Requests for third-party information.

• Author: Monaco, John J.

On June 10, 1994, Tax Executives Institute received the following letter from John J. Monaco, IRS (Examination), concerning the Internal Revenue Service's efforts to secure transfer-pricing informat parties. Mr. Monaco's letter responded to an April 6, 1994, letter from TEI President Ralph Weiland, about the IRS's issuance of requests to companies for information to be used in connection with the liability of unrelated parties (or even parties with which the company had no "transactional nexus") letter to Mr. Monaco was reprinted in the May-June 1994 issue of The Tax Executive.

Thank you for your letter of April 6, 1994, in which you expressed concerns about the Service's practice of collecting third party information in transfer pricing cases. I agree that the tax system as a whole would benefit from more openness, and I certainly wish to reassure third parties contacted by the Service that they have not been "targeted" in any way.

As you noted in your letter, the Service seeks information for third parties in order to uphold the "arm's length standard" of the regulations under Internal Revenue Code (I.R.C. section 482. According to the regulations, transactions among controlled taxpayers in order to determine whether the controlled transactions resulted in a true reflection of income. In order for the Service to determine whether an allocation under section 482 is warranted, very specific comparable third party information is required.

The Service generally obtains information about third party transactions from publicly available sources, such as Securities and Exchange Commission filings. Sometimes, however, this information is not specific enough to be useful in determining whether a transfer pricing allocation is appropriate. Another source of information, tax return data filed with the Service, is protected from disclosure under I.R.C. section 6103, and is therefore not useful in defending section 482 allocations.

Thus, there is a gap between the amount of information needed by the Service to uphold the internationally accepted arm's length standard and the amount of information publicly available. The Service has been concerned about this information gap for some time, and has attempted to fill the information gap in specific audits by asking third parties to voluntarily comply with information requests. These requests are the subject of the complaints mentioned in your letter.

Requests for information from third parties made by the...