4.11.5 Allocation of Income and Deductions Under IRC 482

Manual Transmittal

November 19, 2019


(1) This transmits revised IRM 4.11.5, Examining Officers Guide (EOG), Allocation of Income and Deductions Under IRC 482.

Material Changes

(1) Revised content to reflect current examination processes and procedures relating to transfer pricing examinations.

(2) Added IRM, Program Scope and Objectives, in accordance with the requirements described in IRM 1.11.2, Internal Management Documents System, IRM Process, and renumbered subsequent subsections accordingly.

(3) Various editorial changes were made throughout, including updates to references and cross-references.

Effect on Other Documents

This IRM supersedes IRM 4.11.5 dated November 1, 2004.


LB&I and SB/SE employees

Effective Date


Jennifer L. Best
Director, Treaty and Transfer Pricing Operations
Large Business and International Division

Program Scope and Objectives

  1. Purpose: This IRM section provides guidance for examiners working cases involving the allocation of income and deductions among taxpayers as provided for in IRC 482 and the regulations.

  2. Audience: LB&I and SB/SE personnel

  3. Policy Owner: Director, Treaty and Transfer Pricing Operations (TTPO), LB&I

  4. Program Owner: TTPO

  5. Primary Stakeholders: LB&I and SB/SE personnel

  6. Program Goals: The goal of this program is to provide guidance to examiners making IRC 482 primary and correlative adjustments.


  1. IRC 482, Allocation of Income and Deductions Among Taxpayers, provides that:

    In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. In the case of any transfer (or license) of intangible property (within the meaning of section 367(d)(4)), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible. For purposes of this section, the Secretary shall require the valuation of transfers of intangible property (including intangible property transferred with other property or services) on an aggregate basis or the valuation of such a transfer on the basis of the realistic alternatives to such a transfer, if the Secretary determines that such basis is the most reliable means of valuation of such transfers.

  2. Treasury Regulations further define and expand upon IRC 482. See IRM and IRC 482 regulations. A fundamental principle is the "arm’s length standard" for transactions among commonly owned or "controlled" taxpayers. See Treas. Reg. 1.482-1(b)(1).

  3. Judicial opinions and other legal authorities and guidance have over time interpreted IRC 482 and its regulations. See IRM, Researching Federal Tax Law.


  1. See IRM, Authority.

Roles and Responsibilities

  1. See IRM, Introduction to IRC 482, and IRM, Background.

  2. For roles and responsibilities of LB&I teams in general, see IRM, Roles and Responsibilities.

  3. For guidance on roles and responsibilities more specific to the IRC 482 context, see IRM, Roles and Responsibilities, and IRM, Overview of the Planning Phase for IRC 482 Examinations.

Program Objectives and Review

  1. The objective of this IRM is to provide guidance on applicable substantive rules for examiners working cases under IRC 482 involving the allocation of income and deductions among taxpayers.


  1. The following are commonly used acronyms:

    Acronym Definition
    CSA Cost Sharing Arrangement
    LB&I Large Business and International
    RA Revenue Agent
    RAR Revenue Agent Report
    SB/SE Small Business and Self-Employed
    SRA Senior Revenue Agent
    TTPO Treaty and Transfer Pricing Operations

Related Resources

  1. Related resources include:

    1. IRC 482, related regulations, case law, and other legal authorities and guidance. The applicable regulations have been revised several times. Be sure to apply the correct final, temporary, proposed, or re-designated regulations that are applicable to the examination tax years.

    2. IRM 4.60.1, Exchange of Information.

    3. IRM 4.60.2, Mutual Agreement Procedures and Report Guidelines.

    4. IRM 4.60.3, Tax Treaty Related Matters.

    5. IRM 4.61.3, Development of IRC 482 Cases.

    6. Rev. Proc. 99-32, 1999-2 C.B. 296, which provides a mechanism for taxpayers to conform their accounts in connection with IRC 482 adjustments without certain secondary consequences that would otherwise result under Treas. Reg. 1.482-1(g)(3). See also IRM, Application of Rev. Proc. 99-32.

    7. Rev. Proc. 2005-46, 2005-2 C.B. 142, which prescribes the procedure to be followed with respect to the claiming of any setoffs to adjustments prescribed by the IRS under IRC 482 under Treas. Reg. 1.482-1(g)(4).

