In a long-running transfer pricing case (Facebook, Inc. v. Commissioner, No. 21959-16 (Tax Ct. May 22, 2025)), the US Tax Court (court) held that the income method used by the IRS is valid under the IRC Section 482 temporary regulations (2009 cost-sharing regulations) and can produce an arm's-length result. The court also held, however, that the IRS used the wrong inputs in its calculations and reduced its disputed valuation of the payment in a platform contribution transaction (PCT).

This is the first time that the court has applied the 2009 cost-sharing regulations, which were in effect at the time of the transaction.

Facts

The case involves a dispute over the valuation of the 2010 PCT payment made by Facebook's Irish subsidiary to Facebook as part of a newly established cost-sharing arrangement (CSA) under Temp. Treas. Reg. Section 1.482-7T. Under the CSA, Facebook had the right to use any existing online platform technology in the United States and Canada, and the Irish subsidiary had similar rights for the rest of the world (ROW). Separately, Facebook granted its Irish subsidiary (1) all rights relating to Facebook's existing users, advertisers, and third-party application developers, including their data, and (2) the right to use its marketing intangibles, each in the ROW territory. The Irish subsidiary paid Facebook based on a net present value (NPV) of $6.3 billion in PCT and royalty payments beginning in 2010 and was also required to make annual cost-sharing transaction (CST) payments for ongoing intangible development costs (IDCs) in proportion to its share of reasonably anticipated benefits (RAB share).

In July 2016, the IRS issued a deficiency notice reallocating income to Facebook on the basis of a revised NPV $13.88 billion PCT valuation. The deficiency notice also determined that the Irish subsidiary's RAB share should be increased (and Facebook's decreased), which decreased Facebook's deductions by $5.39 million. Facebook petitioned for a redetermination.

At trial, the IRS's experts used the income method as the best method for valuing contributions to the CSA and determined that an amended PCT payment of $19.95 billion was more appropriate than the $13.88 billion valuation used in the deficiency notice.

Facebook's experts applied an "unspecified method" as the best method, which they described as an adjusted income method that took into account contributions they say were made by the Irish subsidiary and Facebook in valuing the PCT. The resulting range of values produced by Facebook's experts was $5.91 billion to $6.369 billion, which includes the $6.3 billion value reflected in the company's 2010 federal tax return. Facebook also argued that (1) the income method, as applied by the IRS's experts, cannot be the best method because both Facebook and the Irish subsidiary made non-routine contributions to the CSA, (2) the IRS selected incorrect inputs into its income method, (3) the income method cannot be the best method because it does not produce an arm's length result, thus making the Temp. Treas. Reg. Section 1.482-7T invalid, and (4) the IRS inappropriately adjusted the parties' RAB shares.

Findings

Validity of the 2009 regulations

The court, applying Loper Bright,¹ independently reviewed the validity of the 2009 cost-sharing regulations. It rejected Facebook's argument that, in the absence of uncontrolled comparables, the arm's-length standard requires a method that most closely approximates how unrelated parties would price transactions. The court concluded that the commensurate-with-income standard "requires compensation commensurate with the income earned in the transaction at issue, not what unrelated parties operating at arm's length might have agreed." Accordingly, it held that the regulations, and the income method, were within Treasury's authority under IRC Section 482. The court further stated that the regulations do not improperly deny economic profits and are not inconsistent with the statute's requirements of clear reflection and commensurate with income.

2009 regulations

Applying the 2009 regulations, the court said that platform contributions and operating contributions are external to the CSA while cost contributions and operating cost contributions are made as part of the CSA.

After classifying the types of contributions, the court said that six methods are available for calculating an arm's length PCT payment: (1) the comparable uncontrolled transaction (CUT) method described in Treas. Reg. Section 1.482- 4(c) or the comparable uncontrolled services price (CUSP) method described in Treas. Reg. Section 1.482-9(c); (2) the income method; (3) the acquisition price method; (4) the market capitalization method; (5) the residual profit split method (RPSM); and (6) unspecified methods.

The main question in the case is whether applying the income method to determine the PCT payment was reasonable, or whether the unspecified method should be used.

Method for calculating an arm's length payment

The IRS contended that the arm's length amount for the PCT payment should be calculated using the income method, asserting that Facebook made platform contributions that the Irish subsidiary was obligated to compensate. This argument relied on the economic considerations that (1) the value of Facebook's contributions should be evaluated as a package deal rather than individually, and (2) the Irish subsidiary had a weak bargaining position, as Facebook could replace it.

The IRS argued that the income method should apply without classifying contributions as platform contributions or operating contributions, contending that the aggregate benefits from the contributions were more significant than their individual values. The court said it is necessary to classify contributions accurately as either platform or operating contributions to determine how to account for each one.

The income method applies when only one CSA participant makes nonroutine platform contributions. The court concluded that the income method was appropriate for determining the PCT payment because only Facebook made nonroutine platform contributions.

The court then concluded, however, that the IRS did not implement the income method reasonably because the inputs were erroneous.

In its analysis, the court considered the following inputs:

• Financial projections, which include other revenue and acquisition expenditures
• The discount rate for the Irish subsidiary's participation in the CSA, which includes market-correlated risk and beta
• The best realistic alternative

Applying the 2009 cost-sharing regulations to the record, the court then said that "the most reliable income-method inputs to value the PCT Payment are (1) the [Facebook Long Range Plan] financial projections that exclude Other Revenue but make no adjustment for posttransaction acquisition costs; (2) the 17.7% discount rate adopted in [Facebook's] transfer pricing documentation for the international revenue in the actual CSA; and (3) the cost-plus-13.9% markup from [the IRS's transfer pricing valuation expert's] advertising and marketing agency C[omparable] P[rofits] M[ethod] to value Facebook Ireland's ad sales and marketing activity under the licensing alternative. We have addressed only those inputs to Dr. Newlon's [(IRS valuation expert witness)] model that have been disputed by the parties. Insofar as [Facebook] did not challenge an input we assume that it is not controversial and therefore will adopt it."

Applying the corrected inputs, the court concluded a PCT payment value of $7.786 billion.

Commensurate with income

Facebook argued that no IRS adjustment was permitted because the Irish subsidiary's return ratios fell within the regulatory Periodic Return Ratio Range (PRRR) under Temp. Treas Reg. Section 1.482-7T(i)(6). The court concluded that compliance with the PRRR only limits periodic adjustments under Temp. Treas Reg. Section 1.482-7T(i)(6) and does not restrict the Commissioner's authority to make PCT allocations under Temp. Treas Reg. Section 1.482-7T(i)(3). Therefore, the court did not address whether the Irish subsidiary's Actually Experienced Return Ratio (AERR) was within the commensurate-with-income range.

Implications

This decision holds that the income method is a valid approach under the 2009 cost-sharing regulations for valuing PCTs but underscores that the reasonableness of the underlying inputs remains critical. Financial projections, discount rates and alternative scenarios used in valuations must be well-supported and grounded in the relevant facts. The ruling provides practical guidance for taxpayers when applying and reviewing income-based valuations under IRC Section 482.

Additionally, this decision is the first to address the validity of an IRC Section 482 regulation under the Supreme Court's Loper Bright framework, applying independent judicial review and affirming that the 2009 cost-sharing regulations fall within Treasury's statutory authority.