Question: Global Manufacturing, Inc. (GMI) is a publicly-traded U.S. corporation. Its subsidiary, Innovative Solutions LLC (IS), is a U.S. LLC taxed as a partnership. IS is owned 60% by GMI and 40% by Dr. Elena Rivera, who is: The chief scientist and key employee of IS The daughter of Carlos Rivera, who sits on GMI's Board of Directors (holding 5% of GMI stock) A dual citizen of the U.S. and Country X In 2024, the following series of transactions occurred: In February, IS developed a valuable patent. Under Dr. Rivera's employment agreement, all intellectual property she develops belongs to IS, but she is entitled to a "development bonus" of 3% of the fair market value of any successfully commercialized patent. The patent's initial valuation was $20 million. In March, instead of paying the "development bonus" directly to Dr. Rivera, IS created a special purpose Cayman Islands entity called "Rivera Innovation Trust" (RIT). IS contributed $750,000 (approximately 3.75% of the patent's value) to RIT. RIT's founding documents state it was established "to recognize Dr. Rivera's extraordinary contributions to scientific advancement." RIT's beneficiaries include Dr. Rivera (50%), her children (30%), and a scientific educational foundation in Country X (20%) that was founded by Carlos Rivera. Dr. Rivera signed a waiver acknowledging that the RIT contribution "satisfies any claims under her employment agreement regarding the patent development bonus." In July, GMI's Board (including Carlos Rivera) approved an "extraordinary talent retention program" for key scientists. Under this program: IS transferred $1.2 million to a newly established deferred compensation plan for Dr. Rivera. GMI issued restricted stock units (RSUs) worth $500,000 to Dr. Rivera, vesting over 5 years. GMI made a $300,000 donation to the scientific educational foundation in Country X, publicly acknowledging "the Rivera family's multi-generational commitment to scientific advancement." In September, Dr. Rivera's sister, Sofia (who is not employed by any related entity), received: A $50,000 "research stipend" directly from IS for a paper she wrote analyzing industry trends. A $100,000 "emergency health assistance grant" from the scientific educational foundation in Country X after experiencing medical issues. A vintage car (valued at $75,000) as a personal gift from Carlos Rivera. In December, GMI announced it was spinning off IS into a separate publicly-traded company. As part of the pre-spin-off restructuring: Dr. Rivera's 40% interest in IS was exchanged for 15% of the stock in the new public company plus $5 million in cash. Before the exchange, IS forgave a $250,000 loan previously made to Dr. Rivera for the purchase of scientific equipment for her home laboratory. IS established a "Scientific Legacy Award" of $2 million payable to Dr. Rivera over 10 years "in recognition of foundational contributions to the company's intellectual property portfolio," conditioned on non-competition and confidentiality provisions. Required: Analyze the tax implications of these transactions, focusing particularly on the applicability of Section 102 gift exclusions. Identify the proper tax treatment for all relevant parties, discuss how substance-over-form and related doctrines might apply, address international tax considerations, and predict likely IRS positions during an audit. Support your analysis with relevant authorities.

1. Analysis of Rivera Innovation Trust (RIT) Creation [0.25 points] [+0.05] For correctly identifying that the RIT contribution cannot qualify as a gift under §102 due to the employment relationship and waiver of contractual rights [+0.05] For citing Commissioner v. Duberstein and Treas. Reg. §1.102-1(f)(2) to support the non-gift characterization [+0.05] For analyzing the constructive receipt or economic benefit doctrine application to Dr. Rivera (Sproull v. Commissioner) [+0.05] For identifying the foreign trust reporting requirements under §6048 and potential classification issues under §679 [+0.05] For applying substance-over-form or step transaction doctrines to the RIT structure and explaining why the IRS would likely collapse the transaction 2. Analysis of Patent Development and Compensation Arrangements [0.20 points] [+0.05] For correctly calculating the contractual development bonus entitlement ($600,000) and noting the discrepancy with the actual payment ($750,000) [+0.05] For analyzing the tax treatment of the deferred compensation plan under §409A and identifying potential timing issues for income recognition [+0.05] For analyzing the RSU grant under §83 principles and explaining the taxation at vesting versus potential §83(b) election [+0.05] For analyzing the foundation donation as potential constructive dividend to Carlos Rivera and/or indirect compensation to Dr. Rivera, citing relevant authority (e.g., Helvering v. Horst) 3. Analysis of Sofia's Receipts [0.15 points] [+0.05] For correctly distinguishing the tax treatment of the research stipend as taxable compensation versus the potential gift characterization of the personal car gift [+0.05] For analyzing whether the health grant might qualify for exclusion under §102 based on facts and circumstances, or potentially under medical-related provisions like §105 or §213 [+0.05] For identifying the gift tax implications for Carlos Rivera regarding the car gift and explaining reporting requirements 4. Analysis of Spin-Off Transaction [0.20 points] [+0.05] For analyzing the exchange of partnership interest under reorganization provisions (§368 and §355) and identifying boot treatment for cash received [+0.05] For analyzing the loan forgiveness as discharge of indebtedness income under §61(a)(11) and explaining why it cannot qualify as a gift [+0.05] For analyzing the "Scientific Legacy Award" under §409A and explaining why the non-compete provisions preclude gift treatment [+0.05] For applying step transaction doctrine to the integrated spin-off transactions and explaining how the IRS would likely view the arrangement 5. International Tax Implications [0.10 points] [+0.05] For identifying PFIC/CFC issues with the Cayman Islands trust and explaining FATCA/FBAR reporting requirements [+0.05] For analyzing treaty considerations regarding Dr. Rivera's dual citizenship and the Country X foundation's involvement 6. Potential Penalties and IRS Audit Positions [0.10 points] [+0.05] For identifying specific penalties that could apply (accuracy-related, failure to file/report, fraud, reportable transaction) [+0.05] For explaining how the IRS would likely characterize the overall transaction series using judicial doctrines such as the end result test from Penrod v. Commissioner


Question: Maple Technology Group Inc. ("Maple"), a Canadian-controlled private corporation, is undertaking a corporate reorganization to prepare for international expansion and eventual public offering. The current structure and proposed reorganization involve multiple Section 85 transfers: Current Structure: Maple owns 100% of CanSub Ltd. (a Canadian operating company) Maple owns 75% of TechPartners LP (a Canadian partnership), with the remaining 25% owned by key employees CanSub owns 90% of USCo Inc. (a U.S. subsidiary that qualifies as a controlled foreign affiliate) USCo owns 100% of IP Holdings LLC (which holds valuable patents and technology) The reorganization involves: Step 1: Maple will transfer its 75% interest in TechPartners LP to CanSub. The partnership interest has: FMV of $15-18 million ACB of $4 million Consists of capital property, eligible capital property, and inventory Step 2: CanSub will transfer its shares of USCo to a newly formed Canadian holding company, GlobalHoldCo, in exchange for: Common shares (stated capital of $10 million) Preferred shares (redemption value of $5 million) Promissory note of $3 million The USCo shares have an FMV of $20-22 million and ACB of $8 million. USCo has $6 million in exempt surplus and $2 million in taxable surplus. Step 3: IP Holdings LLC will transfer certain patents (with nil tax basis) to a newly formed Irish subsidiary under a cost-sharing arrangement. All agreements include price adjustment clauses and statements that the parties intend to file under Section 85(1) where applicable. Required: a) For each applicable transfer, determine: i. Whether Section 85(1) is available ii. The optimal elected amounts and resulting tax consequences iii. The ACB of consideration received b) Discuss the potential application of the following provisions and their impact: i. Subsection 85(1.11) regarding subsequent dispositions ii. Section 212.3 (Foreign Affiliate Dumping rules) iii. Section 17 regarding outstanding indebtedness iv. Subsection 15(2) regarding shareholder debt c) If Maple goes public 18 months after the reorganization: i. Evaluate the effectiveness of the price adjustment clauses ii. Identify any tax issues related to the previous Section 85 transfers iii. Discuss any remedial steps that should be taken d) If the CRA audits the reorganization and determines that: i. The FMV of the TechPartners LP interest was actually $20 million ii. The USCo shares included $3 million of intangible value not recognized in the valuation Determine the tax consequences and available remedies. e) Discuss the foreign accrual property income implications of the IP transfer to Ireland, considering: i. Paragraph 95(2)(a.1) regarding intellectual property ii. The 2015 OECD BEPS initiatives and Canada's response iii. The General Anti-Avoidance Rule (section 245) Cite relevant provisions of the Income Tax Act, CRA interpretations, and case law in your analysis.

Part A: Analysis of Transfers (0.30 points) Step 1: Maple's transfer of TechPartners LP interest [+0.03] For correctly identifying that partnership interests qualify as eligible property under 85(1.1) [+0.03] For recognizing the need for separate elected amounts for different property types (capital, eligible capital, inventory) per IT-378R [+0.03] For calculating the optimal elected amounts that defer tax ($4M total) Step 2: CanSub's transfer of USCo shares [+0.03] For correctly identifying foreign affiliate shares as eligible property under 85(1.1)(c) [+0.03] For calculating the minimum elected amount as $8M (greater of ACB and boot) [+0.03] For properly calculating the ACB allocation between common shares ($3.33M) and preferred shares ($1.67M) Step 3: IP Holdings transfer [+0.03] For correctly identifying that Section 85(1) is not available for transfers by non-resident entities [+0.03] For explaining that U.S. and Irish tax laws would govern this transaction [+0.03] For discussing potential alternatives to achieve tax efficiency in this cross-border IP transfer Part B: Application of Specified Provisions (0.20 points) [+0.05] For correct analysis of subsection 85(1.11) and its potential application to subsequent dispositions within 3 years, citing CRA Technical Interpretation 2015-0571751E5 [+0.05] For proper analysis of Section 212.3 FAD rules, identifying when they apply and potential exceptions under 212.3(16) [+0.05] For accurate discussion of Section 17 implications for the $3M promissory note, including interest imputation rules and exceptions under 17(8) [+0.05] For correct analysis of potential subsection 15(2) shareholder loan issues and available exceptions under 15(2.6) and 15(2.3)(a) Part C: Going Public Implications (0.15 points) [+0.05] For proper evaluation of price adjustment clause effectiveness citing Guilder News case and IT-169R, and Trudel v. The Queen (2012 TCC 69) [+0.05] For identification of Section 85 issues in IPO context, including valuation challenges and subsection 85(1.11) implications, citing CRA Ruling 2001-0111223 [+0.05] For comprehensive discussion of appropriate remedial steps before IPO (implement price adjustments, accelerate debt repayment, document business purposes) Part D: CRA Audit Implications (0.15 points) [+0.04] For correct analysis of deemed dividend implications under 85(1)(e.2) for the $5M TechPartners LP valuation shortfall [+0.04] For proper analysis of the $3M USCo intangible value shortfall consequences, citing Husky Oil Limited v. Canada (2010 DTC 5089) [+0.04] For discussing price adjustment clause implementation as a remedy [+0.03] For identifying additional remedies (late-filed elections under 220(3.2), VDP), citing Univar Canada Ltd. v. Canada (2016 FCA 241) Part E: FAPI Implications (0.20 points) [+0.07] For comprehensive analysis of paragraph 95(2)(a.1) regarding IP income attribution, citing CRA Document 2015-0610701C6 on substantial economic activity requirements [+0.07] For detailed discussion of relevant OECD BEPS initiatives (Action 8, country-by-country reporting) and Canadian implementation of these measures regarding IP transfers [+0.06] For thorough GAAR analysis under section 245, citing Canada Trustco Mortgage Co. v. Canada (2005 SCC 54) and Copthorne Holdings Ltd. v. Canada (2011 SCC 63) on abusive tax avoidance


