SEC. 4. ADJUSTMENTS TO BE MADE

OR ALLOWED

.01 Account, interest, currency, and payment. If a United States taxpayer qualifying under section 3 complies with the requirements of section 5, such taxpayer (or any member of the affiliated group within the meaning of section 1504(a) of the Code in which such taxpayer is included) shall be permitted to establish an interest-bearing account receivable from, or payable to, the related person (being a corporation as defined in section 7701(a)(3) of the Code) from, or

to, whom the section 482 allocation is made with respect to a controlled transaction 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 result from 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. For purposes of section 1.482–2(a)(2)(iii), where applicable, the account shall be considered to be a loan or advance having a term extending from the day after the date the account is deemed to have been created through the expiration of the 90-day period required in section 5. The interest so computed shall be accrued and included by the obligee in taxable income for each taxable year during which the account is deemed outstanding, regardless of whether the obligee uses the cash receipts and disbursements method of accounting or the accrual method of accounting. The interest so computed shall be accrued and deducted (subject to applicable limitations) by the obligor from taxable income for each taxable year during which the account is deemed outstanding;

(3) be expressed, both as to principal and interest, in the functional currency of a qualified business unit, as defined in section 1.989(a)–1 of the regulations, through which the controlled transaction was carried out, if the residence of such qualified business unit, as defined in section 988(a)(3)(B)(ii), is the United States. If the residence of both of the qualified business units through which the controlled transaction was carried out is the United States, then the account shall be expressed, both as to principal and interest, in the functional currency of such U.S. resident qualified business unit of the obligee. If the residence of both of the qualified business units through which the controlled transaction was carried out is a

country other than the United States, then the account shall be expressed, both as to principal and interest, in the functional currency of such non-U.S. resident qualified business unit of the corporation that is a domestic corporation, or if both corporations are domestic corporations, or neither corporation is a domestic corporation, then in the functional currency of such non-U.S. resident qualified business unit of the obligee;

(4) be paid within the 90-day period required in section 5, or treated as prepaid by offset prior to that time as provided in section 4.02. Payment within the 90-day period 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 bona fide debt between the United States taxpayer (or member of its affiliated group) and the related person. Any such payment within the 90-day period, and any such prepayment prior to that time pursuant to section 4.02, shall be treated as a payment of the account for all Federal income tax purposes, regardless of its characterization under foreign law. For example, to the extent that an account is offset pursuant to section 4.02, by a distribution that would otherwise have constituted a dividend, such distribution shall cease to qualify as a dividend under section 316 of the Code or as a dividend for any Federal income tax purpose; for instance, no foreign tax shall be deemed to have been paid with respect thereto under section 902 of the Code for the purpose of the credit allowed under section 901 of the Code and no dividend received deduction shall be allowed with respect thereto under sections 241 through 247 of the Code. An amount includible in income under section 551 or 951 of the Code shall not be considered a distribution for purposes of this paragraph or section 4.02.

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).

.02 Offset. All or part of the interest and principal of an account may be

1999–34 I.R.B. 299 August 23, 1999

treated as prepaid prior to the beginning of the 90-day period required in section 5 to the extent of an accounting entry offsetting such account against a bona fide debt between the United States taxpayer (or member of its affiliated group) and the related person, or to the extent of any distribution of property or contribution to capital between such parties, where the offsetting entry, the distribution, or the capital contribution occurs during the taxable year in which occurs the execution of the closing agreement on behalf of the Commissioner (in a case under section 5.01), or during the taxable year in which occurs the date on which the United States taxpayer files the return reporting the primary adjustment (in a case under section 5.02), or during the taxable year for which the section 482 allocation is made (in a case under section 5.02, but subject to the provisions stated in the next two sentences). For purposes of this revenue procedure, any offset of the account by reason of such a bona fide debt, distribution, or capital contribution during the taxable year for which the section 482 allocation is made shall be treated as a prepayment of the account made as of the beginning of the day after the date the account is deemed to have been created. No untimely or amended returns will be permitted to claim offset treatment by reason of such a bona fide debt, distribution, or capital contribution during the taxable year for which the section 482 allocation is made.

.03 Primary adjustment not affected. A United States 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 and eliminate the collateral effects of secondary adjustments, such as those described in section 2.