Glossary of Terms

  1. The table below provides a glossary of terms used in this IRM.

    Term Definition Citation
    Arm’s Length Standard The standard to be applied in every case is that of a taxpayer dealing at arm’s length with an uncontrolled taxpayer. A controlled transaction meets the arm’s length standard if the results of the transaction are consistent with the results that would have been realized if uncontrolled taxpayers engaged in the same transaction under the same circumstances (arm’s length result). Treas. Reg. 1.482-1(b)
    Collateral Adjustment Adjustment of related tax items, as provided for by regulations, reflecting implications of an allocation under IRC 482, including correlative allocations, conforming adjustments, and setoffs. Treas. Reg. 1.482-1(g)
    Controlled Taxpayer A taxpayer under common ownership or common control with another. Control can be direct or indirect, need not be legally enforceable, and depends on the facts and circumstances. Treas. Reg. 1.482-1(i)(5)
    Primary Allocation The initial allocation under IRC 482. Treas. Reg. 1.482-1(g)(2)(i)

Overview of IRC 482 Allocation of Income and Deductions Among Taxpayers

  1. The purpose of IRC 482 is to ensure taxpayers clearly reflect income attributable to controlled transactions and to prevent avoidance of taxes regarding such transactions. IRC 482 places a controlled taxpayer on a tax parity with an uncontrolled taxpayer in determining true taxable income. Transactions between controlled taxpayers 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 does not reflect an arm's length result as with an uncontrolled taxpayer.

  2. Transactions between controlled taxpayers which may involve an IRC 482 issue include (but are not limited to) the following:

    1. One entity makes a loan or advance to another entity and charges no interest or charges an interest rate which is not arm's length (including an excessive rate).

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

    3. One entity leases property to another entity without charge or at a charge that is not an arm's length result.

    4. One entity sells tangible or intangible property to another entity without charge or at a sales price that is not an arm's length result.

    5. One entity licenses intangible property to another entity for no royalty fee or a fee that is not an arm’s length result.

    6. One entity enters into a Treas. Reg. 1.482-7 cost sharing arrangement (CSA) with another entity to share costs to develop intangibles, but all costs are not appropriately shared.

    7. One entity contributes a valuable platform including intangibles upon entering into, or subsequent to entering into, a Treas. Reg. 1.482-7 CSA to be used and further developed by the parties in the arrangement (or changes its participation in a CSA) without receiving an arm’s length payment from the other entit(ies).

Primary and Correlative Adjustments

  1. The initial allocation, which ordinarily increases the income of one or more members of the controlled group, is referred to as the "primary allocation" or the "primary adjustment" and the corresponding decrease of the other member(s) is the "correlative allocation" or "correlative adjustment."

  2. Issue teams should review the advance notification procedures under IRM 4.60.2, Mutual Agreement Procedures and Report Guidelines, regarding primary and correlative adjustments, whenever an IRC 482 adjustment is anticipated.

Primary Adjustment

  1. Primary adjustments should be shared with the team coordinator as soon as they are known. These adjustments may affect other items within the taxpayer’s tax return.

Correlative Adjustment

  1. The concurrent examination of the income tax return(s) of the correlative adjustment taxpayer(s) should ordinarily be made when a primary adjustment examination is underway.

  2. For information on correlative adjustments, see Treas. Reg. 1.482-1(g)(2). Correlative adjustments are also addressed in Rev. Proc. 99-32. Taxpayers may, in certain situations, elect relief from otherwise applicable correlative adjustments. See IRM, Application of Rev. Proc. 99-32.

Examination Reports

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

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

    2. Even if it does not impact liability for any open year, the correlative adjustment must be maintained in the correlative adjustment taxpayer’s documentation for future determinations to which it may be relevant. See Treas. Reg. 1.482-1(g)(2)(ii).

  2. Rules regarding the unauthorized disclosure of information apply to IRC 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.

  3. The correlative adjustment should not be made until the primary adjustment has been made. Per Treas. Reg. 1.482-1(g)(2)(iii), the primary adjustment will not be considered to have been made and, accordingly, a correlative adjustment is not required to be made until the date of a final determination on the primary adjustment under IRC 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.

