The Reliability of the Acquisition Price Method in Valuing Intellectual Property Transfers

By Antony Zack and Jonathan Lubick

1. Introduction

The global landscape of transfer pricing has shifted markedly since the OECD/G20 Base Erosion and Profit Shifting (BEPS) project and the enactment of the U.S. Tax Cuts and Jobs Act (TCJA) in 2017. Central to that shift is the valuation of intangible property, particularly where early- or mid-stage technology and biotechnology companies are acquired and then integrated into multinational enterprise (MNE) groups. Following such acquisitions, MNE groups frequently transfer the target’s intellectual property (IP) to a centralized hub to align legal ownership with strategic management and operational substance. To value these post-acquisition transfers, taxing authorities — most prominently the U.S. Internal Revenue Service (IRS) and the Israel Tax Authority (ITA) — favor the Acquisition Price Method (APM).

The APM rests on a simple premise: the price paid in an arm’s-length stock acquisition reflects the aggregate value of all of the target’s functions, assets, and risks (FAR). That aggregate, however, is not the same thing as the value of the discrete IP later transferred within the group. Bridging the gap requires a series of adjustments — carve-outs from the acquisition price for everything that is not part of the transferred IP. This article assesses the reliability of the APM in light of those adjustments and reaches a single operative conclusion: because the adjustments required in a real-world IP transfer are typically numerous, material, and contested, the U.S. transfer pricing regulations,  the OECD Guidelines and the Israeli Transfer Pricing regulations together make it effectively obligatory to test the APM result against at least one additional method. The analysis proceeds from the theoretical basis of the method, through the meaning of “reliability” and the mechanics of the adjustments (including a corrected treatment of goodwill and its sub-components), to the judicial and regulatory case for a mandatory corroborating method.

2. The APM as an Application of the CUP Standard

The APM is not a free-standing specified method under Treas. Reg. § 1.482-3 or § 1.482-4, nor is it a separately named method in the OECD Guidelines. It is, rather, a regulation-specific application of the comparable uncontrolled price (CUP) logic. Under the U.S. cost sharing regulations it is, in fact, expressly enumerated: Treas. Reg. § 1.482-7(g)(5) identifies the “acquisition price method” by name; § 1.482-7(g)(5)(iii) prescribes the “adjusted acquisition price”; § 1.482-7(g)(5)(iv) sets out its best-method reliability considerations; and § 1.482-7(g)(5)(v) provides a worked numerical example (the “Company X” example, in which a $110 million acquisition price is increased by $5 million of assumed liabilities and decreased by $15 million of tangible property and other assets to yield a $100 million adjusted acquisition price, then multiplied by the foreign participant’s 40% RAB share to produce a $40 million platform-contribution-transaction (PCT) payment).¹ The closely related market-capitalization method is likewise enumerated, with its own examples, at § 1.482-7(g)(6).² The OECD reaches the same place from the other direction: Chapter VI, paragraph 6.147 treats a recent third-party acquisition price as a CUP for the intangibles subsequently transferred within the group, “after any appropriate adjustments, including adjustments for acquired assets not re-transferred,” a principle illustrated by Examples 23 and 26 of the Annex to Chapter VI.³

Because the APM derives from the CUP standard, it inherits the CUP standard’s stringent comparability requirement. The uncontrolled “comparable” is the acquisition of the target’s stock — an undeniably arm’s-length event — but the controlled transaction is the transfer of discrete assets, typically technology, patents, or trade secrets. The two differ fundamentally in scope: an M&A transaction buys an entire operating business (its FAR, its identified and unidentified intangibles, its contractual rights, its human capital, and its future growth opportunities), whereas the internal transfer conveys only particular assets. To make the acquisition price a reliable measure of the narrower intangible asset(s) being priced (the transferred IP), the analyst must carve out everything in the acquisition price that is not attributable to the transferred IP. The reliability of the APM therefore focuses entirely on whether those carve-outs can be made accurately — the question to which the rest of this article is addressed.⁴

3. The Best Method Rule and “Reliability”

Neither the U.S. regulations nor the OECD Guidelines treat “reliability” as a subjective label; both define it through specific factors, and both tie it directly to comparability adjustments.

3.1 Defining Reliability: U.S., OECD, and Israeli Principles⁵

Under the best method rule of Treas. Reg. § 1.482-1(c), the arm’s-length result is determined under the method that provides the most reliable measure of an arm’s-length result; no method has strict priority. The two primary factors, stated in § 1.482-1(c)(2), are (i) the degree of comparability between the controlled transaction and the uncontrolled comparables, and (ii) the quality of the data and assumptions used; a further consideration, where relevant, is the sensitivity of the results to deficiencies in the data and assumptions. Comparability is in turn assessed under the five factors of § 1.482-1(d)(1): functions performed, contractual terms, risks assumed, economic conditions, and the property or services transferred.⁶ The OECD Guidelines are to the same effect: paragraph 2.2 requires selection of the “most appropriate method to the circumstances of the case,” taking into account the strengths and weaknesses of each method, its appropriateness given the nature of the transaction, the availability of reliable comparables, and “the degree of comparability … including the reliability of the comparability adjustments that may be needed.”⁷

Israel reaches the same place by an essentially convergent route. The Israeli arm’s-length rule is stated in Section 85A of the Income Tax Ordinance and the Income Tax Regulations (Determination of Market Conditions), 2006, which require an international transaction between related parties to be priced as it would be between unrelated parties in a comparable transaction.⁸ Income Tax Circular 3/2008 (Transfer Pricing) sets out the definitions and the hierarchy of the comparability methods and provides that the comparable-price (CUP/CUT) comparison may be used “only if the comparability characteristics are the same, or where there are only minor differences that were identified and whose effect was neutralized.”⁹¹⁰ That formulation is materially identical to the U.S. standard in Treas. Reg. § 1.482-3(b)(2)(ii)(A) (“minor differences … for which appropriate adjustments are made”) and to OECD paragraph 3.47. The Israeli framework is expressly modelled on both regimes — it draws on the OECD Guidelines and on the principles of IRC section 482 — so its treatment of comparability is convergent rather than idiosyncratic.

