[Federal Register Volume 59, Number 22 (Wednesday, February 2, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2078]
[[Page Unknown]]
[Federal Register: February 2, 1994]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8519]
RIN 1545-AS25
Imposition of Accuracy-Related Penalty
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
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SUMMARY: These amendments to the regulations under 26 CFR part 1
provide guidance on the imposition of the accuracy-related penalty
under Internal Revenue Code sections 6662 (e) and (h) and section
6664(c) for transactions between persons described in Internal Revenue
Code section 482 and net section 482 transfer price adjustments. This
action is necessary because of changes to the applicable tax laws made
by the Omnibus Budget Reconciliation Act of 1993.
EFFECTIVE DATE: These regulations are effective February 2, 1994.
These regulations apply to taxable years beginning after December
31, 1993.
FOR FURTHER INFORMATION CONTACT: Thomas L. Ralph at (202) 622-3880 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
This regulation is being issued without prior notice and public
procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553).
For this reason, the collection of information contained in this
regulation has been reviewed and, pending receipt and evaluation of
public comments, approved by the Office of Management and Budget (OMB)
under control number 1545-1365. The estimated annual burden per
recordkeeper varies from 5 hours to 15 hours, depending on individual
circumstances, with an estimated average of 10 hours.
These estimates are an approximation of the average time expected
to be necessary for a collection of information. They are based on such
information as is available to the Internal Revenue Service. Individual
recordkeepers may require greater or less time, depending on their
particular circumstances.
For further information concerning this collection of information,
and where to submit comments on this collection of information, the
accuracy of the estimated burden, and suggestions for reducing this
burden, please refer to the preamble in the cross-referencing notice of
proposed rulemaking published in the Proposed Rules section of this
issue of the Federal Register.
Background
On January 21, 1993, the IRS published a notice of proposed
rulemaking in the Federal Register (58 FR 5263) that proposed
amendments to the Income Tax Regulations under sections 6662 (e) and
(h) and section 6664(c) of the Internal Revenue Code of 1986 (Code), as
amended. Those proposed regulations implemented section 11312 of the
Omnibus Budget Reconciliation Act of 1990, Public Law 101-508, 104
Stat. 1388. Comments responding to the notice of proposed rulemaking
were received and a public hearing was held on May 14, 1993. Section
13236 of the Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-66,
107 Stat. 312) further amended sections 6662 (e) and (h) of the Code.
After consideration of all comments received and pursuant to the
statutory changes, the IRS has withdrawn the previous proposed
regulations and adopts this Treasury decision.
Explanation of Provisions
The principal purpose of these regulations is to set forth rules
implementing the imposition of accuracy-related penalties in the
context of section 482. The exceptions from the penalty imposed under
section 6662(e) in the case of certain net section 482 transfer pricing
adjustments are a key component of these rules are. Reflecting the
amendments to the statute pursuant to section 13236 of the Omnibus
Budget Reconciliation Act of 1993, the regulations provide a two-part
exception from the imposition of the penalty with respect to such
adjustments, depending on whether the taxpayer used a specified or
unspecified method under the regulations under section 482. If the
taxpayer used a specified method, the taxpayer must have reasonably
concluded, based on the available data and the potentially applicable
alternative specified methods, that its application of the selected
method resulted in the most accurate measure of an arm's length result.
Thus, if the taxpayer reasonably concluded that a different specified
method would result in a more accurate measure of an arm's length
result than the selected method, the taxpayer would not satisfy the
requirements of this exception. If the taxpayer used an unspecified
method, the taxpayer generally must have reasonably concluded, based on
the available data, that none of the specified methods was likely to
achieve an arm's length result and that the method used was likely to
achieve such a result.
Finally, irrespective of the method selected, the taxpayer must
have prepared documentation articulating the required analysis at the
time that the tax return was filed, and provide such documentation to
the Internal Revenue Service within 30 days of a request for such
documentation.
The Need for Transfer Pricing Analysis and Documentation
The arm's length standard seeks to mirror the results obtained by
unrelated parties in their business dealings. Unrelated parties analyze
the value of property or services prior to selling or buying such
property or services in the open market. However, transactions between
related parties do not involve the transfer of goods outside of the
related party group. A transfer price will not affect the total profit
ultimately realized by the group but may affect total tax liability. To
ensure that the transfer price a taxpayer reports on its income tax
return is determined in a manner consistent with the arm's length
standard, section 6662(e) encourages a taxpayer engaged in related
party transactions to prepare a factual and economic analysis based on
reasonably available related party and third party market data that
substantiates the price chosen, and to maintain appropriate
documentation of that analysis.
The experience of the IRS has been that the majority of taxpayers
do not provide an explanation of how their intercompany pricing was
established. In many cases examiners' access to a corporation's
transfer pricing information is delayed or denied. Moreover, many
taxpayers do not rely upon any form of comparables or other
contemporaneous information either in planning or in defending
intercompany transactions. The taxpayer, not having attempted to
structure the transaction in accordance with the arm's length standard,
seeks to defend its position on examination by finding whatever
uncontrolled transaction or transfer pricing method provides a result
that most closely approximates the result initially reported. The
failure by taxpayers to analyze their intercompany pricing prior to
audit increases controversy between taxpayers and the IRS, as both seek
to develop post hoc analyses of the arm's length character of the
transactions. Thus, the failure to apply the arm's length standard in
setting prices for controlled transactions (and the lack of
contemporaneous documentation explaining that application) increases
the time spent and expense incurred by both the taxpayer and the IRS in
determining whether that result was consistent with the arm's length
standard. Accordingly, these regulations are designed to encourage
taxpayers to make a serious effort to comply with the arm's length
standard, report an arm's length result on their income tax return,
document their transfer pricing analyses, and provide that
documentation to the IRS upon request.
Statutory Requirements
Section 6662(a) imposes a penalty in the amount of 20 percent of
any underpayment to which the section applies. Section 6662(b) lists
the types of underpayments to which section 6662(a) applies. One such
underpayment is an underpayment attributable to any substantial
valuation misstatement under chapter 1 of the Code.
Section 6662(e) defines a substantial valuation misstatement. These
temporary regulations under section 6662(e) contain the rules for
determining whether there is a substantial valuation misstatement
attributable to section 482 allocations. A substantial valuation
misstatement exists if (1) the transfer price for any property or
services (or for the use of property) claimed on a return is 200
percent or more (or 50 percent or less) of the amount determined under
section 482 to be the arm's length amount (the transactional penalty),
or (2) the net section 482 adjustment exceeds the lesser of five
million dollars or ten percent of gross receipts (the net adjustment
penalty).
