IRS rejects stale acquisition-price method for cost-sharing platform valuation

The memorandum, dated 8 May 2026 and released on 23 October, addresses a US cloud-software company and its foreign cost-sharing participants. The US company bought a minority interest in a target and received a call option setting a formula price for the remaining shares. Five years later it exercised the option, then contributed target resources to the cost-sharing arrangement two months after closing. The advice is fact-specific and, under Internal Revenue Code section 6110(k)(3), may not be used or cited as precedent.^[1][2]

Why the acquisition-price method failed

Treasury Regulation section 1.482-7(g)(5) allows an acquisition-price method incorporating principles from the comparable uncontrolled transaction method, but only where the acquisition price is a reliable comparable for the platform contribution. The Chief Counsel concluded that the price here was effectively fixed by the five-year-old option formula and the holder's enforceable rights, rather than a current arm's-length negotiation. It also found material changes between the option date and acquisition, including substantially higher revenue and profit potential.^[1]

Contemporaneous business projections carried greater weight

The taxpayer's business teams had prepared discounted-cash-flow valuations for the board and other non-tax purposes before the acquisition. Those analyses produced much higher ranges than the formula price. Applying the best-method rule and the reliability principle in section 1.482-7(g)(2)(vi), the Chief Counsel considered the contemporaneous projections more reliable than assumptions prepared later for the tax report. It recommended using the business projections as a base, with appropriate comparability modifications, under the income method in section 1.482-7(g)(4).^[1]

Coverage and disclosure defects compounded the problem

The advice estimated that resources worth roughly 70% of the target's total asset value were not contributed to the cost-sharing arrangement, yet the taxpayer did not make a reliable allocation between contributed and retained resources. Its platform-contribution report also omitted the option details and the internal valuations. The redacted conclusion refers to the accuracy-related penalty provisions in section 6662(b) and (h), but does not disclose the ultimate penalty determination; it therefore should not be read as confirming that a penalty was imposed.^[1]

Implications for multinational groups

The advice does not prohibit the acquisition-price method. It shows, however, that an option, earn-out or other historic pricing formula may make the closing price a poor proxy for the current value of contributed intangibles. Groups integrating an acquisition into a cost-sharing arrangement should preserve contemporaneous board valuations, reconcile contributed and retained resources, test changes in market circumstances and profit potential, and document why the selected method is more reliable than the available alternatives.^[1]