CCA 200913056: A routine tested party's arm's-length range could include losses

Plain-English summary

Chief Counsel clarified transfer-pricing analysis during an economic downturn. Characterizing a tested party as a routine distributor or contract manufacturer did not prevent the arm's-length range from including negative profitability. A different issue arose if a party previously characterized as virtually risk-free was reclassified as routine or high-risk during the downturn to produce a loss-inclusive range. That change might be unacceptable and required analysis of the specific facts and circumstances. Counsel emphasized that this special recharacterization problem was distinct from an ordinary routine distributor or contract manufacturer earning a loss.

Ruling snapshot

• Question: Could an arm's-length transfer-pricing range include negative profitability for a routine distributor or contract manufacturer during a downturn?
• Outcome: Advice given: yes, although changing a previously risk-free entity's characterization to reach that result required separate factual scrutiny.
• Key authorities: IRC § 482.

Full text (IRS public release)

ID: CCA-223100-09 Number: 200913056
Release Date: 3/27/2009
Office: -------------------
UILC: 482.03-02

From: ------------------
Sent: [Monday, February 23, 2009 10:09 AM]
To: ---------------------------------------------------------------------------------------------------------------------------
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Cc:
Subject: ------ View on Down Economy ----------

[On February 5th we had joint -------USCA training on dealing with transfer pricing issues when there is a down economy.

I want to clarify that the ------ Program takes the position that the characterization of a tested party as a "routine distributor" or "contract manufacturer" does not preclude an arm's-length range that includes negative profitability.

There was a comment during the discussions that if a tested party had, prior to the economic downturn, been characterized as being virtually risk free then a change in the characterization of such an entity to a routine entity or high risk entity during the economic downturn might not be acceptable if that results in an arm's-length range that includes negative profitability. This represents a special case for which we will need to consider the specific facts and circumstances. But this type of case is distinguishable from the "routine distributor" or "contract manufacturer" case mentioned above.

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