As part of the Tax Cuts and Jobs Act bill, the new law has codified a longstanding IRS position relative to the valuation of intangible assets: that goodwill, going concern, and workforce-in-place must be considered in the valuation of transferred intangible assets.
What to do from a valuation standpoint? When transferring intangible assets, the default valuation methodology should be a multi-period excess earnings approach to ensure that goodwill, going concern, and workforce-in-place are also captured in the valuation of the transferred asset where appropriate.
What not to do from a valuation standpoint? Do not, in most cases, utilize a relief-from-royalty approach to value the transferred intangible assets, as this approach does not capture value beyond the rights associated with licensing the intangible asset (thus excluding goodwill, going concern, workforce-in-place, etc.). Furthermore, if transferring an intangible asset that was recently acquired from a third party, do not unilaterally utilize the value of the asset that was derived for financial reporting purposes, as this value is often estimated utilizing the relief-from-royalty approach. While acceptable for financial reporting purposes, this value will likely not be acceptable for tax purposes as part of a transfer of the asset.
The other interesting question is if the new tax bill will strengthen the IRS’ position relative to transfers of intangible assets that occurred prior to January 1, 2018, given it supports the IRS’ long-time interpretation of the old tax law, or if the Tax Cuts and Jobs Act bill is strictly considered a new bill that has no bearing on pre-2018 intangible asset transfers.
The new provision redefines intangible property and confirms the IRS's authority to require certain valuation methods, House and Senate tax writers said in the law's Dec. 18 conference report, but it doesn't modify the “basic approach” of existing transfer pricing rules to income from intangible property. ‘A Clear Change in the Law’ The old tax code specifically excluded foreign goodwill, going-concern value and workforce-in-place from the calculation of the value of a company's transferred intangible assets. As of Jan. 1, 2018, Sections 482 and 367(d) of the 2017 tax code explicitly include them.