The one structural difference worth noting is method preference, and it is Israel that stands apart. The OECD abandoned its former strict method hierarchy in the 2010 revision of the Guidelines; the 2017 and 2022 Guidelines apply the “most appropriate method to the circumstances of the case” standard (¶ 2.2), which commentators and this article treat as functionally equivalent to the U.S. “best method rule” — both are reliability-based and neither imposes a strict ordering of methods. The only residual preference in the OECD standard is a soft tie-breaker: where a traditional transaction method and a transactional profit method can be applied in an equally reliable manner, the traditional method is preferred, and where the CUP and another method are equally reliable, the CUP is preferred (¶ 2.3) — a preference the U.S. regulations echo in treating the CUP/CUT as “the most direct and reliable measure” when comparables are close.¹¹ By contrast, Israel alone retains a formal hierarchy: Section 85A and Circular 3/2008 prescribe an ordered preference for the CUP/CUT comparison where a reliable comparable exists, resorting to the profit-based methods (the Israeli analogues of the CPM/TNMM) only when it cannot be applied. For business restructurings specifically, the ITA elaborates this standard in Circular 15/2018, which adopts the OECD Chapter IX framework and its terminology and treats the Guidelines as an interpretive source for Israeli law.¹² We further note that all three transfer pricing bodies highlight that for the APM/CUP to be the preferred method of choice, the level of comparability must be stringent. Adjustments/carve-outs to the CUP notably reduce its viability as a preferred method. Note in particular that an acquisition price represents an array of value drivers within a company, and generally speaking, the APM is seeking to quantify but a portion of the value drivers (i.e., the intellectual property) which is being transferred. As such, there is by definition almost always a need to make adjustments/carve-outs to the CUP, which by legislative definition weakens the use of the CUP as a primary methodology and likely by definition requires the assessment of at least one alternative methodology.

3.2 Reliability as a Sliding Scale

The decisive point for the APM is that the regulations do not treat adjustments as neutral refinements. They tie the reliability of the whole analysis to the number, magnitude, and reliability of the adjustments required. Treas. Reg. § 1.482-1(d)(2) provides that if adjustments for material differences cannot be made, an uncontrolled transaction “may be used as a measure of an arm’s length result, but the reliability of the analysis will be reduced,” and that “the extent and reliability of any adjustments will affect the relative reliability of the analysis.”¹³ Treas. Reg. § 1.482-1(d)(3)(i) is more explicit still: as comparability increases, the potential differences that could render the analysis inaccurate diminish, and “if adjustments are made to increase the degree of comparability, the number, magnitude, and reliability of those adjustments will affect the reliability of the results of the analysis.”¹⁴ Reliability is thus a sliding scale, not a binary attribute: it degrades as adjustments proliferate or grow, because each adjustment introduces its own estimation error and its own scope for dispute.

The same preference runs through the specified-method rules. The comparable profits method (CPM) of Treas. Reg. § 1.482-5 requires the tested party to be the participant whose operating profit can be verified using the most reliable data and “requiring the fewest and most reliable adjustments.”¹⁵ The CUP rule permits the CUP to be the “most direct and reliable measure” only where there are no differences, or “only minor differences that have a definite and reasonably ascertainable effect on price and for which appropriate adjustments are made,” and warns that if such adjustments cannot be made, or if there are “more than minor differences,” the method may still be used “but the reliability of the results … will be reduced.”¹⁶ The CUT rules for intangibles apply the same screen.¹⁷ And the APM’s own reliability provision states that reliability “normally is reduced” where a substantial part of the target’s non-routine contributions is not covered by a PCT and cannot reliably be valued, where a substantial part of its assets is tangible property that cannot reliably be valued, or where the acquisition and the PCT are not contemporaneous.¹⁸

3.3 The OECD Guidelines

The OECD Guidelines are, if anything, more cautionary about heavy adjustment. Paragraph 3.47 states that to be comparable “none of the differences (if any) between the situations being compared could materially affect the condition being examined … or that reasonably accurate adjustments can be made to eliminate the effect of any such differences.”¹⁹ Paragraph 3.50 cautions that the fact that comparability adjustments “are found in practice does not mean that they should be performed on a routine or mandatory basis,” and that the need to make “numerous or substantial adjustments to key comparability factors may indicate that the third party transactions are in fact not sufficiently comparable.”²⁰ Paragraph 3.51 permits adjustments only where they are “expected to increase the reliability of the results,” weighing the materiality of the difference, the quality of the data, the purpose of the adjustment, and the reliability of the approach used to make it.²¹ The throughline of both regimes is identical: the more numerous or material the required adjustments, the less reliable the method, and the greater the need to look to — and test against — an alternative.

3.4 The Israeli Approach

According to Israeli Circular 3/2008, the use of a CUP is applicable only if the third-party comparables are similar, and only if there are but minor comparability differences which are adjusted for. As such, the implication is that if there is a need for more material adjustments, the CUP method will not be an appropriate method from an Israeli regulatory perspective.

We also note that the ITA’s Circular 15/2018, which uniformly treats the acquisition price as the comparable and applies the “price-comparison method” (the Israeli CUP), notes that the acquisition price itself is not directly comparable to the intangible or FAR transfer and that “significant adjustments are usually required” to derive an arm’s-length value for the FAR that are actually transferred.²²

We do note that Circular 15/2018 does not mention the reliability issue of the APM/CUP if there are significant carve-out adjustments. Only Circular 3/2008, providing comments on the Israeli transfer pricing regulations, provides insight into the CUP and its lessened reliability if there is a need for multiple adjustments to the CUP.

