Imposition of Accuracy-Related Penalty

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8519]

RIN 1545-AS25

Imposition of Accuracy-Related Penalty

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: These amendments to the regulations under 26 CFR part 1

provide guidance on the imposition of the accuracy-related penalty

under Internal Revenue Code sections 6662 (e) and (h) and section

6664(c) for transactions between persons described in Internal Revenue

Code section 482 and net section 482 transfer price adjustments. This

action is necessary because of changes to the applicable tax laws made

by the Omnibus Budget Reconciliation Act of 1993.

EFFECTIVE DATE: These regulations are effective February 2, 1994.

These regulations apply to taxable years beginning after December

31, 1993.

FOR FURTHER INFORMATION CONTACT: Thomas L. Ralph at (202) 622-3880 (not

a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

This regulation is being issued without prior notice and public

procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553).

For this reason, the collection of information contained in this

regulation has been reviewed and, pending receipt and evaluation of

public comments, approved by the Office of Management and Budget (OMB)

under control number 1545-1365. The estimated annual burden per

recordkeeper varies from 5 hours to 15 hours, depending on individual

circumstances, with an estimated average of 10 hours.

These estimates are an approximation of the average time expected

to be necessary for a collection of information. They are based on such

information as is available to the Internal Revenue Service. Individual

recordkeepers may require greater or less time, depending on their

particular circumstances.

For further information concerning this collection of information,

and where to submit comments on this collection of information, the

accuracy of the estimated burden, and suggestions for reducing this

burden, please refer to the preamble in the cross-referencing notice of

proposed rulemaking published in the Proposed Rules section of this

issue of the Federal Register.

Background

On January 21, 1993, the IRS published a notice of proposed

rulemaking in the Federal Register (58 FR 5263) that proposed

amendments to the Income Tax Regulations under sections 6662 (e) and

(h) and section 6664(c) of the Internal Revenue Code of 1986 (Code), as

amended. Those proposed regulations implemented section 11312 of the

Omnibus Budget Reconciliation Act of 1990, Public Law 101-508, 104

Stat. 1388. Comments responding to the notice of proposed rulemaking

were received and a public hearing was held on May 14, 1993. Section

13236 of the Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-66,

107 Stat. 312) further amended sections 6662 (e) and (h) of the Code.

After consideration of all comments received and pursuant to the

statutory changes, the IRS has withdrawn the previous proposed

regulations and adopts this Treasury decision.

Explanation of Provisions

The principal purpose of these regulations is to set forth rules

implementing the imposition of accuracy-related penalties in the

context of section 482. The exceptions from the penalty imposed under

section 6662(e) in the case of certain net section 482 transfer pricing

adjustments are a key component of these rules are. Reflecting the

amendments to the statute pursuant to section 13236 of the Omnibus

Budget Reconciliation Act of 1993, the regulations provide a two-part

exception from the imposition of the penalty with respect to such

adjustments, depending on whether the taxpayer used a specified or

unspecified method under the regulations under section 482. If the

taxpayer used a specified method, the taxpayer must have reasonably

concluded, based on the available data and the potentially applicable

alternative specified methods, that its application of the selected

method resulted in the most accurate measure of an arm's length result.

Thus, if the taxpayer reasonably concluded that a different specified

method would result in a more accurate measure of an arm's length

result than the selected method, the taxpayer would not satisfy the

requirements of this exception. If the taxpayer used an unspecified

method, the taxpayer generally must have reasonably concluded, based on

the available data, that none of the specified methods was likely to

achieve an arm's length result and that the method used was likely to

achieve such a result.

Finally, irrespective of the method selected, the taxpayer must

have prepared documentation articulating the required analysis at the

time that the tax return was filed, and provide such documentation to

the Internal Revenue Service within 30 days of a request for such

documentation.

The Need for Transfer Pricing Analysis and Documentation

The arm's length standard seeks to mirror the results obtained by

unrelated parties in their business dealings. Unrelated parties analyze

the value of property or services prior to selling or buying such

property or services in the open market. However, transactions between

related parties do not involve the transfer of goods outside of the

related party group. A transfer price will not affect the total profit

ultimately realized by the group but may affect total tax liability. To

ensure that the transfer price a taxpayer reports on its income tax

return is determined in a manner consistent with the arm's length

standard, section 6662(e) encourages a taxpayer engaged in related

party transactions to prepare a factual and economic analysis based on

reasonably available related party and third party market data that

substantiates the price chosen, and to maintain appropriate

documentation of that analysis.

