482 Services regulations and survey on LMSB "environment" command TEI's attention: institute engages in Canadian pre-budget consultations, addresses EU enlargement and on cost sharing.

Reflecting TEI's increasingly global nature, international issues dominated the Institute s technical activities this fall. TEI testified on the section 482 services regulations in the United States, submitted comments to the Canadian Standing Committee on Finance in respect of its pre-budget consultations, provided additional examples to the Internal Revenue Code and U.S. Treasury Department on the cost sharing rules, and commented to the European Union on issues relating to the most recent EU enlargement. In addition, TEI submitted member comments to the IRS Large and Mid-Size Business Division on the current "environment" in which LMSB personnel and taxpayers interact.

Section 482 Testimony

TEI's International Tax Committee chair, Janice L. Lucchesi, testified October 27 at an IRS hearing on the revised section 482 services regulations. Ms. Lucchesi began by commended the government for substantially redesigning regulations that had been originally proposed in 2003.

"[The 2003] regulations presented many challenges to taxpayers, particularly the elimination of the cost safe harbor and its replacement with the simplified cost-based method," she stated, "and TEI is gratified that the government responded to TEI's--and other groups'--concems by, among other things, replacing the SCBM method with a services cost method under which covered services may be charged out at cost and proposing a revenue procedure detailing 'specified covered services" eligible for the SCM."

Noting that two categories of covered services--"specified covered services" and "low margin covered services"--qualify for being billed at cost under SCM, Ms. Lucchesi referred to a restriction imposed on the use of the SCM that a taxpayer must reasonably conclude "in its business judgment" that the covered services are not core capabilities of the renderer or the recipient. She recommended that that this subjective "business judgment" qualifier be replaced with one that considers whether the taxpayer is in the business of providing the service. If so, the taxpayer may not treat the service as a specified covered service.

Ms. Lucchesi also offered comments on Announcement 200650, which sets forth a proposed revenue procedure listing 21 areas with descriptions of 48 activities that qualify as specified covered services. She urged that the list of services be broadened by taking into account the ways in which taxpayers customarily account for and bill their costs. "Any structure...