Section 6662(h) increases the amount of the penalty to 40 percent
for both the transactional and the net adjustment penalties in the case
of a gross valuation misstatement. There is a gross valuation
misstatement if (1) the price for any property or services (or for the
use of property) claimed on any return in connection with any
transaction between persons described in section 482 is 400 percent or
more (or 25 percent or less) of the amount determined under section 482
to be the arm's length amount, or (2) the net section 482 adjustment
exceeds the lesser of twenty million dollars or twenty percent of gross
receipts.
Amounts Excluded From a Net Section 482 Adjustment
An amount is excluded from the calculation of a net section 482
adjustment if the requirements of Sec. 1.6662-6T(d)(2), (3), or (4) are
met with respect to that amount. If a taxpayer meets the requirements
of paragraph (d) of these regulations with respect to some, but not all
of the allocations made under section 482, then for purposes of
determining the net section 482 adjustment, setoffs, as taken into
account under Sec. 1.482-1T(e)(5), must be applied ratably against all
such allocations.
Specified Method Applied
Paragraph (d)(2) provides that an adjustment will be excluded from
the calculation of a net section 482 adjustment if the taxpayer
satisfies the specified method requirement of paragraph (d)(2)(ii) and
the documentation requirement of paragraph (d)(2)(iii). A taxpayer will
meet the specified method requirement if the taxpayer selects and
applies a method specified in the section 482 regulations in a
reasonable manner. A method is a specified method if it is described in
the regulations under section 482. With respect to transfers of
tangible property, these methods currently include the comparable
uncontrolled price method, resale price method, cost-plus method, and
comparable profits method. With respect to transfers of intangible
property these methods currently include the comparable uncontrolled
transactions method and comparable profits method. A bona fide cost
sharing arrangement under Sec. 1.482-2A(d)(4) is considered a specified
method.
Unspecified methods are methods other than specified methods. The
profit split method, under Sec. 1.482-6 of the proposed regulations and
qualified cost sharing arrangements, under Sec. 1.482-2(g) of the
proposed regulations, will become specified methods if and when
regulations describing those methods are finalized. A taxpayer will
ordinarily not be considered to have applied an unspecified method
merely because it failed to make an adjustment in the application of a
specified method. However, the failure to make adjustments is relevant
to the reasonableness of the application of that method. The selection
and application of a method are reasonable only if, given the available
data and the potentially available methods, the taxpayer reasonably
concluded that the method (and its application of that method) provided
the most accurate measure of an arm's length result under the
principles of the best method rule in Sec. 1.482-1T(b)(2)(iii).
The specified method standard differs from the more likely than not
be sustained on the merits standard set forth in proposed regulations
issued on January 21, 1993. This change reflects the amendments made by
section 13236 of the Omnibus Budget Reconciliation Act of 1993 (Pub. L.
103-66, 107 Stat. 312) to section 6662(e), under which a section 482
adjustment is to be excluded from the calculation of a net section 482
adjustment if the taxpayer reasonably applied one of the specified
section 482 methods (and satisfied the documentation requirements
described below). In selecting the method to apply, a taxpayer should
select the specified method that is most appropriate under the facts
and circumstances. Thus, the taxpayer must reasonably conclude that its
application of the transfer pricing method chosen will provide the most
accurate measure of an arm's length result under the facts and
circumstances of the transaction under review. The application of a
specified method will not satisfy this standard if the taxpayer
concluded, or should have concluded, that a reasonable application of
another specified method would provide a more accurate arm's length
result than the method chosen. For example, a taxpayer might not
satisfy this standard if the taxpayer applied the comparable profits
method to determine its prices but the taxpayer had data relating to a
comparable uncontrolled transaction involving substantially similar
conditions. Given the guidance set forth in the section 482 regulations
and the existence of closely comparable data, a conclusion that a
different analysis would provide a more accurate measure of an arm's
length result, ordinarily would not be reasonable.
A taxpayer's analysis of its transfer prices must include the most
current data that is available at the time that the taxpayer files its
tax return. These regulations require that taxpayers perform a
reasonably thorough search for data. However, this data may not reflect
transactions in the current taxable year. Accordingly, it may be
necessary for taxpayers to make compensating adjustments to reflect
changes in the data between the time that prices were set for the year
and the time that the return is filed.
Factors
The regulations discuss several nonexclusive factors that are to be
taken into account in determining whether the taxpayer reasonably
concluded that its application of the method selected would provide the
most accurate measure of an arm's length result. The first factor is
that a taxpayer's experience and knowledge in transfer pricing will be
relevant in determining how thorough and precise the taxpayer's
analysis must be. In assessing the experience and knowledge of the
taxpayer, the experience and knowledge of the controlled group is taken
into account, rather than the experience and knowledge of any member of
the controlled group. Thus, the larger and more sophisticated a
controlled group of corporations, the more thorough and precise its
analysis should be.
The second factor is the extent to which sufficient accurate data
is available to apply a method reasonably. A taxpayer is obligated to
engage in a reasonably thorough search for comparable transactions and
other data necessary to apply the methods under section 482. A factor
to consider in determining whether a search for data is reasonably
thorough is the cost of searching for the data in relation to the
dollar amount of the intercompany transaction in question. For example,
a taxpayer need not obtain data regarding a comparable uncontrolled
transaction if the intercompany transaction had a value of $50,000 and
the search for and analysis of the data will cost $25,000.
Alternatively, if necessary to reasonably apply a specified method, it
ordinarily would be reasonable to expect that a taxpayer would incur a
similar expense to search for and analyze data if the taxpayer is
engaged in intercompany transactions with a dollar amount of $250
million. If a taxpayer's analysis neglected data that it would have
been expected to obtain under the above criteria, then the analysis
would not be considered reasonable.
The third factor is the extent to which a taxpayer follows the
relevant requirements set forth in regulations under section 482.
Furthermore, in applying the selected method, the extent to which the
taxpayer makes all the adjustments necessary to reasonably conclude
that its application of the method chosen would provide the most
accurate measure of an arm's length result will be taken into account.
The fourth factor is the extent to which the taxpayer relied on the
advice of a qualified professional. The extent to which reliance is
appropriate will depend on the qualifications of the professional and
the quality of the study or other advice that is rendered, rather than
the relationship that the professional has to the taxpayer.
