SECTION 2. BACKGROUND — Internal Revenue Bulletin 2007-3

The section 482 regulations provide pricing methods for transactions between controlled parties, including transactions involving services. The existing regulations for transactions involving services were issued in 1968. Section 1.482–2(b) of the existing regulations provides a “cost safe harbor” that permits certain “non-integral” services to be priced at cost. In 2003, the Treasury Department and IRS issued proposed regulations that set forth

2007–3 I.R.B. 295 January 16, 2007

Locating and notifying customer(s) of delinquent accounts by mail (either electronic or otherwise) or telephone to solicit payment. Receiving payment from customers and posting payment to customer accounts. If customer fails to respond, preparing statements to credit department, initiating repossession proceedings or service disconnection. Keeping records of collection activities and status of accounts.
Other activities similar to those specified in paragraphs (7) through (9).

Accounts Payable:

Compiling information and records to draw up purchase orders for procurement of materials and services.
Making payment to vendors and posting payment to status of accounts.
Other activities similar to those specified in paragraphs (11) and (12).

General Administrative:

Performing clerical and administrative functions such as drafting correspondence, scheduling appointments, and organizing and maintaining paper and electronic files.
Performing data entry through use of a keyboard or scanning device, including verifying data and preparing materials for printing.
Using a word processor/computer or typewriter to generate (without substantial modification) letters, reports, forms, or other material from another person’s rough draft, corrected copy, or voice recording.
Performing duties relating to office management systems and procedures, such as answering telephones, bookkeeping, typing, word processing, office machine operation, and filing.

respect to the SCM in general and Announcement 2006–50.

Notice 2007–5, issued contemporaneously with this Revenue Procedure, contains clarifications concerning several provisions related to the SCM. In addition, the notice partially modifies the effective date of the temporary regulations. Subject to the exceptions described below, the effective date of the temporary regulations, insofar as they pertain to the identification of controlled services eligible to be priced at cost, is moved back one year. The provisions related to the SCM in Temp. Treas. Reg. § 1.482–9T(b) will thus apply to taxable years beginning after December 31, 2007. The only SCM provision that has immediate effect, i.e., for taxable years beginning after December 31, 2006, is the business judgment rule in Temp. Treas. Reg. § 1.482–9T(b)(2).

The net effect of this modification is that, for taxable years with beginning dates from January 1, 2007 to December 31, 2007, taxpayers may apply the existing regulations in Treas. Reg. § 1.482–2(b) for purposes of identifying controlled services that are eligible to be priced on a cost basis, without a markup. For such taxable years, any services priced at cost must be “non-integral” within the meaning of existing Treas. Reg. § 1.482–2(b)(7), and they must also satisfy the SCM business judgment test in Temp. Treas. Reg. § 1.482–9T(b)(2).

Alternatively, for tax years beginning between January 1, 2007 and December 31, 2007, taxpayers may elect to apply the SCM as set forth in Temp. Treas. Reg. § 1.482–9T(b), without taking into account any of the modifications described in the previous two paragraphs.

A number of commentators stated that the list of specified covered services in Announcement 2006–50 was too narrow. In response to comments, this revenue procedure significantly broadens the existing categories and adds a number of new activities to the list of specified covered services. In addition, a provision covering “other similar activities” has been added to each category of activities.