 2009-4 I.R.B.333
76-54
Obsoleted by
T.D. 9435, 2009-4 I.R.B.333
92-19
Supplemented by
Rev. Rul. 2009-3, 2009-5 I.R.B.382
2008-19
Modified by
Rev. Rul. 2009-3, 2009-5 I.R.B.382
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2008–27 through 2008–52 is in Internal Revenue Bulletin 2008–52, dated December 29,
2008.
2009–7 I.R.B.iiiFebruary 17, 2009

February 17, 20092009–7 I.R.B.

INTERNAL REVENUE BULLETIN
The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superin-
tendent of Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINS
The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are
sold on a single copy basis andare notincluded as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weekly
Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print
and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the
Superintendent of Documents.
ACCESS THE INTERNAL REVENUE BULLETIN ON THE INTERNET
You may view the Internal Revenue Bulletin on the Internet at www.irs.gov. Select Businesses. Under Businesses Topics, select
More Topics. Then select Internal Revenue Bulletins.
INTERNAL REVENUE BULLETINS ON CD-ROM
Internal Revenue Bulletins are available annually as part ofPublication 1796 (Tax Products CD-ROM). The CD-ROM can be
purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders)
or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January.
HOW TO ORDER
Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,
detach entire page, and mail to the Superintendent of Documents, P.O. Box 371954, Pittsburgh PA, 15250–7954. Please allow two to
six weeks, plus mailing time, for delivery.
WE WELCOME COMMENTS ABOUT THE INTERNAL
REVENUE BULLETIN
If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page (www.irs.gov)
or write to the IRS Bulletin Unit, SE:W:CAR:MP:T:T:SP, Washington, DC 20224.
Internal Revenue Service
W
ashington,DC20224
Official Business
Penalty for Private Use, $300