IRS Settlement Indicates Continuation of M&A Carveout Fights
Scalar comment:
The IRS’s and other tax authorities’ use of the Acquisition Price Method (APM), with de minimis “carve outs” (adjustments to the purchase price) remains unresolved. There has yet to be a U.S. based court case decided with the APM. The move toward settlement by both parties could however imply that both parties understand that either more carve outs (IRS) or less carve outs (Microsemi) are pertinent to each side’s position.
Microsemi Cost-Sharing Case Settles, Leaving Key Platform Contribution Questions Unanswered
Issue:
The Microsemi v. Commissioner case was expected to clarify how taxpayers should determine platform contribution transaction (PCT) payments when newly acquired intangible property and business functions are folded into an existing cost-sharing arrangement (CSA). Central disputes involved how to apply the acquisition price method, particularly:
- Whether control premiums, goodwill, synergies, and going-concern value can be carved out of the acquisition price.
- Whether routine business functions (e.g., sales and distribution) should be excluded because they don’t contribute to developing cost-shared intangibles.
- How to value resources and rights that are not platform contributions under the regulations.
Present Result:
The case settled just before trial, meaning the Tax Court issued no opinion. As a result, none of the contested issues received judicial clarification.
- IRS positions remain unchanged—they generally resist taxpayer carve-outs such as control premiums or valuations of routine business functions.
- Taxpayers face continued uncertainty in applying the acquisition price method to post-acquisition contributions.
To-Dos / Expectations / Next Steps:
Taxpayers with cost-sharing arrangements that absorb acquired assets should expect continued IRS scrutiny of PCT calculations, especially:
- Control premium exclusions
- Goodwill/synergy adjustments
- Carve-outs for sales, distribution, or other routine functions
Recommended actions:
Anticipate that IRS disputes will continue until a future case produces judicial guidance.
Prepare robust contemporaneous transfer-pricing documentation supporting any valuation adjustments, exclusions, or carve-outs.
Ensure documentation satisfies the accuracy-related penalty rules, as the IRS increasingly asserts penalties when it makes transfer-pricing adjustments.
Evaluate whether the acquisition price method remains the “best method” when significant adjustments are needed; IRS may challenge its use.