4. Financial Accounting vs. Transfer Pricing (the PPA)

The APM is closely linked to, but distinct from, the financial-accounting exercise known as a purchase price allocation (PPA). Following a business combination, accounting standards such as ASC 805 or IFRS 3 require the acquirer to allocate the total purchase price to the fair value of identifiable tangible and intangible assets and assumed liabilities; any excess of the purchase price over the net fair value of those identifiable assets is recorded as goodwill.²³ A PPA is a useful starting point for identifying assets, but its standard of value differs from transfer pricing. A PPA applies a “fair value” standard — a market-based measurement from the perspective of hypothetical market participants — whereas transfer pricing seeks an “arm’s-length” price focused on the result that specific uncontrolled taxpayers would realize in the same transaction under the same circumstances. The value attributed to intangibles in a PPA is therefore not determinative for transfer-pricing purposes, a point the OECD makes expressly in Chapter VI, Annex I, Examples 23 and 26.²⁴

5. Goodwill as an Umbrella Concept

A recurring source of analytical error is to treat goodwill as determined via a PPA (i.e., control premium, synergies, and an assembled workforce) as separate, parallel elements of the purchase price. They are not. For the purposes of this article, and consistent with how an acquisition is actually recorded, “goodwill” as defined in the PPA is the residual identified — the amount left after the price has been allocated to identifiable tangible and intangible assets and assumed liabilities. Control premium, synergies, the assembled workforce, going-concern value, and self-created or otherwise unidentified intangibles are not alternatives to goodwill; they are distinct potential sub-categories of it. Economically, goodwill is the container, and these items are its contents. Further, it is these elements, and the assessment of which of these elements needs to be carved out in an APM/CUP analysis, which often will be the defining criterion on whether an APM/CUP is a reliable method.

5.1 The U.S. Post-TCJA Definition

Before 2017, U.S. transfer-pricing law notably omitted goodwill, going-concern value, and workforce in place from the definition of compensable intangible property, which generated disputes over whether such items were compensable under section 482. The TCJA amended the definition to include “goodwill, going concern value, or workforce in place” expressly.²⁵ Under current U.S. law these items are, therefore, compensable intangibles — but only to the extent they constitute resources, capabilities, or rights reasonably anticipated to contribute to the relevant intangible development. The transfer-pricing question is not whether “goodwill” as a label is compensable, but which of the specific value drivers inside the accounting goodwill residual are compensable contributions and which are not.

5.2 The OECD View

The OECD Guidelines adopt a conceptual, economic definition, describing goodwill as the future economic benefits associated with business assets that are not individually identified and separately recognized.²⁶ This framing reinforces the umbrella point: goodwill is a residual bundle of value drivers, and a reliable transfer-pricing analysis must open the bundle rather than accept or reject it wholesale.

5.3 The Israeli Tax Authority View

The ITA’s Circular 15/2018 treats goodwill and going-concern as an indivisible item. It adopts the OECD’s definitions of goodwill and going-concern value, but it notes that none of the components are generally separable or transferable apart from the other business assets, and states the ITA’s express position that the total consideration “includes also the components classified as goodwill and/or going-concern value.”²⁷ The animating principle, stated repeatedly in the circular, is that “no value disappears or is destroyed” in an internal restructuring within a multinational group, so goodwill cannot simply evaporate on the transfer.²⁸ On whether the ITA’s own definition of what may be deducted from an acquisition price is internally consistent, the better reading is that it is consistent, but only once one distinguishes two different operations that are easy to conflate. The circular permits deductions that isolate the operating business — excess and non-operating assets (cash, non-operating investments, a tax asset) and the balance-sheet items addressed in § 6.3.4 — because those items are not part of the goodwill or the operating IP at all. It forbids deductions that would carve value out of the goodwill/going-concern residual itself — synergy, control premium, “liquidity” or “winner’s-curse” discounts. The residual tension, such as it is, lies in the treatment of the goodwill: the circular states both that the components of goodwill are a separately owned or controlled “intangible” (relying on Gteko) and that their value nonetheless remains embedded in, and compensable as part of, the transferred assets — but a taxpayer cannot deduct a specific goodwill component as a discrete item.²⁹

The circular’s working premise is, in substance, that the whole of the acquisition goodwill belongs to the transferred IP. By treating the entire consideration (net of identifiable non-operating items) as the value of the transferred FAR, and by refusing carve-outs for goodwill’s sub-components (synergy, control premium, and the like), Circular 15/2018 effectively equates “goodwill” with “transferred intangible value.” Both the U.S. regulations and the OECD Guidelines reject that equation and require the components to be identified and assessed individually. The U.S. APM applies only where “substantially all” of the target’s non-routine contributions are in fact covered by the PCT, and the adjusted acquisition price must be reduced for resources, capabilities and rights not covered by a PCT — a rule that presupposes goodwill may contain value that is not transferred and must be removed (Treas. Reg. § 1.482-7(g)(5)(i), (iii)). The OECD is to the same effect: goodwill and going-concern value are not a monolith, and Chapter VI directs that the specific intangibles and any other transferred value be delineated and valued individually, with a recent acquisition price used only “after any appropriate adjustments” for assets not re-transferred (OECD TPG (2022), Chapter VI and ¶ 6.147). The Israeli courts have themselves resisted the circular’s perspective: in Broadcom the court insisted that each component’s value be examined on the facts, treated the acquirer’s own contributed/synergistic value as something that “disappears” and must not be swept into the transferred value, and held (with Gteko) that a purchase price allocation is not an adequate measure of arm’s-length value (Broadcom, ¶¶ 83, 97–98, 111). In short, on goodwill the circular is not coordinated with the U.S. and OECD frameworks and with Israel’s own case law: goodwill is an umbrella to be opened and assessed component by component, not a block assigned in its entirety to the transferred IP.

5.4 The Sub-Categories of Goodwill

Among the value drivers that typically reside within the accounting goodwill residual, and that must be examined individually, are the following:

Control premium. The premium paid to acquire the right to unilaterally direct the target’s affairs through stock ownership. Courts have recognized a control premium as a separate element of a purchase price, over and above the value attributable to the underlying assets. The authority most often cited for that proposition, Philip Morris, is not itself a transfer-pricing case and does not apply the APM: it arose under section 334 in the basis/purchase-price-allocation context, where — following Philip Morris’s hostile stock acquisition of Seven-Up — the Tax Court had to allocate the cost of the acquired stock among the corporation’s assets, and held that the portion of the price paid to obtain control is not allocable to the corporation’s underlying assets.³⁰ Because a transferee of IP does not acquire control of the overall business, the control-premium component of goodwill is generally not part of the transferred IP’s value.

