Consulting fees are currently deductible.

• Author: Herndon, Diane

The IRS National Office has ruled that a company may deduct consulting fees incurred in developing a transfer pricing methodology (TPM) and negotiating an advance pricing agreement (APA). In Letter Ruling (TAM) 9929038, the IRS ruled that the fees were tax compliance costs that did not create a separate and distinct asset or provide significant future benefits. The ruling is consistent with the Service's position that INDOPCO, Inc., 503 US 79 (1992), does not support capitalization when the only future benefit is a reduction in future costs.

Business Purpose for TPM

During its Year 1 tax year, the company considered whether to apply to the Service for an APA for transactions in two different countries. At the time, the IRS was considering the proposal of significant transfer pricing adjustments under Sec. 482 for transactions for tax years beginning in Year 2, and had already proposed such adjustments for Years 3 and 4. The company reasoned that the APA could be a vehicle for developing a TPM agreeable to the Service, as well as to the tax authorities in the two countries. In addition, the TPM could serve as a basis for resolving all actual and potential disputes with the IRS for prior tax years and for avoiding such disputes in future years. In Year 5, the company filed for an APA to cover Years 5 and 6. While the application was pending, the IRS Examinations Division suspended its consideration of transfer pricing adjustments for the tax years under audit, and the Appeals division suspended its consideration of proposed transfer pricing adjustments for prior tax years.

To help the company develop a TPM, its attorney hired an economic consulting firm. The firm developed a TPM that was proposed as part of the APA application; the firm then consulted with the company and the Service over the next several years, making modifications to the TPM as negotiations proceeded. The company currently deducted amounts paid to the consulting firm. It also began using a version of the TPM for internal pricing purposes in Year 7 and reported operating results based on these prices for both tax and financial...