Chief Counsel Advice
201751014
Released December 22, 2017
Advice
Common control exists but arm's-length prices require no adjustment
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This page covers one taxpayer's ruling from 2017, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.
Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.
About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.
View official IRS release (PDF)
Plain-English summary
A taxpayer provided redacted services in transactions involving entities that were not commonly owned. The IRS advised that section 482 can still apply because its control test is disjunctive and reaches direct or indirect control, including management control without a meaningful ownership interest. Based on the heavily redacted management facts, the IRS found common control and treated the services as controlled transactions. It nevertheless concluded that no transfer-pricing adjustment was appropriate because the amounts paid were arm's-length prices that clearly reflected income. A second issue about calculating an adjustment therefore did not need to be addressed.
Ruling snapshot
- Question: Are the redacted service transactions controlled under section 482, and should their pricing be adjusted?
- Outcome: advice given, common control exists but no adjustment is warranted because the prices are arm's length
- Key authorities: IRC § 482; Treas. Reg. § 1.482-1(i)(4)-(6)
Full text (IRS public release)
Office of Chief Counsel
Internal Revenue Service
Memorandum
Number: 201751014
Release Date: 12/22/2017
CC:INTL:B06:CJBello Third Party Communication: None
POSTF-122080-16 Date of Communication: Not Applicable
UILC: 482.02-00, 482.09-00
date: August 17, 2017
to: ---------------------------
-------------------------------------
Division Counsel, Large Business & International
from: Christopher J. Bello
Branch Chief, CC:INTL:6
Associate Chief Counsel (International)
subject: ----------------------------
This Chief Counsel Advice responds to your request for assistance dated November 13,
2015. This advice may not be used or cited as precedent.
LEGEND
Taxpayer = ----------------------------------
Affiliate1 = ----------------------------------------------
Affiliate2 = -------------------------------------------
Individual1 = ---------------
Individual2 = -------------------------
State1 = -------------
State2 = ------------------
Taxable Year1 = ------
Taxable Year2 = ------
Taxable Year3 = ------
Calendar Year1 = ------
POSTF-122080-16 2
Calendar Year2 = ------
Month1 = ------------------
Month3 = ----------------------
Date1 = -----------------
Date2 = -------------------
Date4 = ---------------------------
Period1 = --------------------
Period2 = --------------------
Amount1 = -----
Amount2 = ------------
Amount3 = ------------------
----------- = --------------------------------------------------------
--------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------
------------------= ----------------------------------------
ISSUES
1. Whether the-------------provided by Taxpayer in this----------------------------------------------
--------- fact pattern are controlled transactions for purposes of section 482.
2. If a transfer pricing adjustment is made, whether Exam should
to determine the amount of the adjustment.
CONCLUSIONS
1. The ----------- provided by Taxpayer are controlled transactions for purposes of
section 482. However, even though the ----------- are controlled transactions, an
adjustment to the pricing of the ----------- is not appropriate in this ------------------------------
---------------------fact pattern because the ------------------paid for Taxpayer’s ----------- are
arm’s length prices.
2. Because the ------------------are arm’s length prices, we need not address the second
issue.
POSTF-122080-16 3
FACTS
Taxpayer is a State1 corporation headquartered in State2. During Taxable
Year1, Taxable Year2, and Taxable Year3, Taxpayer was owned by -------------------------
---------------------------------------------------------------------------------------------------------------------
-------------------------------. We refer collectively to ----------------------------------------------------
I. History
Taxpayer was formed in Calendar Year1 ------------------. Prior to that year,
several -----------------------------------------------------------------------------1 ---------------------------
---------------------------------------------------------------------------------------------------------------------
-------------------------------. During that time, Affiliate1 provided ------------------------------------
---------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------- The------------were provided
pursuant to -----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------. At that time, Affiliate1 charged an
amount that exceeded --------------------------------------------------------------------------------------
--------------------.
In Month1----------------------------------------------------------------------------------------------
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---------------------------------------------------------------------------------------------------------,
Taxpayer was to perform the ------------------------------------------------------------------------------
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---------------------------------------------------------------------------------------------------------------------
--------------------------.
--------------------------------------------------------, Taxpayer would assume -----------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------.
----------------------------stated the following regarding the transfer of --------------------
functions -------------------to Taxpayer:
1
For simplicity, we use the term -------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------.
POSTF-122080-16 4
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
---------------------------------------
----------------------------provided the following terms2 regarding the ---------------------
----------------------------
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
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------------------------------------------------------------------------------------------
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----------------------
In Calendar Year1, the -----------------------------------------------------------------------------
----------------a -------------------------between Taxpayer and ------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
--------.