A note on how other bodies of law treat the control premium, since the article’s point is that its recognition is context- and proof-dependent. In federal estate and gift tax valuation (the fair-market-value standard), a control premium — like the correlative minority and marketability discounts — is recognized, but it is a fact-specific determination that must be supported by appraisal evidence (control-premium studies, acquisition databases); the IRS routinely challenges premiums or discounts asserted without such support. Delaware statutory appraisal (the fair-value standard under 8 Del. C. sec. 262) goes further and more mechanically: because Delaware values the company as a going concern on a pro-rata basis without a minority discount, its Court of Chancery has at times added a control premium, or corrected for a supposed “implicit minority discount,” by reference to average premiums observed in unrelated acquisitions rather than case-specific proof. This control premium addition was then refuted in two other court cases in 2017, Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd. andDFC Global Corp. v. Muirfield Value Partners, L.P.   As such, in Delaware courts, it is understood that the stock price reflects the going concern value of a company.  The implication is that an acquisition of such a company by another entity for a price above the going stock market price would reflect some sort  of control premium, and/or synergies.   

The transfer-pricing context is strict with respect to control premiums: as the Israeli court held in Broadcom, a control-premium carve-out from an acquisition-price comparable is available in principle but only on contemporaneous proof that a premium was in fact paid for control — estimates, or premiums drawn from other transactions, will not do. The lesson for the APM is that a control premium cannot be assumed from the mere fact of an acquisition; whether it may be carved out depends on the governing valuation standard and, in transfer pricing, on real-time evidence.

The Israeli position on the control premium is more nuanced than a first look at the ITA circular suggests, and it is a good example of the courts diverging from the circular. The circular takes a flat line: Circular 15/2018 § 6.3.3 directs that, when the acquisition price is used as the comparable, the analyst may not reduce the consideration for a claimed control premium (or for synergy, or for “liquidity” or “winner’s-curse” adjustments).³¹ The case law, however, treats the control premium as a fact-specific, provable carve-out. In Gteko — decided by Judge Dr. Samuel Bornstein of the Central District Court (the “Borenstein” referred to in the comments) — the court rejected the taxpayer’s “excess price” and synergy-reduction arguments, but it did so on the evidence rather than as a matter of principle: it reasoned that the fact that a particular buyer enjoys a unique advantage does not prove that the price exceeds the asset’s market value, because another buyer might pay a comparable premium for its own reasons, and the taxpayer had not shown that the excess reflected something other than the value of what was transferred.³² That reasoning leaves the door open: where a taxpayer can demonstrate that a portion of the price bought something genuinely not among the transferred FAR, a carve-out is essential. The later case law confirms this. In the Broadcom decision the court held expressly that, in extracting the value of the transferred FAR from the share-acquisition price, the value of the control premium as computed by the Israel Tax Authority itself (au contraire!) should be deducted — squarely recognizing a control-premium carve-out that the circular’s § 6.3.3 does not permit.³³ And in Medtronic Ventor the same judge again declined to recognize a control premium — but, consistent with Gteko, on the facts (no premium was proven), adopting the acquisition-based value.³⁴ The upshot for the article: under Israeli case law a control premium is neither automatically allowed (Philip Morris) nor automatically forbidden (Circular 15/2018 § 6.3.3); it is a carve-out that is allowed where the taxpayer proves it and denied where it does not (Gteko, Medtronic Ventor). The courts have left, and in Broadcom exercised, room for a control-premium carve-out on proper proof.

Synergies. The additional value from integrating the target with the acquirer. A critical distinction lies between “market” synergies that any participant could achieve and “buyer-specific” synergies unique to the acquirer. Buyer-specific synergies developed by the group’s own participants are, taxpayers argue, not “acquired externally” from the target; the analysis looks to what a normal market participant would pay rather than to a specific buyer’s unique ability to enhance value.³⁵

Assembled workforce. The value of an in-place, trained workforce. Post-TCJA this is a compensable intangible, but whether it forms part of the transferred IP’s value, is retained by the transferor, or is separately compensated through an ongoing service fee is a facts-and-circumstances question. In OECD Example 23 (Birincil / Company T), the acquired research workforce remained employed by the transferor under a cost-plus contract-R&D arrangement and was compensated through that service fee rather than through the price of the transferred technology, the Guidelines observing that “value does not disappear” in an internal restructuring.³⁶ In the Israeli Gteko case, the workforce was defined as a discrete value, but valued in the form of a replacement-cost value, rather than as a routine service return value as in the OECD’s Example 23.

Going-concern value and self-created / unidentified intangibles. The value of the business as an operating whole, together with know-how, trade secrets, in-process R&D, and other self-created intangibles not separately identified in the PPA. Where these are reasonably anticipated to contribute to the relevant development, they are typically compensable platform contributions, and the largest genuine dispute is usually how to value them, not whether they count.

As such, in an APM/CUP analysis, two consequences follow. First, the compensability inquiry is conducted sub-component by sub-component within goodwill, not on the goodwill label as a whole; a taxpayer cannot carve out “goodwill” wholesale, and an authority cannot include it wholesale. Second, and more importantly for reliability, each sub-component that must be separately valued and either included or excluded is itself an adjustment or a potential adjustment (if there is a conflict between the taxpayer and tax authority) — so a material accounting-goodwill residual is, almost by definition, a signal that the APM may require many adjustments of significant magnitude, thereby reducing its reliability as a primary methodology.

6. Adjustments to the Acquisition Price

As noted earlier, to convert a gross acquisition price into a reliable arm’s-length value for the transferred IP, the analyst must perform a series of functional and economic adjustments. The mechanical framework is set by Treas. Reg. § 1.482-7(g)(5)(iii): the adjusted acquisition price is the acquisition price increased by the target’s assumed liabilities and decreased by the value of the target’s tangible property and of any other resources, capabilities, and rights not covered by a PCT or group of PCTs.³⁷ In practice the adjustments fall into three groups — the identifiable adjustments that authorities generally accept, the goodwill-related adjustments that they generally contest, and a set of other special returns and deductions that arise on particular facts.

