SECTION 8. PAPERWORK

REDUCTION ACT

The collection of information contained in this revenue procedure has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545–1656. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the col

lection of information displays a valid OMB control number.

The collections of information in this revenue procedure are in sections 3.04 and 4.01–4.07. This information is required to enable the Office of Assistant Commissioner (Employee Plans and Exempt Organizations) of the Internal Revenue Service to make determinations regarding the issuance of certain closing agreements and to ascertain if plan participants have been notified of certain actions. This information can allow individual plans to continue to maintain their tax qualified status. As a result, favorable tax treatment of the benefits of the eligible employees is retained. The likely respondents are individuals, state or local governments, business or other for- profit

1999–34 I.R.B. 295 August 23, 1999

institutions, nonprofit institutions, and small businesses or organizations.

The estimated total annual reporting and/or recordkeeping burden is 10,800 hours.

The estimated annual burden per respondent/recordkeeper varies from 2 to 12 hours, depending on individual circumstances, with an estimated average of 10.8 hours. The estimated number of respondents and/or recordkeepers is 1,000.

The estimated annual frequency of responses is occasionally.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

DRAFTING INFORMATION

The principal authors of this revenue procedure are Jeanne Royal Singley and Maxine Terry of the Employee Plans Division. For more information concerning this revenue procedure, call the Employee Plans Division’s taxpayer assistance telephone service at (202) 622-6074/6075 (not toll-free numbers) between the hours of 1:30 and 3:30 p.m. Eastern Time, Monday through Thursday. Ms. Singley and Ms. Terry may be reached at (202) 6226214 (also not a toll-free number).

Rev. Proc. 99–32

SUMMARY: This document contains a new revenue procedure that sets forth the Service’s position regarding adjustments that may be made to conform the accounts of taxpayers to reflect allocations made under section 482 of the Internal Revenue Code.

SUPPLEMENTARY INFORMATION:

Background

In Announcement 99–1, 1999–2 I.R.B. 11, the Internal Revenue Service invited comment on a revision of Rev. Proc. 65–17, 1965–1 C.B. 833, on conforming a taxpayer’s accounts to reflect a primary adjustment under section 482 of the Internal Revenue Code. The comments received and changes finally adopted in this revenue procedure are summarized below.

Explanation of Provisions

A. Taxpayer-Initiated Primary

Adjustments

In furtherance of the overall goal of promoting upfront compliance with the arm’s length standard, Announcement 99–1 proposed providing a mechanism for taxpayers to conform their accounts in connection with taxpayer-initiated (as well as Service-initiated) primary adjustments, without the Federal income tax consequences of the secondary adjustments that would otherwise result under section 482. Commentators welcomed this proposal and it is finally adopted in this revenue procedure. Accordingly, taxpayers may elect, by filing a statement with their Federal income their tax returns, to apply revenue procedure treatment for taxpayer-initiated upward and downward adjustments of taxable income pursuant to section 1.482–1(a)(3) of the Treasury regulations, in connection with inbound, outbound, and certain foreignto-foreign controlled transactions. Election of revenue procedure treatment through such a statement shall be binding on the taxpayer.

B. Offsets

Announcement 99–1 proposed eliminating dividend offsets and making account treatment the sole means to repatriate the cash attributable to a primary adjustment, without the Federal income tax consequences of secondary adjustments. Some commentators supported this proposal on the ground that dividend paying policies are independent of transfer pricing. Other commentators, however, expressed the view that elimination of dividend offsets would discourage current repatriation of earnings, prolong transfer pricing disputes, and pose problems when payment of a form of income is restricted under foreign law. Others suggested that permitting offsets in connection with taxpayer-initiated adjustments would be consistent with upfront compliance with the arm’s length standard.

In response to these comments, this revenue procedure allows taxpayers to offset accounts by distributions, including those that would otherwise be dividends, in the same year as that to which a taxpayer-initiated primary adjustment re

lates, provided the offset treatment is claimed on a timely-filed income tax return (including extensions). In addition, offsets may be claimed for distributions in the year in which a return is filed reporting a taxpayer-initiated adjustment or in the year a closing agreement is entered into in connection with a Service-initiated adjustment. Offsets are also permitted by means of entries offsetting bona fide debts and capital contributions. No offsets are allowed with respect to a year for which an income tax return has already been filed, except for pre-effective date years as described below. Offsets are treated as prepayments of the interest and principal of an account established under the revenue procedure for all Federal income tax purposes, regardless of their characterization under foreign law.

In the Service’s view, these changes are consistent with the overall goal of upfront compliance with the arm’s length standard and reduce any disincentive to repatriate earnings. Moreover, they improve administrability by dispensing with the need to reverse tax effects reported on prior income tax returns, as was required with the dividend offset pursuant to Rev. Proc. 65–17.

The Service recognizes that a domestic subsidiary of a foreign parent may claim an offset pursuant to this revenue procedure by reason of a distribution as to which the subsidiary withheld tax in accordance with its obligations pursuant to section 1442 of the Code. In such a case, the Service anticipates that the foreign parent will be able to file an income tax return to obtain a refund of such withholding tax.

The Service intends that offset treatment pursuant to this revenue procedure shall be the exclusive means of addressing the situations in which payments of certain forms of income are restricted under foreign law that are described in Example 2 and Example 3 of section 1.482– 1(h)(2)(v) of the Treasury regulations.

