Services

Office of Chief Counsel
Internal Revenue Service
Memorandum
Number: 201751014
Release Date: 12/22/2017
CC:INTL:B06:CJBello
POSTF-122080-16
UILC: 482.02-00, 482.09-00 date: August 17, 2017 to: ---
---
Third Party Communication: None
Date of Communication: Not Applicable
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 =
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Calendar Year2 = ---
Month1 = ---
Month3 = ---
Date1 = ---
Date2 = ---
Date4 = ---
Period1 = ---
Period2 = ---
Amount1 = ---
Amount2 = ---
Amount3 = ---
--- = ---
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# 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.

# 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 ---
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---stated the following regarding the transfer of --- functions ---to Taxpayer:
1 For simplicity, we use the term ---
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---.
---
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---provided the following terms2 regarding the ---
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In Calendar Year1, the ---
---a ---between Taxpayer and ---
---
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---
---.
A ---as amended and supplemented over time, memorialized
---
---. Section ---of the ---
---provides:
---
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A. ---
---
B. ---
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2 ---
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C. ---
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---. Section --- of the ---
--- provides:
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--- Taxpayer claims that---
---.
In Calendar Year2, ---
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II. Current Operations
Currently, ---
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Taxpayer claims that a relatively small proportion of the ---
---. Taxpayer also claims that, to the extent that one of the ---
---

---.
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 purposes of the ---
---.
Taxpayer’s methodology for calculating ---
---
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--- ---
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Taxpayer advertises its ---on its website as the item that ---
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See “---”
(last visited on June 29, 2017).
V. Compensation of Taxpayer Employees
Taxpayer compensates non-officer employees predominantly with ---
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---
Taxpayer’s executive compensation program comprises the following elements:
---
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Awards under the plans are based ---
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---.
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 ---
---
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---
---.3
While Taxpayer pays ---
---
---
---. For example, Affiliate2 is ---
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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 VII.
4
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9
4
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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 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 See Foster v. Commissioner, 80 T.C. 34, 157-158 (1983), aff’d in relevant part, 756 F.2d 1430 (9th 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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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 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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--- the ---(---) are compensation for the --- provided by Taxpayer to ---
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We also note that Taxpayer’s ---
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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 ---
---
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--- 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, ---
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Accordingly, we conclude that even though the---are controlled transactions, the ---are arm’s length prices ------------------.11
II. Issue 2
Because the ---charged for the --- are arm’s length, we need not address the second issue.
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Please call the branch at (202) 317-6939 if you have any further questions.
____
Christopher J. Bello
Chief, Branch 6
(International)