SEC. 2. BACKGROUND — Internal Revenue Bulletin 1999-2

Section 482 of the Code gives the Internal Revenue Service authority to “distribute, apportion or allocate gross income, deductions, credits, or allowances” among certain related organizations, trades or businesses if it “determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income” of any such entity. Absent a taxpayer’s election of treatment under this revenue procedure, an adjustment under section 482 (the “primary adjustment”) entails secondary adjustments to conform a taxpayer’s accounts to reflect the primary adjustment. These secondary adjustments may result in adverse tax conse

quences to the taxpayer. For example, an allocation of income under section 482 from a foreign parent corporation to its domestic subsidiary corporation would entail a deemed distribution from the domestic subsidiary to its foreign parent in an amount equal to the primary adjustment in the year for which the allocation is made. The deemed distribution would be treated as dividend income to the foreign parent to the extent of the earnings and profits of the domestic subsidiary, as recomputed after taking into account the primary adjustment. Under section 881 of the Code, the foreign parent would be subject to a 30-percent tax liability (as reduced by any applicable income tax treaty), and under section 1442 of the Code, the domestic subsidiary would be a withholding agent required to withhold the tax. See Rev. Rul. 82–80, 1982–1 C.B. 89; Treas. Reg. § 1.1441–2(e)(2). This revenue procedure allows the taxpayer to repatriate the cash attributable to a primary adjustment via an account without the Federal income tax consequences of the secondary adjustments that would otherwise be entailed as the result of the primary adjustment.

Additionally, section 1.482–1(a)(3) of the Income Tax Regulations permits a controlled taxpayer to report an arm’s length result for controlled transactions based upon prices different from those actually charged. If the adjustment results in an increase in income, the increased income may be reported by the taxpayer at any time. If the adjustment results in a decrease in income (after appropriate accounting for section 1059A of the Code), the arm’s length result may be reported on a timely filed return (including extensions). A taxpayer can avail itself of the treatment provided by this revenue procedure to mitigate the Federal income tax consequences of the secondary adjustments that would otherwise be entailed as a result of the taxpayer’s “self-initiated” primary adjustment. The taxpayer-initiated adjustment for the treatment provided under the revenue procedure will be subject to review and adjustment, and to possible imposition of the section 6662(e) or (h) penalty, by the Service upon examination.

This revenue procedure applies in situations where an adjustment is made under section 482 of the Code, as well as to ad

January 11, 1999 42 1999–2 I.R.B.

the related person from, or to, whom the section 482 allocation is made in an amount equal to the primary adjustment for each of the years in which an allocation is made. The account may be established and paid in accordance with this revenue procedure without the Federal income tax consequences of the secondary adjustments that would otherwise be entailed as the result of the primary adjustment. The account shall:

1 be deemed to have been created as of the last day of the taxpayer’s taxable year for which the primary adjustment is made;

2 bear interest at an arm’s length rate, computed in the manner provided in section 1.482–2(a)(2) of the regulations, from the day after the date the account is deemed to have been created to the date of payment. The interest so computed shall be accrued and included in, or deducted (subject to applicable limitations) from taxable income for each taxable year during which the account is deemed outstanding;

3 must be paid within the 90-day period required in section 5, below. Payment must be in the form of money, a written debt obligation payable at a fixed date and bearing interest at an arm’s length rate determined in the manner provided in section 1.482–2(a)(2) of the regulations, or an accounting entry offsetting such account against an existing debt between the taxpayer and the related person.

such payment free of the Federal income tax consequences of the secondary adjustments that would otherwise be entailed as the result of the primary adjustment, provided such payment is made within 90 days after execution of the closing agreement on behalf of the Commissioner.

.02 Cases of a taxpayer reporting an adjustment pursuant to section 1.482– 1(a)(3) of the regulations. If a United States taxpayer that has increased or decreased its taxable income pursuant to section 482 and section 1.482–1(a)(3) of the regulations desires to avail itself of the treatment provided in section 4, above, it must file a statement with its Federal income tax return reporting the primary adjustment. The statement shall contain the following:

1 A statement that the taxpayer desires the treatment provided by section 4 of this revenue procedure for the years indicated; 2 A description of the arrangements or transactions, or the terms thereof, which gave rise to the primary adjustment; 3 A statement that the applicable conditions set forth in section 3 are met, and that the taxpayer will cooperate fully with the Service in providing evidence supporting such statement; 4 The amount of the primary adjustment; 5 The amount of the account which the taxpayer elects to establish under section 4.01, above; 6 The amount of interest on the account includible in income, or deductible, pursuant to section 4.01, above, and the years of such inclusion or deduction; 7 The amount of any foreign tax credit that taxpayer will claim under section 901 of the Code with respect to payment of the principal or interest on an account established pursuant to section 4.01, above; 8 The manner of payment of the account pursuant to section 4.01, above, which shall be free of the Federal income tax consequences of the secondary adjustments that would otherwise be entailed as the result of the primary adjustment, provided such payment is made within 90 days of the date on which the taxpayer files the return reporting the primary adjustment.

A foreign tax credit shall be allowed for any foreign withholding tax with respect to the repayment of the principal or interest of the account to the extent and subject to the limitations provided under section 901 of the Code. See Treas. Reg. §§ 1.901–2(e)(5) and 1.904–6(a)(1)(iv).

1 If a United States taxpayer whose income has been adjusted by the Internal Revenue Service pursuant to section 482 of the Code desires to avail itself of the treatment provided in section 4, above, it must file a request in writing with the Service before closing action is taken on the primary adjustment. The request shall be signed by a person having the authority to sign the taxpayer’s Federal income tax returns, and shall contain the following:

(a) A statement that the taxpayer desires the treatment provided by section 4 of this revenue procedure and the years for which the treatment is requested; (b) A description of the arrangements or transactions, or the terms thereof, which gave rise to the primary adjustment; (c) A statement that the applicable conditions set forth in section 3 are met, and that the taxpayer will cooperate fully with the Service in providing evidence supporting such statement; (d) An offer to enter into a closing agreement under section 7121 of the Code as provided in section 5.013, below. 2 The Service will determine whether the taxpayer qualifies for the requested treatment and inform the taxpayer of its decision.

3 If the Service concludes that section 4 of this revenue procedure properly applies, and if the amount of the primary adjustment has been agreed upon, the taxpayer will be requested to enter into a closing agreement under section 7121 of the Code, establishing for each year involved:

(a) The amount of the primary adjustment;

(b) The amount of the account which the taxpayer elects to establish under section 4.01, above;

(d) The amount of any foreign tax credit that taxpayer will claim under section 901 of the Code with respect to payment of the principal or interest on an account established pursuant to section 4.01, above; (e) The manner of payment of the account pursuant to section 4.01, above, and the taxpayer’s right to receive or make

.02 Primary adjustment not affected. A taxpayer’s election to avail itself of the provisions of this revenue procedure shall in no way affect the primary adjustment under section 482 of the Code. Such election shall, however, affect the taxpayer’s taxable income and credits to the extent indicated by section 4.01 above, and eliminate the collateral effects of secondary adjustments described in section 2 above.