On Sept. 14, 2015, the Treasury Department and the IRS issued T.D. 9738, which contained temporary regulations under Sec. 482 clarifying the application of the arm's-length standard when multiple Code sections (e.g., Secs. 482 and 367) apply. The temporary regulations apply to tax years ending on or after Sept. 14, 2015. The temporary regulations revise Regs. Secs. 1.482-1(f)(2)(i) and (ii)(B) and are set forth in Temp. Regs. Secs. 1.482-1T(f)(2)(i)(A)-(E) and (j)(7).
The temporary regulations are primarily concerned with making the following points:
1. Compensation for a controlled transaction under Sec. 482 is required regardless of whether another Code section (e.g., Sec. 367) may also apply to the transfer;
2. The arm's-length values of assets determined under Sec. 482 should be the same whether or not Sec. 367 applies; and
3. The "best method" rule may require an analysis of the assets transferred in the aggregate even when some assets are transferred under the purview of Sec. 351 and other assets are transferred under other provisions of the Code.
Absent further action, the provisions of these temporary regulations will expire on Sept. 14, 2018.
Specific Provisions of Temp. Regs. Sec. 1.482-1T
Consistent with the existing regulations, the temporary regulations assert that the arm's-length standard of Sec. 482 applies to all controlled transactions. As such, the arm's-length amount must be consistent with the value transferred between the parties "without regard to the form or character of the transaction" (Temp. Regs. Sec. 1.482-1T(f)(2)(i)(A)). Consequently, a coordinated best method analysis and evaluation of the transaction or transactions may be necessary and that analysis "would include a consistent consideration of the facts and circumstances of the functions performed, resources employed, and risks assumed in the relevant transactions," to achieve "a consistent measure of arm's-length results" (Temp. Regs. Sec. 1.482-1T(f)(2)(i)(C)). Further, the preamble to the temporary regulations specifically notes that the relative reliability of any measure of an arm's-length result "depends on the economics of the controlled transactions, not their formal character."
The temporary regulations also require the taxpayer to consider the potential accretive effects of multiple transactions on the valuation of subject assets to determine if an aggregate analysis is appropriate (Temp. Regs. Sec. 1.482-1T(f)(2)(i)(B)). Finally, the temporary regulations note that an allocation of some portion of the aggregate value among the transferred assets may be required as a result of the foregoing. Such an allocation "must be made using the method that, under the facts and circumstances, provides the most reliable measure of an arm's-length result for each allocated amount" (Temp. Regs. Sec. 1.482-1T(f)(2)(i)(D)).
The temporary Sec. 482 regulations provide 11 examples, seven of which are new. The examples detail best method analyses that are consistent with the proposition that Sec. 482 requires arm's-length compensation regardless of the character (e.g., provision of services versus transfer of know-how or other intangibles) or form of a controlled transaction (e.g., license versus sale versus contribution). The examples specifically address the issues of aggregative analysis of transactions, synergies among transactions, and best method analysis under Sec. 482 (regardless of whether the transaction is also subject to Sec. 367). The examples indicate that aggregation is likely required when the sum of the transactions results in a higher value than if the transactions were analyzed separately (Temp. Regs. Sec. 1.482-1T(f)(2)(i)(E), Example (5)). Further, the examples indicate that an analysis of realistic alternatives is always potentially relevant under Regs. Sec. 1.482-4(d) or Regs. Sec. 1.482-7(g) (see Temp. Regs. Secs. 1.482-1T(f)(2)(i)(E) and (ii)(B) example).
Coordination With Proposed Sec. 367 Regulations
The release of the temporary regulations in T.D. 9738 coincides with the release of proposed regulations under Sec. 367 (REG-139483-13). The text of the temporary regulations was simultaneously issued as proposed regulations as part of this proposed regulation package under Sec. 367.
The concurrent release of these temporary Sec. 482 and proposed Sec. 367 regulations is significant because it highlights the interrelation between the activities and transactions covered under these two Code sections and regulations, and it signals an attempt by the IRS to "clarify the coordination of the application of the arm's-length standard and the best method rule . . . under Sec. 482 in conjunction with other Code provisions" (preamble to REG-139483-13).
Other IRS Actions and Guidance
In addition to the release of these temporary Sec. 482 and proposed Sec. 367 regulations, the IRS has issued Notice 2015-54, which announced forthcoming regulations under Sec. 721(c) that will create an exception to the general nonrecognition rule for property contributions to a partnership under Sec. 721(a). The IRS and Treasury intend that the regulations will ensure that a U.S. transferor of Sec. 721(c) property to a Sec. 721(a) partnership takes into account (either immediately or periodically) the built-in gain attributable to the Sec. 721(c) property. The IRS and Treasury also announced their intent to issue modified regulations specific to partnerships under Secs. 482 and 6662 to address controlled transactions involving partnerships and the appropriate transfer-pricing methods, valuation approaches, periodic adjustment provisions, and documentation of those transactions.
Taken together, these actions by the IRS and Treasury constitute a concerted effort to clarify the application of Sec. 482 to controlled transactions that occur within regulatory schemes of special application within the Code, particularly to the extent that those controlled transactions might involve tax-favored transfers of appreciated assets outside the United States. These actions also apparently seek to establish the primacy of the Sec. 482 regulations (particularly the arm's-length standard and best method analysis) in determining the value of the assets conveyed in those transactions.
Michael Dell is a partner at Ernst & Young LLP in Washington.
For additional information about these items, contact Mr. Dell at 202-327-8788 or firstname.lastname@example.org.
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