E6-21908. Treatment of Services Under Section 482; Allocation of Income and Deductions From Intangibles; Stewardship Expense; Correction

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Correcting amendments.

SUMMARY:

This document contains corrections to final and temporary regulations (TD 9278) that was published in the Federal Register on Friday, August 4, 2006 (71 FR 44466) regarding the treatment of controlled services transactions under section 482 and the allocation of income from intangibles, in particular with respect to contributions by a controlled party to the value of an intangible owned by another controlled party. This document also contains corrections to final and temporary regulations that modify the regulations under section 861 concerning stewardship expenses to be consistent with the changes made to the regulations under section 482.

DATES:

Effective Date: The amendments are effective on January 1, 2007.

FOR FURTHER INFORMATION CONTACT:

Thomas A. Vidano, [phone], or Carol B. Tan [phone], for matters relating to section 482, and David F. Bergkuist, [phone], for matters relating to stewardship expenses (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

The final and temporary regulations that are the subject of these corrections are under sections 482 and 861 of the Internal Revenue Code.

Need for Correction

As published, the final and temporary regulations (TD 9278) contains errors that may prove to be misleading and are in need of clarification.

List of Subjects in 26 CFR Part 1

• Income taxes
• Reporting and recordkeeping requirements

Correction of Publication

Accordingly, 26 CFR part 1 is corrected by making the following correcting amendments:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *.

Par. 2. Section 1.482-0T is amended by removing the entries for paragraphs (i)(1) through (i)(10), (j)(1), (j)(2) and (j)(3) from § 1.482-1T.

Par. 3. Section 1.482-1 is amended by revising paragraph (i) introductory text to read as follows:

§ 1.482-1

Allocation of income and deductions among taxpayers.

* * * * *

(i) [Reserved]. For further guidance, see § 1.482-1T(i) introductory text.

* * * * *

Par. 4. Section 1.482-1T is amended as follows:

1. Paragraphs (i)(1) through (i)(10) are added and reserved.

2. Paragraphs (j)(1) through (j)(5) are amended by adding “§ ” before the language “1.482-1(j)(1)”.

The addition reads as follows:

§ 1. 482-1T

Allocation of income and deductions among taxpayers (temporary).

* * * * *

(i)(1) through (i)(10) [Reserved]. For further guidance, see § 1.482-1(i)(1) through (i)(10).

* * * * *

Par. 5. Section 1.482-8T is amended by revising paragraph (b) Example 12. (iv), second sentence to read as follows:

§ 1.482-8T

Example of the best method rule (temporary).

* * * * *

(b) * * *

Example 12.

(i) * * *

(iv) * * * USP contributed the long-term endorsement contracts with professional athletes. * * *

* * * * *

Par. 6. Section 1.482-9T is amended as follows:

1. Paragraph (b)(6), Example 22. (vi), introductory text is revised.

2. Paragraph (g)(2), Example 2. (iv), fifth sentence is revised.

3. Paragraph (i)(2) is revised.

4. Paragraph (i)(5), Example 1. (iii), first sentence is revised.

5. Paragraph (i)(5), Example 3. (ii), first sentence is revised.

6. Paragraph (l)(5), Example 20. (i), second sentence is revised.

7. Paragraph (m)(5), Example 1. (ii), fourth sentence is revised.

The revisions read as follows:

§ 1.482-9T

Methods to determine taxable income in connection with a controlled services transaction (temporary).

* * * * *

(b) * * *

(6) * * *

Example 22.

(i) * * *

(vi) In contrast, if aggregated services AB were allocated by reference to the total U.S. dollar value of sales to uncontrolled parties (trade sales) by each company, the following results would obtain:

* * * * *

(g) * * *

(2) * * *

Example 2.

* * *

(iv) * * * In the bid on the Country 2 contract for Level 1 waste remediation, Company B proposes to use a multidisciplinary team of specialists from Company A and Company B. * * *

* * * * *

(i) * * *

(2) * * * For purposes of this paragraph (i), an arrangement will be treated as a contingent-payment arrangement if it meets all of the requirements in paragraph (i)(2)(i) of this section and is consistent with the economic substance and conduct requirement in paragraph (i)(2)(ii) of this section.

* * * * *

(5) * * *

Example 1.