Unspecified Method Applied
Paragraph (d)(3) provides that an adjustment will be excluded from
the calculation of a net section 482 adjustment if the taxpayer
satisfies the unspecified method requirement of paragraph (d)(3)(ii)
and the documentation requirement of paragraph (d)(3)(iii). The
unspecified method requirement is met if a method other than a
specified method was applied and the requirements of paragraph
(d)(3)(ii) (B) or (C) are met, as appropriate.
Paragraph (d)(3)(ii)(B) provides that if the transaction is of a
type for which there are specified methods, then a taxpayer will be
considered to have met the unspecified method requirement if the
taxpayer reasonably concludes that, given the available data, none of
the specified methods was likely to provide an accurate measure of an
arm's length result, and that it selected and applied an unspecified
method in a way that would likely provide an accurate measure of an
arm's length result, given the available data.
Paragraph (d)(3)(ii)(C) provides that if the transaction is of a
type for which there are no specified methods, then a taxpayer will be
considered to have met the unspecified method requirement if it
selected and applied an unspecified method in a reasonable manner. A
taxpayer's selection and application is reasonable if the taxpayer
reasonably concludes that the method (and its application of that
method) provided the most accurate measure of an arm's length result
under the principles of the best method rule in Sec. 1.482-
T(b)(2)(iii).
Documentation Requirement
An examiner cannot effectively examine a taxpayer's transfer
pricing without adequate documentation setting forth the basic transfer
pricing analysis conducted by the taxpayer. Accordingly, the
documentation requirement does not provide a long, rigid list of
documents that must be maintained; rather it focuses on the type of
information necessary to evaluate how the taxpayer determined its
transfer prices. The documentation requirements are essentially the
same regardless of whether the taxpayer uses a specified method or an
unspecified method. They diverge only in what the documentation must
establish rather than the type of information that must be maintained.
A taxpayer that uses a specified method must maintain sufficient
documentation (that is in existence when the return is filed) to
establish that it met the specified method requirement. A taxpayer that
uses an unspecified method must maintain sufficient documentation (that
is in existence when the return is filed) to establish that it met the
unspecified method requirement. Regardless of the method used by the
taxpayer, it must provide that documentation to the IRS within 30 days
of a request.
The temporary regulations set forth two classifications of
documentation--principal and background documents. Principal documents
consist of the basic transfer pricing analysis conducted by the
taxpayer. Background documents are documents that typically support the
principal documents. Only principal documents must be provided upon the
IRS's request for principal documents. However, both types of
documentation must be produced within thirty days of a request.
A district director has discretion to extend the period for
producing principal documents only if the taxpayer has made a minor or
inadvertent failure to provide the required documents, has otherwise
made a good faith effort to comply, and remedies the failure when it
becomes known. For background documents, a district director has
discretion to extend the production period for a short period.
Foreign-to-Foreign Transactions
Finally, paragraph (d)(4) provides that adjustments that are
attributable to a transaction between foreign corporations are also
excluded from the calculation of a net section 482 adjustment, unless
the treatment of that transaction affects the determination of U.S.
source income or taxable income that is effectively connected with the
conduct of a trade or business within the United States.
Carryovers and Carrybacks
The regulations contain a special rule concerning tax benefits,
such as losses, deductions, or credits, that may be carried to another
taxable year. If a taxpayer's substantial or gross valuation
misstatement gives rise to such a tax benefit that is carried to
another taxable year, then the penalty will be imposed on any resulting
underpayment of tax attributable to such a tax benefit in that other
taxable year. In determining whether there is a substantial or gross
valuation misstatement for a taxable year, no amount carried from
another taxable year shall be included.
Coordination Rules
The coordination rules remain substantively unchanged from the
proposed regulations issued on January 21, 1993. These regulations
provide rules for coordinating imposition of the transactional penalty
and the net adjustment penalty.
Advance Pricing Agreements
If a transfer pricing methodology is developed and applied pursuant
to an Advance Pricing Agreement in any tax year, that methodology may
reasonably be relied upon in the current year if the relevant facts and
circumstances have not changed or if the methodology has been
appropriately modified to reflect any changes in facts and
circumstances.
Effective Date
These regulations apply to taxable years beginning after December
31, 1993. For taxable years ending after November 5, 1990, but
beginning prior to January 1, 1994, the Treasury Department considers
the proposed regulations issued on January 21, 1993, to be a reasonable
interpretation of sections 6662 (e) and (h), except that no requirement
of contemporaneous documentation may be imposed for transactions prior
to April 21, 1993. In any case, contemporaneous documentation may be
helpful in establishing that the taxpayer had reasonable cause and
acted in good faith.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, an initial Regulatory Impact Analysis is not required. It
has also been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act
(5 U.S.C. chapter 6) do not apply to these regulations, and, therefore,
an initial Regulatory Flexibility Analysis is not required. Pursuant to
section 7805(f) of the Internal Revenue Code, these temporary
regulations will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on their impact on small
business.
Drafting Information
The principal author of these regulations is Thomas L. Ralph of the
Office of the Associate Chief Counsel (International), Internal Revenue
Service. However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * * Secs. 1.6662-0 and 1.6662-6T
also issued under 26 U.S.C. 6662. * * *
Par. 2. Section 1.6662-0 is amended by:
1. Adding the entries for Sec. 1.6662-5T.
2. Adding the entries for Sec. 1.6662-6T.
3. The additions read as follows:
Sec. 1.6662-0 Table of contents. * * *
* * * * *
Section 1.6662-5T Substantial and Gross Valuation Misstatements
Under Chapter 1 (Temporary)
(a) through (d) [Reserved]
(e) Definitions.
(1) Substantial valuation misstatement.
(i) 200 percent test.
(ii) Tests related to section 482.
(2) Gross valuation misstatement.
(i) 400 percent test.
(ii) Tests related to section 482.
(3) Property.
(f) through (i) [Reserved]
(j) Transactions between persons described in section 482 and
net section 482 transfer price adjustments.
Section 1.6662-6T Transactions Between Persons Described in Section
482 and Net Section 482 Transfer Price Adjustments (Temporary)
(a) In general.
(1) Purpose and scope.
(2) Reported results.
(3) Identical terms used in section 482 regulations.
(b) The transactional penalty.
(1) Substantial valuation misstatement.
(2) Gross valuation misstatement.
(3) Reasonable cause and good faith.
(c) Net adjustment penalty.
(1) Net section 482 adjustment.