Question: TechGlobal Corporation, a US multinational enterprise (MNE), is planning a business restructuring of its global operations. The current structure is: TechGlobal Corp. (US Parent): Performs R&D, owns global IP, manages supply chain TechManufacture Ltd. (Malaysia): Contract manufacturer with routine 5% return on costs TechServices GmbH (Germany): Limited-risk distributor with routine 3% return on sales TechSales Ltd. (UK): Limited-risk distributor with routine 3% return on sales TechSupport SRL (Italy): Provides technical support, cost plus 8% In the proposed restructuring: TechGlobal will enter into a cost sharing arrangement (CSA) with a newly formed entity, TechIP Ltd. (Ireland), for future IP development Existing IP will be sold to TechIP for $1.2 billion, payable over 10 years TechIP will become the principal for non-US operations, assuming inventory risk and market development responsibilities TechManufacture will continue as contract manufacturer, but now for TechIP European entities will become commissionaire agents for TechIP TechGlobal will provide corporate services to all entities for a fee of 2% of group operating expenses TechGlobal will license back certain IP from TechIP for US market use at a 7% royalty rate TechGlobal has calculated the following annual tax impacts (in USD millions): Reduced US taxable income: $300M Additional Irish taxable income: $280M Reduced taxable income in Germany, UK, Italy: $25M combined No change in Malaysia Required: Analyze the transfer pricing implications of this restructuring under IRC §482, Treasury Regulations, and OECD Guidelines Evaluate potential challenges under BEPS Action Plans 8-10 and US anti-tax avoidance provisions Calculate the GILTI and FDII implications for TechGlobal Assess whether the IRS could successfully challenge the restructuring under the economic substance doctrine Recommend specific documentation and implementation steps to strengthen the defensibility of the restructuring Provide detailed analysis with citations to relevant code sections, regulations, rulings, and court cases.

1. Transfer Pricing Analysis (0.35 points) [+0.05] For correctly identifying that the CSA must comply with Treas. Reg. §1.482-7, including platform contribution transaction requirements, reasonably anticipated benefits, and cost allocation [+0.05] For analyzing the $1.2 billion PCT payment using appropriate valuation methods under Treas. Reg. §1.482-7(g) and citing relevant case law (Veritas Software Corp. v. Commissioner, 133 T.C. 297 (2009) and/or Amazon.com Inc. v. Commissioner, 148 T.C. No. 8 (2017)) [+0.05] For analyzing the business restructuring under OECD Transfer Pricing Guidelines Chapter IX, including exit charges for transferred functions, assets, and risks [+0.05] For evaluating whether appropriate compensation exists for the surrender of profit potential (Treas. Reg. §1.482-1(d)(3)(v)) [+0.05] For analyzing whether the 2% corporate services fee satisfies the arm's length standard under Treas. Reg. §1.482-9 [+0.05] For evaluating whether the 7% license-back royalty rate is arm's length under Treas. Reg. §1.482-4, including potential "round-trip" transaction concerns [+0.05] For analyzing the conversion of European entities to commissionaire structures with appropriate consideration of DHL Corp. v. Commissioner, T.C. Memo 1998-461 on marketing intangibles 2. BEPS and Anti-Avoidance Provisions (0.25 points) [+0.05] For analyzing BEPS Actions 8-10 implications, focusing on aligning transfer pricing outcomes with value creation [+0.05] For evaluating substance requirements for TechIP in Ireland, including personnel, decision-making authority, and financial capacity to bear risks [+0.05] For analyzing Base Erosion and Anti-Abuse Tax (BEAT) implications under IRC §59A [+0.05] For identifying potential IRC §367(d) outbound transfer issues, including the expanded definition of intangibles under TCJA [+0.05] For analyzing the commensurate with income standard under IRC §482 and its implications for the PCT payment 3. GILTI and FDII Calculations (0.15 points) [+0.05] For correctly calculating GILTI under IRC §951A using the formula: Net CFC Tested Income - (10% × QBAI), with specific calculations showing the $280M tested income and appropriate QBAI reduction [+0.05] For correctly calculating the foreign tax credit limitation (80% of foreign taxes paid) with specific numerical analysis: Irish tax of $35M (12.5% of $280M), FTC limitation of $28M (80% of $35M), and resulting net additional US tax [+0.05] For correctly explaining FDII calculation under IRC §250 using the complete formula: (Foreign-Derived Deduction Eligible Income ÷ Deduction Eligible Income) × (Deduction Eligible Income - 10% of QBAI), and identifying the 13.125% effective tax rate benefit 4. Economic Substance Analysis (0.10 points) [+0.05] For correctly applying the two-pronged test under IRC §7701(o): objective economic effects (meaningful change to economic position) and subjective business purpose (substantial non-tax purpose) [+0.05] For analyzing potential IRS challenges based on substance and citing relevant case law (Coltec Industries, Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006) and/or Xilinx Inc. v. Commissioner, 125 T.C. 37 (2005), aff'd, 598 F.3d 1191 (9th Cir. 2010)) 5. Documentation and Implementation Recommendations (0.15 points) [+0.05] For recommending specific transfer pricing documentation under Treas. Reg. §1.6662-6, including CSA documentation per Treas. Reg. §1.482-7(k) [+0.05] For providing specific implementation steps for establishing genuine substance in Ireland and properly documenting risk transfers [+0.05] For recommending appropriate APA strategy under Rev. Proc. 2015-41 and aligning transfer pricing outcomes with value creation (referencing GlaxoSmithKline Holdings (Americas) Inc. v. Commissioner, T.C. Docket No. 5750-04)


Question: MegaCorp Global, a US-headquartered multinational enterprise, is executing a business transformation involving: 1. A restructuring of its digital business model and intangible property ownership 2. Changes to its operating model in multiple jurisdictions 3. Implementation of new transfer pricing policies across its value chain The current structure includes: * MegaCorp USA (parent) which performs R&D, manufacturing, and holds valuable IP * MegaCorp France (wholly-owned subsidiary) which functions as a fully-fledged distributor and performs local R&D under a cost sharing arrangement with MegaCorp USA * MegaCorp Singapore (wholly-owned subsidiary) which manufactures components * MegaCorp Switzerland (wholly-owned subsidiary) which coordinates European sales The proposed transformation involves: * Creating MegaCorp Ireland to centralize global IP ownership * Converting MegaCorp France from a fully-fledged distributor to a limited-risk distributor * Implementing a new digital services business model with users in multiple jurisdictions * Establishing a principal structure in Ireland * Creating a new R&D cost sharing arrangement between USA, France, and Ireland Recent developments affecting the transformation include: * France's implementation of a 3% Digital Services Tax * The OECD's BEPS Actions 1 and 8-10 * The Tax Cuts and Jobs Act provisions on GILTI, FDII, and BEAT * The Amazon and Coca-Cola transfer pricing court decisions * The 2022 foreign tax credit final regulations Required: a) Analyze and explain the IRC Section 367(d) implications of transferring the existing IP from MegaCorp USA to MegaCorp Ireland. Discuss the valuation methodology that should be applied with reference to relevant case law and regulations. b) For each of the following intercompany transactions in the new structure, identify the applicable transfer pricing method under IRC Section 482 and Treasury Regulations that MegaCorp should apply, explaining your reasoning for each selection: i. Digital services provided by MegaCorp Ireland to global customers ii. R&D services performed by MegaCorp USA and France under the new CSA iii. Limited-risk distribution activities of MegaCorp France iv. Management services provided by MegaCorp USA to all subsidiaries v. Component manufacturing by MegaCorp Singapore c) Evaluate how the French Digital Services Tax impacts MegaCorp's transfer pricing and discuss the foreign tax credit implications under the 2022 regulations. Cite specific provisions and explain the potential for double taxation. d) Analyze whether MegaCorp's digital services create a permanent establishment in France under the expanded definition in BEPS Action 7. What documentation should MegaCorp maintain to defend its position? e) Calculate the arm's length compensation due to MegaCorp France for its conversion from a fully-fledged distributor to a limited-risk distributor. Use the following information: * MegaCorp France's average annual operating profit over the past 5 years: €15 million * Projected annual operating profit as a limited-risk distributor: €5 million * Remaining useful life of local marketing intangibles: 10 years * Discount rate based on weighted average cost of capital: 12% * Tax rates: France 25%, Ireland 12.5% Show your calculation methodology with reference to the appropriate regulations and explain how the determination would be affected by the Veritas and Guidant cases. f) Explain how MegaCorp's proposed structure and transfer pricing policies might be affected by OECD Pillars One and Two, and what contingency planning the company should undertake.

