International Tax Bulletin (January 1999)
IRS Proposes Modification of
E. Bonano, a tax partner in the
San Francisco office of Pillsbury
Winthrop Shaw Pittman LLP.
If you have or can obtain the
you may wish to download the printed
the bulletin containing this
article, a 123K pdf file, or of
99-1, a 38K pdf file which includes the text of the proposed Revenue
Procedure modifying Revenue Procedure 65-17.
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In the Internal Revenue Bulletin for January 11,
1999, the United States Internal Revenue Service (the "Service" or "IRS")
published Announcement 99-1 containing its proposed modification of
Revenue Procedure 65-17.[fn.
For a number of years the Service and taxpayer
groups have discussed the need to update Revenue Procedure 65-17. That
revenue procedure, as amended and modified over the years, generally
allows taxpayers to repatriate cash in the amount of a section 482 allocation
without additional tax consequences. It accomplishes this result by allowing
a controlled taxpayer subject to a section 482 allocation to establish a
receivable in the amount of the allocation. The allocated amounts may then
be paid to the controlled taxpayer and will be treated as nontaxable payments
in satisfaction of the receivable.
Significantly, Revenue Procedure 65-17 also allows
taxpayers to avoid withholding liability under Internal Revenue Code section
1442 as a consequence of a section 482 allocation. Typically, the IRS
asserts such withholding liability when it makes an allocation from a foreign
parent to its domestic subsidiary.
Announcement 99-1 provides that the account
receivable treatment discussed above will apply only if the taxpayer subject
to the section 482 allocation is not also subject to a penalty under Internal
Revenue Code sections 6662(e)(1)(B) or 6662(h).[fn. 2] The Announcement also
provides that relief will not be granted if any part of the allocation is due to
The requirement that taxpayers must not be subject to
section 6662 to qualify for relief is a significant change from prior practice.
Under Revenue Procedure 65-17, as initially promulgated, relief is
permitted as long as the pricing transaction does not have "the avoidance of
federal income tax" as one of its "principal purposes." The "background"
discussion in Announcement 99-1 states that the "factual nature" of the "tax
avoidance" inquiry under Revenue Procedure 65-17 caused significant
"difficulty" for both taxpayers and the Service. The background discussion
further states that a change to the section 6662 requirement "focuses the
inquiry on the objective adequacy of the taxpayer's documentation."
It is unlikely that taxpayers will blithely accept the
Service's characterization of this new approach as an "objective analysis."
For example, the question of whether a taxpayer's documentation is
adequate under the penalty regulations is far from an "objective inquiry."
There are significant questions concerning both quantitative and qualitative
requirements under those regulations. Indeed, it is doubtful that any
taxpayer could ever be in literal compliance with every requirement of the
penalty regulations. Thus, the IRS could no doubt find fault with almost
any taxpayer's documentation, belying the "objective adequacy"
Another significant change from past practice is that
the proposed revenue procedure eliminates dividend offset treatment. The
"background" portion of the Announcement states that the dividend offset
treatment is "inconsistent with the current policy under sections 482 and
6662(e) that taxpayers should strive up front to price their related party
transactions in compliance with the arms'-length standard." That statement
presupposes that taxpayers who have made dividend distributions are less
likely to have made an "up front" effort to comply with the arm's-length
standard. Clearly, significant doubt exists as to the validity of that
Finally, Announcement 99-1 clarifies that a foreign
tax credit will be allowed for any foreign tax that is withheld with respect to
a payment made in satisfaction of a repatriation receivable. The
announcement provides, however, that taxpayers must exhaust all practical
remedies, including invocation of competent authority procedures, if
available, in order to qualify for the credit, citing Income Tax Regulations
Announcement 99-1 provides that the proposed
changes to Revenue Procedure 65-17 will become effective for taxable years
beginning after the date of publication of the final revenue procedure.
- 1965-1 C.B. 833.[return to
- Ann. 99-1, § 3.[return to text]
- Id.[return to
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