Controlled services transactions.

• Author: Laffie, Lesli S.

The IRS has issued final and temporary regulations on the treatment of controlled services transactions under Sec. 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; see TD 9278, NPRM REG146893-02, NPRM REG-115037-00 and NPRM REG-138603-03 (all dated 8/1/06).

The regulations also modify the Sec. 861 regulations on stewardship expenses, to make them consistent with the changes to the Sec. 482 regulations.

Background: Under Sec. 482 generally, the IRS may allocate gross income, deductions and credits between or among two or more taxpayers owned or controlled by the same interests, to prevent tax evasion or to reflect clearly a controlled taxpayer's income.

Proposed regulations (and subsequent corrections) issued in 2003 triggered a substantial volume of taxpayer comments, which resulted in significant changes to the proposed regulations. Among other suggestions, commentators recommended issuing the regulations in proposed and temporary form, to give taxpayers an opportunity to submit additional continents and to consider the interaction between these regulations and the cost-sharing regulations. The IRS has done so.

Controlled services: The previously proposed regulations set forth a simplified cost-based method (SCBM) to preserve the Regs. Sec. 1.482-2(b) cost safe harbor and to bring the existing rules more in line with the arms-length standard. The goal was to provide certainty for the pricing of low-margin services. Based on the comments received, however, the IRS eliminated the SCBM and replaced it with the services cost method (SCM) described in Temp. Regs. Sec. 1.482-9T(b). Covered services eligible for the SCM include certain low-margin covered services described in Temp. Regs. Sec. 1.482-9T(b)(2), as well as those that will be described in a revenue procedure and in an initial list to be published in an IRS announcement.

Shared service arrangements (SSAs) are addressed in Temp. Regs. Sec. 1.482-9T(b)(5). In general, an SSA must have at least two participants. It must include as participants all controlled taxpayers that benefit from one or more covered services subject to the SSA, and it must be structured so that each covered service or group of covered services confers a benefit on at least one participant. The arm's-length charge to each participant is the portion of the total costs of the services...