Part A (0.15 points) [+0.01] For identifying that IRC Section 367(d) treats outbound transfers of intangibles as a sale for contingent payments [+0.01] For explaining that MegaCorp USA must include in income annually an amount commensurate with income attributable to the intangible [+0.01] For explaining that the deemed payments are treated as royalties under IRC Section 367(d)(2)(A)(ii) [+0.01] For citing Rev. Proc. 2015-41 regarding valuation methods [+0.02] For discussing the Amazon.com Inc. v. Commissioner case and its implications for realistic projections and finite useful lives [+0.02] For explaining that intangible valuation must use one of the specified methods (CUT, income, acquisition price, market capitalization, profit split) [+0.02] For identifying the income method as appropriate and explaining how it values the present value of anticipated residual profits [+0.02] For discussing how the useful life determination impacts valuation with reference to Treas. Reg. §1.367(d)-1T [+0.01] For explaining the requirement to adjust inclusions based on actual results per the commensurate with income standard [+0.01] For identifying inclusion period as the useful life of the property (not to exceed 20 years) [+0.01] For discussing the requirement to determine separate values for different types of intangibles Part B (0.25 points) i. Digital services provided by MegaCorp Ireland (0.05 points) [+0.01] For correctly identifying that this may involve both services and intangibles requiring multiple methods [+0.01] For correctly selecting the CUT method for digital service transactions if comparable uncontrolled transactions exist [+0.01] For discussing the profit split method as an alternative when comparable transactions cannot be identified [+0.01] For explaining how to determine if transactions are services or intangibles with reference to Treas. Reg. §1.482-9 and §1.482-4 [+0.01] For discussing how user value creation affects method selection with reference to BEPS Action 1 ii. R&D services under the new CSA (0.05 points) [+0.01] For identifying that the CSA must comply with Treas. Reg. §1.482-7 [+0.01] For explaining how RAB shares must be calculated based on reasonably anticipated benefits [+0.01] For discussing platform contribution transactions (PCTs) required for pre-existing contributions [+0.01] For explaining that the CSA must meet all requirements in Treas. Reg. §1.482-7(b) [+0.01] For discussing the impact of Altera Corp. v. Commissioner on inclusion of stock-based compensation iii. Limited-risk distribution activities (0.05 points) [+0.01] For correctly identifying the resale price method as most appropriate per Treas. Reg. §1.482-3(c) [+0.01] For explaining why comparable profits method (CPM) with operating margin as PLI is an alternative [+0.01] For discussing how to identify comparable limited-risk distributors [+0.01] For explaining the required functional analysis under Treas. Reg. §1.482-1(d)(3)(i) [+0.01] For discussing the importance of contractual terms that align with actual conduct iv. Management services (0.05 points) [+0.01] For correctly identifying the services cost method (SCM) for qualifying low-margin services [+0.01] For citing Treas. Reg. §1.482-9(b) regarding eligible services [+0.01] For discussing the CPM or cost plus method for high-value services [+0.01] For explaining the shareholder stewardship exception under Treas. Reg. §1.482-9(l) [+0.01] For discussing required documentation to establish benefits received v. Component manufacturing (0.05 points) [+0.01] For correctly identifying the cost plus method as appropriate for contract manufacturing [+0.01] For explaining why CUP might apply if comparable transactions exist [+0.01] For discussing the CPM as an alternative with appropriate PLI selection [+0.01] For explaining the required functional analysis to determine manufacturing classification [+0.01] For discussing inventory valuation implications under Treas. Reg. §1.482-3 Part C (0.15 points) [+0.02] For identifying that the French DST applies to gross revenue, not net income [+0.02] For explaining that the DST must be accounted for as a cost in transfer pricing analysis [+0.02] For discussing the creditability limitations under the 2022 foreign tax credit regulations in T.D. 9959 [+0.02] For citing specific provisions that restrict creditability of DSTs due to the jurisdictional nexus requirement [+0.02] For explaining the double taxation risk when DST is not creditable [+0.02] For discussing TAM 200231022 guidance on treating non-income taxes in transfer pricing [+0.015] For explaining the impact on the Section 904 foreign tax credit limitation [+0.015] For discussing potential relief mechanisms including competent authority procedures Part D (0.15 points) [+0.02] For analyzing the expanded PE definition under BEPS Action 7 [+0.02] For discussing the concept of digital permanent establishment [+0.02] For analyzing the impact of the Multilateral Instrument (MLI) on the US-France tax treaty [+0.02] For discussing the dependent agent provisions and how they might apply [+0.02] For analyzing whether specific activity exemptions in Article 5(4) apply [+0.01] For discussing server/website presence and its potential PE implications [+0.02] For identifying required documentation including: • Functional analysis showing exact activities performed in France • Contracts defining the roles and responsibilities of each entity • Documentation of decision-making authority and where exercised • Technical documentation showing where digital services are delivered from [+0.02] For discussing attribution of profits to PE if one exists under Article 7 principles Part E (0.20 points) [+0.02] For correctly identifying that compensation should reflect the present value of foregone profits [+0.03] For correctly calculating the annual foregone profit (€15M - €5M = €10M) [+0.03] For correctly applying the discounted cash flow method to calculate present value: PV = €10M × (1 - (1 / (1 + 0.12)^10)) / 0.12 = approximately €56.5M [+0.02] For discussing the impact of tax rate differentials on the arm's length amount [+0.02] For identifying that the termination value should be analyzed under Treas. Reg. §1.482-1(d)(3)(v) regarding realistic alternatives [+0.02] For discussing the Veritas case implications for valuing separate intangibles individually [+0.02] For explaining the Guidant case guidance on business restructurings [+0.02] For discussing the need to value marketing intangibles separately from the going concern value [+0.02] For analyzing whether exit payment is required under OECD Transfer Pricing Guidelines Chapter IX Part F (0.10 points) [+0.02] For explaining Pillar One's reallocation of taxing rights to market jurisdictions [+0.02] For discussing the impact on MegaCorp's digital services revenue allocation [+0.01] For explaining Amount A calculation and thresholds [+0.02] For explaining Pillar Two's global minimum tax implications for the Irish structure [+0.01] For discussing the proposed 15% minimum effective tax rate [+0.02] For identifying appropriate contingency planning strategies: • Modeling effective tax rate impact under Pillar Two • Identifying potential covered activities under Pillar One • Evaluating substance requirements in each jurisdiction • Reviewing transfer pricing documentation for audit readiness


Question: ABC Corp, a US-based multinational technology company, has developed proprietary manufacturing technology for widgets along with a digital platform that provides remote monitoring services for the widgets. In 2019, ABC Corp entered into a qualified cost sharing arrangement (QCSA) with its wholly-owned subsidiary in Country X under Treas. Reg. §1.482-7. The Country X subsidiary also has a branch operation in Country Y, which is a known low-tax jurisdiction with an effective tax rate of 9%. The US parent sells physical widgets to the Country X subsidiary for $100 per unit, while the comparable uncontrolled price for similar widgets is $150. The widgets' remote monitoring services are provided directly to global customers by ABC Corp, which charges a separate subscription fee. In 2020, ABC Corp obtained a bilateral Advance Pricing Agreement (APA) with Country X, agreeing to the $100 transfer price for widgets based on the Comparable Uncontrolled Price method with specific comparability adjustments for manufacturing scale and market differences. The APA did not address the QCSA or digital services. The QCSA specifies that Country X subsidiary contributed 30% of R&D costs and is entitled to 30% of the economic benefits from the manufacturing technology but explicitly excludes the digital platform technology. Additionally, ABC Corp provides management services to the subsidiary for a flat fee of $500,000 annually and temporarily transfers certain marketing intangibles to the subsidiary through a limited 5-year license for a one-time payment of $1 million. The Country X subsidiary utilizes these marketing intangibles primarily in Country Y through its branch. In 2023, following pandemic-related supply chain disruptions, ABC Corp restructured its operations: It moved certain high-value manufacturing processes back to the US while maintaining the QCSA It began using the Country Y branch as the global distribution hub It integrated the previously separate remote monitoring services into the base widget price, effectively bundling tangible and digital service elements It reduced the management services fee to $300,000 claiming reduced service scope Country X has implemented the OECD's BEPS Action 8-10 recommendations and has agreed to implement the Pillar Two global minimum tax with a 15% effective rate starting in 2024. Country Y, which has minimal transfer pricing rules, has not agreed to the Pillar Two framework. In a 2024 audit, the IRS has challenged this arrangement, claiming that: The widget transfer price is not arm's length despite the APA, especially after bundling in digital services The operational restructuring constitutes a termination of the original QCSA requiring a new buy-in payment The reduced management fee is inadequate given the actual services provided The intangible license payment undervalues the marketing intangibles The QCSA and the branch arrangement constitute a tax avoidance scheme designed to circumvent GILTI, Subpart F, and now Pillar Two minimum tax requirements Analyze this complex transfer pricing arrangement under relevant US and international tax law, regulations, and case law. How should the taxpayer respond to the IRS challenges? How might the implementation of Pillar Two impact this analysis? What documentation and economic analyses would strengthen the taxpayer's position?

[+0.15] For correctly analyzing the widget transfer pricing and APA status: Identifying that bundling digital services likely constitutes a material change under Rev. Proc. 2015-41 §7.06 Applying Treas. Reg. §1.482-1(d) to assess the comparability adjustments justifying the $50 price variance Citing Eaton Corp. v. Commissioner (T.C. Memo 2017-147) on the IRS burden to prove critical assumption violations Recognizing the need for separate valuation of embedded digital services under Treas. Reg. §1.482-4 [+0.15] For properly evaluating the QCSA and restructuring implications: Analyzing how moving high-value manufacturing processes impacts proportional benefits under Treas. Reg. §1.482-7(e)(1) Assessing whether restructuring creates new platform contribution transactions under Treas. Reg. §1.482-7(g)(2) Analyzing the legitimacy of separating digital platform technology under Treas. Reg. §1.482-7(c)(1) Citing Amazon.com, Inc. v. Commissioner (148 T.C. 108 (2017)) on proper valuation approaches for platform contributions [+0.10] For correctly analyzing the management services and marketing intangibles: Evaluating the reduced management fee under Treas. Reg. §1.482-9 Assessing the $1 million marketing intangibles license payment under the "commensurate with income" standard Applying Treas. Reg. §1.482-9(l) regarding aggregation of interrelated transactions Citing Guidant LLC v. Commissioner (T.C. Memo 2013-281) on documenting service benefits [+0.15] For thorough analysis of the branch structure and international implications: Analyzing Country Y branch as a global distribution hub under functional risk profile (Treas. Reg. §1.482-1(d)(3)(iii)) Evaluating Subpart F (§952), GILTI (§951A), and FDII (§250) implications Assessing the economic substance of the structure under IRC §7701(o) Analyzing the branch structure's vulnerability under BEPS Action 8-10 DEMPE framework [+0.15] For correctly analyzing Pillar Two implications: Identifying that Country Y's 9% rate would trigger top-up tax in Country X under Pillar Two Evaluating the Substance-Based Income Exclusion eligibility for Country Y operations Analyzing how Pillar Two implementation affects the overall tax structure efficiency Recommending strategic responses to Pillar Two implementation [+0.10] For developing a comprehensive APA defense strategy: Proposing APA amendments rather than cancellation under Rev. Proc. 2015-41 §7.06 Developing separate pricing methodology for the newly bundled digital services Addressing the comparability adjustments post-restructuring Citing Coca-Cola Co. v. Commissioner (155 T.C. No. 10 (2020)) on APA enforcement [+0.10] For crafting a viable QCSA and restructuring defense: Demonstrating the 30% cost sharing remains proportionate to anticipated benefits Addressing the high-value manufacturing processes relocation Defending the digital platform exclusion with evidence of separate development paths Citing Veritas Software Corp. v. Commissioner (133 T.C. 297 (2009)) on pre-existing intangibles valuation [+0.10] For identifying required economic analyses and documentation: Specifying necessary value chain analysis across the enterprise Detailing profit split analyses considering relative contributions Outlining DEMPE analysis requirements for all relevant intangibles Recommending benchmarking studies for the Country X subsidiary and Country Y branch


Question: MicroTech Inc., a US parent company, restructured its global operations in 2023. The restructuring involved: Creating a regional hub in Singapore (SingTech Ltd) and transferring certain marketing intangibles valued at $80M to SingTech for a lump sum payment of $50M. Establishing a cost sharing arrangement (CSA) between MicroTech, SingTech, and its Irish subsidiary (IreTech Ltd) for future R&D. SingTech and IreTech made combined buy-in payments of $150M for pre-existing technology. MicroTech now manufactures components at $200 per unit (cost plus 5%) and sells them to IreTech, which assembles and sells finished products to SingTech at cost plus 8%. SingTech sells to end customers in Asia. MicroTech licenses certain retained patents to SingTech for a 1.5% royalty and to IreTech for a 1% royalty. Market royalty rates for comparable technologies range from 2-4%. SingTech employs 20 people who perform limited marketing functions, while strategic decisions are made by executives who split their time between the US and Singapore. Required: a) Analyze the transfer pricing issues under IRC §482 for each aspect of this restructuring, citing relevant Treasury Regulations and case law. b) Explain how the IRS might apply the commensurate with income standard to the intangible transfers and royalty arrangements. c) Discuss the implications of this structure under the GILTI, FDII, and BEAT provisions of the Tax Cuts and Jobs Act. d) Explain how the economic substance doctrine (codified in IRC §7701(o)) and the recent decision in Whirlpool Financial Corp. v. Commissioner (19 F.4th 944 (6th Cir. 2021)) might impact the IRS's approach to this structure. e) Recommend documentation and planning strategies to mitigate tax risks, including potential penalty exposure.