6.1 Identifiable Adjustments (Generally Accepted)

These adjustments separate out value that is identifiable and plainly not part of the transferred IP. Practitioner analysis of the post-TCJA APM confirms that the IRS ordinarily accepts them:³⁸

• Tangible property. § 1.482-7(g)(5)(iii) expressly requires reducing the acquisition price by the target’s tangible property; the transferred item is IP, not physical assets.
• Working capital and other non-physical assets. Trade receivables and payables, marketable investments, and cash and cash equivalents (in addition to inventory) are read into the “tangible property and other assets” reference in the § 1.482-7(g)(5)(v) example.
• Assumed liabilities (add-back). § 1.482-7(g)(5)(iii) increases the price by assumed liabilities, converting a price for stock into a price for assets.
• Routine returns. The arm’s-length reward for the target’s continuing routine functions is carved out so that only the non-routine, IP-driven residual remains. In a U.S. analysis this return is ordinarily benchmarked using the comparable profits method of Treas. Reg. § 1.482-5 (the OECD’s transactional net margin method is the functional analogue, but the two should not be conflated). The routine returns eligible for carve-out typically include contract or routine research and development (usually cost-plus), routine or toll/contract manufacturing, routine distribution, sales and marketing functions, and a return on working capital and routine tangible assets. The IRS and taxpayers frequently disagree on the profit level indicator (for example, return on total cost versus return on assets).³⁹
• Net operating losses and tax attributes. NOLs remain with the owner of the stock and cannot contribute to a foreign participant’s development of cost-shared intangibles, so their value is deducted to reach an asset-based transfer price.

6.2 Goodwill-Related Adjustments (Contested)

The contested adjustments are, without exception, the carve-outs of non-compensable sub-components of goodwill discussed above. Because these are often the largest and least precisely measurable pieces of the price, they are the usual battleground. The IRS typically resists, and often rejects outright: a carve-out for the control-premium component (arguing the foreign participant should share the whole price); and a carve-out for buyer-specific synergies. A related and unsettled dispute concerns a “tax gross-up” of the adjusted acquisition price — whether the after-tax price must be grossed up to a pre-tax PCT under § 1.482-7(g)(2)(x) and the realistic-alternatives principle — which the IRS has at times demanded and at other times resisted.⁴⁰ These contested items are precisely the adjustments whose magnitude and contestability most threaten the reliability of the APM.

Israel addresses the same acquisition-price build-up and the tax-gross-up question with a concrete safe-harbour formula. Under the ITA’s finalized R&D-center circular, an Israeli target that is acquired and then sells its IP and converts to a limited-risk R&D service model can obtain certainty only if the value assigned to the transferred IP is at least 85% of the total acquisition consideration plus excess balance-sheet liabilities and off-balance-sheet obligations (for example, obligations to the Innovation Authority and employee bonuses), the whole divided by (1 minus the taxpayer’s tax rate).⁴¹ Crucially, however, the Israeli courts have gone the other way. In the Hexadite decision — handed down on 28 October 2025, days before the finalized R&D-center circular — the Tel Aviv District Court (Judge Yardena Seroussi) rejected the ITA’s attempt to add a tax gross-up to the value of transferred IP, holding that under the CUP method future tax is not added because unrelated parties already reflect tax considerations in the price they set, that the OECD Guidelines contemplate a gross-up only within a DCF analysis (not the CUP applied there), and that Circular 15/2018 contains no provision authorizing a gross-up; the court also criticized the ITA for changing its position retroactively and without publishing a coherent policy.⁴² The result is a live tension the article should flag: the ITA’s Circular 8/2025 builds a gross-up into its safe harbour, yet a district court has held — under the very CUP method the circulars prefer — that no gross-up is permitted. Because a court is not bound by an ITA circular, Hexadite is the stronger authority, and the 8/2025 gross-up is best described as the tax authority’s position rather than settled law. It is also a textbook instance of this article’s thesis: the gross-up is exactly the kind of large, contested, single-method adjustment whose resolution swings the result materially and therefore calls for a corroborating method.

6.3 Other Returns and Deductions

Beyond the standard carve-outs, particular facts frequently generate additional returns or deductions that, based on the specific facts, ought to be removed from, or reconciled with, the acquisition price. These further increase the number and magnitude of adjustments and are often themselves contested:

Other contingent items. Contingent liabilities, deferred consideration, and similar items assumed or retained in the transaction may likewise require adjustment, on principles analogous to the assumed-liability add-back.

Holdbacks, escrows, and earn-outs. A portion of the nominal consideration is often deferred or made contingent — held back pending indemnity conditions, placed in escrow, or structured as an earn-out. Whether such amounts form part of the “price paid” for the transferred IP is fact-specific: retention-linked holdbacks may be, in substance, compensation for future employee services (and thus excluded from the asset price), whereas indemnity escrows and deferred purchase consideration may remain part of the price. The treatment is genuinely contested — in the Israeli Hexadite decision, for example, the court added deferred shareholder payments back into the value of the transferred IP rather than excluding them.⁴³

Continuing or retained risks. Where a risk that existed in the target continues to be borne after the transfer — for example, the funding risk of ongoing development, product-liability risk, or regulatory risk retained by the transferor or the target — an arm’s-length return for bearing that risk must be attributed to the risk-bearer under the risk-and-DEMPE analysis of OECD Chapter I and the investor model embedded in § 1.482-7.⁴⁴ To the extent such a return is attributable to a party other than the IP transferee, it reduces the value properly assigned to the transferred IP.

Summary of Adjustments

The following table gathers the adjustments, distinguishing the identifiable items from the sub-components of goodwill and the other special returns, and noting the authorities’ typical posture.

7. Reliability and the Scale of Adjustments

Sections 3, 5, and 6 combine to a straightforward proposition: an APM applied to a real IP transfer almost always requires more than minor adjustments, and its largest adjustments are the contested sub-components of goodwill. Under the regulations’ own definition of reliability, that combination places the APM on the “reduced reliability” side of the line, and the analysis cannot resolve the problem from within itself.

