4.11.5  Allocation of Income and Deductions - IRC Section 482

4.11.5.1  (11-01-2004)
References

  1. The references for Allocation of Income and Deductions - IRC section 482 are as follows:

    • IRC section 482 and related regulations;

      Note:

      Depending on the year involved, the applicable regulations generally may be found in Treas. Reg. 1.482-1A and 1.482-2A (for taxable years beginning before April 22, 1993), Treas. Reg. 1.482-1 through 1.482-6 and 1.482–8 (for taxable years beginning after October 6, 1994), or Treas. Reg. 1.482-1T through 1.482-7T (for the intervening years). For cost sharing arrangements for tax years beginning after December 31, 1995 and certain amendments regarding stock-based compensation granted in taxable years beginning after August 25, 2003, see Treas. Reg. 1.482-7.

    • IRM 4.60.1, International Procedures Handbook - Exchange of Information

    • IRM 4.60.2, International Procedures Handbook - Mutual Agreement Procedures and Report Guidelines

    • IRM 4.60.3, International Procedures Handbook - Tax Treaty Related Matters

    • IRM 4.61.3, International Guidelines Handbook - Development of IRC section 482 Cases

    • IRM 25.5.3, Summons Handbook - Procedures

    • Rev. Proc. 65-17 1965-1 C.B. 833, including Amendment I (1966-2 C.B. 1211) and Amendment II (1974-1 C.B. 411) as amended by Rev. Proc. 65-31, 1965-2 C.B. 1024; Rev. Proc. 70-23, 1970-2 C.B. 505; Rev. Proc. 71-35, 1971-2 C.B. 573; Rev. Proc. 72-48, 1972-2 C.B. 829; and Rev. Proc. 72-53, 1972-2 C.B. 833

    • Rev. Proc. 99-32, 1999-2 C.B. 296, supersedes Rev. Proc. 65-17 as amendedfor taxable years beginning after August 23, 1999, and, if elected by the taxpayer, for the taxable year including August 23, 1999.

    Note:

    A domestic examiner may submit a Form 2962, Foreign and Domestic Entity International Transaction Report and Referral, requesting participation of an International Examiner (IE) in a case involving a complex and substantial domestic IRC section 482 issue. In other words, international transactions are not necessary for an IE to participate in the case. Also, the assistance of an Economist may be requested to determine the economic substance of a transaction.

4.11.5.2  (11-01-2004)
Overview for Allocation of Income and Deductions - IRC Section 482

  1. The purpose of IRC section 482 is to ensure taxpayers clearly reflect income attributable to controlled transactions and to prevent avoidance of taxes regarding such transactions. IRC section 482 places a controlled taxpayer on a tax parity with an uncontrolled taxpayer by determining true taxable income. Transactions between one controlled taxpayer and another will be subject to special scrutiny to ascertain whether common control is being used to reduce, avoid, or escape taxes. In determining the true taxable income of a controlled taxpayer, the Service is not restricted to the case of improper accounting, to the case of a fraudulent or sham transaction, or to the case of a device designed to reduce or avoid tax by shifting or distorting income, deductions, credits, or allowances. The authority to determine true taxable income extends to any case in which either by inadvertence or design the taxable income of a controlled taxpayer is other than it would have been had the taxpayer, in the conduct of his affairs, been dealing at arm's length with an uncontrolled taxpayer.

  2. Transactions between controlled taxpayers which may involve an IRC section 482 issue include the following:

    1. One entity makes a loan or advance to another entity and charges no interest or does not charge an arm's-length interest rate,

    2. One entity performs services for another entity without charge or at a charge which does not reflect an arm's-length payment,

    3. One entity leases property to another entity at a rental charge that is not an arm's-length rental charge,

    4. One entity sells poperty to another entity at a sales price that is not an arm's-length price.

    5. One entity leases intangible property to another entity for no royalty fee or a fee that is not an arms-length fee.

    6. One entity enters into a cost sharing arrangement with another entity to share costs to develop intangibles but all related costs are not shared.