Part A: Transfer Pricing Analysis (0.35 points) [+0.07] For correctly identifying that the $50M payment for $80M marketing intangibles violates arm's length standard under Treas. Reg. §1.482-4 and citing Coca-Cola Co. v. Commissioner [+0.07] For analyzing the CSA buy-in payment of $150M under Treas. Reg. §1.482-7(g) and discussing applicable valuation methods with reference to Amazon.com Inc. v. Commissioner [+0.07] For evaluating the component pricing (cost plus 5%) under Treas. Reg. §1.482-3(d) with reference to comparability factors from Medtronic Inc. v. Commissioner [+0.07] For identifying that the 1-1.5% royalty rates are below arm's length range (2-4%) under Treas. Reg. §1.482-4 and citing Veritas Software Corp. v. Commissioner [+0.07] For analyzing the limited substance in Singapore (20 employees with split management) under Treas. Reg. §1.482-1(d)(3)(ii)(B) and referencing Xilinx Inc. v. Commissioner Part B: Commensurate with Income Standard (0.15 points) [+0.05] For explaining periodic adjustments to marketing intangible valuation under Treas. Reg. §1.482-4(f)(2) [+0.05] For analyzing CSA periodic adjustments under Treas. Reg. §1.482-7(i)(6) and applying the "realistic alternatives" principle from Treas. Reg. §1.482-1(f)(2)(ii) [+0.05] For discussing the vulnerability of lump-sum payment for marketing intangibles under Treas. Reg. §1.482-4(f)(6) Part C: TCJA Implications (0.15 points) [+0.05] For correctly analyzing GILTI implications under IRC §951A, including the 10.5% minimum tax rate and QBAI considerations [+0.05] For explaining FDII implications for MicroTech under IRC §250 and Treas. Reg. §1.250(b)-3 through 6 [+0.05] For identifying potential BEAT issues under IRC §59A related to royalty and service payments, with reference to the Treas. Reg. §1.59A-3(b)(3)(ii) exceptions Part D: Economic Substance and Case Law (0.15 points) [+0.05] For applying the two-prong test under IRC §7701(o) (objective economic substance and business purpose) [+0.05] For correctly analyzing Whirlpool's application to the SingTech structure, focusing on DEMPE functions [+0.05] For discussing supply chain restructuring principles with reference to relevant case law such as Medtronic Inc. v. Commissioner or Amazon.com Inc. v. Commissioner Part E: Risk Mitigation Strategies (0.20 points) [+0.05] For recommending comprehensive transfer pricing documentation under Treas. Reg. §1.6662-6(d)(2)(iii) with specific functional analysis requirements [+0.05] For suggesting a multilateral Advance Pricing Agreement under Rev. Proc. 2015-41 [+0.05] For analyzing penalty exposure under IRC §6662(e) and (h) (20-40%) and reasonable cause exception under IRC §6664(c) [+0.05] For incorporating OECD BEPS Action 8-10 principles (as referenced in Treas. Reg. §1.482-1(b)(2)(i)) and step-transaction doctrine considerations under Comm'r v. Clark


Question: MicroTech Inc., a US-headquartered technology company (effective tax rate: 21%), has the following international structure: MicroTech Singapore (MS) (17% tax rate): Regional headquarters for Asia-Pacific Licenses manufacturing technology from US parent for 3% royalty Purchases components from US at $100/unit (market range: $140-160) Assembles and sells products for $300/unit MicroTech Switzerland (MSW) (8.5% effective tax rate): Established as "principal" for European operations Holds rights to European marketing intangibles via CSA with US parent Charges 2% service fee to all affiliates for "supply chain management" Recently designated as "in-house treasury center" MicroTech Ireland (MI) (12.5% tax rate): Software development center with 30 developers Participates in CSA for software IP (contributes 15% of costs, receives EMEA rights) Sells digital products and services to European customers remotely Financial Transactions: MSW provides intercompany loans to MS at LIBOR+2% ($50M outstanding) US parent guarantees MSW's external borrowing without charging a guarantee fee MS and MSW participate in a cash pooling arrangement managed by MSW US parent executed a business restructuring in 2022, transferring certain APAC customer contracts to MS for a one-time payment of $10M (internal valuation showed $45-60M range) Digital Activities: MI provides remote technical support to all global customers MI employees regularly travel to Germany for 60-90 day assignments Cloud-based services are delivered by MI to customers throughout Europe During an IRS audit covering 2022-2024, the following issues have emerged: The IRS has proposed a $30M adjustment to the 2022 business restructuring under IRC §482 German tax authorities have asserted that MI has created a digital PE in Germany under new digital economy rules The IRS disputes the characterization of MSW as the "lender of record" due to its minimal functional capacity In 2023, Treasury finalized regulations under IRC §482 for financial transactions, incorporating OECD BEPS Action 4 concepts Each entity maintains separate transfer pricing documentation using different methods: CUP for royalties TNMM (ROCE 7-9%) for manufacturing Profit split for digital services CUP for financial transactions Provide a comprehensive analysis of the transfer pricing issues facing MicroTech Inc., including: Intercompany pricing for tangible goods, intangibles, services, and financial transactions Application of DEMPE analysis to the various intangibles Permanent establishment risks in European operations Business restructuring valuation Documentation adequacy and penalty exposure Multilateral considerations and dispute resolution options Cite specific IRC sections, Treasury Regulations, case law, and OECD guidance to support your analysis.

[+0.05] For correctly identifying the component pricing issue from US to MS ($100 vs. $140-160 market range) and citing IRC §482 and Treas. Reg. §1.482-3 as the basis for potential IRS adjustment [+0.05] For analyzing the manufacturing technology royalty (3%) under Treas. Reg. §1.482-4 and citing relevant case law (e.g., Amazon.com Inc. v. Commissioner (148 T.C. No. 8, 2017)) [+0.05] For explaining the CSA requirements under Treas. Reg. §1.482-7, including RAB shares, PCT payments, and IDC allocation, with reference to Altera Corp. v. Commissioner (926 F.3d 1061 (9th Cir. 2019)) [+0.05] For evaluating MSW's 2% service fee under Treas. Reg. §1.482-9, addressing the benefit test, duplicative services rule, and passive association concepts, with reference to Container Corp. v. Commissioner (134 T.C. 122 (2010)) [+0.1] For comprehensive analysis of financial transactions, including: Accurate delineation of intercompany loans under final regulations regarding financial transactions pursuant to IRC §482 Explanation of missing guarantee fees for US parent guarantees Analysis of cash pooling arrangements under OECD TPG Chapter X Discussion of economic substance considerations under IRC §7701(o) [+0.1] For conducting a thorough DEMPE analysis for all identified intangibles (manufacturing, marketing, software), with application of OECD TPG paragraph 6.32-6.35 and Treas. Reg. §1.482-1(d)(3)(iii)(B), and citation of Coca-Cola Co. v. Commissioner (155 T.C. No. 10, 2020) regarding marketing intangibles [+0.1] For analysis of the German PE risk, including: Physical presence through employee visits (60-90 day assignments) Digital services provision under BEPS Action 1 Profit attribution methodology following Authorized OECD Approach Reference to OECD's work on tax challenges arising from the digitalization of the economy [+0.1] For evaluating the business restructuring valuation: Analysis of the $10M payment vs. $45-60M internal valuation range Application of IRC §482 and §367(d) to the transaction Discussion of economic substance requirements under IRC §7701(o) Reference to DHL Corp. v. Commissioner (T.C. Memo 1998-461, aff'd in part, rev'd in part, 285 F.3d 1210 (9th Cir. 2002)) regarding valuation of transferred business operations [+0.1] For documentation adequacy assessment, including: Requirements under IRC §6662(e) and Treas. Reg. §1.6662-6(d)(2)(iii) Identification of penalties (20% under §6662(e), 40% under §6662(h) and §6662(b)(6)) Analysis of penalty protection requirements under Treas. Reg. §1.6662-6(d)(2)(iii)(B) Discussion of inconsistent documentation approach impact on penalty exposure [+0.1] For addressing multilateral considerations: Treaty-based relief options (MAP, arbitration provisions) BEPS compliance issues across Actions 4, 7, 8-10, and 13 Dispute resolution strategies including Advance Pricing Agreements Citation of Eaton Corp. v. Commissioner (152 T.C. No. 2, 2019) regarding APAs [+0.1] For identifying and explaining transfer pricing method selection issues: Application of best method rule across entities (Treas. Reg. §1.482-1(c)) Appropriateness of selected methods for each transaction type Consistency issues in global documentation approach Potential alternatives to enhance defensibility [+0.1] For comprehensive recommendations addressing: Business restructuring remediation options (e.g., amended returns with revised valuation) Financial transactions compliance improvements (guarantee fees, functional substance) German PE risk management strategies Documentation enhancement approach for penalty protection Future structure planning considerations For full credit in each section, answers must cite specific applicable IRC sections, Treasury Regulations, OECD guidance paragraphs, and relevant case law.