7.1 Courts Discount Adjustment-Heavy Analyses

Courts have applied this logic to reject or discount adjustment-heavy analyses. The clearest illustration is the Medtronic litigation, in which the taxpayer’s comparable-uncontrolled-transaction analysis, built on the Pacesetter agreement, ultimately failed because the differences between the comparable and the controlled license were too significant to be cured by adjustment — the court’s own approach had to more than quadruple the 7% Pacesetter royalty, and the Eighth Circuit held the CUT was “not the best method” under the § 1.482-4(c)(2) comparability standard.⁴⁵ Commentators put the point plainly: the analysis “required too many adjustments to be reliable,” and the volume of alterations undermined the transaction’s qualification as a valid comparable. The same instinct pervades other intangible-transfer decisions — the Israeli, Swiss, Swedish, Dutch, Danish, and Bulgarian cases — where tribunals gravitated to the acquisition or share price where only limited, reliable adjustments were required, and/or grew skeptical of valuations resting on layers of contested adjustment.⁴⁶ The judicial pattern confirms the regulatory rule: adjustment-heavy analyses lose reliability, and the decision-maker looks for a corroborating measure.

7.2 External Commentary

Advisory and academic literature is consistent. Practitioner guidance emphasizes that comparability adjustments “can be subjective and may require significant judgment,” and that where adjustments to achieve reasonable similarity are not possible, the comparable may still be used “but the reliability of the comparison is reduced.” The intangibles literature stresses that one-sided, comparables-based methods can be “less persuasive where the intangible is unique and drives non-routine returns,” and that sound practice documents valuation assumptions and corroborates the result with a second technique.⁴⁷ The OECD says as much in its 2020 COVID-19 transfer-pricing guidance (paragraph 24): “the application of more than one transfer pricing method may be useful to corroborate the arm’s length price of a controlled transaction,” cross-referencing paragraphs 2.2 and 2.12.⁴⁸

7.3 A Dispute Alone Can Compel a Second Method

There is a further and subtler point. It is not only the objective number or magnitude of adjustments that erodes reliability; the mere existence of a bona fide dispute between the taxpayer and the tax authority over which adjustments are appropriate, or over their magnitude, is itself evidence that the effect of the underlying differences cannot be “ascertained with sufficient accuracy” — the very standard § 1.482-1(d)(2) sets for a reliable adjustment. If reasonable experts disagree on whether a control-premium, synergy, holdback, retained-risk, or tax-gross-up adjustment should be made or how large it should be, then by definition its effect on price is not “definite and reasonably ascertainable” within the meaning of § 1.482-3(b)(2)(ii)(A), and the reliability of the APM as applied is reduced pro tanto.⁴⁹ In that posture the dispute cannot be resolved from within the APM; the only way to test whether the contested adjustments move the result toward or away from an arm’s-length outcome is to triangulate against an independent method. The disagreement itself, in other words, creates the need for the second/alternative method.

Neither the OECD Guidelines nor the Israeli transfer pricing regulations are as direct regarding the need for a second method. The OECD does not require more than one method (paragraph 2.12 says the arm’s-length principle “does not require the application of more than one method”), but it expressly endorses using several methods together “in difficult cases where no one approach is conclusive,” and its COVID-19 guidance states that applying more than one method “may be useful to corroborate the arm’s length price.”⁵⁰ The Israeli authorities go further in practice. Circular 15/2018 builds a cross-check directly into its prescribed workflow: where a comparable acquisition exists, the ITA both applies the price-comparison method and examines the acquisition/“purchase model” DCF, and where no comparable exists it performs a DCF while first using a market-multiples comparison to bracket a “reasonableness range” for the result — that is, each method is tested against the other.⁵¹ So the correct, defensible statement is not that a disagreement legally compels a second method, but that the U.S. reliability standard, the OECD’s corroboration guidance, and the ITA’s own cross-checking workflow all point the same way: where the adjustments are contested, a second method is the expected, and practically necessary, means of demonstrating an arm’s-length result.

8. Conclusion

The acquisition price method, the market-capitalization method, and the OECD’s acquisition-price-as-CUP approach all rest on the same premise: that a recent, arm’s-length transaction price for a business can be adjusted into a reliable price for the discrete intangibles later transferred within the group. That premise holds only so far as the adjustments hold.

Under Treas. Reg. §§ 1.482-1(c), 1.482-1(d)(2) and (d)(3)(i), 1.482-3, 1.482-4, 1.482-5(b)(2)(i), and 1.482-7(g)(5)–(6), and under the OECD’s comparability and most-appropriate-method standards (Chapters I–III and VI, including Annex I Examples 23 and 26), reliability declines as the number and magnitude of required adjustments grow. In the ordinary IP transfer those adjustments are numerous and material: the identifiable carve-outs (tangibles, working capital, assumed liabilities, routine returns, and NOLs) are joined by the contested sub-components of goodwill (control premium, buyer-specific synergies, and the like) and, on many facts, by further special returns and deductions (holdbacks and earn-outs, returns for continuing or retained risks such as funding risk, and any tax gross-up). Because the largest of these are routinely disputed between taxpayer and authority, the reliability of the APM as applied is, in the ordinary case, materially reduced.

The central conclusion follows directly. In almost every case in which an APM/CUP is used to price an intellectual-property transfer, at least one additional method — and where the facts warrant, two — must also be performed to test the APM result. The best method rule and the OECD most-appropriate-method standard, reinforced by the corroboration guidance of paragraph 2.12 and the OECD’s observation that more than one method “may be useful to corroborate the arm’s length price,” do not merely permit a second method in these circumstances; taken together with the reliability provisions, they make one effectively obligatory.⁵² The obligation is strongest precisely where it matters most — where the required adjustments are numerous or material, or where the taxpayer and the tax authority disagree about them. A single, undisputed, precisely quantifiable adjustment may leave the APM standing on its own; the multi-adjustment, contested reality of real-world IP transfers does not. Treating a validating (or non-validating) second method as a mandatory step, rather than an optional courtesy, is therefore the disciplined, defensible, and regulation-consistent practice, and should be regarded as the standard of care for any APM/CUP analysis of an IP transfer.