(2) Substantial valuation misstatement.
(3) Gross valuation misstatement.
(4) Setoff allocation rule.
(5) Gross receipts.
(6) Coordination with reasonable cause exception under section
6664(c).
(7) Examples.
(d) Amounts excluded from net section 482 adjustments.
(1) In general.
(2) Application of a specified section 482 method.
(i) In general.
(ii) Specified method requirement.
(iii) Documentation requirement.
(A) In general.
(B) Principal documents.
(C) Background documents.
(3) Application of an unspecified method.
(i) In general.
(ii) Unspecified method requirement.
(A) In general.
(B) Specified method potentially applicable.
(C) No specified method applicable.
(iii) Documentation requirement.
(A) In general.
(B) Principal and background documents.
(4) Certain foreign to foreign transactions.
(5) Special rule.
(6) Examples.
(e) Special rules in the case of carrybacks and carryovers.
(f) Rules for coordinating between the transactional penalty and
the net adjustment penalty.
(1) Coordination of a net section 482 adjustment subject to the net
adjustment penalty and a gross valuation misstatement subject to the
transactional penalty.
(2) Coordination of net section 482 adjustment subject to the net
adjustment penalty and substantial valuation misstatements subject to
the transactional penalty.
(3) Examples.
(g) Effective date.
Par. 3. Section 1.6662-5T is added to read as follows:
Sec. 1.6662-5T Substantial and gross valuation misstatements under
chapter 1 (temporary).
(a) through (d) [Reserved]
(e) Definitions--(1) Substantial valuation misstatement. There is
a substantial valuation misstatement if--
(i) 200 percent test. The value or adjusted basis of any property
claimed on a return of tax imposed under chapter 1 of the Internal
Revenue Code is 200 percent or more of the correct amount; or
(ii) Tests related to section 482. There is a misstatement
described in Sec. 1.6662-6T (b)(1) or (c)(1) (concerning substantial
valuation misstatements pertaining to transactions between related
persons).
(2) Gross valuation misstatement. There is a gross valuation
misstatement if--
(i) 400 percent test. The value or adjusted basis of any property
claimed on a return of tax imposed under chapter 1 of the Internal
Revenue Code is 400 percent or more of the correct amount; or
(ii) Tests related to section 482. There is a misstatement
described in Sec. 1.6662-6T (b)(2) or (c)(2) (concerning gross
valuation misstatements pertaining to transactions between related
persons).
(3) Property. For purposes of this section, the term property
refers to both tangible and intangible property. Tangible property
includes property such as money, land, buildings, fixtures, and
inventory. Intangible property includes property such as goodwill,
covenants not to compete, leaseholds, patents, contract rights, debts,
choses in action, and any other item of intangible property described
in Sec. 1.482-4T(b).
(f) through (i) [Reserved]
(j) Transactions between persons described in section 482 and net
section 482 transfer price adjustments. For rules relating to the
penalty imposed with respect to a substantial or gross valuation
misstatement arising from a section 482 allocation, see Sec. 1.6662-6T.
Par. 4. Section 1.6662-6T is added to read as follows:
Sec. 1.6662-6T Transactions between persons described in section 482
and net section 482 transfer price adjustments.
(a) In general--(1) Purpose and scope. Pursuant to section 6662(e)
a penalty is imposed on any underpayment attributable to a substantial
valuation misstatement pertaining to either a transaction between
persons described in section 482 (the transactional penalty) or a net
section 482 transfer price adjustment (the net adjustment penalty). The
penalty is equal to 20 percent of the underpayment of tax attributable
to that substantial valuation misstatement. Pursuant to section 6662(h)
the penalty is increased to 40 percent of the underpayment in the case
of a gross valuation misstatement with respect to either penalty.
Paragraph (b) of this section provides specific rules related to the
transactional penalty. Paragraph (c) of this section provides specific
rules related to the net adjustment penalty, and paragraph (d) of this
section describes amounts that will be excluded for purposes of
calculating the net adjustment penalty. Paragraph (e) of this section
sets forth special rules in the case of carrybacks and carryovers.
Paragraph (f) of this section provides coordination rules between
penalties. Paragraph (g) of this section provides the effective date of
this section.
(2) Reported results. Whether an underpayment is attributable to a
substantial or gross valuation misstatement must be determined from the
results of controlled transactions that are reported on an income tax
return, regardless of whether the amount reported differs from the
transaction price initially reflected in the taxpayer's books and
records. The results of controlled transactions that are reported on an
amended return will be used only if the amended return is filed before
the Internal Revenue Service has contacted the taxpayer regarding the
corresponding original return. A written statement furnished by a
taxpayer subject to the Coordinated Examination Program will be
considered an amended return for purposes of this section if it
satisfies either the requirements of a qualified amended return for
purposes of Sec. 1.6664-2(c)(3) or such requirements as the
Commissioner may prescribe by revenue procedure. In the case of a
taxpayer that is a member of a consolidated group, the rules of this
paragraph (a)(2) apply to the consolidated income tax return of the
group.
(3) Identical terms used in section 482 regulations. For purposes
of this section, the terms used in these regulations shall have the
same meaning as identical terms used in regulations under section 482.
(b) The transactional penalty--(1) Substantial valuation
misstatement. In the case of any transaction between related persons,
there is a substantial valuation misstatement if the price for any
property or services (or for the use of property) claimed on any return
is 200 percent or more (or 50 percent or less) of the amount determined
under section 482 to be the correct price.
(2) Gross valuation misstatement. In the case of any transaction
between related persons, there is a gross valuation misstatement if the
price for any property or services (or for the use of property) claimed
on any return is 400 percent or more (or 25 percent or less) of the
amount determined under section 482 to be the correct price.
(3) Reasonable cause and good faith. Pursuant to section 6664(c),
the transactional penalty will not be imposed on any portion of an
underpayment with respect to which the requirements of Sec. 1.6664-4
are met. A taxpayer that meets the requirements of paragraph (d) of
this section with respect to an allocation under section 482 will be
treated as having established that there was reasonable cause and good
faith with respect to that item for purposes of Sec. 1.6664-4. If a
substantial or gross valuation misstatement under the transactional
penalty also constitutes (or is part of) a substantial or gross
valuation misstatement under the net adjustment penalty, then the rules
of section (d) (and not the rules of Sec. 1.6664-4) will be applied to
determine whether the adjustment is excluded from calculation of the
net section 482 adjustment.
