SECTION 4. REQUEST FOR

COMMENTS

The Treasury Department and the IRS request further comments from interested persons on the rules announced in this notice. In addition, the revenue procedure issued contemporaneously with this notice is intended to be an evolving list of services

trolled parties, as that term is defined in Treas. Reg. § 1.482–5(d)(3). For example, the activities performed by a corporate tax department should not be disqualified from the SCM, given that these activities primarily affect foreign income taxes (as defined in § 1.901–2(a)) and domestic income taxes, which are not classified as operating expenses. See Treas. Reg. § 1.482–5(d)(3).

(3) Taxpayer’s Reasonable Business Judgment

Several commentators expressed concern over how the business judgment rule would be administered. They raised questions concerning how to evidence the necessary business judgment, for example, whether an executive’s representation must be preferred to the tax director’s. Commentators also requested that statements from the preamble to the temporary regulations be incorporated in final regulations.

The Treasury Department and the IRS reiterate that the temporary regulations already incorporate a high threshold for application of the business judgment rule to exclude services otherwise eligible for the SCM. The exclusion is inapplicable so long as the taxpayer reasonably concludes in its business judgment that the covered services do not contribute significantly to key competitive advantages, core capabilities, or fundamental risks of success or failure in one or more trades or businesses of the controlled group.

The test is satisfied by a reasonable exercise of the taxpayer’s business judgment, not a reasonable exercise of the IRS’s judgment in examining the taxpayer. In the view of the Treasury Department and the IRS, the gloss in the preamble to the temporary regulations, such as that this is a business judgment preeminently within the business person’s own expertise, flows directly from the regulations’ specification that the matter lies in the taxpayer’s reasonable business judgment. The evidence necessary to establish the taxpayer’s reasonable business judgment is determined under all the facts and circumstances. No source, executive or otherwise, is generally more probative than another.

§ 3.05 Shared Services Concept Applicable to non-SCM Services

In general, commentators supported the SSA provision as a useful mechanism for allocation of costs from shared or centralized services. Commentators called into question, however, the need to restrict SSAs to covered services eligible to be analyzed under the SCM. In the view of the commentators, extending the SSA concept to all controlled services would produce accurate results and would also be consistent with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, in particular, the provisions pertaining to cost contribution arrangements.

This notice confirms that taxpayers may also make allocations of arm’s length charges for services ineligible for the SCM that yield a benefit to multiple members of a controlled group. In such a case, however, the flexible rules under the SCM for establishing the joint benefits and selecting the allocation key are inapplicable. Instead, the more robust analysis under the general transfer pricing rules applies for purposes of determining the appropriate arm’s length charges, benefits, allocation keys, etc.

§ 3.06 Documentation Provisions

This notice clarifies that the documentation for services analyzed under the SCM, described in Temp. Treas. § 1.482–9T(b)(3)(i) (adequate books and records) need not be generated contemporaneously with the filing of the income tax return.

In addition, for tax years beginning after December 31, 2006, and on or before December 31, 2007, the written contract specified by Temp. Treas. Reg. § 1.482–9T(i)(2) need not be entered into prior to, or contemporaneous with the start of the activity or group of activities. Instead, the written contract need only be prepared prior to, or contemporaneous with the filing of the income tax return.

§ 3.07 Penalty Relief for Certain Controlled Services Transactions

During a one-year transition period, the Treasury Department and the IRS intend that taxpayers’ reasonable efforts to

2007–3 I.R.B. 271 January 16, 2007

in § 411(a)(13)(C)(i). For purposes of this notice, a plan described either in § 411(a)(13)(C)(i) or in regulations or other guidance issued pursuant to § 411(a)(13)(C)(ii) is referred to as a statutory hybrid plan .

Section 411(b)(1)(H)(i) provides that a defined benefit plan fails to comply with § 411(b) if, under the plan, an employee’s benefit accrual is ceased, or the employee’s rate of benefit accrual is reduced, because of the attainment of any age. Section 411(b)(5)(A), as added by section 701(b)(1) of PPA ’06, generally provides that a plan will not be treated as failing to meet the requirements of § 411(b)(1)(H)(i) if a participant’s benefit accrued to date, as determined as of any date under the terms of the plan, would be equal to or greater than that of any similarly situated, younger individual who is or could be a participant. For purposes of this notice, a participant’s benefit accrued to date is referred to as the participant’s accumulated benefit . Under § 411(b)(5)(A)(iv), for purposes of the safe harbor standard of § 411(b)(5)(A), a participant’s accumulated benefit may, under the terms of the plan, be expressed as an annuity payable at normal retirement age, the balance of a hypothetical account, or the current value of the accumulated percentage of the employee’s final average compensation.

Section 411(b)(5)(B) imposes several requirements on a statutory hybrid plan as a condition of satisfying § 411(b)(1)(H). First, § 411(b)(5)(B)(i) provides that a statutory hybrid plan is treated as failing to meet the requirements of § 411(b)(1)(H) if the terms of the plan provide for an interest credit (or an equivalent amount) for any plan year at a rate that is greater than a market rate of return. Second, § 411(b)(5)(B)(ii) and (iii) contain minimum benefit rules that apply if, after June 29, 2005, an amendment is adopted that converts a defined benefit plan to a statutory hybrid plan. For purposes of this notice, such an amendment is referred to as a conversion amendment . Third, § 411(b)(5)(B)(vi) provides a special rule for projecting variable interest crediting rates in the case of a terminating statutory hybrid plan. In addition, § 411(a)(13)(B) requires a statutory hybrid plan to provide that an employee who has completed at least 3 years of service has a nonforfeitable

that are eligible for the SCM. The Treasury Department and the IRS contemplate issuing updates as appropriate, including a further revision of the revenue procedure to coincide with the end of the one-year transition period and in response to comments received on the temporary regulations. Comments are solicited on the categories and listed activities in the revenue procedure, possible additions, and other revisions. For example, comments are solicited whether warehousing and other functions that support distribution should be eligible for the SCM in light of Temp. Treas. Reg. § 1.482–9T(b)(3)(ii)(E) (reselling, distribution ineligible for SCM).

Written comments may be submitted to CC:INTL:6 (Notice 2007–5), room 4607, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20224. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to: CC:INTL:6 (Notice 2007–5) Courier’s desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224. Alternatively, taxpayers may submit comments electronically via the following e-mail address: Notice.Com- ments@irscounsel.treas.gov . Please include “Notice 2007–5” in the subject line of any electronic communications.