In the context of a Cost Sharing Arrangement (“CSA”), Treas. Reg. §1.482-7(c)(1) defines a platform contribution (“PCT”) to be “any resource, capability, or right that a controlled participant has developed, maintained, or acquired externally to the intangible development activity (whether prior to or during the course of the CSA) that is reasonably anticipated to contribute to developing cost shared intangibles.” Treas. Reg. §1.482-7(g)(2)(viii) defines subsequent PCTs as those whose date occurs subsequent to the inception of the CSA. Treas. Reg. §1.482-7(g)(1) explains that “a value for the compensation obligation of each PCT Payor” has to be “consistent with the product of the combined pre-tax value to all controlled participants of the platform contribution that is the subject of the PCT and the PCT Payor’s RAB share.” Treas. Reg. §1.482-7(e)(1)(i) notes further that “RAB shares must be updated to account for changes in economic conditions, the business operations and practices of the participants, and the ongoing development of intangibles under the CSA.”
While requiring that the RAB shares be updated, the regulations provide little guidance as to how this is to be accomplished. In particular, the regulations do not specify whether the Payors’ obligations with regard to the prior PCT and the subsequent PCT should be calculated on a combined basis, or whether separate RAB shares, and separate PCT obligations, are appropriate. Whether a combined or separate RAB share will be more appropriate after any subsequent PCT will therefore depend on facts and circumstances of the specific PCTs contributed to the CSA over the life of the CSA.
It can be shown mathematically that the subsequent PCT can often materially affect the RAB shares and, therefore, the obligations of each PCT Payor with regard to such subsequent PCT. This will be the case where a subsequent PCT is added to an existing CSA (which had a PCT at inception), and the subsequent PCT changes the projections of the selected measures of benefit serving as the basis for calculating the RAB shares. The parties’ PCT obligations will be overstated or understated to varying degrees that depend not only on the ratios of the subsequent benefits to the prior benefits, but also on the ratio of the value of subsequent PCT to the value of prior PCT. Therefore, when subsequent PCTs are incorporated into an existing CSA, the parties to the CSA should carefully review the interaction between the subsequent PCTs and the prior PCT (in terms of their values and their benefits to the CSA parties) in order to correctly allocate the PCT obligations of the PCT Payors.
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