SECTION 2. BACKGROUND

.01 Section 1.482–1(g)(4)(i) of the Income Tax Regulations (T.D. 8552, 1994–2 C.B. 93, 125) provides in part:

If an allocation is made under section 482 with respect to a transaction between controlled taxpayers, the district director will also take into account the effect of any other non-arm’s length transaction between the same controlled taxpayers in the same taxable year which will result in a setoff against the original section 482 allocation. Such setoff, however, will be taken into account only if the requirements of § 1.482–1(g)(4)(ii) are satisfied.

.02 Section 1.482–1(g)(4)(ii) of the regulations further provides:

The district director will take a setoff into account only if the taxpayer—

(A) Establishes that the transaction that is the basis of the setoff was not at arm’s length and the amount of the appropriate arm’s length charge;

(B) Documents, pursuant to paragraph (g)(2) of this section, all correlative adjust

ments resulting from the proposed setoff; and

(C) Notifies the district director of the basis of any claimed setoff within 30 days after the earlier of the date of a letter by which the district director transmits an examination report notifying the taxpayer of proposed adjustments or the date of the issuance of the notice of deficiency.

The relevant duties of the district director referred to in the regulations are now exercised by the director of field operations. For purposes of this revenue procedure, references to the Commissioner shall be to the director of field operations or other applicable delegate.

.03 The requirement that a taxpayer notify the Commissioner of the basis of any § 482 setoff is separate and distinct from the requirements that the taxpayer must:

(1) Establish that the transaction that is the basis of the setoff was not at arm’s length;

(2) Establish the amount of the appropriate arm’s length charge; and

(3) Document all correlative adjustments resulting from the § 482 setoff.

The notification requirement requires that the non-arm’s length transactions upon which the amount of the appropriate arm’s length charge is based be sufficiently identified in the notification to the Commissioner so as to constitute a reasonable foundation for the claimed § 482 setoff and to permit verification by the Commissioner. The listed requirements involve the proving of the § 482 setoff. Taxpayers must establish or document the requirements described in this section with reasonable specificity.

.04 The taxpayer must notify the Commissioner of the basis of any claimed § 482 setoff within 30 days after the earlier of the date of a letter by which the Commissioner transmits an examination report notifying the taxpayer of proposed adjustments (“30-day letter”) or the date of the issuance of the notice of deficiency. Ordinarily, the taxpayer will be able to notify the Commissioner of the basis of any claimed § 482 setoff during the course of an examination, prior to the time the Commissioner transmits a 30-day letter. In unusual circumstances, this may not be so. However, orderly administration of the Code necessitates a reasonable cutoff point

2005–30 I.R.B. 142 July 25, 2005

regulations), and § 1.482–1T(d)(5) of the temporary Income Tax Regulations (T.D. 8470, 1993–1 C.B. 90, 110) is generally effective for taxable years beginning after April 21, 1993, but before October 7, 1994 (if no election pursuant to § 1.482–1(j)(2) of the regulations is applicable). For the taxable years beginning after April 21, 1993, to which this revenue procedure is not otherwise applicable pursuant to §§ 4.01 and 4.02 of this revenue procedure, taxpayers must apply § 1.482–1(g)(4) of the regulations and § 1.482–1T(d)(5) of the temporary regulations in a reasonable manner consistent with those regulations. The Commissioner considers an application of the provisions of this revenue procedure to be a reasonable manner of compliance with such regulations.

.04 For taxable years beginning prior to April 22, 1993, where no election pursuant to § 1.482–1(j)(2) of the regulations is applicable, Rev. Proc. 70–8, 1970–1 C.B. 434, prescribes the procedure to be followed with respect to the claiming of any § 482 setoffs pursuant to § 1.482–1A(d)(3) of the Income Tax Regulations (T.D. 6952, 1968–1 C.B. 218, 220).