Internal Revenue Service, Treasury §1.482–0

1 Internal Revenue Service, Treasury 0. agreement shall be binding on the par- (i) Market share strategy. ties except upon a showing of fraud, (ii) Different geographic markets. malfeasance, or misrepresentation of (A) In general. (B) Example. material fact. (C) Location savings. [ 8608, 60 FR 40079, Aug. 7, 1995] (D) Example. (iii) Transactions ordinarily not accepted 5 Effective dates. as comparables. (A) In general. Sections 1, 2, 3, and (B) Examples. 4 are effective for Consent Agree- (e) Arm's length range. ments signed on or after December 27, (1) In general. 1994. For Consent Agreements signed (2) Determination of arm's length range. before December 27, 1994, see 1, (i) Single method. 2, 3, 4, and 5 (as (ii) Selection of comparables. (iii) Comparables included in arm's length contained in the 26 CFR part 1 edition range. revised as of April 1, 1995). (A) In general. [ 8608, 60 FR 40079, Aug. 7, 1995] (B) Adjustment of range to increase reli- ability.

2 0 Outline of regulations under (C) Interquartile range. 482. (3) Adjustment if taxpayer's results are outside arm's length range. This section contains major captions (4) Arm's length range not prerequisite to for 1 through 8. allocation. (5) Examples. 1 Allocation of income and deductions (f) Scope of review. among taxpayers. (1) In general. (a) In general. (i) Intent to evade or avoid tax not a pre- (1) Purpose and scope. requisite. (2) Authority to make allocations. (ii) Realization of income not a pre- (3) Taxpayer's use of section 482. requisite. (b) Arm's length standard. (A) In general. (1) In general. (B) Example. (2) Arm's length methods. (iii) Nonrecognition provisions may not (i) Methods. bar allocation. (ii) Selection of category of method appli- (A) In general. cable to transaction. (B) Example. (c) Best method rule. (iv) Consolidated returns. (1) In general. (2) Rules relating to determination of true (2) Determining the best method.

3 Taxable income. (i) Comparability. (i) Aggregation of transactions. (ii) Data and assumptions. (A) In general. (A) Completeness and accuracy of data. (B) Examples. (B) Reliability of assumptions. (ii) Allocation based on taxpayer's actual (C) Sensitivity of results to deficiencies in transactions. data and assumptions. (A) In general. (iii) Confirmation of results by another (B) Example. method. (iii) Multiple year data. (d) Comparability. (A) In general. (1) In general. (B) Circumstances warranting consider- (2) Standard of comparability. ation of multiple year data. (3) Factors for determining comparability. (C) Comparable effect over comparable pe- (i) Functional analysis. riod. (ii) Contractual terms. (D) Applications of methods using multiple (A) In general. year averages. (B) Identifying contractual terms. (E) Examples. (1) Written agreement. (iv) Product lines and statistical tech- (2) No written agreement.

4 Niques. (C) Examples. (v) Allocations apply to results, not meth- (iii) Risk. ods. (A) In general. (A) In general. (B) Identification of party that bears risk. (B) Example. (C) Examples. (g) Collateral adjustments with respect to (iv) Economic conditions. allocations under section 482. (v) Property or services . (1) In general. (4) Special circumstances. (2) Correlative allocations. 573. VerDate May<04>2004 08:00 May 19, 2004 Jkt 203087 PO 00000 Frm 00573 Fmt 8010 Sfmt 8010 Y:\SGML\ 203087T. 0 26 CFR Ch. I (4 1 04 Edition). (i) In general. (C) Applicable Federal rate. (ii) Manner of carrying out correlative al- (D) Lender in business of making loans. location. (E) Foreign currency loans. (iii) Events triggering correlative alloca- (3) Coordination with interest adjustments tion. required under certain other Internal Rev- (iv) Examples. enue Code sections. (3) Adjustments to conform accounts to re- (4) Examples.

5 Flect section 482 allocations. (b) Performance of services for another. (i) In general. (1) General rule. (ii) Example. (2) Benefit test. (4) Setoffs. (3) Arm's length charge. (i) In general. (4) Costs or deductions to be taken into ac- (ii) Requirements. count. (iii) Examples. (5) Costs and deductions not to be taken (h) Special rules. into account. (1) Small taxpayer safe harbor. [Reserved] (6) Methods. (2) Effect of foreign legal restrictions. (7) Certain services . (i) In general. (8) services rendered in connection with (ii) Applicable legal restrictions. the transfer of property. (iii) Requirement for electing the deferred (c) Use of tangible property. income method of accounting. (1) General rule. (iv) Deferred income method of accounting. (2) Arm's length charge. (v) Examples. (i) In general. (3) Coordination with section 936. (ii) Safe haven rental charge. (i) Cost sharing under section 936. (iii) Subleases.