Endnotes

1. Treas. Reg. § 1.482-7(g)(5) (acquisition price method), including § 1.482-7(g)(5)(iii) (adjusted acquisition price), (g)(5)(iv) (best-method reliability considerations), and (g)(5)(v) (example).

2. Treas. Reg. § 1.482-7(g)(6) (market capitalization method).

3. OECD Transfer Pricing Guidelines (2022), Chapter VI, ¶ 6.147, and Annex I to Chapter VI, Examples 23 and 26.

4. Please note that for this article, the words carve-out and adjustments are used interchangeably and imply the same thing—an adjustment to the original price or profit derived in analytics.

5. We include the Israeli Transfer Pricing regulations as Israel has had to date the most transfer pricing IP transfer/business restructuring court cases to date in which the APM was a primary method presented by either the Israel Tax Authority or the taxpayer, or both.

6. Treas. Reg. § 1.482-1(c) (best method rule), (c)(2) (factors for determining the best method), and (d)(1) (comparability factors).

7. OECD Transfer Pricing Guidelines (2022), Chapter II, ¶ 2.2 (selection of the most appropriate method).

8. Section 85A, Income Tax Ordinance (New Version), 1961; Income Tax Regulations (Determination of Market Conditions), 5767-2006 (in force 1 November 2006).

9. Israel Tax Authority, Income Tax Circular 3/2008 – Transfer Pricing (14 July 2008), the general Israeli transfer-pricing circular. The ITA’s later transfer-pricing circulars are 11/2018 and 12/2018 (method selection and safe-harbour profitability ranges for distribution/marketing/low-value-adding services), 15/2018 (business restructuring), 1/2020 (burden of proof), and 8/2025 (attribution of income to R&D centers), each of which is drawn on where relevant.

10. Israel Tax Authority, Income Tax Circular 3/2008 – Transfer Pricing (14 July 2008).

11. OECD Transfer Pricing Guidelines (2022), ¶¶ 2.2 and 2.3; the strict pre-2010 hierarchy (traditional methods preferred, profit methods a “last resort”) was replaced by the “most appropriate method” standard in the 2010 revision and retained in 2017 and 2022. Cf. Treas. Reg. § 1.482-1(c) (best method rule) and § 1.482-3(b)(2)(ii)(A).

12. Israel Tax Authority, Income Tax Circular 15/2018 – Business Restructuring in Multinational Groups (1 November 2018), §§ 1, 3 (adopting the OECD Guidelines, including Chapter IX, as an interpretive source).

13. Treas. Reg. § 1.482-1(d)(2) (standard of comparability).

14. Treas. Reg. § 1.482-1(d)(3)(i) (factors for determining comparability — effect of adjustments on reliability).

15. Treas. Reg. § 1.482-5(b)(2)(i) (selection of tested party requiring the fewest and most reliable adjustments); see also § 1.482-5(c)(2) (comparability).

16. Treas. Reg. § 1.482-3(b)(2)(ii)(A) (comparable uncontrolled price method — degree of comparability).

17. Treas. Reg. § 1.482-4(c)(2) (comparable uncontrolled transaction — comparability and reliability).

18. Treas. Reg. § 1.482-7(g)(5)(iv) (acquisition price method — best-method analysis considerations).

19. OECD Transfer Pricing Guidelines (2022), Chapter III, ¶ 3.47.

20. OECD Transfer Pricing Guidelines (2022), Chapter III, ¶ 3.50.

21. OECD Transfer Pricing Guidelines (2022), Chapter III, ¶ 3.51; see also ¶¶ 3.48–3.54.

22. Circular 15/2018, § 6.3 (where a comparable acquisition exists, “significant adjustments are usually required” to determine the arm’s-length price of the transferred FAR).

23. FASB ASC 805, Business Combinations; IFRS 3, Business Combinations.

24. OECD Transfer Pricing Guidelines (2022), Annex I to Chapter VI, Examples 23 and 26 (purchase price allocation not determinative for transfer-pricing purposes).

25. Tax Cuts and Jobs Act, Pub. L. No. 115-97 (2017), amending IRC §§ 367(d) and 482 and the definition of intangible property in IRC § 936(h)(3)(B) to include goodwill, going concern value, and workforce in place.

26. OECD Transfer Pricing Guidelines (2022), Chapter VI, Section A (discussing goodwill and ongoing concern value).

27. Circular 15/2018, § 3 (definitions of “goodwill and going-concern value”, tracking OECD ¶¶ 6.27–6.28) and § 6.3.3 (ITA position that the consideration includes components classified as goodwill and/or going-concern value).

28. Circular 15/2018, §§ 6.1, 6.3.3 (“no value is lost or destroyed” in an internal business restructuring).

29. Circular 15/2018, § 3 (group synergies are not an “intangible” owned or controlled by any party, citing the Gteko decision, but affect the value of the intangibles) and § 6.3.3 (no synergy discount from the consideration). The apparent tension is definitional rather than operative: synergy is not a separable asset, yet its value is compensated as part of the whole.

30. Philip Morris Inc. v. Commissioner, 96 T.C. 606 (1991), aff’d without published opinion, 970 F.2d 897 (2d Cir. 1992). Not a section 482 transfer-pricing case; does not apply the acquisition price method. Characterised in Slattery v. United States, 583 F.3d 800 (Fed. Cir. 2009). See L. Hamermesh & M. Wachter, “The Short and Puzzling Life of the ‘Implicit Minority Discount’ in Delaware Appraisal Law,” 156 U. Pa. L. Rev. 1 (2007).

31. Circular 15/2018, § 6.3.3 (no reduction of the consideration for a control premium or similar claims).

32. Gteko Ltd. v. Kfar Saba Assessing Officer, District Court (Central), Case 49444-01-13 (6 June 2017) (Bornstein, J.), ¶¶ 57, 66, 74.