(c) Net adjustment penalty--(1) Net section 482 adjustment. For
purposes of this section, the term net section 482 adjustment means the
sum of all increases in the taxable income of a taxpayer for a taxable
year resulting from allocations under section 482 (determined without
regard to any amount carried to such taxable year from another taxable
year) less any decreases in taxable income attributable to collateral
adjustments as described in Sec. 1.482-1T(e). For purposes of this
section, amounts that meet the requirements of paragraph (d) of this
section will be excluded from the calculation of the net section 482
adjustment. Substantial and gross valuation misstatements that are
subject to the transactional penalty under paragraphs (b) (1) or (2)
are included in determining the amount of the net section 482
adjustment. See paragraph (f) of this section for coordination rules
between penalties.
(2) Substantial valuation misstatement. There is a substantial
valuation misstatement if a net section 482 adjustment is greater than
the lesser of 5 million dollars or ten percent of gross receipts.
(3) Gross valuation misstatement. There is a gross valuation
misstatement if a net section 482 adjustment is greater than the lesser
of 20 million dollars or twenty percent of gross receipts.
(4) Setoff allocation rule. If a taxpayer meets the requirements of
paragraph (d) of this section with respect to some, but not all of the
allocations made under section 482, then for purposes of determining
the net section 482 adjustment, setoffs, as taken into account under
Sec. 1.482-1T(e)(5), must be applied ratably against all such
allocations. The following example illustrates the principle of this
paragraph (c)(4).
Example. (i) The Internal Revenue Service makes the following
section 482 adjustments for the taxable year:
(1)........................................................ $9,000,000
(2)........................................................ 6,000,000
(3) Because of a setoff under Sec. 1.482-1T(e)(5).......... (5,000,000)
------------
Total section 482 adjustments.......................... 10,000,000
(ii) The taxpayer meets the requirements of paragraph (d) with
respect to adjustment number one, but not with respect to adjustment
number two. The five million dollar setoff will be allocated ratably
against the nine million dollar adjustment ($9,000,000/$15,000,000
x $5,000,000 = $3,000,000) and the six million dollar adjustment
($6,000,000/$15,000,000 x $5,000,000 = $2,000,000). Accordingly,
in determining the net section 482 adjustment, the nine million
dollar adjustment is reduced to six million dollars ($9,000,000 -
$3,000,000) and the six million dollar adjustment is reduced to four
million dollars ($6,000,000 - $2,000,000). Therefore, the net
section 482 adjustment equals four million dollars.
(5) Gross receipts. For purposes of this section, gross receipts
must be computed pursuant to the rules contained in Sec. 1.448-
1T(f)(2)(iv), as adjusted to reflect allocations under section 482.
(6) Coordination with reasonable cause exception under section
6664(c). Pursuant to section 6662(e)(3)(D), a taxpayer will be treated
as having reasonable cause under section 6664(c) for any portion of an
underpayment attributable to a net section 482 adjustment only if the
taxpayer meets the requirements of paragraph (d) of this section with
respect to that portion.
(7) Examples. The principles of this paragraph (c) are illustrated
by the following examples.
Example 1. (i) The Internal Revenue Service makes the following
section 482 adjustments for the taxable year:
(1) Attributable to an increase in gross income because of
an increase in royalty payments........................... $2,000,000
(2) Attributable to an increase in sales proceeds due to a
decrease in the profit margin of a related buyer.......... 2,500,000
(3) Attributable to a decrease in the cost of goods sold
because of a decrease in the cost plus mark-up of a
related seller............................................ 2,000,000
------------
Total section 482 adjustments.......................... 6,500,000
(ii) None of the adjustments are excluded under paragraph (d) of
this section. The net section 482 adjustment ($6.5 million) is
greater than five million dollars. Therefore, there is a substantial
valuation misstatement.
Example 2. (i) The Internal Revenue Service makes the following
section 482 adjustments for the taxable year:
(1)....................................................... $11,000,000
(2)....................................................... 2,000,000
(3) Because of a setoff under Sec. 1.482-1T(e)(5)......... 9,000,000)
-------------
Total section 482 adjustments......................... 4,000,000
(ii) The taxpayer has gross receipts of sixty million dollars
after taking into account all section 482 adjustments. None of the
adjustments are excluded under paragraph (d) of this section. The
net section 482 adjustment ($4 million) is less than the lesser of
five million dollars or ten percent of gross receipts ($60 million
x 10% = $6 million). Therefore, there is no substantial valuation
misstatement.
Example 3. (i) The Internal Revenue Service makes the following
section 482 adjustments to the income of an affiliated group that
files a consolidated return for the taxable year:
(1) Attributable to Member A................................ $1,500,000
(2) Attributable to Member B................................ 1,000,000
(3) Attributable to Member C................................ 2,000,000
-----------
Total section 482 adjustments........................... 4,500,000
(ii) Members A, B, and C have gross receipts of 20 million
dollars, 12 million dollars, and 11 million dollars, respectively.
Thus, the total gross receipts are 43 million dollars. None of the
adjustments are excluded under paragraph (d) of this section. The
net section 482 adjustment ($4.5 million) is greater than the lesser
of five million dollars or ten percent of gross receipts ($43
million x 10%=$4.3 million). Therefore, there is a substantial
valuation misstatement.
Example 4. (i) The Internal Revenue Service makes the following
section 482 adjustments to the income of an affiliated group that
files a consolidated return for the taxable year:
(1) Attributable to Member A................................ $1,500,000
(2) Attributable to Member B................................ 3,000,000
(3) Attributable to Member C................................ 2,500,000
-----------
Total section 482 adjustments........................... 7,000,000
(ii) Members A, B, and C have gross receipts of 20 million
dollars, 35 million dollars, and 40 million dollars, respectively.
Thus, the total gross receipts are 95 million dollars. None of the
adjustments are excluded under paragraph (d) of this section. The
net section 482 adjustment (7 million dollars) is greater than the
lesser of five million dollars or ten percent of gross receipts ($95
million x 10%=$9.5 million). Therefore, there is a substantial
valuation misstatement.
Example 5. (i) The Internal Revenue Service makes the following
section 482 adjustments to the income of an affiliated group that
files a consolidated return for the taxable year:
(1) Attributable to Member A................................ $2,000,000
(2) Attributable to Member B................................ 1,000,000
(3) Attributable to Member C................................ 1,500,000
-----------
Total section 482 adjustments........................... 4,500,000
(ii) Members A, B, and C have gross receipts of 10 million
dollars, 35 million dollars, and 40 million dollars, respectively.
