The IRS is aggressively reviving a rarely-used 1986 tax rule that allows hindsight-based adjustments to transfer pricing, signalling a major shift in enforcement strategy. 

RF Report

The US Internal Revenue Service (IRS) is dusting off a 40-year-old tax provision that could dramatically reshape how multinational companies price transactions involving intellectual property, raising concerns among international tax practitioners about massive income reallocation.

The commensurate-with-income (CWI) standard, enacted by Congress in 1986, allows the IRS to adjust transfer prices using hindsight—examining actual profits generated by intangible assets rather than relying solely on projections made when transactions occurred. Though rarely invoked for decades, the agency is now deploying this tool aggressively, most notably in a September 2025 deficiency notice to Meta Platforms asserting over USD 54 billion in CWI adjustments.

Major shift in IRS position

The resurgence stems from January 2025 guidance (AM 2025-001) that fundamentally reinterprets how CWI operates. The new memorandum reverses the IRS’s previous stance from 2007, which treated actual post-transfer income as rebuttable evidence requiring consideration of what parties could reasonably have projected at transaction time.

Instead, the agency now claims actual income from transferred intangibles automatically determines appropriate pricing, regardless of whether outcomes were foreseeable. The guidance further asserts these adjustments need not comply with standard arm’s-length transfer pricing rules—a position observers find questionable given regulatory text explicitly requiring such consistency.

What transactions face risk

The statutory language applies specifically to transfers or licenses of intangible property between related parties. This includes both outbound transfers from US companies to foreign affiliates and inbound transactions moving in the opposite direction. Notably, the provision works both ways—it can reduce income allocations when intangibles underperform, not just increase them when assets exceed expectations.

Platform contribution transactions under cost-sharing arrangements present particular complexity. These agreements bundle intangible transfers with ongoing research services, yet the CWI statute explicitly excludes services. Whether the provision validly applies to such mixed transactions remains legally contested, with the Ninth Circuit’s Altera decision conflicting with Tax Court precedent in other jurisdictions.

Treaty complications ahead

The aggressive interpretation creates potential conflicts with US tax treaties. The OECD guidelines on hard-to-value intangibles adopt the rebuttable presumption approach that the IRS abandoned, allowing taxpayers to challenge hindsight-based adjustments. When treaty partners resist accepting CWI-based income allocations, US companies could face double taxation without relief through competent authority negotiations.

Companies with significant intangible property transactions should reassess their transfer pricing risk profiles now. Some may consider building contractual price adjustment mechanisms into agreements to stay within regulatory safe harbours. Others face difficult choices about whether to treat potential future CWI adjustments as economic deal terms affecting upfront pricing, ignore them as tax fictions, or account for resulting tax liability as transaction costs.

The Meta case proceeding through Tax Court will likely shape how aggressively the IRS pursues this revived enforcement theory across other multinational taxpayers.