    Note:

    IRC section 482 issues occur in the context of a large variety of factual patterns. Consequently, establishing specific guidelines for every type of factual pattern is impractical. In these cases, the income, deduction, credit, or allowance is included on the return of a taxpayer other than the taxpayer to whom the item properly belongs as a result of a " controlled" relationship. "Control" can be direct or indirect based on the facts and circumstances of the relationship.


  3. IRM 4.61, International Audit Guidelines, at 4.61.3, Development of IRC section 482 Cases, has an informative discussion of the principles and purpose of an examination in this area.

4.11.5.3  (11-01-2004)
Primary Adjustment

  1. To accomplish tax parity, the Service may allocate items of income or expense among controlled taxpayers. The initial adjustment which ordinarily increases the income of one or more members is the "primary " adjustment and the corresponding decrease in income of the other member(s) is the "correlative" adjustment.

4.11.5.4  (11-01-2004)
Correlative Adjustment

  1. Where an adjustment is made to the primary-adjustment taxpayer under IRC section 482, the concurrent examination of the income tax return(s) of the correlative-adjustment taxpayer(s) should ordinarily be made.

4.11.5.5  (11-01-2004)
Examination Reports

  1. A statement will be made in the report to the primary-adjustment taxpayer to the effect that:

    1. Separate reports of examination have been prepared reflecting the IRC section 482 correlative adjustments, or

    2. The correlative adjustment is deemed to have been made — in instances where the correlative adjustment has no effect on the income tax liability of the correlative-adjustment taxpayer.

    Note:

    Rules regarding the unauthorized disclosure of information apply to IRC section 482 adjustments, despite the relationship between primary-adjustment and correlative-adjustment taxpayers. The primary-adjustment and correlative-adjustment taxpayers' report should not disclose tax return information of the other taxpayer except to the extent necessary to explain the primary and correlative adjustments.

  2. The correlative adjustment should not be made until the primary adjustment has been made. Per regulation 1.482-1(g)(2)(iii), the primary adjustment will not be considered to have been made (and therefore, correlative adjustment are not required to be made) until the date of a final determination on the primary adjustment under section 482. For this purpose, a final determination includes:

    1. Assessment of the tax following execution by the taxpayer of Form 870, (Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment), with respect to such adjustment.

    2. Acceptance of a Form 870-AD, (Offer of Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Assessment of Overassessment).

    3. Payment of the deficiency.

    4. Stipulation in the Tax Court of the United States, or

    5. Final determination of tax liability by offer-in-compromise, closing agreement, or final resolution (determined under the principles of IRC section 7481) of a judicial proceeding.

  3. To provide uniform treatment of all IRC section 482 cases, agreed or unagreed, reports on the primary-adjustment taxpayer and the correlative-adjustment taxpayer(s) should be prepared concurrently, kept together (not separated) and transmitted to the next function, i.e., Case Processing, Technical Services, or Office of Appeals.

  4. In cases with no current tax effect as a result of a correlative adjustment (foreign entity, loss entity, etc.), place a statement in the audit report to the effect that the correlative adjustments are deemed to have been made when and if the adjustments are agreed to and assessment has been made or deficiency has been paid and will be given affect to when the correlative adjustment produces a current tax effect. It is important that this statement be included in all reports in order that the taxpayer(s) to which the correlative adjustments apply may not escape the effect of these adjustments in the event of a subsequent examination or carryback of losses or credits or other events which do have a tax effect.

  5. To ensure that overpayments resulting from the correlative adjustments are not scheduled and refunded to the taxpayer, the examiner will attach Form 3198, Special Handling Notice, to the case jacket of the correlative-adjustment taxpayer. The Form 3198 will be annotated as to the need to delay making a refund to the correlative-adjustment taxpayer until the primary-adjustment taxpayer has paid the deficiency resulting from the IRC section 482 adjustment. Delay of 90 days is necessary to provide the government adequate time to file a protective suit for refund in the event the primary-adjustment taxpayer subsequently files a claim for refund .