Thus, the total gross receipts are 85 million dollars. None of the
adjustments are excluded under paragraph (d) of this section. The
net section 482 adjustment ($4.5 million) is less than the lesser of
five million dollars or ten percent of gross receipts ($85
million x 10%=$8.5 million). Therefore, there is no substantial
valuation misstatement even though individual member A's adjustment
($2 million) is greater than ten percent of its individual gross
receipts ($10 million x 10%=$1 million).
(d) Amounts excluded from net section 482 adjustments--(1) In
general. An amount is excluded from the calculation of a net section
482 adjustment if the requirements of paragraph (d)(2), (3), or (4) of
this section are met with respect to that amount.
(2) Application of a specified section 482 method--(i) In general.
An amount is excluded from the calculation of a net section 482
adjustment if the taxpayer establishes that both the specified method
and documentation requirements of this paragraph (d)(2) are met with
respect to that amount. For purposes of this paragraph (d), a method
will be considered a specified method if it is described in the
regulations under section 482 and the method applies to transactions of
the type under review. A bona fide cost sharing arrangement is
considered a specified method. See Sec. 1.482-2A(d)(4). An unspecified
method is not considered a specified method. See Sec. 1.482-3T(e) and
Sec. 1.482-4T(d).
(ii) Specified method requirement. The specified method requirement
is met if the taxpayer selects and applies a specified method in a
reasonable manner. The taxpayer's selection and application of a
specified method is reasonable only if, given the available data and
the applicable pricing methods, the taxpayer reasonably concluded that
the method (and its application of that method) provided the most
accurate measure of an arm's length result under the principles of the
best method rule in Sec. 1.482-1T(b)(2)(iii). For examples illustrating
the selection of a specified method consistent with this paragraph
(d)(2)(ii), see Sec. 1.482-1T(b)(2)(iii)(C). An application of a
specified method provides the most accurate measure of an arm's length
result if it provides a more accurate measure of an arm's length result
than any alternative specified method and any alternative application
of the method chosen. Thus, it is not necessary for a taxpayer to
conclude that the selected specified method provides a more accurate
measure of an arm's length result than any unspecified method. Whether
the taxpayer's conclusion was reasonable must be determined from all
the facts and circumstances. The factors relevant to this determination
include the following:
(A) The experience and knowledge of the taxpayer, including all
members of the taxpayer's controlled group.
(B) The extent to which accurate data was available and the data
was analyzed in a reasonable manner. A taxpayer must engage in a
reasonably thorough search for the data necessary to determine which
method should be selected and how it should be applied. Furthermore, a
taxpayer must use the most current reliable data that is available
before the return is filed. In this regard, the expense of collecting
data relative to the dollar amount of the transactions in question is a
factor that may be taken into account in determining the scope of a
reasonably thorough search for data.
(C) The extent to which the taxpayer followed the relevant
requirements set forth in regulations under section 482 with respect to
the application of the method.
(D) The extent to which the taxpayer reasonably relied on the
analysis of, or a study done by, a professional qualified to conduct
such an analysis or study, including an attorney, accountant, or
economist. Whether the professional is an employee of, or related to,
the taxpayer is not determinative in evaluating the reliability of that
analysis or study, as long as the analysis or study is objective,
thorough, and well reasoned. Such reliance is reasonable only if the
taxpayer disclosed to the professional all relevant information
regarding the controlled transactions at issue. A transfer pricing
study or analysis that was reasonably relied upon in a prior year may
reasonably be relied upon in the current year if the relevant facts and
circumstances have not changed or if the study or analysis has been
appropriately modified to reflect any change in facts and
circumstances.
(iii) Documentation requirement--(A) In general. The documentation
requirement of this paragraph (d)(2)(iii) is met if the taxpayer
maintains sufficient documentation to establish that the taxpayer
reasonably concluded that, given the available data and the applicable
pricing methods, the method (and its application of that method)
provided the most accurate measure of an arm's-length result under the
principles of the best method rule in Sec. 1.482-1T(b)(2)(iii), and
provides that documentation to the Internal Revenue Service within 30
days of a request for it. That documentation must be in existence when
the return is filed. The district director may, in his discretion,
excuse a minor or inadvertent failure to provide required documents,
but only if the taxpayer has made a good faith effort to comply, and
the taxpayer promptly remedies the failure when it becomes known. The
required documentation is divided into two categories, principal and
background documents, as described in paragraphs (d)(2)(iii) (B) and
(C) of this section.
(B) Principal documents. The principal documents should accurately
and completely describe the basic transfer pricing analysis conducted
by the taxpayer. The documentation must include the following--
(1) An overview of the taxpayer's business, including an analysis
of the economic and legal factors that affect the pricing of its
property or services;
(2) A description of the taxpayer's organizational structure
(including an organization chart) covering all related parties engaged
in transactions potentially relevant under section 482, including
foreign affiliates whose transactions directly or indirectly affect the
pricing of property or services in the United States;
(3) Any documentation explicitly required by the regulations under
section 482;
(4) A description of the specified method selected and an
explanation of why that method was selected;
(5) A description of the unspecified methods that were considered
and an explanation of why they were not selected;
(6) A description of the controlled transactions (including the
terms of sale) and any internal data used to analyze those
transactions;
(7) A description of the comparables that were used, how
comparability was evaluated, and what (if any) adjustments were made;
(8) An explanation of the economic analysis and projections relied
upon in developing the method; and
(9) A general index of the principal and background documents and a
description of the recordkeeping system used for cataloging and
accessing those documents.
(C) Background documents. The assumptions, conclusions, and
positions contained in principal documents ordinarily will be based on,
and supported by, additional background documents. Documents that
support the principal documentation may include the documents listed in
Sec. 1.6038A-3(c) that are not otherwise described in paragraph
(d)(2)(iii)(B) of this section. Every document listed in those
regulations may not be relevant to pricing determinations under the
taxpayer's specific facts and circumstances and, therefore, each of
those documents need not be maintained in all circumstances. Moreover,
other documents not listed in those regulations may be necessary to
establish that the taxpayer's method was selected and applied in the
way that provided the most accurate measure of an arm's length result
under the principles of the best method rule in Sec. 1.482-
1T(b)(2)(iii). Background documents need not be provided to the
Internal Revenue Service in response to a request for principal
documents. If the Internal Revenue Service subsequently requests
background documents, a taxpayer must provide that documentation to the
Internal Revenue Service within 30 days of the request. However, the
district director may, in his discretion, extend the period for
producing the background documentation.