Question: MediTech Inc., a US pharmaceutical company, has a complex global structure including subsidiaries in Ireland (manufacturing), Switzerland (IP holding), Singapore (regional HQ), and a new digital health division in Israel that uses AI to analyze patient data and improve drug efficacy. Consider the following scenario: In 2019, MediTech entered a 10-year cost sharing arrangement covering traditional pharmaceutical R&D and the new AI/digital health initiatives. The CSA used the Acquisition Price Method under Treas. Reg. §1.482-7(g)(5) to value platform contributions based on MediTech's acquisition of a biotech startup for $2 billion. During 2020-2023: The COVID-19 pandemic disrupted global supply chains, causing the Irish manufacturing subsidiary to operate at 40% capacity while fixed costs remained constant. The Israeli digital health division developed an AI algorithm that unexpectedly increased drug efficacy by 200% and created a new revenue stream from licensing the algorithm to third parties, generating $500M annually not anticipated in the original CSA projections. The Swiss entity seconded key personnel to Israel for AI development but maintained legal ownership of resulting patents under the CSA. In 2023, the OECD implemented Pillar One with Amount A reallocating 25% of residual profit to market jurisdictions, and Pillar Two establishing a 15% global minimum tax. The IRS initiated a transfer pricing examination, proposing adjustments under §482 to reallocate 60% of the Israeli subsidiary's algorithm profits to the US, citing the Coca-Cola case (Coca-Cola Co. v. Commissioner, 155 T.C. No. 10 (2020)). MediTech applied for a bilateral APA with Israel in 2022, but the process stalled due to disagreements about the value of data as an intangible. Required: a) Apply the "substantially disproportionate income rule" from Treas. Reg. §1.482-7(i)(6) to the unexpected AI algorithm revenue. Would the "periodic adjustment" exception for "extraordinary events" under §1.482-7(i)(6)(vi)(A) apply? b) Analyze whether the IRS has a valid basis for reallocating the Israeli subsidiary's algorithm profits to the US under §482 in light of TD 9568 (2012) regarding intangibles not legally protected. Cite the Veritas and Amazon cases in your analysis. c) Evaluate how the secondment arrangement impacts the DEMPE analysis under Treas. Reg. §1.482-4 and OECD Transfer Pricing Guidelines paragraph 6.56. Would the Swiss entity be entitled to intangible-related returns? d) Determine how Pillars One and Two affect MediTech's global effective tax rate and transfer pricing positions. Calculate the effective tax rate under three scenarios: (i) current structure, (ii) restructured with DEMPE alignment, and (iii) centralized IP ownership in the US. e) Propose a comprehensive restructuring plan that addresses the multiple jurisdiction issues while minimizing global tax and maximizing APAs coverage. Include how the restructuring would be evaluated under OECD BEPS Action 8-10 and IRC §367. f) Determine whether the Israeli digital health operations constitute a substantial contribution to the development of platform intangibles under the three-part test established in Amazon and discussed in the IRS Transfer Pricing Audit Roadmap (2019).

Part A - Substantially Disproportionate Income Rule (0.15 points) [+0.05] For correctly explaining that Treas. Reg. §1.482-7(i)(6) allows the IRS to make periodic adjustments when actual results diverge significantly from projections [+0.05] For identifying that the $500M annual algorithm revenue (not anticipated in original projections) triggers this rule [+0.05] For correctly analyzing that the "extraordinary events" exception would likely not apply because: AI development was the purpose of the CSA, making advances foreseeable, not extraordinary The temporal proximity between CSA formation (2019) and breakthrough (2020-2023) makes it difficult to argue unforeseeability under the Amazon standard Part B - IRS Basis for Reallocation (0.15 points) [+0.05] For correctly explaining TD 9568 (2012) expanded the definition of intangibles under §482 to include items not legally protected but having substantial value [+0.05] For correctly analyzing Veritas Software Corp. v. Commissioner (rejecting IRS's attempt to value future innovations in buy-in payment) and Amazon.com Inc. v. Commissioner (holding that "subsequently developed intangibles" should not be included in initial valuation) [+0.05] For correctly distinguishing the Coca-Cola precedent by noting that if the Israeli subsidiary performed substantial DEMPE functions within the CSA, the case may be distinguishable since Coca-Cola involved foreign entities performing routine functions but receiving non-routine returns Part C - Secondment and DEMPE Analysis (0.15 points) [+0.05] For correctly explaining that under Treas. Reg. §1.482-4 and OECD TP Guidelines paragraph 6.56, legal ownership alone does not entitle the Swiss entity to intangible-related returns [+0.05] For correctly applying OECD Guidelines paragraph 1.105 which states that seconded employees following instructions from the host entity generally act on behalf of that entity, not the seconding entity [+0.05] For correctly determining that the Swiss entity would be entitled to: A routine return for providing personnel (comparable to a services fee) A portion of intangible returns only to the extent it demonstrates control over development risks and strategic decisions, citing GlaxoSmithKline as precedent for economic substance over contractual arrangements Part D - Pillar One and Two Impact (0.15 points) [+0.05] For correctly explaining that Pillar One reallocates 25% of profits above a 10% threshold to market jurisdictions (reducing profits in lower-tax jurisdictions) [+0.05] For correctly explaining that Pillar Two's 15% global minimum tax creates top-up taxes for operations historically taxed below 15%, with reference to available foreign tax credits [+0.05] For calculating appropriate effective tax rates under all three scenarios and explaining the differences: Current structure: ~18% (with Pillar Two top-up taxes) DEMPE alignment: ~21% (reflecting profit alignment with substance) Centralized US IP: ~24% (reflecting higher US taxation) Part E - Restructuring Plan (0.25 points) [+0.05] For proposing conversion of Swiss IP holding to principal entity with specific strategic R&D management functions and risk assumption under Treas. Reg. §1.482-1(d)(3)(iii) [+0.05] For proposing limited risk distributor model for Irish manufacturing with appropriate specific benchmarks (Berry Ratio or TNMM) [+0.05] For designing a two-tiered compensation model for the Israeli entity with specific percentages (cost-plus markup for routine R&D and value-based milestone payments for breakthroughs) [+0.05] For addressing documentation requirements supporting Swiss DEMPE claims and proposing specific multilateral APA strategy [+0.05] For addressing tax implications of restructuring under: OECD BEPS Actions 8-10 substance requirements IRC §367(d) deemed royalty provisions Economic substance doctrine in IRC §7701(o) Potential challenges under §482 anti-abuse rules Part F - Substantial Contribution Analysis (0.15 points) [+0.05] For correctly applying the Amazon three-part test: Identifying the preexisting contributions (acquired biotech platform valued at $2 billion) Analyzing the ongoing development activities (the Israeli team's AI development) Evaluating realistic alternatives (independent licensing of algorithm to third parties) [+0.05] For correctly applying the IRS Transfer Pricing Audit Roadmap (2019) criteria: Documentation of decision-making authority Location of key management personnel Entity controlling budget decisions [+0.05] For correctly determining whether the Israeli subsidiary constitutes a substantial contributor under Treas. Reg. §1.482-7(j)(3)(iii) by analyzing whether it made autonomous development decisions or merely executed a predetermined research plan


Question: MNE Group implemented a global business restructuring with the following features: US Parent (USP) historically operated a vertically integrated widget business with R&D, manufacturing, and distribution functions in the US, achieving a 25% operating margin. Under the restructuring: USP converted Country B subsidiary (Sub-B) from a full-fledged distributor to a limited-risk distributor USP established a regional principal company in Country C (Sub-C) that entered into a cost sharing arrangement (CSA) with USP Sub-C created a digital platform for remote monitoring of widgets USP established a contract manufacturer in Country D (Sub-D) USP established a financial services center in Country E (Sub-E) The CSA between USP and Sub-C covers widget technology and digital platform development with a $150 million platform contribution transaction (PCT) payment from Sub-C based on the income method with a 12% discount rate. R&D costs are split 55% (USP) and 45% (Sub-C). Sub-C acquired marketing intangibles and customer lists from Sub-B for a one-time payment of $10 million based on a relief-from-royalty valuation (3% royalty rate, 10-year life, 14% discount rate). No payment was made for workforce in place or going concern value. All Country B customers now contract directly with Sub-C for widgets and digital services through the platform, with Sub-B receiving a 4% commission on sales. USP sales representatives regularly visit Country B customers, remotely connecting them with Sub-C technical experts. USP manufactures proprietary components at a cost of $65 per unit and transfers them to Sub-D at $75. Sub-D assembles final widgets at a cost of $25 per unit ($15 materials, $10 labor) and sells them to Sub-C for $105 (5% return on total costs). Sub-C sells finished widgets and digital services to Country B customers for $200, with digital services representing 15% of the price. Sub-C has a 40% operating margin. Sub-E provides financing for the group, with $500 million loaned to Sub-C at 6% interest (market rate 4-5%) and $200 million loaned to Sub-D at 7% (market rate 5-6%). Sub-E is funded primarily by $650 million in loans from USP at 2%. USP maintains a "quality control team" of 5 people in Country C who regularly advise Sub-C but have no formal authority. Financial results post-restructuring: USP: 10% operating margin Sub-B: 3% operating margin Sub-C: 40% operating margin Sub-D: 5% operating margin on costs Sub-E: 4% spread on loans Additional context: Country B imposes a 30% withholding tax on royalties and a 28% corporate tax rate Country C has a 10% corporate tax rate and a patent box regime offering 5% rate on qualifying IP income Country D has an 8% corporate tax rate and 0% withholding tax Country E has a 5% tax rate on financial services income Countries B and C have implemented digital services taxes of 3% and 2% respectively Country B customs authorities recently challenged the $105 import value, asserting it should include an allocation for IP As a Tax Director preparing for a global audit, identify and analyze all transfer pricing and international tax issues in this structure. Your answer should address: Transfer pricing characterization and valuation issues under §482 and OECD Guidelines Permanent establishment risks Digital taxation implications Secondary adjustment considerations Appropriate restructuring alternatives to mitigate identified risks In your analysis, cite relevant regulations, rulings, and cases, and include perspectives of various tax authorities as well as potential taxpayer responses.

[+0.05] For identifying the business restructuring compensation issues, specifically that Sub-B was inadequately compensated for the conversion from full-fledged distributor to limited-risk distributor under Treas. Reg. §1.482-1(b)(2)(i) and OECD TPG Chapter IX [+0.05] For analyzing the $10 million payment for marketing intangibles as inadequate based on the low 3% royalty rate, short 10-year life assumption, and omission of workforce in place and going concern value, citing Amazon.com Inc. v. Commissioner, 148 T.C. No. 8 (2017) [+0.05] For identifying potential §367(d) implications for the outbound transfer of intangibles to Sub-C, noting the Tax Cuts and Jobs Act expansion of intangibles definition to include goodwill, going concern value, and workforce in place [+0.1] For comprehensive analysis of the Cost Sharing Arrangement issues, including: (1) evaluation of the $150 million PCT payment under the commensurate with income standard and potential undervaluation with the 12% discount rate; (2) questioning whether the 55%/45% R&D cost split aligns with the benefits received by each party given the operating margin disparities (Sub-C: 40% vs. USP: 10%); and (3) citing relevant cases like Altera Corp. v. Commissioner, 926 F.3d 1061 (9th Cir. 2019) [+0.1] For analyzing the transfer pricing issues in the manufacturing and distribution chain, specifically: (1) the USP to Sub-D component pricing ($75 on $65 cost); (2) the Sub-D to Sub-C finished goods pricing ($105 with 5% return on cost); and (3) Sub-C's 40% operating margin in a low-tax jurisdiction, with reference to The Coca-Cola Company v. Commissioner, 155 T.C. No. 10 (2020) [+0.1] For identifying and analyzing the non-arm's length financing arrangements, specifically: (1) the above-market interest rates on loans from Sub-E to Sub-C (6% vs. market 4-5%) and Sub-D (7% vs. market 5-6%); (2) the profit shifting created by USP funding Sub-E at 2% while Sub-E lends at 6-7%; and (3) potential §385 debt-equity recharacterization risks [+0.1] For identifying permanent establishment risks, specifically: (1) USP sales representatives in Country B potentially creating a dependent agent PE under BEPS Action 7 and OECD Model Treaty Article 5(5); (2) USP's "quality control team" in Country C potentially creating a fixed place of business PE under Article 5(1); and (3) citing relevant case law such as Dell Products v. Spanish Tax Administration (2016) [+0.1] For analyzing digital taxation implications, specifically: (1) the applicability of Country B's 3% and Country C's 2% digital services taxes to the 15% of widget price ($30 per unit) attributed to digital services; (2) potential characterization of digital service income as royalties subject to Country B's 30% withholding tax; and (3) citing relevant precedents like the ABB FZ-LLC (2017) Indian tax case [+0.1] For identifying secondary adjustment considerations, specifically: (1) potential Country B deemed dividend treatment of undercompensation in the restructuring, triggering withholding taxes; and (2) the customs valuation challenge by Country B authorities requiring proper inclusion of IP values in the declared $105 import value under WTO Customs Valuation Agreement principles [+0.1] For proposing specific restructuring alternatives to mitigate identified risks, including: (1) implementing a residual profit split methodology aligning profits with DEMPE functions; (2) revising intercompany financing to use arm's length rates; (3) creating a more robust legal framework for digital services; and (4) developing comprehensive transfer pricing documentation addressing BEPS Action 13 requirements [+0.15] For comprehensive analysis from multiple tax authority perspectives, specifically: (1) IRS focus on §367(d), CSA valuation, DEMPE alignment, and GILTI/BEAT implications; (2) Country B focus on restructuring compensation, PE status, withholding taxes, and customs valuation; (3) Country C focus on patent box qualification and substance requirements; and (4) citing key precedents like The Coca-Cola Company v. Commissioner and the Colgate-Palmolive French commissionaire case