4.11.5.6  (11-01-2004)
Agreed IRC Section 482 Issues

  1. In order to have an agreed IRC section 482 issue, all related parties must be in full agreement with the IRC section 482 issue.

  2. Obtain a signed agreement (Form 870) or payment of the deficiency from the primary-adjustment taxpayer.

  3. Make the correlative adjustments and obtain agreements for the overassessment.

  4. The taxpayers will be advised that their cases can be more expeditiously adjusted and closed if the taxpayers scheduled to receive refunds will voluntarily consent in writing to have the refunds applied against the proposed deficiencies.

  5. The taxpayer's written statement can be incorporated in Form 870. The examiner's report in the overassessment cases must include a statement as to whether or not consents, as provided for in this paragraph, have been furnished and, if not, the reason.

  6. The examiner should refer to Rev. Proc. 99–32 (or Rev. Proc. 65-17 for taxable years not covered by Ref. Proc. 99-32) in situations where the taxpayer requests permission to receive payment from the correlative-adjustment taxpayer to the extent of the IRC section 482 adjustment, without further federal income tax consequences on that payment.

  7. The examiner will attach to the return involving the overassessment a Form 3198, as prescribed in IRM 4.11.5.5(5), above.

4.11.5.7  (11-01-2004)
Unagreed IRC Section 482 Issues

  1. In unagreed IRC section 482 cases where the correlative adjustment is the only adjustment on the correlative-adjustment taxpayer, do not write a complete report for the correlative adjustment. Submit the files on the correlative-adjustment taxpayer with tax computation sheets in each case file. Prior to closing, the examiner will draft a letter inviting the correlative-adjustment taxpayer to file a claim for refund.

  2. In unagreed IRC section 482 cases when there are other adjustments on the correlative-adjustment taxpayer, take an inconsistent position. Do not make the "correlative" IRC section 482 adjustments, but explain fully the reason for not making the correlative adjustments. This explanation should be made in the taxpayer's portion of the Revenue Agent's Report (RAR).

  3. In all unagreed IRC section 482 issue cases the correlative-adjustment taxpayer should be advised of the period of limitations under IRC section 6511 for filing a claim for refund. If the period for filing a claim for refund expires in less than 180 days, the examiner should inform the taxpayer of the opportunity to file an amended return claiming a refund. Such claims should be picked up and submitted with the case, if possible.

  4. To ensure that overpayments resulting from the correlative adjustments are not scheduled and refunded to the taxpayer, the examiner will complete and affix Form 3198 to the return of the correlative-adjustment taxpayer, see IRM 4.11.5.5(5), above.

  5. If the taxpayer or a related entity is involved in bankruptcy litigation see IRM 4.27.2.4, Bankruptcy Examiner Responsibility. Automatic stays as a result of bankruptcy may require a re-calculation of the assessment statute expiration date (ASED) and refund statute expiration date (RSED).

4.11.5.8  (11-01-2004)
Related Cases Not Managed In The Same Compliance Area

  1. When a return is examined in one Area Office and an issue is the allocation of income or deductions to a related taxpayer in another Area Office, the office making the initial examination will (except cases arising out of partnership and/or fiduciary return or S-corporations) immediately, upon identification of a potential IRC section 482 adjustment, advise the other Area Office of the issue(s) and amount involved so appropriate steps may be taken to secure the return and protect the statute of limitations.

  2. Immediately upon conclusion of the examination, a notice should be issued to the other Area Office that will contain sufficient information to enable the receiving office to make the correlative adjustment(s) to the related return(s). The initiating office examiner's case files will include copies of the notification.

  3. Upon receipt of notification, the receiving office will take prompt action to make adjustments for the allocation of income or deductions resulting from the initial taxpayer examination. In the event the return has been examined and closed, reopening procedures will be considered.


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