(3) Application of an unspecified method--(i) In general. An
adjustment is excluded from the calculation of a net section 482
adjustment if the taxpayer establishes that both the unspecified method
and documentation requirements of this paragraph (d)(3) are met with
respect to that amount.
(ii) Unspecified method requirement--(A) In general. If a method
other than a specified method was applied, the unspecified method
requirement is met if the requirements of paragraph (d)(3)(ii) (B) or
(C), as appropriate, are met.
(B) Specified method potentially applicable. If the transaction is
of a type for which methods are specified in the regulations under
section 482, then a taxpayer will be considered to have met the
unspecified method requirement if the taxpayer reasonably concludes
that, given the available data, none of the specified methods was
likely to provide an accurate measure of an arm's length result, and
that it selected and applied an unspecified method in a way that would
likely provide an accurate measure of an arm's length result, given the
available data. This conclusion must be based on all the facts and
circumstances. The factors relevant to this conclusion include those
set forth in paragraph (d)(2)(ii) of this section.
(C) No specified method applicable. If the transaction is of a type
for which no methods are specified in the regulations under section
482, then a taxpayer will be considered to have met the unspecified
method requirement if it selected and applied an unspecified method in
a reasonable manner. For purposes of this paragraph (d)(3)(ii)(C), a
taxpayer's selection and application is reasonable if the taxpayer
reasonably concludes that the method (and its application of that
method) provided the most accurate measure of an arm's length result
under the principles of the best method rule in Sec. 1.482-
1T(b)(2)(iii). This conclusion must be based on all the facts and
circumstances. The factors relevant to this conclusion include those
set forth in paragraph (d)(2)(ii) of this section.
(iii) Documentation requirement--(A) In general. The documentation
requirement of this paragraph (d)(3) is met if the taxpayer maintains
sufficient documentation to establish that the unspecified method
requirement of paragraph (d)(3)(ii) of this section is met and provides
that documentation to the Internal Revenue Service within 30 days of a
request for it. That documentation must be in existence when the return
is filed. The district director may, in his discretion, excuse a minor
or inadvertent failure to provide required documents, but only if the
taxpayer has made a good faith effort to comply, and the taxpayer
promptly remedies the failure when it becomes known.
(B) Principal and background documents. See paragraphs (d)(2)(iii)
(B) and (C) of this section for rules regarding these two categories of
required documentation.
(4) Certain foreign to foreign transactions. For purposes of
calculating a net section 482 adjustment, any increase in taxable
income resulting from an allocation under section 482 that is
attributable to any controlled transaction solely between foreign
corporations will be excluded unless the treatment of that transaction
affects the determination of either corporation's income from sources
within the United States or taxable income effectively connected with
the conduct of a trade or business within the United States.
(5) Special rule. If the regular tax (as defined in section 55(c))
imposed on the taxpayer is determined by reference to an amount other
than taxable income, that amount shall be treated as the taxable income
of the taxpayer for purposes of section 6662(e)(3). Accordingly, for
taxpayers whose regular tax is determined by reference to an amount
other than taxable income, the increase in that amount resulting from
section 482 allocations is the taxpayer's net section 482 adjustment.
(6) Examples. The principles of this paragraph (d) are
illustrated by the following examples.
Example 1. (i) The Internal Revenue Service makes the following
section 482 adjustments for the taxable year:
(1)........................................................ $9,000,000
(2) Not a 200 percent or 400 percent adjustment............ 2,000,000
(3)........................................................ 9,000,000
------------
Total section 482 adjustments.......................... 20,000,000
(ii) The taxpayer has gross receipts of seventy-five million
dollars after all section 482 adjustments. The taxpayer establishes
that for adjustments number one and three, it applied a transfer
pricing method specified in section 482, the selection and
application of the method was reasonable, it documented the pricing
analysis, and turned that documentation over to the IRS within 30
days of a request. Accordingly, eighteen million dollars is excluded
from the calculation of the net section 482 adjustment. Because the
net section 482 adjustment is two million dollars, there is no
substantial valuation misstatement.
Example 2. (i) The Internal Revenue Service makes the following
section 482 adjustments for the taxable year:
(1)......................................................... $9,000,000
(2) Attributable to an adjustment that is 200 percent or
more of the correct section 482 price...................... 2,000,000
(3)......................................................... 9,000,000
-----------
Total section 482 adjustments........................... 20,000,000
(ii) The taxpayer has gross receipts of seventy-five million
dollars after all section 482 adjustments. The taxpayer establishes
that for adjustments number one and three it applied a transfer
pricing method specified in section 482, the selection and
application of the method was reasonable, it documented that
analysis, and turned the documentation over to the IRS within 30
days. Accordingly, eighteen million dollars is excluded from the
calculation of the section 482 transfer pricing adjustments for
purposes of applying the five million dollar or 10% of gross
receipts test. Because the net section 482 adjustment is only two
million dollars, the taxpayer is not subject to the net adjustment
penalty. However, the taxpayer may be subject to the transactional
penalty on the underpayment of tax attributable to the two million
dollar adjustment.
Example 3. CFC1 and CFC2 are controlled foreign corporations
within the meaning of section 957. Applying section 482, the IRS
disallows a deduction for twenty five million dollars of the
interest that CFCI paid to CFC2, which results in CFC1's U.S.
shareholder having a subpart F inclusion in excess of five million
dollars. No other adjustments under section 482 are made with
respect to the controlled taxpayers. However, the increase has no
effect upon the determination of CFC1's or CFC2's income from
sources within the United States or taxable income effectively
connected with the conduct of a trade or business within the United
States. Accordingly, there is no substantial valuation misstatement.
(e) Special rules in the case of carrybacks and carryovers. If
there is a substantial or gross valuation misstatement for a taxable
year that gives rise to a loss, deduction or credit that is carried to
another taxable year, the transactional penalty and the net adjustment
penalty will be imposed on any resulting underpayment of tax in that
other taxable year. In determining whether there is a substantial or
gross valuation misstatement for a taxable year, no amount carried from
another taxable year shall be included. The following example
illustrates the principle of this paragraph (e).