Question: XYZ Corp (US parent) sells widgets to wholly-owned subsidiary ABC Ltd. (Country B, 20% tax rate) at $100 per unit. Comparable uncontrolled price for basic widgets is $150. The structure includes: A qualified cost sharing arrangement (CSA) under Treas. Reg. §1.482-7 where ABC contributes 30% of development costs In 2022, XYZ underwent an outbound IP migration of its "next-generation" widget technology to HIJ Ltd. (Country G, 12.5% tax rate) via a §367(d) deemed royalty arrangement HIJ licenses this technology to both XYZ and ABC under a tiered royalty structure (3% of sales for first $10M, 5% thereafter) Due to pandemic supply chain disruptions in 2023, ABC temporarily shifted manufacturing from MNO Ltd. to related party PQR Inc. (US) but maintained the $100 transfer price XYZ claims FDII deductions under §250 for its royalty income from HIJ XYZ's consolidated group has GILTI inclusions from ABC and foreign tax credits limited by §904(d) basketing The group's BEAT liability under §59A is affected by the pricing structure ABC recently entered a unilateral APA with Country B's tax authority accepting the $100 price ABC sells 10% of its widgets to ultimate customers in the US, potentially creating a "round-trip" issue under transfer pricing principles The IRS examiner has proposed a transfer pricing adjustment based on the Ninth Circuit's decision in Altera and a novel application of Veritas Software Corp. v. Commissioner regarding the CSA buy-in payment. XYZ argues that the unilateral APA and the OECD's recent guidance on COVID-19 transfer pricing implications support its position. You are asked to: Analyze all relevant IRC provisions affecting this structure, including §§482, 367(d), 250, 951A, 904, and 59A Evaluate the proper transfer price considering the judicial precedents, supply chain disruptions, and APA implications Address potential repatriation strategies that minimize global tax burden while complying with the arm's length principle Determine if the structure creates BEPS concerns under the OECD's two-pillar approach Cite relevant case law, Treasury regulations, and OECD guidance.

I. Transfer Pricing Foundation Analysis (0.25 points) [+0.05] For correctly identifying that the CUP method under Treas. Reg. §1.482-3(b) indicates a potential $50 per unit adjustment from $100 to $150 [+0.05] For analyzing the round-trip considerations when 10% of widgets are ultimately sold to US customers [+0.05] For applying Treas. Reg. §1.482-1(d)(3)(ii)(B) to evaluate whether ABC's DEMPE functions have economic substance [+0.05] For analyzing the application of Treas. Reg. §1.482-9 to the temporary manufacturing shift to PQR Inc. [+0.05] For explaining that the unilateral APA creates double taxation risk requiring Competent Authority assistance II. Intellectual Property Analysis (0.25 points) [+0.05] For analyzing the §367(d) deemed royalty implications, including the "commensurate with income" standard [+0.05] For correctly applying Veritas Software Corp. v. Commissioner (133 T.C. 297, 2009) to the CSA buy-in payment [+0.05] For analyzing whether the tiered 3%-to-5% royalty structure meets the arm's length standard [+0.05] For properly applying Altera Corp. v. Commissioner (926 F.3d 1061, 9th Cir. 2019) regarding stock-based compensation [+0.05] For applying the periodic adjustment provisions of Treas. Reg. §1.482-4(f)(2) to the royalty rates III. FDII/GILTI/BEAT Integration (0.2 points) [+0.05] For analyzing XYZ's FDII claim under §250 for royalty income from HIJ [+0.05] For explaining how higher profits in ABC would increase GILTI inclusion under §951A [+0.05] For analyzing how §904(d) basketing limitations affect foreign tax credits [+0.05] For analyzing the BEAT implications under §59A related to royalty payments to HIJ IV. Pandemic and Supply Chain Considerations (0.1 points) [+0.05] For applying the OECD's COVID-19 Transfer Pricing Guidance (December 2020) to the temporary manufacturing shift [+0.05] For analyzing whether pandemic disruptions justify comparability adjustments under Treas. Reg. §1.482-1(d)(2) V. BEPS and OECD Two-Pillar Approach (0.1 points) [+0.05] For analyzing Pillar One and Two implications for the structure, including the 15% global minimum tax [+0.05] For evaluating the structure against OECD BEPS Actions 8-10 principles on profit alignment with value creation VI. Repatriation Strategy Analysis (0.1 points) [+0.05] For analyzing §245A participation exemption for dividends as an alternative to the royalty structure [+0.05] For recommending appropriate strategies to address double taxation risks and optimize the global structure


Question: RetailCorp, headquartered in California, conducts business across multiple states with the following operations: Direct website sales of $150,000 annually to Nevada customers, fulfilled from inventory in Arizona Marketplace sales of $95,000 annually to Nevada customers through OnlineMarket (a marketplace facilitator) Direct sales of $75,000 annually to international tourists at their kiosk in a designated area at Las Vegas airport Operation of a "click-and-collect" location in Stateline, Nevada, where California customers can pick up orders to avoid California sales tax Drop-shipping arrangement with DropShip Inc., which maintains inventory in: A warehouse in Phoenix, Arizona A Foreign Trade Zone (#89) in Las Vegas, Nevada A warehouse on tribal land within the Reno-Sparks Indian Colony in Nevada Additionally: RetailCorp sells both taxable goods and digital products 30% of RetailCorp's Nevada sales consist of custom-designed jewelry where customers select basic designs online but sales are finalized through consultation calls with California-based designers RetailCorp recently acquired SmallVendor LLC, a Nevada-based company selling similar products with $80,000 in annual Nevada sales For tax year 2024, analyze: RetailCorp's sales tax collection obligations in Nevada, considering all nexus-creating activities Which specific sales are subject to Nevada sales tax, which are exempt, and which require further analysis RetailCorp's potential liability for failure to collect Nevada sales tax on sales made by SmallVendor LLC prior to acquisition The proper tax treatment of drop-shipped orders fulfilled from each of DropShip Inc.'s three locations Whether the "click-and-collect" arrangement creates potential tax avoidance concerns under either California or Nevada law Cite specific statutory provisions, case law, and administrative rulings in your analysis.

[+0.05] For correctly identifying both economic nexus (NRS 372.724) and physical nexus as applying to RetailCorp in Nevada [+0.05] For identifying all physical nexus-creating activities: kiosk, click-and-collect location, FTZ inventory, and acquisition of SmallVendor [+0.05] For correctly citing South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018) as the controlling case for economic nexus [+0.05] For correctly analyzing direct website sales as generally taxable under NRS 372.105 [+0.05] For analyzing digital products under NRS 372.106 and noting that some may be exempt [+0.05] For analyzing custom-designed jewelry under NAC 372.370 regarding fabrication labor and custom manufacturing [+0.05] For correctly identifying that OnlineMarket (not RetailCorp) is responsible for collecting tax on marketplace sales under NRS 372.7263 [+0.05] For correctly analyzing sales to international tourists under NRS 372.715 regarding exemptions for non-residents [+0.05] For analyzing temporary use in Nevada under NRS 372.258 and its impact on export exemptions [+0.05] For citing General Motors v. Nevada Dep't of Taxation, 122 Nev. 555 (2006) on Nevada's interpretation of tax exemptions [+0.05] For identifying successor liability for SmallVendor LLC's tax obligations under NRS 372.707 [+0.05] For discussing the requirements for successor liability protection including tax clearance certificates and due diligence [+0.05] For correctly analyzing resale certificate requirements for Arizona drop-shipping (A.R.S. § 42-5022) [+0.05] For correctly analyzing FTZ shipments under NRS 372.715(3) regarding exemptions for property delivered outside the state [+0.05] For correctly analyzing that Nevada sales tax applies when goods leave FTZ for Nevada delivery [+0.05] For citing Washington v. Confederated Tribes of Colville Indian Reservation, 447 U.S. 134 (1980) on taxation of non-tribal members on tribal land [+0.05] For citing White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980) on the balancing test for state taxation affecting tribal interests [+0.05] For correctly identifying physical nexus created by Stateline location [+0.05] For analyzing California "look-through" provisions in Cal. Rev. & Tax Code § 6203(c) [+0.05] For citing Appeal of Borders Online, LLC, California State Board of Equalization, Case No. 1-A (2005) on nexus created by affiliated entities


Question: MNO Corporation, based in California, sells the following products: Standard widgets (tangible personal property) Digital widget designs (digital products) Widget customization services (services) Extended widget warranties (warranties) MNO sells through multiple channels: Direct website sales with drop-shipping via Supplier Inc. (Texas) TechMarket platform (a marketplace that takes possession of goods) QuickSale platform (a marketplace that doesn't take possession of goods) MNO has no employees outside California. TechMarket stores MNO's inventory in 15 states. For QuickSale platform sales, MNO ships inventory to FastLogistics (a third-party fulfillment company) which temporarily stores inventory in various states before shipping to customers. Annual sales figures: Direct website sales to New York: $75,000 (150 transactions) TechMarket sales to New York: $50,000 (100 transactions) QuickSale platform sales to New York: $40,000 (80 transactions) Direct website sales to Colorado: $30,000 (60 transactions) TechMarket sales to Colorado: $45,000 (90 transactions) QuickSale platform sales to Colorado: $35,000 (70 transactions) FastLogistics stored MNO's inventory in a New York warehouse for 20 days last year. In Colorado, FastLogistics used a cross-docking facility where goods remained for less than 48 hours before shipping. Customer Smith in New York purchases the following from MNO: Standard widget: $1,000 Digital widget design: $500 Widget customization service: $750 Extended warranty: $250 The standard widget will be installed at Smith's office in New Jersey, but shipped to Smith's warehouse in New York where it will remain for 3 weeks before installation. Smith provided a valid New York resale certificate for the standard widget only. Customer Jones in Colorado purchases the following from MNO: Standard widget: $800 Digital widget design: $400 (to be used by employees in both Colorado and Wyoming, with approximately 60% use in Colorado) Widget customization service: $600 Extended warranty: $200 The standard widget will be installed at Jones's home in Colorado. Required: Identify where MNO has sales tax nexus and explain why. Determine who is responsible for collecting sales tax (MNO or the marketplace) for each sales channel in each state. Calculate the correct sales tax for each component of the Smith and Jones transactions. Identify what documentation MNO must maintain to support its tax positions. Explain how MNO should handle any potential audit issues that might arise from these transactions.

