SEC. 2. BACKGROUND AND SCOPE

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 United States taxpayer’s election of treatment under this revenue procedure, an adjustment under section 482 (the “primary adjustment”) entails secondary adjustments to conform the taxpayer’s accounts to reflect the primary adjustment. These secondary adjustments may result in adverse tax consequences 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 United States 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 result from 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 taxable income, the increased income may be reported by the taxpayer at any time. If the adjustment results in a decrease in taxable 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 United States 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 result from the taxpayer’s “self-initiated” primary adjustment. In the case of a taxpayer-initiated adjustment, a United States taxpayer may, in accordance with section 4.02 of this revenue procedure, use an offset in combination with an account to effectuate the repatriation of the cash attributable to the primary adjustment without the Federal income tax consequences of the secondary adjustments that would otherwise result from the primary adjustment. The United States taxpayer is bound by its election of treatment under the revenue procedure. 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 Service-initiated adjustments made under sections 61 or 162 of the Code, provided the adjustment could have been made under section 482 of the Code. All references in this revenue procedure to section

482 of the Code will be deemed to include sections 61 and 162 of the Code, except when the context or express language indicates or provides otherwise.

Any reference in this revenue procedure to an increase or decrease in, or an adjustment of, taxable income shall also be deemed a reference, in an appropriate case, to a reduction or increase in, or an adjustment of, a taxpayer’s loss.

Any reference in this revenue procedure to the Service shall be deemed a reference to the office within the Service that has jurisdiction over the Federal income tax return filed for the taxable year for which the primary adjustment is made.

For purposes of this revenue procedure, a “United States taxpayer” is a domestic corporation, or a foreign corporation that is, or is treated as, engaged in trade or business within the United States.

For purposes of this revenue procedure, an increase or decrease, or an adjustment of, the taxable income of a United States taxpayer that is a domestic corporation pursuant to section 482 of the Code shall be deemed to include an allocation of an amount to, or from, a related person (being a corporation as defined in section 7701(a)(3) of the Code), from, or to, a foreign corporation that is a controlled foreign corporation within the meaning of section 957 of the Code solely by reason of ownership of such foreign corporation’s stock by such domestic corporation (or any member of the affiliated group within the meaning of section 1504(a) of the Code in which such domestic corporation is included) with respect to a controlled transaction. In the latter circumstances, the parties to any account established under section 4.01 shall be such controlled foreign corporation and such related person, and for purposes of section 4.01(2) the requirement to accrue and include, or deduct, interest in, or from, taxable income shall mean accounting for such interest for all Federal income tax purposes that may affect the determination of the taxable income or tax liability of such domestic corporation, including, for example, the computation of earnings and profits, subpart F income, and the foreign tax credit provided under section 901 of the Code.

Treatment under this revenue procedure shall not be denied solely by reason of the fact a corporation under State law is

August 23, 1999 298 1999–34 I.R.B.

in existence for the purpose of winding up its affairs, where such corporation, subsequent to its liquidation, was a corporation from, or to, which an amount was allocated pursuant to section 482 of the Code.