TEI comments on Section 482 penalty, notional principal contracts, earnings stripping, and information reporting penalties.

As prospects for a tax bill ebbed during the last two months of 1991, Tax Executives Institute turned its attention to a tidal wave of IRS regulatory issues. That there has been an increase in the number of published regulations cannot be denied. According to Associate Chief Counsel (Domestic) Stuart Brown, in fiscal year 1990 the IRS issued 50 sets of regulations; in fiscal year 1991, the number rose to 113.

Specifically, the Institute filed comments on four regulatory subjects: the section 482 valuation misstatement penalty, information-reporting penalties, notional principal contracts, and so-called earnings stripping. On the administrative side, TEI responded to an IRS request for comments on the efficacy of a proposal to exclude dormant foreign subsidiaries from certain reporting requirements. In addition, the Institute followed up on its August 28 meeting with IRS and Treasury representatives with supplemental comments on the proposal to use U.S. generally accepted accounting principles in computing the earnings and profits of foreign corporations.

Finally, at the end of October, the Institute convened its 46th Annual Conference in Seattle. The conference is the subject of a separate story elsewhere in this issue.

Section 482 Penalty

According to comments submitted by TEI to the IRS on October 11, the IRS should issue immediate guidance to its field personnel not to assert the section 482 penalty until final "post-White Paper" regulations under section 482 are issued. The Institute's comments relate to a project recently opened by the IRS to develop regulations under section 6662(e) of the Code. The comments on the application of the valuation misstatement penalties to net section 482 transfer price adjustments expand on an earlier TEI submission relating to the accuracy-related penalties under section 6662 and the reasonable-cause exception under section 6664. (The accuracy-related penalty comments were reprinted in the May-June issue of The Tax Executive.)

In its written comments, TEI said that the 1986 Tax Reform Act changes to section 482 and the subsequent Treasury-IRS White Paper on transfer pricing have caused a significant controversy over the standards underlying section 482. Hence, it would be inequitable to assert the penalty until the basic standard is redefined. TEI explained that the fact-driven nature of section 482 transfer price disputes raises serious concerns over the propriety of imposing penalties in an area where the standard of conduct is not known or knowable in advance.

Under the 1990 Omnibus Budget Reconciliation Act, the IRS is to submit a report to Congress by March 1, 1992, on measures designed to "improve compliance" with section 482. TEI recommended that IRS endorse repeal of section 6662(e) as an ad hoc, ill-conceived appendage to the integrated penalty reform enacted in 1989.

Absent repeal of the statute, TEI proposed a number of...