[+0.1] For correctly identifying MNO's nexus profile: Physical nexus in CA (headquarters), NY (temporary inventory storage), and all 15 states where TechMarket stores inventory Economic nexus in NY and CO based on total transaction counts and/or dollar amounts Correctly applying NY Tax Law § 1101(b)(8)(i)(A) regarding temporary storage Correctly applying Colorado's temporary storage exception (Colo. Code Regs. § 201-4:39-26-102.3) [+0.15] For correctly determining sales tax collection responsibilities: TechMarket must collect for its platform sales in both NY and CO under marketplace facilitator laws (NY Tax Law § 1131(1); Colo. Rev. Stat. § 39-26-105(1.5)) QuickSale is not a marketplace facilitator under either state's laws MNO must collect tax on direct website and QuickSale platform sales [+0.2] For correctly calculating NY sales tax for Smith: Standard widget: No sales tax due with valid resale certificate (NY Tax Law § 1101(b)(4)) Digital widget design: $44.38 tax (8.875% of $500) per NY Tax Law § 1101(b)(6) Widget customization service: $66.56 tax (8.875% of $750) per NY Tax Law § 1105(c)(3) Extended warranty: $0 tax if properly documented for NJ use per NY Publication 750 and TSB-M-11(1)S, otherwise $22.19 [+0.2] For correctly calculating CO sales tax for Jones: Standard widget: $66.48 tax (8.31% of $800 based on Denver rates) per Colo. Rev. Stat. § 39-26-104(1)(a) Digital widget design: $19.94 tax (8.31% of $240 [applying reasonable apportionment showing 60% Colorado usage]) per Colo. Rev. Stat. § 39-26-104(1)(c.5) and 1 CCR 201-4, Special Rule 5 Widget customization service: $49.86 tax if taxable based on tangible result Extended warranty: $16.62 tax per Colo. Rev. Stat. § 39-26-104(1)(b.5) [+0.15] For identifying required documentation: Resale/exemption certificates for each state where drop-shipping occurs Records distinguishing marketplace vs. direct sales transactions Evidence of proper sourcing decisions for interstate transactions Documentation of digital product use locations Records of inventory locations and duration in each state [+0.1] For correctly analyzing cross-border issues: Proper sourcing of the Smith transaction between NY and NJ Correct apportionment of the digital product used in multiple states Application of destination-based sourcing principles for the tangible goods Identification of potential multiple taxation issues [+0.1] For identifying proper audit defense strategies: Maintaining state-specific documentation for all exemption claims Implementing proper electronic storage systems for certificates Creating contemporaneous documentation of tax decisions Establishing written policies for consistent application of tax rules Tracking marketplace facilitator compliance


Question: Company A, based in New York, has the following sales and activities in California: $300,000 in direct sales shipped from New York $250,000 through Marketplace M (a marketplace facilitator) $200,000 via drop shipping through Supplier B (located in Nevada) $100,000 in electronically delivered software as a service (SaaS) $150,000 in consulting services $175,000 in sales fulfilled by Fulfillment Provider F, which stores Company A's inventory at a California warehouse Additionally: Company A temporarily stores some inventory in California for 60 days during Q3 for a trade show, generating $50,000 in sales shipped from the trade show location Company A sells $75,000 in training manuals bundled with its consulting services Some consulting clients are based in California but receive services at their headquarters in other states Company A charges a single price for SaaS and training manuals to some customers ($30,000 of the SaaS sales) Company A's sales span multiple California localities with varying district tax rates, and the company's current fiscal year overlaps with a mid-year district tax rate change in Los Angeles County. Analyze Company A's complete sales tax collection obligations, including determination of nexus, tax base, applicable rates, and filing requirements. Cite relevant California statutes, regulations, and case law where appropriate.

[+0.1] For correctly identifying that Company A has physical nexus in California due to both temporary inventory storage (trade show) and inventory at Fulfillment Provider F, citing California Revenue and Taxation Code § 6203(c)(1) and/or Scholastic Book Clubs, Inc. v. State Bd. of Equalization [+0.1] For correctly identifying Company A has economic nexus with California (total sales exceeding $500,000 threshold) under California Revenue and Taxation Code § 6203(c)(4) and Wayfair, with accurate calculation of total sales amount ($1,175,000) [+0.1] For correctly analyzing the marketplace facilitator's obligation to collect and remit tax on the $250,000 in marketplace sales per California Revenue and Taxation Code § 6015(a), while explaining these sales still count toward Company A's economic nexus threshold [+0.1] For correctly analyzing the drop-shipping relationship, including Company A's obligation to provide a California resale certificate to Supplier B (California Regulation 1668) and the consequences of failing to provide a valid certificate [+0.1] For correctly analyzing the taxability of SaaS ($100,000) as generally non-taxable in California (citing Legal Ruling 96-008 and California Regulation 1502), while identifying the "true object" test for the bundled SaaS/training manual sales ($30,000) with reference to Preston v. State Board of Equalization [+0.1] For correctly analyzing the taxability of the training manuals ($75,000) as tangible personal property under California Revenue and Taxation Code § 6016, including the bundling issues and separate statement requirements [+0.1] For correctly analyzing the sourcing rules for district taxes based on destination (delivery address) rather than origin, per California Regulation 1802, and explaining how the Los Angeles County mid-year rate change affects tax calculation (California Regulation 1826) [+0.1] For correctly identifying that Company A must register for district tax collection in all districts where they make sales (California Revenue and Taxation Code § 7262) and maintain specific documentation for exempt sales (California Regulation 1668) [+0.1] For correctly analyzing the non-taxability of standalone consulting services per California Revenue and Taxation Code § 6012, and the out-of-state service delivery exemption based on destination sourcing principles [+0.1] For correct analysis of the filing requirements, including registration for a seller's permit, allocation of sales to appropriate districts on Schedule A, deduction of marketplace sales on Schedule C (per California Revenue and Taxation Code § 6203(c)(8)), and potential lookback liability period


Question: Western Manufacturing, Inc. ("Western") is a Delaware corporation with headquarters in California. Western sells industrial equipment and provides installation and repair services. Consider the following facts: Western has manufacturing facilities in California and Arizona Western has no physical presence in New York, Florida, Colorado, or Missouri Western's annual sales by state are: New York: $300,000 (equipment: $225,000; installation: $50,000; repair services: $25,000) Florida: $180,000 (equipment: $120,000; installation: $40,000; repair services: $20,000) Colorado: $90,000 (equipment: $70,000; installation: $10,000; repair services: $10,000) Missouri: $95,000 (equipment: $75,000; installation: $10,000; repair services: $10,000) In New York, 60% of equipment sales were to manufacturers claiming production exemptions In Florida, Western sells through a marketplace facilitator for 40% of its equipment sales In Colorado, Western's sales span multiple local jurisdictions including Denver and Boulder In Missouri, Western performed repair services remotely via internet-connected equipment For each state: a) Determine if Western has nexus and must collect sales/use tax b) Identify which of Western's products and services are taxable c) Calculate Western's effective tax collection obligation considering exemptions d) Identify all registration and filing requirements, including any local requirements e) Explain the sourcing rules that apply to Western's sales in each state

New York (0.25 points) [+0.05] For correctly analyzing New York's economic nexus threshold of $500,000 AND 100 transactions (N.Y. Tax Law § 1101(b)(8)(i)(E)) and concluding that more information is needed [+0.05] For correctly identifying equipment, installation, and repair services as taxable under N.Y. Tax Law § 1105 [+0.05] For correctly applying the manufacturing exemption (N.Y. Tax Law § 1115(a)(12)) and calculating $90,000 in taxable equipment sales ($225,000 × 40%) [+0.05] For identifying the proper registration form (ST-100) and exemption certificate requirements (Form ST-121) [+0.05] For explaining that New York uses destination-based sourcing for all sales and services Florida (0.25 points) [+0.05] For correctly identifying that Western has economic nexus in Florida with $180,000 in sales (exceeding $100,000 threshold in Fla. Stat. § 212.0596(2)(j)) [+0.05] For correctly identifying that all products and services are taxable under Florida law (Fla. Stat. § 212.05) [+0.05] For correctly calculating that Western must collect tax on $132,000 ($72,000 direct equipment sales + $40,000 installation + $20,000 repair) [+0.05] For identifying that the marketplace facilitator is responsible for collecting tax on $48,000 in sales (Fla. Stat. § 212.05965) [+0.05] For explaining Florida's destination-based sourcing rules and monthly filing requirement (Form DR-15) Colorado (0.25 points) [+0.05] For correctly determining that Western does not have state-level economic nexus with $90,000 in sales (below $100,000 threshold in Colo. Rev. Stat. § 39-26-102(3)(c)) [+0.05] For identifying the potential home rule city nexus issues in Denver and Boulder [+0.05] For correctly identifying which products and services would be taxable if nexus existed (Colo. Rev. Stat. § 39-26-104) [+0.05] For explaining the dual state/local tax administration system unique to Colorado [+0.05] For explaining Colorado's destination-based sourcing for state tax and potential different rules for home rule jurisdictions Missouri (0.25 points) [+0.05] For correctly determining that Western does not have economic nexus with $95,000 in sales (below $100,000 threshold in Mo. Rev. Stat. § 144.605(2)(e)) [+0.05] For correctly identifying that equipment and installation would be taxable if nexus existed (Mo. Rev. Stat. § 144.020) [+0.05] For analyzing the special case of remote repair services and their taxability under Mo. Rev. Stat. § 144.020.1(8) and Missouri Department of Revenue guidance regarding where the benefit of the service is received [+0.05] For explaining that no registration is required due to lack of nexus [+0.05] For explaining Missouri's destination-based sourcing rules and how they apply to remote services


