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SUMMARY: This document contains a new revenue procedure that sets forth the Service's position regarding adjustments that may be made to conform the accounts of taxpayers to reflect allocations made under section 482 of the Internal Revenue Code.
SUPPLEMENTARY INFORMATION:
Background
In Announcement 99-1, 1999-2 I.R.B. 11, the Internal Revenue Service invited comment on a revision of Rev. Proc. 65-17, 1965-1 C.B. 833, on conforming a taxpayer's accounts to reflect a primary adjustment under section 482 of the Internal Revenue Code. The comments received and changes finally adopted in this revenue procedure are summarized below.
Explanation of Provisions
A. Taxpayer-Initiated Primary Adjustments
In furtherance of the overall goal of promoting upfront compliance with the arm's length standard, Announcement 99-1 proposed providing a mechanism for taxpayers to conform their accounts in connection with taxpayer-initiated (as well as Service-initiated) primary adjustments, without the Federal income tax consequences of the secondary adjustments that would otherwise result under section 482. Commentators welcomed this proposal and it is finally adopted in this revenue procedure. Accordingly, taxpayers may elect, by filing a statement with their Federal income their tax returns, to apply revenue procedure treatment for taxpayer-initiated upward and downward adjustments of taxable income pursuant to section 1.482-1(a)(3) of the Treasury regulations, in connection with inbound, outbound, and certain foreign-- to-foreign controlled transactions. Election of revenue procedure treatment through such a statement shall be binding on the taxpayer.
Offsets
Announcement 99-1 proposed eliminating dividend offsets and making account treatment the sole means to repatriate the cash attributable to a primary adjustment, without the Federal income tax consequences of secondary adjustments. Some commentators supported this proposal on the ground that dividend paying policies are independent of transfer pricing. Other commentators, however, expressed the view that elimination of dividend offsets would discourage current repatriation of earnings, prolong transfer pricing disputes, and pose problems when payment of a form of income is restricted under foreign law. Others suggested that permitting offsets in connection with taxpayer-initiated adjustments would be consistent with upfront compliance with the arm's length standard.
In response to these comments, this revenue procedure allows taxpayers to offset accounts by distributions, including those that would otherwise be dividends, in the same year as that to which a taxpayer-initiated primary adjustment relates, provided...