(i) * * *

(iii) The years under examination are years 6 through 9. * * *

* * * * *

Example 3.

(i) * * *

(ii) The years under examination are years 6 through 9. * * *

* * * * *

(l) * * *

(5) * * *

Example 20.

(i) * * * Y, a Country B corporation, is a distribution and marketing company that also performs clinical trials for X in Country B. * * *

* * * * *

(m) * * *

(5) * * *

Example 1.

(i) * * *

(ii) * * * The comparable profits method may provide the most reliable measure of an arm's length result if uncontrolled parties are identified that perform similar, combined functions of maintaining and providing spare parts for similar equipment. * * *

* * * * *

Par. 7. Section 1.861-8T is amended as follows:

1. Paragraph (b)(3) is revised.

2. Paragraph (g), paragraph (i) following Example 30. (i)(C) is redesignated as paragraph (ii) and the paragraph designation for Example 30. (i)(C) is removed.

3. Paragraph (h)(1), first three sentences are revised.

4. Paragraph (h)(3) is revised.

The revisions read as follows:

§ 1.861-8T

Computation of taxable income from sources within the United States and from other sources and activities (temporary).

* * * * *

(b) * * *

(3) Supportive functions. Deductions which are supportive in nature (such as overhead, general and administrative, and supervisory expenses) may relate to other deductions which can more readily be allocated to gross income. In such instance, such supportive deductions may be allocated and apportioned along with the deductions to which they relate. On the other hand, it would be equally acceptable to attribute supportive deductions on some reasonable basis directly to activities or property which generate, have generated or could reasonably be expected to generate gross income. This would ordinarily be accomplished by allocating the supportive expenses to all gross income or to another broad class of gross income and apportioning the expenses in accordance with paragraph (c)(1) of this section. For this purpose, reasonable departmental overhead rates may be utilized. For examples of the application of the principles of this paragraph (b)(3) to expenses other than expenses attributable to stewardship activities, see Examples 19 through 21 of paragraph (g) of this section. See paragraph (e)(4)(ii) of this section for the allocation and apportionment of deductions attributable to stewardship expenses. However, supportive deductions that are described in § 1.861-14T(e)(3) shall be allocated and apportioned in accordance with the rules of § 1.861-14T and shall not be allocated and apportioned by reference only to the gross income of a single member of an affiliated group of corporations as defined in § 1.861-14T(d).

* * * * *

(h) * * * (1) * * * In general, the rules of this section, as well as the rules of §§ 1.861-9T, 1.861-10T, 1.861-11T, 1.861-12T, and 1.861-14T apply for taxable years beginning after December 31, 1986, except for paragraphs (a)(5)(ii), (b)(3), (e)(4), (f)(4)(i), and paragraph (g) Example 17, Example 18, and Example 30 of this section, which are generally applicable for taxable years beginning after December 31, 2006. Also, see §§ 1.861-8(e)(12)(iv) and 1.861-14(e)(6) for rules concerning the allocation and apportionment of deductions for charitable contributions. In the case of corporate taxpayers, transition rules set forth in § 1.861-13T provide for the gradual phase-in of certain provisions of this and the foregoing sections. * * *

(3) Expiration date. The applicability of the paragraphs (a)(5)(ii), (b)(3), (e)(4), (f)(4)(i), and paragraph (g) Example 17, Example 18, and Example 30 of this section, expires on or before July 31, 2009.

Par. 8. Section 1.6662-6T is amended by revising paragraph (d)(2)(ii)(B), first sentence to read as follows:

§ 1.6662-6T

Transactions between parties described in section 482 and net section 482 transfer price adjustments (temporary).

* * * * *

(d)(2)(ii)(B) A taxpayer's selection of the services cost method for certain services, described in § 1.482-9T(b), and its application of that method to a controlled services transaction will be considered reasonable for purposes of the specified method requirement only if the taxpayer reasonably allocated and apportioned costs in accordance with § 1.482-9T(k), reasonably concluded that the controlled services transaction meets the conditions of § 1.482-9T(b)(3), and reasonably concluded that the controlled services transaction is not described in § 1.482-9T(b)(2). * * *

* * * * *

Cynthia Grigsby,

Senior Federal Register Liaison Officer, Legal Processing Division, Associate Chief Counsel (Procedure and Administration).