A ---------------------------as amended and supplemented over time, memorialized
---------------------------------------------------------------------------------------------------------------------
-------------------------------------------------. Section -------------------------------of the ---------------
-----------------provides:
------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------
A. -------------------------------------------------------------------------------------------------------
-------
B. ------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
2
------------------------------------------------------------------------------------------------------------------------------------------
-----------------------
POSTF-122080-16 5
--------------------------------------------------------------------------------------------------------
-------------
C. ----------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
-------------------------------------
------------------------------------------------------------------. Section ------------ of the ----------------
------------------ provides:
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
---------------------------------------------
--- Taxpayer claims that------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------.
In Calendar Year2, ----------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------.
II. Current Operations
Currently, ----------------------------------------------------------------------------------------------
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---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
POSTF-122080-16 6
---------------------------------------------------------------------------------------------------------------------
---------------------------
Taxpayer claims that a relatively small proportion of the ---------------------------------
------------. Taxpayer also claims that, to the extent that one of the -----------------------------
---------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------. In those cases, the -----------
----------------------------------------------------------------------------------------------. Such
payments are not ---------------------------------------------------------------------------------------------
--------.
III. Corporate Management
As contemplated in the ----------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------.
During the taxable years at issue, Individual2 served as ------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-------------------. For example, the most recently amended --------------------------was --------
-----------------------------as ------------------------------------------------------------------------------------
-------------.
Generally, the ----------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------.
The current --------------------------provides a catch-all clause that states: “-------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------.” It is the --------------------------------
-----------------------------------------------------------------------------------------------------------------.
IV. -------------------------------
Since its inception, Taxpayer has provided --------------Taxpayer -----------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-----------. The most recent --------------------------was signed by Taxpayer and ----------------
on Date1.
Pursuant to the -------------------------, Taxpayer is also -------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------For
POSTF-122080-16 7
purposes of the -----------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------.
Taxpayer’s methodology for calculating -------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-------------------- -----------------------------------------------------------------------------------------------
------------
Taxpayer advertises its -------------------------------------------------on its website as the
item that -----------------------------------------------------------
--------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------
See “------------------------------------------------------------------------------------------------------------”
(last visited on June 29, 2017).
V. Compensation of Taxpayer Employees
Taxpayer compensates non-officer employees predominantly with -------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------
Taxpayer’s executive compensation program comprises the following elements:
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
POSTF-122080-16 8
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
--------------------------------------------.
Awards under the plans are based -------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-----------------.
VI. Tax Reporting
Taxpayer is taxed as a C corporation and files a consolidated federal income tax
return (Form 1120) with its domestic subsidiaries. Each of --------------------------------------
---------------------------------------------------------------------------------------------------------------------
------ -------------------------------------------------------------------------------------------------------------
-------.
During the taxable years at issue, Taxpayer reported income from the --------------
equal to the ----------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------.3
While Taxpayer pays -------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
------------------------------------------------------. For example, Affiliate2 is --------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
------------------------------------
3
Contemporaneous with our consideration of your request for advice and our development of this
memorandum, the National Office (with primary jurisdiction residing in -----------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------
---------------------------
POSTF-122080-16 9
VII.
4
5
6
4
5
6
POSTF-122080-16 10
At the opening conference for the Audit in Month3, Taxpayer’s representatives
stated that,
7
LAW AND ANALYSIS
I. Issue 1
A. Section 482 in general
Section 482 provides, in relevant part:
In any case of two or more organizations, trades, or businesses . . . owned or
controlled directly or indirectly by the same interests, the Secretary may
7
POSTF-122080-16 11
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.
Thus, before the Service has authority to apply section 482, the following requirements
must be met: (1) there must be two or more organizations, trades, or businesses
(collectively “entities”); (2) such entities must be commonly owned or controlled by the
same interests; and (3) an adjustment must be necessary to prevent tax avoidance 8 or
clearly to reflect income.
B. Common Ownership or Control
Here, Taxpayer and ------------- clearly satisfy the requirement of two or more
entities.9 The next question is whether those entities are commonly owned or
controlled. The statute and the regulations express the common ownership or control
requirement as a disjunctive rule. See I.R.C. § 482 (“owned or controlled”); Treas. Reg.
§ 1.482-1(i)(5) and (6) (“owns or controls” and “owned or controlled,” respectively); see
also Austin Inv. Fund, LLC v. U.S., 2015 U.S. Dist. LEXIS 156312, *11 (“The statute
does not require both ownership and control; it requires only one or the other. Sunshine
Dep't Stores, Inc. v. C.I.R., T.C. Memo 1981-586, 42 T.C.M. (CCH) 1379 (T.C. 1981)
aff'd sub nom. Sunshine Dep't Stores, Inc., v. Internal Revenue Serv., 705 F.2d 470
(11th Cir. 1983) (‘[T]he relevant language of section 482 is phrased in the disjunctive:
either common ownership or control, directly or indirectly, will suffice.’)”). Because, in
this -----------------------------------------------fact pattern, Taxpayer and the -----------------------
---------------------------------------------------------------------------------------------------------------------
----------------, the common ownership requirement is not satisfied-------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------.