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

  4. To provide uniform treatment of all IRC 482 cases, agreed or unagreed, reports on the primary adjustment taxpayer and the correlative adjustment taxpayer should be prepared concurrently, kept together and transmitted to the next function, (e.g., Case Processing, Technical Services, or Office of Appeals).

  5. In cases with no current tax effect as a result of a correlative adjustment (e.g., foreign entity, loss entity, etc.), place a statement in the correlative adjustment taxpayer’s audit report to the effect that the correlative adjustments are deemed to have been made when and if:

    1. The adjustments are agreed to and assessment has been made; or

    2. The deficiency has been paid and will be given effect to when the correlative adjustment produces a current tax effect.

    It is important that this statement be included in all reports prepared for the taxpayer(s) to which the correlative adjustments apply so the subsequent issue team does not miss 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. The historical case file of the taxpayer should include the examination report(s) with the primary and correlative tax effects.

  6. The examiner will attach Form 3198, Special Handling Notice, to the case jacket of the correlative adjustment taxpayer to ensure that overpayments resulting from the correlative adjustments are not scheduled and refunded to the taxpayer. The Form 3198 will note 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 482 adjustment.

  7. Correlative adjustment taxpayers whose tax liability is reduced will be advised of the nature of the adjustment(s), the reason the overpayment cannot be refunded at this time and the possible need to protect statute(s) of limitations from expiring. See IRM, Protested Primary Adjustments Involving Only U.S. Taxpayers for Primary Adjustment and Correlative Allocation.

  8. The correlative adjustment taxpayer(s) will be invited to file a claim for refund (protective claim) if the period for filing a claim for refund expires in less than 180 days. Letter 897(DO) will be sent to solicit a claim for each taxable year needing protection. Once a protective claim is received, Form 895, Notice of Statute Expiration, will be attached and the statute will be updated according to IRM 25.6.22, Statute of Limitations, Extension of Assessment Statute of Limitations by Consent. See also IRM, Protested Primary Adjustments Involving Only U.S. Taxpayers for Primary Adjustment and Correlative Allocation.

Agreed IRC Section 482 Issues

  1. An agreed IRC 482 issue is where all affected (primary and correlative) taxpayers are in full agreement with the IRS’s IRC 482 issue.

  2. The examiner must obtain a signed agreement, using the appropriate Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment, or payment of the deficiency from the primary adjustment taxpayer.

  3. The examiner must make the correlative adjustment(s) and obtain agreement for the adjustment(s) using the appropriate Form 870.

  4. The taxpayer should be advised that their cases can be more expeditiously adjusted and closed if the taxpayer(s) scheduled to receive refunds, if any, will voluntarily consent in writing to have the refunds applied against the proposed deficiencies.

    1. The taxpayer's written consent statement(s) can be incorporated into Form 870.

    2. The examiner's report in 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 reasons the consents were not obtained.

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

Unagreed IRC Section 482 Issues

  1. An unagreed IRC 482 cases is where any affected (primary or correlative) taxpayer does not agree to the IRS’s adjustment under IRC 482. See IRM, Types of Examination Reports Based on Agreement, and IRM, Unagreed Report.

  2. In unagreed IRC 482 cases when the correlative-adjustment taxpayer takes any inconsistent positions, do not make the correlative IRC 482 adjustments. Instead, explain the reason for not making the correlative adjustments. This explanation should be made in the revenue agent's report (RAR).

  3. In all unagreed IRC 482 cases, the correlative adjustment taxpayer should be advised of the period of limitations under IRC 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. In all unagreed IRC 482 cases, 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, Examination Reports.

  5. If the taxpayer or a related entity is involved in bankruptcy litigation see IRM, Closing Procedures - Unagreed Cases with Automatic Stay. Automatic stays due to bankruptcy may require a recalculation of the assessment statute expiration date and refund statute expiration date.

Related Cases Not Managed In The Same Compliance Area

  1. There may be instances when an IRC 482 allocation is examined in one area office and the issue will affect an allocation to a controlled taxpayer in another area office. The office making the initial examination will immediately advise the other area office of the issue 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 primary adjustment taxpayer’s examination, a notice should be issued each other area office that will contain sufficient information to enable the receiving office to make the correlative adjustment to the related return. 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 IRC 482 allocations resulting from the initial taxpayer examination. Reopening procedures will be considered in the event that the return has been examined and closed.