Question: TechGadgets Corp. is headquartered in Oregon with warehouses in Washington and Nevada. During a recent internal audit, TechGadgets discovered it has been making several sales tax calculation errors for the past three years (2022-2024): It incorrectly classified all medical monitoring devices as exempt in California, whereas only certain qualifying devices met the exemption requirements under Cal. Rev. & Tax. Code § 6369. It failed to collect any sales tax on educational software downloads in New York, despite the ruling in New York Department of Taxation and Finance Advisory Opinion TSB-A-09(8)S, which clarified that prewritten software delivered electronically is taxable. It has been collecting Washington local sales tax based on its warehouse location (origin-based) rather than customer location (destination-based) as required by RCW 82.32.730, resulting in under-collection of approximately $42,000. It has not registered or filed returns in Connecticut despite exceeding the economic nexus threshold since 2023. For 2024, TechGadgets has the following sales distribution: Direct website sales: California: $600,000 (Los Angeles County: $250,000, San Francisco County: $200,000, San Diego County: $150,000) Product mix in California: standard electronics: $330,000, medical devices: $120,000, educational software: $75,000, cloud services: $75,000 New York: $150,000 (product mix: standard electronics: $80,000, educational software: $70,000) Connecticut: $90,000 Florida: $450,000 Drop shipping arrangement: TechGadgets contracts with SupplyDirect (based in Michigan) to drop ship products directly to customers in Texas ($300,000) and Illinois ($250,000) TechGadgets contracts with GlobalShip (based in Kentucky) to drop ship products to customers in Ohio ($280,000) and Pennsylvania ($210,000) Marketplace sales: Sales through Marketplace A: $300,000 to California, $450,000 to New York Sales through Marketplace B: $200,000 to Texas, $110,000 to Illinois TechGadgets has just received a nexus questionnaire from the California Department of Tax and Fee Administration and a notification that Connecticut's Department of Revenue Services is initiating a sales tax audit. As TechGadgets' tax advisor, prepare a comprehensive analysis of: The company's current sales tax obligations The potential liability from past reporting errors The recommended remediation strategy, including voluntary disclosure considerations The proper handling of the pending California questionnaire and Connecticut audit A go-forward compliance strategy, including specific product taxability determinations and the proper handling of drop shipping arrangements Include relevant statutory citations, case law, administrative rulings, and practical considerations in your analysis.

[+0.05] For correctly identifying all states where TechGadgets has nexus (Washington, Nevada, California, Connecticut, Florida, Texas, Illinois, Ohio, Pennsylvania) with proper threshold citations for each economic nexus state [+0.05] For correctly noting states where TechGadgets does not have nexus obligations (Oregon due to no sales tax; New York due to being below $500,000 threshold per N.Y. Tax Law § 1101(b)(8)(v)) [+0.10] For accurate product taxability analysis of California sales, specifically: Identifying standard electronics as fully taxable under Cal. Rev. & Tax. Code § 6051 Correctly analyzing medical monitoring devices under Cal. Rev. & Tax. Code § 6369(b) and Cal. Code Regs. tit. 18, § 1591(b)(5) Properly classifying educational software downloads as taxable under Cal. Rev. & Tax. Code § 6016 and citing relevant case law such as the California Supreme Court decision addressing electronic data transfer taxability Correctly identifying cloud services as generally exempt under Nortel Networks Inc. v. State Board of Equalization precedent [+0.05] For correctly identifying educational software downloads as taxable in New York per TSB-A-09(8)S [+0.10] For accurate past liability calculations including: properly identifying applicable lookback periods for each jurisdiction; correctly applying appropriate tax rates to the misclassified products; properly calculating penalties according to each state's statutory rates (e.g., up to 10% under Cal. Rev. & Tax. Code § 6476 for California, up to 14.5% under N.Y. Tax Law § 1145 for New York); and accurately applying each state's interest calculation methodology [+0.15] For detailed remediation strategy including: Connecticut VDA application under Conn. IP 2017(15) with timing considerations California Voluntary Disclosure Program under Cal. Rev. & Tax. Code § 6487.07 New York Voluntary Disclosure and Compliance Program specifics Washington amended returns with penalty waiver request under WAC 458-20-228 Proper prioritization of remediation actions [+0.10] For proper handling of regulatory actions: California nexus questionnaire response strategy with reference to Appeal of Agilent Technologies, Inc., 2019-SBE-001 Connecticut audit management strategy with reference to Conn. Gen. Stat. § 12-415 regarding managed audit options Proper application of attorney-client privilege considerations [+0.15] For comprehensive go-forward compliance strategy: Tax calculation software implementation with reference to "good faith" defense under Cal. Code Regs. tit. 18, § 1705 Product taxability matrix development with references to People v. Schwartz, 31 Cal.App.3d 475 (1973) Drop shipping compliance with specific certificate requirements by state Ongoing nexus monitoring protocol with reference to South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018) [+0.10] For correctly addressing marketplace facilitator considerations: Identifying that marketplace facilitators must collect tax on marketplace sales Noting TechGadgets' obligation to maintain records of marketplace sales Recognizing impact on economic nexus thresholds Addressing inclusion in gross receipts for income tax purposes [+0.05] For addressing local tax jurisdictions correctly: California local taxes (Los Angeles County: generally 9.5%-10.25%, San Francisco County: 8.625%, San Diego County: 7.75%-8.75% depending on specific location) Washington destination-based sourcing requirements under RCW 82.32.730 Texas origin-based local tax sourcing under Tex. Tax Code § 321.203 Proper CDTFA-401-A2 reporting requirements [+0.10] For comprehensive citation of relevant authority throughout the analysis, including statutory references, case law, and administrative guidance


Question: In 2024, TechSolutions Inc. underwent a corporate restructuring, splitting into three entities: TechCore LLC (Delaware) - Owns intellectual property and server infrastructure TechSales Inc. (Nevada) - Handles sales and customer relationships TechService Co. (California) - Provides implementation and support services The companies use a complex licensing model where: TechCore LLC licenses its proprietary software to Value-Added Resellers (VARs) that may or may not have reseller permits in various states. TechSales Inc. sells both downloadable enterprise software and SaaS solutions through: a. Direct sales to end-users b. Amazon Marketplace c. Specialized industry marketplace TechExchange (based in Colorado with employees in 22 states) d. VARs who bundle the software with their own services TechService Co. provides implementation services that are sometimes bundled with software sales and sometimes sold separately. Customer Alpha, a multi-state corporation, purchases the following: Enterprise software licenses for 250 users across 15 states, with the contract negotiated in Chicago and the billing address in Atlanta SaaS access through a VAR called IntegraTech, which claims a resale exemption Implementation services from TechService Co., with the implementation team working remotely from California, Washington, and Texas Customer Beta, a government contractor, purchases software through TechExchange for use on a federal government project, claiming both a marketplace facilitated sale and potential government exemption. TechSales uses a drop-shipping arrangement where it sells to Colorado customers but has TechCore deliver electronic access keys. Required: A. Analyze the sales tax nexus implications for each of the three related entities under both physical and economic nexus standards, citing relevant statutes and case law. Include a discussion of affiliate/attributional nexus under Tyler Pipe Industries v. Washington Department of Revenue, 483 U.S. 232 (1987). B. Determine the sales tax collection responsibilities between TechSales, the marketplaces, and the VARs in Colorado, Illinois, New York, and Washington, with specific reference to each state's marketplace facilitator laws and reseller exemption requirements. C. Apply the appropriate sourcing rules to Customer Alpha's purchase, addressing both the bundled and unbundled transactions. Cite specific statutory authority and relevant rulings on mixed transactions and bundled sales. D. Evaluate the validity of Customer Beta's claimed exemptions, referencing specific government contractor exemption provisions and the interaction with marketplace facilitator laws. E. Explain how the drop-shipping arrangement in Colorado affects sales tax responsibilities, citing relevant Colorado regulations and the Colorado Department of Revenue's FYI Publication Sales 5. F. Discuss how home rule jurisdictions in Colorado and Louisiana would impact the overall compliance requirements for these entities, including any recent developments in local tax administration. G. Recommend a compliance strategy that addresses potential audit risk areas and documentation requirements.

Part A: Nexus Analysis (0.20 points) [+0.05] For correctly identifying TechCore LLC's nexus based on economic nexus standards under Wayfair despite Delaware incorporation, citing specific economic thresholds in relevant states [+0.05] For correctly analyzing TechSales Inc.'s marketplace seller nexus obligations with reference to Nevada's lack of sales tax and how it affects multi-state obligations [+0.05] For properly identifying TechService Co.'s physical nexus in California and potential employee-based nexus in remote work states [+0.05] For accurate application of Tyler Pipe attributional nexus principles to the corporate structure, explaining how TechCore's activities could create nexus for TechSales in states where TechCore has presence Part B: Marketplace Facilitator and Reseller Analysis (0.20 points) [+0.05] For correctly applying Colorado's marketplace facilitator statute (§39-26-102(5.7)) to TechExchange and Amazon requiring collection on TechSales' products [+0.05] For accurately analyzing Illinois marketplace facilitator law (35 ILCS 120/2-7) and its interaction with reseller exemptions for VARs [+0.05] For accurately analyzing New York's marketplace provisions (NY Tax Law §1101(e)(1) and §1132(l)) including specific documentation requirements for exempt resellers [+0.05] For correctly identifying Washington's marketplace facilitator provisions (RCW 82.08.0531) and explaining their impact on TechSales' obligations Part C: Sourcing Rules (0.15 points) [+0.05] For correctly applying destination-based sourcing rules to Alpha's multi-state software purchase with specific reference to SSUTA Section 310 [+0.05] For accurately analyzing bundled transaction rules for the implementation services package citing relevant state statutes on mixed transactions [+0.05] For properly addressing the "benefit of use" standard for SaaS products across multiple user locations with reference to state-specific case law (e.g., Citrix Systems Inc. v. Commissioner of Revenue) Part D: Exemption Analysis (0.10 points) [+0.05] For correctly evaluating the validity of Beta's government contractor exemption with specific citations to relevant statutes and rulings on pass-through exemptions [+0.05] For accurately analyzing the interaction between government exemptions and marketplace facilitator laws, including proper documentation requirements Part E: Drop Shipment Analysis (0.10 points) [+0.05] For correctly explaining Colorado's treatment of electronic drop shipments under FYI Publication Sales 5 [+0.05] For accurately identifying the collection responsibilities between TechSales and TechCore in the drop-shipping arrangement, citing relevant Colorado regulations Part F: Home Rule Jurisdiction Analysis (0.15 points) [+0.05] For correctly analyzing Colorado home rule jurisdictions' specific filing requirements with citations to local ordinances [+0.05] For accurately addressing Louisiana's centralized remote seller administration system under La. R.S. 47:340 [+0.05] For properly discussing the practical impact of recent developments in local tax administration in both states, including specific examples of divergent local requirements Part G: Compliance Strategy (0.10 points) [+0.05] For developing a comprehensive compliance strategy that addresses all key risk areas including exemption certificate management and documentation of user locations [+0.05] For recommending specific compliance solutions with reference to state-specific documentation requirements and audit defense preparation