8 th
See Foster v. Commissioner, 80 T.C. 34, 157-158 (1983), aff’d in relevant part, 756 F.2d 1430 (9 Cir.
1985), cert. denied, 474 U.S. 1055 (1986) (for purposes of section 482, evasion of taxes means tax
avoidance).
9
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POSTF-122080-16 12
That does not, however, preclude the possibility of common control. Treas. Reg.
§ 1.482-1(i)(4) provides:
Controlled includes any kind of control, direct or indirect, whether legally
enforceable or not, and however exercisable or exercised, including control
resulting from the actions of two or more taxpayers acting in concert or with a
common goal or purpose. It is the reality of the control that is decisive, not its
form or the mode of its exercise. A presumption of control arises if income or
deductions have been arbitrarily shifted. (Emphasis in original.)
We agree with you that the fact that -----------------------------------------
--------------------------------------------------------------------------------- supports a finding of
common control in this case. See, e.g., Charles Town, Inc. v. Commissioner, 372 F.2d
415, 419-420 (4th Cir. 1966) (standing for the proposition that management control of
an entity, absent a meaningful ownership interest, can satisfy the common control
requirement); compare with Treas. Reg. § 1.482-1A(b)(1) (1968) (providing in relevant
part: “The interests controlling a group of controlled taxpayers are assumed to have
complete power to cause each controlled taxpayer so to conduct its affairs that its
transactions and accounting records truly reflect the taxable income from the property
and business of each of the controlled taxpayers.”) and Commissioner v. First Security
Bank of Utah, N.A. et al., 405 U.S. 394, 404-405 (1972) (interpreting the “complete
power” language of the 1968 regulation: “The regulation, as applied to the facts in this
case, contemplates that Holding Company – the controlling interest – must have
‘complete power’ to shift income among its subsidiaries. It is only where this power
exists, and has been exercised in such a way that the ‘true taxable income’ of a
subsidiary has been understated, that the Commissioner is authorized to reallocate
under § 482.”). The current regulation does not contain the “complete power” language
of the 1968 regulation.
Thus, unlike the control concept set forth in the 1968 regulation (as interpreted by
the United States Supreme Court) which was premised, among other things, on the
ability of the controlling interests to influence transfer prices, the control concept set
forth in the current regulation requires only that the controlling interests control the
taxpayers (and not that they exercise control to affect the transfer prices between the
taxpayers). With those rules in mind, the control requirement has been met. The
remaining question, then, is whether an adjustment is necessary to prevent tax
avoidance or clearly to reflect income.
C. Even Though Common Ownership or Control is Present, the
--------------------are, Nonetheless, Arm’s Length Prices and Clearly
Reflect Income
Even though common ownership or control is present in this case, an adjustment
under section 482 would not be warranted because the third threshold requirement
under that provision – that an adjustment is necessary to prevent tax avoidance or
POSTF-122080-16 13
clearly to reflect income – has not been met. To the contrary, the evidence leads us to
conclude that in this -----------------------------------------------fact pattern, the ---------------------
in question are arm’s length prices.
Based on the information provided to us, -----------------------------------------------------
---------------------------------------------------------------------------------------- we agree with
Taxpayer’s assertion ----------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
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----------------------------------------------------------------.
Moreover, the purchase of ------------------------------------------------------------------------
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---------------------------------------------------------------------------------------------------------------------
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-------------- the ------------------(-------------------------------------------------) are compensation
for the ----------- provided by Taxpayer to --------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
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---------------------------------------------------------------------------------.
We also note that Taxpayer’s --------------------------------------------------------------------
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POSTF-122080-16 14
---------------------------------------------------------------------------------------------------------------------
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-----------------------------------------
Stated differently, based on the information that we have been provided ------------
------------------------------------------------------------------------------------------------------------it
appears to us that, ------------------------------------------------------------ amounts charged by
Taxpayer to ----------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- ensure that the ---------------
------------------- pricing --------------------------------------------- will be arm’s length.
Finally, we note that section 482 is not intended to ----------------------------------------
-------------------------------------------------. If Exam were to increase the ---------------under
section 482, ----------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-------------------10 ----------------------------------------------------------------------------------------------
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-----------------------------------------------------------------------------------------------------------.
Accordingly, we conclude that even though the-------------are controlled
transactions, the ------------------are arm’s length prices ---------------------------------------------
---------------------------------------------------------------------------------------------------------------------
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------.11
II. Issue 2
Because the ------------------charged for the ----------- are arm’s length, we need not
address the second issue.
10
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11
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POSTF-122080-16 15
Please call the branch at (202) 317-6939 if you have any further questions.
_____________________________
Christopher J. Bello
Chief, Branch 6
(International)
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