6 (ii) Use of terms. (d) Transfer of property. (i) Definitions. (j) Effective dates. 3 Methods to determine taxable income in connection with a transfer of tangible prop- 2 Determination of taxable income in erty. specific situations. (a) In general. (a) Loans or advances. (b) Comparable uncontrolled price method. (1) Interest on bona fide indebtedness. (1) In general. (i) In general. (2) Comparability and reliability consider- (ii) Application of paragraph (a) of this sec- ations. tion. (i) In general. (A) Interest on bona fide indebtedness. (ii) Comparability. (B) Alleged indebtedness. (A) In general. (iii) Period for which interest shall be (B) Adjustments for differences between charged. controlled and uncontrolled transactions. (A) General rule. (iii) Data and assumptions. (B) Exception for certain intercompany (3) Arm's length range. transactions in the ordinary course of busi- (4) Examples. ness.

7 (5) Indirect evidence of comparable uncon- (C) Exception for trade or business of debt- trolled transactions. or member located outside the United (i) In general. States. (ii) Limitations. (D) Exception for regular trade practice of (iii) Examples. creditor member or others in creditor's in- (c) Resale price method. dustry. (1) In general. (E) Exception for property purchased for (2) Determination of arm's length price. resale in a foreign country. (i) In general. (1) General rule. (ii) Applicable resale price. (2) Interest-free period. (iii) Appropriate gross profit. (3) Average collection period. (iv) Arm's length range. (4) Illustration. (3) Comparability and reliability consider- (iv) Payment; book entries. ations. (2) Arm's length interest rate. (i) In general. (i) In general. (ii) Comparability. (ii) Funds obtained at situs of borrower. (A) Functional comparability. (iii) Safe haven interest rates for certain (B) Other comparability factors.

8 Loans and advances made after May 8, 1986. (C) Adjustments for differences between (A) Applicability. controlled and uncontrolled transactions. (1) General rule. (D) Sales agent. (2) Grandfather rule for existing loans. (iii) Data and assumptions. (B) Safe haven interest rate based on appli- (A) In general. cable Federal rate. (B) Consistency in accounting. 574. VerDate May<04>2004 08:00 May 19, 2004 Jkt 203087 PO 00000 Frm 00574 Fmt 8010 Sfmt 8010 Y:\SGML\ 203087T. Internal Revenue Service, Treasury 0. (4) Examples. (3) Ownership of intangible property. (d) Cost plus method. (i) In general. (1) In general. (ii) Identification of the owner. (2) Determination of arm's length price. (A) Legally protected intangible property. (i) In general. (B) Intangible property that is not legally (ii) Appropriate gross profit. protected. (iii) Arm's length range. (iii) Allocations with respect to assistance (3) Comparability and reliability consider- provided to the owner.

9 Ations. (iv) Examples. (i) In general. (4) Consideration not artificially limited. (ii) Comparability. (5) Lump sum payments. (A) Functional comparability. (i) In general. (B) Other comparability factors. (ii) Exceptions. (C) Adjustments for differences between (iii) Example. controlled and uncontrolled transactions. (D) Purchasing agent. 5 Comparable profits method. (iii) Data and assumptions. (a) In general. (A) In general. (b) Determination of arm's length result. (B) Consistency in accounting. (1) In general. (4) Examples. (e) Unspecified methods. (2) Tested party. (1) In general. (i) In general. (2) Example. (ii) Adjustments for tested party. (f) Coordination with intangible property (3) Arm's length range. rules. (4) Profit level indicators. (i) Rate of return on capital employed. 4 Methods to determine taxable income (ii) Financial ratios. in connection with a transfer of intangible (iii) Other profit level indicators.

10 Property. (c) Comparability and reliability consider- ations. (a) In general. (1) In general. (b) Definition of intangible. (2) Comparability. (c) Comparable uncontrolled transaction (i) In general. method. (ii) Functional, risk and resource com- (1) In general. parability. (2) Comparability and reliability consider- (iii) Other comparability factors. ations. (iv) Adjustments for differences between (i) In general. tested party and the uncontrolled taxpayers. (ii) Reliability. (3) Data and assumptions. (iii) Comparability. (i) In general. (A) In general. (ii) Consistency in accounting. (B) Factors to be considered in deter- (iii) Allocations between the relevant busi- mining comparability. ness activity and other activities. (1) Comparable intangible property. (d) Definitions. (2) Comparable circumstances. (e) Examples. (iv) Data and assumptions. (3) Arm's length range. 6 Profit split method. (4) Examples.