Example. The Internal Revenue Service makes a section 482
adjustment of six million dollars in taxable year 1, no portion of
which is excluded under paragraph (d) of this section. The
taxpayer's income tax return for year 1 reported a loss of three
million dollars, which was carried to taxpayer's year 2 year income
tax return and used to reduce income taxes otherwise due with
respect to year 2. A determination is made that the six million
dollar allocation constitutes a substantial valuation misstatement,
and a penalty is imposed on the underpayment of tax in year 1
attributable to the substantial valuation misstatement and on the
underpayment of tax in year 2 attributable to the disallowance of
the net operating loss in year 2. For purposes of determining
whether there is a substantial or gross valuation misstatement for
year 2, the three million dollar reduction of the net operating loss
will not be added to any section 482 adjustments made with respect
to year 2.
(f) Rules for coordinating between the transactional penalty and
the net adjustment penalty--(1) Coordination of a net section 482
adjustment subject to the net adjustment penalty and a gross valuation
misstatement subject to the transactional penalty. In determining
whether a net section 482 adjustment exceeds five million dollars or 10
percent of gross receipts, an adjustment attributable to a substantial
or gross valuation misstatement that is subject to the transactional
penalty will be taken into account. If the net section 482 adjustment
exceeds five million dollars or ten percent of gross receipts, any
portion of such amount that is attributable to a gross valuation
misstatement will be subject to the transactional penalty at the forty
percent rate, but will not also be subject to net adjustment penalty at
a twenty percent rate. The remaining amount is subject to the net
adjustment penalty at the twenty percent rate, even if such amount is
less than the lesser of five million dollars or ten percent of gross
receipts.
(2) Coordination of net section 482 adjustment subject to the net
adjustment penalty and substantial valuation misstatements subject to
the transactional penalty. If the net section 482 adjustment exceeds
twenty million dollars or 20 percent of gross receipts, the entire
amount of the adjustment is subject to the net adjustment penalty at a
forty percent rate. No portion of the adjustment is subject to the
transactional penalty at a twenty percent rate.
(3) Examples. The following examples illustrate the principles
of this paragraph (f).
Example 1. (i) Applying section 482, the Internal Revenue
Service makes the following adjustments for the taxable year:
(1) Attributable to an adjustment that is 400 percent or
more of the correct section 482 arm's length result........ $2,000,000
(2) Not a 200 or 400 percent adjustment..................... 2,500,000
-----------
Total................................................... 4,500,000
(ii) The taxpayer has gross receipts of 75 million dollars after
all section 482 adjustments. None of the adjustments is excluded
under paragraph (d) (Amounts excluded from net section 482
adjustments) of this section, in determining the five million dollar
or 10% of gross receipts test under section 6662(e)(1)(B)(ii). The
net section 482 adjustment (4.5 million dollars) is less than the
lesser of five million dollars or ten percent of gross receipts ($75
million x 10% = $7.5 million). Thus, there is no substantial
valuation misstatement. However, the two million dollar adjustment
is attributable to a gross valuation misstatement. Accordingly, the
taxpayer may be subject to a penalty, under section 6662(h), equal
to 40 percent of the underpayment of tax attributable to the gross
valuation misstatement of two million dollars. The 2.5 million
dollar adjustment is not subject to a penalty under section
6662(b)(3).
Example 2. The facts are the same as in Example 1, except the
taxpayer has gross receipts of 40 million dollars. The net section
482 adjustment ($4.5 million) is greater than the lesser of five
million dollars or ten percent of gross receipts ($40 million x
10% = $4 million). Thus, the five million dollar or 10% of gross
receipts test has been met. The two million dollar adjustment is
attributable to a gross valuation misstatement. Accordingly, the
taxpayer is subject to a penalty, under section 6662(h), equal to 40
percent of the underpayment of tax attributable to the gross
valuation misstatement of two million dollars. The 2.5 million
dollar adjustment is subject to a penalty under sections 6662(a) and
6662(b)(3), equal to 20 percent of the underpayment of tax
attributable to the substantial valuation misstatement.
Example 3. (i) Applying section 482, the Internal Revenue
Service makes the following transfer pricing adjustments for the
taxable year:
(1) Attributable to an adjustment that is 400 percent or
more of the correct section 482 arm's length result........ $6,000,000
(2) Not a 200 or 400 percent adjustment..................... 15,000,000
-----------
Total................................................... 21,000,000
(ii) None of the adjustments are excluded under paragraph (d)
(Amounts excluded from net section 482 adjustments) in determining
the twenty million dollar or 20% of gross receipts test under
section 6662(h). The net section 482 adjustment (21 million dollars)
is greater than twenty million dollars and thus constitutes a gross
valuation misstatement. Accordingly, the total adjustment is subject
to the net adjustment penalty equal to 40 percent of the
underpayment of tax attributable to the 21 million dollar gross
valuation misstatement. The six million dollar adjustment will not
be separately included for purposes of any additional penalty under
section 6662.
(g) Effective date. This section applies to taxable years beginning
after December 31, 1993.
Par. 5. Section 1.6664-O is amended by adding an entry for
Sec. 1.6664-4T to read as follows:
Sec. 1.6664-O Table of contents.
* * * * *
Sec. 1.6664-4T Reasonable cause and good faith exception to section
6662 penalties
(a) through (c) [Reserved]
(d) Transactions between persons described in section 482 and
net section 482 transfer price adjustments.
Par. 6. Section 1.6664-4T is added to read as follows:
Sec. 1.6664-4T Reasonable cause and good faith exception to section
6662 penalties.
(a) through (c) [Reserved]
(d) Transactions between persons described in section 482 and net
section 482 transfer price adjustments. For purposes of applying the
reasonable cause and good faith exception of section 6664(c) to net
section 482 adjustments, the rules of Sec. 1.6662-6T(d) of the
regulations apply. A taxpayer that does not satisfy the rules of
Sec. 1.6662-T(d) for a net section 482 adjustment cannot satisfy the
reasonable cause and good faith exception under section 6664(c). The
rules of this section apply to underpayments subject to the
transactional penalty in Sec. 1.6662-6T(b). If the standards of the net
section 482 penalty exclusion provisions under Sec. 1.6662-6T(d) are
met with respect to such underpayments, then the taxpayer will be
considered to have acted with reasonable cause and good faith for
purposes of this section.
Par. 7. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par. 7. Section 602.101(c) is amended by adding an entry in
numerical order to the table to read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(c) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
*****
1.6662-6T................................................. 1545-1365
*****
------------------------------------------------------------------------
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved:
Leslie B. Samuels,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 94-2078 Filed 1-27-94; 11:10 am]
BILLING CODE 4830-01-U