On June 30, 2016, the Internal Revenue Service (IRS) issued Chief Counsel Notice 2016-009, which can be found here. In the notice, the IRS updated the list of issues that require IRS National Office review (the List). The List indicates those issues or matters raised by IRS field examiners that must be coordinated with the appropriate IRS Associate office.

There are several new items on the List. Notably, corporate formations with repatriation transactions, certain spin-off transactions and transactions that may implicate Treasury Regulation § 1.701-2 partnership anti-abuse rules are now also included. Debt-equity issues pursuant to Section 385 continue to be on the List.

In addition, now included are issues designated for litigation and issues that for technical tax reasons will not be referred to the IRS Office of Appeals under Revenue Procedure 2016-22, Section 3.03 (also relating to issues designated for litigation). We discussed Revenue Procedure 2016-22 in a recent posting.
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In Altera Corp. v. Commissioner, 145 T.C. No. 3 (July 27, 2015), the Tax Court, in a unanimous reviewed opinion, held that regulations under Section 482 requiring parties to a qualified cost-sharing agreement (QCSA) to include stock-based compensation costs in the cost pool to comply with the arm’s-length standard were procedurally invalid because the US Deparment of Treasury and the Internal Revenue Service (IRS) did not engage in the “reasoned decisionmaking” required by the Administrative Procedures Act and the cases interpreting it. For a discussion of the Tax Court’s Altera opinion, see our prior On the Subject. The Commissioner of Internal Revenue (Commissioner) appealed this holding to the Ninth Circuit Court of Appeals; he filed his opening brief on June 27, 2016.

According to the Commissioner, the Tax Court’s holding was based on several related errors: (1) the Tax Court mistakenly concluded that promulgation of the QCSA regs required the IRS to engage in an “essentially empirical” analysis; (2) this led the court to apply the wrong standard; (3) in its analysis, the court relied heavily on its holding in Xilinx, Inc. v. Commissioner, 125 T.C. 37 (2005), that analysis of QCSAs must comport with the arm’s-length standard, meaning that a taxpayer can defend a QCSA by reference to comparable behavior between unrelated parties; and (4) the Tax Court failed to take into account that the finalization of the new QCSA regulations worked a “change in the legal landscape,” which should have altered the court’s analysis of the new regulations’ validity. Moreover, “the coordinating amendments [to the existing QCSA regulations] supersede [the Ninth Circuit’s] understanding of the arm’s-length standard as reflected in its own Xilinx opinion.”
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On March 7, 2016, the Internal Revenue Service (IRS) released a new International Practice Unit (IPU) on a specific transfer pricing method—the residual profit split method (RPSM).  The IPU explains to IRS examiners how to determine if the RPSM is the “best method” under Section 482, and if so, how to apply such method between

In Guidant LLC f.k.a. Guidant Corporation, and Subsidiaries, et al. v. Commissioner, 146 T.C. No. 5 (Feb. 29, 2016), the taxpayer filed a motion seeking partial summary judgment on the ground that the Internal Revenue Service’s (IRS’s) transfer pricing adjustments were “arbitrary, capricious and unreasonable” as a matter of law. Judge David Laro denied the motion, ruling that “whether the Commissioner abused his discretion … depends on the facts and circumstances of a given case.” The taxpayer’s motion thus presented “a question of fact that should be resolved on the basis of the trial record.”

The case involves transfer pricing adjustments under Section 482 that increased the income of Guidant Corporation and its U.S. subsidiaries by nearly $3.5 billion. Section 482 grants the IRS broad discretion to “distribute, apportion, or allocate gross income, deductions, credits, or allowances” between or among controlled enterprises if it determines that such a re-allocation is “necessary in order to prevent evasion of taxes or clearly to reflect the income” of any of the enterprises. A taxpayer that challenges a Section 482 adjustment has a “dual burden.” First, it must show that the IRS’s adjustments are “arbitrary, capricious, and unreasonable.” The taxpayer must then show that its intercompany transactions reflect arm’s-length dealing.
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