33. Broadcom Semiconductor Ltd. v. Kfar Saba Assessing Officer, Lod District Court, Tax Appeal 26342-01-16 (9 Dec. 2019) (Bornstein, J.).

34. Medtronic Ventor Technologies Ltd. v. Kfar Saba Assessing Officer, District Court (Central), (1 June 2023) (Bornstein, J.).

35. Xilinx, Inc. v. Commissioner, 125 T.C. 37 (2005), aff’d, 598 F.3d 1191 (9th Cir. 2010); see also G.B. Wilcox, “Applying Acquisition Price Method to Post-TCJA Platform Contribution Transactions,” Int’l Tax J. (July–Aug. 2019).

36. OECD Transfer Pricing Guidelines (2022), Annex I to Chapter VI, Example 23.

37. Treas. Reg. § 1.482-7(g)(5)(iii) (adjusted acquisition price).

38. Gary B. Wilcox, “Applying Acquisition Price Method to Post-TCJA Platform Contribution Transactions,” International Tax Journal (July–August 2019) (Mayer Brown).

39. Treas. Reg. § 1.482-5 (comparable profits method); cf. OECD Transfer Pricing Guidelines (2022), Chapter II, Part III.B (transactional net margin method).

40. Treas. Reg. § 1.482-7(g)(2)(x) (PCT payments determined on a pre-tax basis); see Wilcox, supra.

41. Israel Tax Authority, Income Tax Circular 8/2025 – Attribution of Income to Research and Development Centers (2 Nov. 2025), § 4; finalizing the 27 Feb. 2025 draft.

42. Hexadite Ltd. v. Tel Aviv 3 Tax Assessor, Tel Aviv District Court, Administrative Appeal 59306-01-23 (28 Oct. 2025) (Seroussi, J.).

43. Israel v. Hexadite Ltd., District Court, Case No. 23-01-59306 (Oct. 2025).

44. OECD Transfer Pricing Guidelines (2022), Chapter I, Section D.1.2 (risk analysis / DEMPE); Treas. Reg. § 1.482-7(g)(2)(ii)–(v) (investor model; discount rates and risk).

45. Medtronic, Inc. v. Commissioner, T.C. Memo. 2016-112, vacated and remanded, 900 F.3d 610 (8th Cir. 2018); on remand, T.C. Memo. 2022-84, aff’d in relevant part, No. 22-3028 (8th Cir. 2025).

46. See, e.g., Israel v. Gteko Ltd. (Microsoft) (Dist. Ct. 2017); Israel v. Medingo Ltd. (Dist. Ct. 2022); Israel v. Medtronic Ventor Technologies Ltd. (Dist. Ct. 2023); Israel v. Hexadite Ltd. (Dist. Ct. 2025); Switzerland v. A-IP AG (Admin. Ct. 2021); Sweden v. AB bioMérieux (Admin. Ct. App. 2016); Sweden v. G AB (Admin. Ct. App. 2020); Netherlands v. “Agri B.V.” (Ct. App. 2024); Denmark v. “Global Services A/S” (Nat’l Tax Tribunal 2025); Bulgaria v. Kamenitza AD (Sup. Admin. Ct. 2025), all collected at www.tpcases.com.

47. See, e.g., Grant Thornton, “Valuation, transfer pricing and tax: Strategic imperatives” (2025); Exactera, “Transfer Pricing & Intangible Assets Valuation” (2026); Bloomberg Tax, “Comparability Adjustment of Market-Specific Features” (2019).

48. OECD, Guidance on the Transfer Pricing Implications of the COVID-19 Pandemic (Dec. 2020), ¶ 24.

49. Treas. Reg. § 1.482-1(d)(2); Treas. Reg. § 1.482-3(b)(2)(ii)(A).

50. OECD Transfer Pricing Guidelines (2022), Chapter II, ¶ 2.12; OECD, Guidance on the Transfer Pricing Implications of the COVID-19 Pandemic (2020), ¶ 24.

51. Circular 15/2018, § 6.2 (work-flow diagram) and §§ 6.4.1–6.4.2 (indicative market-multiples comparison used to bracket the reasonableness range for the DCF, and vice-versa).

52. OECD Transfer Pricing Guidelines (2022), Chapter II, ¶ 2.12 (use of more than one method in difficult cases); OECD COVID-19 guidance (2020), ¶ 24.

Selected Sources

• Treas. Reg. § 1.482-1, 1.482-3, 1.482-4, 1.482-5, 1.482-7 (allocation of income and deductions; methods for tangible and intangible property; comparable profits method; cost sharing arrangements).
• OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2017 / 2022), Chapters I–III, VI and IX.
• OECD, Guidance on the Transfer Pricing Implications of the COVID-19 Pandemic (2020).
• Gary B. Wilcox, “Applying Acquisition Price Method to Post-TCJA Platform Contribution Transactions,” International Tax Journal (July–August 2019) — Mayer Brown.
• Medtronic, Inc. v. Commissioner, T.C. Memo. 2016-112; 900 F.3d 610 (8th Cir. 2018); T.C. Memo. 2022-84; 8th Cir. 2025.
• Facebook, Inc. & Subsidiaries v. Commissioner (U.S. Tax Court 2025).
• Philip Morris, Inc. v. Commissioner, 96 T.C. 606 (1991); Xilinx, Inc. v. Commissioner, 125 T.C. 37 (2005), aff’d, 598 F.3d 1191 (9th Cir. 2010).
• Israel: Section 85A, Income Tax Ordinance (New Version), 1961; Income Tax Circulars 3/2008, 11/2018, 12/2018, 15/2018, 1/2020, and 8/2025.
• Israeli business-restructuring decisions: Gteko (2017); Broadcom (2019); Medtronic Ventor (2023); Hexadite (2025). See also decisions collected at www.tpcases.com.
• FASB ASC 805 and IFRS 3 (Business Combinations); Tax Cuts and Jobs Act, Pub. L. No. 115-97 (2017).
• Practitioner commentary: Grant Thornton; Exactera; Bloomberg Tax; KPMG.
  

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