Revision of Rev. Proc. 65-17: adjustments required after a section 482 adjustment.

• Position: IRS Revenue Procedure 65-17, IRC s. 482

On June 27, 1998, Tax Executives Institute submitted the following comments on Rev. Proc. 65-17, relating to the adjustments required after a section 482 adjustment is made. TEI's comments took the form of a letter from TEI President Paul Cherecwich, Jr. of Cordant Technologies Inc. to Michael Danilack, Associate Chief Counsel (International) of the Internal Revenue Service. The comments were prepared under the aegis of the Institute's International Tax Committee, whose chair is Joseph S. Tann of Ameritech Corporation. Contributing materially to the submission were committee vice chair Joseph E. Bernot of NCR Corporation, Thomas R. Blythe of Baxter International, Inc., David A. Gellatly of Reynolds Metals Co., Margaret A. Osborne of Medtronic, Inc., Peter M. White of Eastman Kodak Co., and Terilea J. Wielenga of QAD, Inc.

Earlier this year, you gave a speech on proposed changes the Internal Revenue Service is considering to Rev. Proc. 65-17, relating to the adjustments required after a section 482 adjustment is made. You indicated that the IRS is considering the elimination of the dividend offset provision in that procedure and invited comments. Tax Executives Institute believes that the dividend offset provision affords taxpayers and the government with another form of alternative dispute resolution and urges the IRS to retain it.

Background

Revenue Procedure 65-171 addresses the collateral consequences of U.S. transfer pricing adjustments. Specifically, the procedure permits a qualifying U.S. taxpayer, whose taxable income has been increased by reason of an allocation under section 482 of the Internal Revenue Code, to receive payment from the related entity from (or to) which the allocation of income (or deduction) was made, without having the receipt of such payment considered a taxable distribution for federal income tax purposes.

The procedure essentially adopts the theory that section 482 adjustments will be treated as a loan from the entity to which the income properly belonged to the entity that received the income. This treatment occurs whether the adjustment increases or decreases the taxpayer's reported U.S. taxable income. Moreover, taxpayers may elect to establish "loan" accounts under prescribed IRS procedures. If such an election is not made, or if requests for relief are denied, then the taxpayer may face constructive dividend (or capital) treatment.

Rev. Proc. 65-17 provides the mechanism for U.S. parent companies to...