Veritas Software Corp. v. Comm'r of Internal Revenue, No. 12075–06.
| Citation | 133 T.C. No. 14,133 T.C. 297 |
| Decision Date | 10 December 2009 |
| Docket Number | No. 12075–06. |
| Parties | VERITAS SOFTWARE CORPORATION & Subsidiaries, Symantec Corporation (Successor in Interest to Veritas Software Corporation & Subsidiaries), Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
P entered into a cost-sharing arrangement with S, its foreign subsidiary, to develop and manufacture storage management software products. Pursuant to the cost-sharing arrangement, P granted S the right to use certain preexisting intangibles in Europe, the Middle East, Africa, and Asia. As consideration for the transfer of preexisting intangibles, S made a $166 million buy-in payment to P. P employed the comparable uncontrolled transaction method to calculate the payment. In a notice of deficiency issued to P, R employed an income method and determined a requisite buy-in payment of $2.5 billion and made an income allocation to P of that amount. In an amendment to answer, R reduced the allocation from $2.5 to $1.675 billion. R further determined that the requisite buy-in payment must take into account access to P's research and development team; access to P's marketing team; and P's distribution channels, customer lists, trademarks, trade names, brand names, and sales agreements. P contends that R's determinations are arbitrary, capricious, and unreasonable and the comparable uncontrolled transaction method is the best method to calculate the requisite buy-in payment.
Mark A. Oates, Scott Frewing, Andrew P. Crousore, James M. O'Brien, Catlin A. Urban, Erika S. Schechter, Paul E. Schick, Jaclyn Pampel, Jenny A. Austin, Mark T. Roche, Erika L. Andersen, John M. Peterson, Jr., and Kristen B. Proschold, for petitioner.
Lloyd Silberzweig, James P. Thurston, Kimberley Peterson, David Rakonitz, Stephanie Profitt, Margaret Burow, and John Strate, for respondent.
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¦CONTENTS ¦
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¦I. ¦Storage Management Software Products ¦6 ¦
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¦II. ¦Product Distribution Channels ¦10¦
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¦III. ¦Intensely Competitive Market ¦11¦
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¦IV. ¦Product Lifecycles and Useful Lives ¦15¦
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¦V. ¦Geographic Expansion ¦16¦
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¦VI. ¦The Cost–Sharing Arrangement ¦17¦
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¦VII. ¦VERITAS Ireland's Operations ¦21¦
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¦VIII.¦Procedural History ¦23¦
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¦Discussion ¦30¦
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¦I. ¦Applicable Statute and Regulations ¦33¦
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¦II. ¦Respondent's Buy-in Payment Allocation Is Arbitrary, Capricious, and¦35¦
¦ ¦Unreasonable ¦ ¦
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¦ ¦A.¦Respondent's Notice Determination Is Arbitrary, Capricious, and ¦37¦
¦ ¦ ¦Unreasonable ¦ ¦
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¦ ¦B.¦Respondent's Determination in Amendment to Amended Answer Is ¦39¦
¦ ¦ ¦Arbitrary, Capricious, and Unreasonable ¦ ¦
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¦ ¦ ¦1.¦Respondent's “Akin” to a Sale Theory Is Specious ¦39¦
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¦ ¦ ¦2.¦Respondent's Allocation Took into Account Items Not ¦41¦
¦ ¦ ¦ ¦Transferred or of Insignificant Value ¦ ¦
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¦ ¦ ¦3.¦Respondent's Allocation Took Into Account Subsequently ¦44¦
¦ ¦ ¦ ¦Developed Intangibles ¦ ¦
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¦ ¦ ¦4.¦Respondent Employed the Wrong Useful Life, Discount Rate, and ¦45¦
¦ ¦ ¦ ¦Growth Rate ¦ ¦
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¦III. ¦Petitioner's CUT Analysis, With Some Adjustments, Is the Best Method¦50¦
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¦ ¦A.¦Comparability of OEM Agreements ¦54¦
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¦ ¦B.¦Unbundled OEM Agreements Were Comparable to the Controlled ¦56¦
¦ ¦ ¦Transaction ¦ ¦
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¦IV. ¦Requisite Adjustments to Petitioner's CUT Analysis ¦64¦
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¦ ¦A.¦The Appropriate Starting Royalty Rate ¦65¦
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¦ ¦B.¦The Appropriate Useful Life and Royalty Degradation Rate ¦66¦
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¦ ¦C.¦Value of Trademark Intangibles and Sales Agreements ¦67¦
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¦ ¦D.¦The Appropriate Discount Rate ¦69¦
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¦V. ¦Conclusion ¦71¦
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On November 3, 1999, VERITAS Software Corp. (VERITAS US) and VERITAS Ireland entered into a cost-sharing arrangement (CSA), which consisted of a research and development agreement and a technology license agreement.1 Also on November 3, 1999, VERITAS US, pursuant to the CSA, transferred preexisting intangible property to VERITAS Ireland and VERITAS Ireland made a buy-in payment to VERITAS U.S. as consideration for the preexisting intangible property. After concessions, the issue for decision is whether, pursuant to section 482,2 the buy-in payment was arm's length.
On August 22, 2007, the Court issued a protective order to prevent disclosure of petitioner's proprietary and confidential information. The facts and opinion have been adapted accordingly, and any information set forth herein is not proprietary or confidential. VERITAS U.S. is a Delaware corporation with its principal place of business in Cupertino, California. During 1999, 2000, and 2001 (years in issue) VERITAS U.S. was the parent of a group of affiliated subsidiaries.
VERITAS U.S. is in the business of developing, manufacturing, marketing, and selling advanced storage management software products. VERITAS US' products protect against data loss and file corruption, provide rapid recovery after disk or system failure, process large files efficiently, manage and back up systems without user interruption, and provide performance improvement and reliability enhancement features that are critical for many commercial applications.
In the mid to late 1990s VERITAS U.S. expanded its business through corporate acquisitions and the establishment of foreign subsidiaries. On April 25, 1997, VERITAS U.S. acquired and merged with OpenVision Technologies, Inc. (OpenVision). With the acquisition of OpenVision, VERITAS U.S. obtained NetBackup; 3 offices in the United Kingdom, Germany, and France; an engineering team; and skilled sales and marketing executives. By the end of 1997 VERITAS U.S. had sales subsidiaries in Canada, Japan, the United Kingdom, Germany, France, Sweden, and the Netherlands. VERITAS US, on May 28, 1999, acquired Seagate Software Network and Storage Management Group, Inc. (NSMG). As a result of this acquisition, VERITAS U.S. became the largest storage software company in the industry and obtained Backup Exec; 4 a distribution channel in Europe, the Middle East, and Africa (EMEA); and a sales force that sold Backup Exec to customers in Europe. On July 2, 2005, VERITAS U.S. was purchased by Symantec Corp. (Symantec) and became one of Symantec's wholly owned subsidiaries. References to petitioner are to VERITAS US, its subsidiaries, and Symantec (successor in interest to VERITAS U.S. and subsidiaries).
All computer operating systems have “backup” and “restore” capabilities. 5 Storage management software replaces the portion of a computer's...
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