Section 482 service regulations.

• Author: Skinner, Jack R.

On July 24, 1996, Tax Executives Institute submitted the following comments to the Internal Revenue Service on possible changes to the regulations under section 482 of the Internal Revenue Code relating to intercompany services. The regulations, which took the form of a letter from TEI President Jack R. Skinner to Lisa Sams, Attorney-Adviser in the IRS Office of Chief Counsel, was prepared under the aegis of the Institute's International Tax Committee, whose chair is Joseph S. Tann, Jr. of Ameritech Corporation. The following members of the Institute contributed to the preparation of the comments: Linda B. Burke of Aluminum Company of America, Paul Cherecwich, Jr. of Thiokol Corporation, Lester D. Ezrati of Hewlett-Packard Company, James W. Derouin of Lear Seating Corporation, Anthony A. Falzone of State Street Bank & Trust Co., James D. Loizeaux of Carlson Companies, Inc., Lisa Norton of Ingersoll-Rand Company, Donna L. Walker of PPG Industries, Inc., and Seth Y. Wu of Varian Associates, Inc.

This letter responds to your request for TEI's recommendations concerning the forthcoming section 482 regulations relating to the performance of intercompany services. TEI is pleased to have the opportunity to assist the IRS in this important project. Although an IRS representative recently announced that the proposed regulations were not a priority item for this year, we assume the request for comments signals an intent not to relegate the proposed section 482 service regulations to the "bottom of the pile."

The Statutory Scheme

Section 482 of the Internal Revenue Code authorizes the Secretary of the Treasury to "distribute, apportion, or allocate gross income, deductions, credits or allowances" among related parties if he determines it necessary to prevent the "evasion of taxes or clearly to reflect the income" of the entities. Ten years ago, Congress amended section 482 to impose a commensurate-with-income standard on transfers of intangible property, which is defined by specific reference to section 936(h)(3)(B). See [sections] 1231(e)(1), Tax Reform Act of 1986, Pub. L. No. 99-514, amending I.R.C. [sections] 482. Section 936(h) provides an extended list of intangible property "which has substantial value independent of the services of any individual." This list includes any (i) patent, invention, formula, process, design, pattern, or know-how; (ii) copyright, literary musical, or artistic composition; (iii) trademark, trade name, or brand name; (iv) franchise license or contract; (v) method, program, system, procedure, campaign survey, study, forecast, estimate, customer list, or technical date; or (vi) any similar item.

In reviewing any proposed amendment of Treas. Reg. [sections] 1.4822(b), the IRS should keep three principles in mind:

* The rules for services and the rules for intangible property are mutually exclusive because intangibles are defined in the Code as property rights having "substantial value independent of the services of any individual." Any revised regulations should reflect this distinction.

* Any new regulations should be consistent with the revised transfer pricing guidelines issued by the Organisation for Economic Co-operation and Development (OECD).(1) U.S. multinational corporations do not operate in a vacuum. Deviations from the OECD's Guidelines would create problems with the United States' trading partners, have an anti-competitive effect for multinational corporations, and pose an increased risk of double taxation.

* The current safe harbors should be retained.

It is against this backdrop that TEI offers the following comments.

The Current Regulations

The obvious place to begin in revising the service regulations...