C. Effective Date and Transitional

Treatment

Announcement 99–1 proposed that the revised revenue procedure be prospectively effective for taxable years beginning after its publication. Commentators suggested that liberal transitional rules be provided for application of revenue pro

August 23, 1999 296 1999–34 I.R.B.

cedure treatment in connection with taxpayer-initiated adjustments for pre-effective date taxable years.

In response to these comments, the final revised revenue procedure published in this document provides that for taxable years prior to the taxable year that includes the date of publication, taxpayers shall be permitted to use a reasonable interpretation of the principles of Rev. Proc. 65–17 for purposes of conforming their accounts to reflect a taxpayer-initiated primary adjustment. The Service considers an interpretation that applies the final revised revenue procedure or its general principles to be such a reasonable interpretation of Rev. Proc. 65–17. The Service also considers that a reasonable interpretation would include the permission of a taxpayer-initiated offset by reason of a distribution reported as a dividend on a prior income tax return for the taxable year to which the primary adjustment relates, provided the subsequent treatment reverses any previously claimed tax effects associated with such dividend in accordance with the principles of section 4.01 of Rev. Proc. 65–17. For taxable years that include the date of publication of this revenue procedure, a taxpayer may elect to apply all of the provisions of this revenue procedure. Otherwise, Rev. Proc. 65–17 applies for such taxable years in accordance with its terms. In such cases, revenue procedure treatment for taxpayer-initiated adjustments will necessitate a closing agreement with the Service.

D. Penalty Condition

Announcement 99–1 proposed to substitute inapplicability of any penalty under section 6662(e), for absence of a principal tax avoidance purpose required under Rev. Proc. 65–17, as the condition for revenue procedure treatment. Commentators criticized the requirement of any condition for various reasons, including that such condition would inappropriately expand the section 6662(e) penalty and may yield apparently arbitrary results. Other commentators suggested that the determination of the inapplicability of the penalty was problematic in the case of a taxpayer-initiated adjustment.

This revenue procedure removes the penalty condition in the case of taxpayerinitiated adjustments, but retains the con

dition for Service-initiated adjustments, including such adjustments as result from examination of taxpayer-initiated adjustments. The condition is neither an expansion of the penalty, nor arbitrary, but, rather, it is a reasonable tax administration restriction on availability of the revenue procedure treatment. In the Service’s view the penalty condition of this revenue procedure is more objective than absence of a principal tax avoidance purpose under Rev. Proc. 65–17 and, moreover, is consistent with the goal of upfront compliance.

E. Other Changes and Clarifications

As proposed by Announcement 99–1, the revenue procedure clarifies that 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. The amount of any payment or prepayment of an account established under the revenue procedure is considered to include the amount of such foreign withholding tax. The revenue procedure does not adopt comments that allowance of a section 901 credit for a foreign withholding tax should be without regard to whether a taxpayer exhausts all effective and practical remedies, including invocation of competent authority procedures. This is a requirement under the applicable regulations. Treas. Reg. § 1.901–2(e)(5).

Persons eligible for revenue procedure treatment are limited to “United States taxpayers,” i.e., either a domestic corporation or a foreign corporation that is, or is treated as, engaged in a trade or business within the United States. Controlled transactions between a controlled foreign corporation of a domestic corporation and a foreign related corporation are also eligible for treatment under the revenue procedure. Transactions with noncorporate persons, for example, a transaction between a partnership and its controlling corporate partner, are not covered by the revenue procedure, but will be the subject of further study by the Service.

Accounts under the revenue procedure are set up, and offsets are permitted, between the related corporation and the United States taxpayer, or any member of its affiliated group. See Rev. Proc. 70–23, 1970–2 C.B. 505, and Rev. Proc. 71–35,

1971–2 C.B. 573, both superseded by this revenue procedure. The revenue procedure clarifies application of the safe harbor interest rates in the case of interest on accounts. Where an account is paid in the form of term debt, such debt will be considered a new obligation commencing with a new term; however, payment by means of term debt shall be respected only to the extent the debt qualifies in substance as bona fide debt under applicable debt-equity rules. The revenue procedure provides that interest on accounts is includible in the income of the obligee on the accrual basis regardless of the obligee’s method of accounting. See Rev. Proc. 72–48, 1972–2 C.B. 829, superseded by this revenue procedure. Account interest is deductible by the obligor, but subject to applicable limitations including sections 163(e)(3) and 267(a)(3) of the Code. Rules are prescribed for determining the currency in which the principal and interest of an account must be denominated, which generally will be the U.S. dollar.

Other conforming changes are made to incorporate the provisions of other various progeny of Rev. Proc. 65–17 that are superseded by this revenue procedure. Coordination of revenue procedure treatment and the competent authority process and the advance pricing agreement program will be considered in connection with the revision and updating of the revenue procedures governing those processes. See generally Rev. Proc. 96–13, 1996–1 C.B. 616; Rev. Proc. 96–14, 1996–1 C.B. 626; and Rev. Proc. 96–53, 1996–2 C.B. 375.

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26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement; determination of correct tax liability. (Also, Part I, section 482)

Rev. Proc. 99–32