The experience of the IRS has been that the majority of taxpayers

do not provide an explanation of how their intercompany pricing was

established. In many cases examiners' access to a corporation's

transfer pricing information is delayed or denied. Moreover, many

taxpayers do not rely upon any form of comparables or other

contemporaneous information either in planning or in defending

intercompany transactions. The taxpayer, not having attempted to

structure the transaction in accordance with the arm's length standard,

seeks to defend its position on examination by finding whatever

uncontrolled transaction or transfer pricing method provides a result

that most closely approximates the result initially reported. The

failure by taxpayers to analyze their intercompany pricing prior to

audit increases controversy between taxpayers and the IRS, as both seek

to develop post hoc analyses of the arm's length character of the

transactions. Thus, the failure to apply the arm's length standard in

setting prices for controlled transactions (and the lack of

contemporaneous documentation explaining that application) increases

the time spent and expense incurred by both the taxpayer and the IRS in

determining whether that result was consistent with the arm's length

standard. Accordingly, these regulations are designed to encourage

taxpayers to make a serious effort to comply with the arm's length

standard, report an arm's length result on their income tax return,

document their transfer pricing analyses, and provide that

documentation to the IRS upon request.

Statutory Requirements

Section 6662(a) imposes a penalty in the amount of 20 percent of

any underpayment to which the section applies. Section 6662(b) lists

the types of underpayments to which section 6662(a) applies. One such

underpayment is an underpayment attributable to any substantial

valuation misstatement under chapter 1 of the Code.

Section 6662(e) defines a substantial valuation misstatement. These

temporary regulations under section 6662(e) contain the rules for

determining whether there is a substantial valuation misstatement

attributable to section 482 allocations. A substantial valuation

misstatement exists if (1) the transfer price for any property or

services (or for the use of property) claimed on a return is 200

percent or more (or 50 percent or less) of the amount determined under

section 482 to be the arm's length amount (the transactional penalty),

or (2) the net section 482 adjustment exceeds the lesser of five

million dollars or ten percent of gross receipts (the net adjustment

penalty).

Section 6662(h) increases the amount of the penalty to 40 percent

for both the transactional and the net adjustment penalties in the case

of a gross valuation misstatement. There is a gross valuation

misstatement if (1) the price for any property or services (or for the

use of property) claimed on any return in connection with any

transaction between persons described in section 482 is 400 percent or

more (or 25 percent or less) of the amount determined under section 482

to be the arm's length amount, or (2) the net section 482 adjustment

exceeds the lesser of twenty million dollars or twenty percent of gross

receipts.

Amounts Excluded From a Net Section 482 Adjustment

An amount is excluded from the calculation of a net section 482

adjustment if the requirements of Sec. 1.6662-6T(d)(2), (3), or (4) are

met with respect to that amount. If a taxpayer meets the requirements

of paragraph (d) of these regulations with respect to some, but not all

of the allocations made under section 482, then for purposes of

determining the net section 482 adjustment, setoffs, as taken into

account under Sec. 1.482-1T(e)(5), must be applied ratably against all

such allocations.

Specified Method Applied

Paragraph (d)(2) provides that an adjustment will be excluded from

the calculation of a net section 482 adjustment if the taxpayer

satisfies the specified method requirement of paragraph (d)(2)(ii) and

the documentation requirement of paragraph (d)(2)(iii). A taxpayer will

meet the specified method requirement if the taxpayer selects and

applies a method specified in the section 482 regulations in a

reasonable manner. A method is a specified method if it is described in

the regulations under section 482. With respect to transfers of

tangible property, these methods currently include the comparable

uncontrolled price method, resale price method, cost-plus method, and

comparable profits method. With respect to transfers of intangible

property these methods currently include the comparable uncontrolled

transactions method and comparable profits method. A bona fide cost

sharing arrangement under Sec. 1.482-2A(d)(4) is considered a specified

method.

Unspecified methods are methods other than specified methods. The

profit split method, under Sec. 1.482-6 of the proposed regulations and

qualified cost sharing arrangements, under Sec. 1.482-2(g) of the

proposed regulations, will become specified methods if and when

regulations describing those methods are finalized. A taxpayer will

ordinarily not be considered to have applied an unspecified method

merely because it failed to make an adjustment in the application of a

specified method. However, the failure to make adjustments is relevant

to the reasonableness of the application of that method. The selection

and application of a method are reasonable only if, given the available

data and the potentially available methods, the taxpayer reasonably

concluded that the method (and its application of that method) provided

the most accurate measure of an arm's length result under the

principles of the best method rule in Sec. 1.482-1T(b)(2)(iii).

The specified method standard differs from the more likely than not

be sustained on the merits standard set forth in proposed regulations

issued on January 21, 1993. This change reflects the amendments made by

section 13236 of the Omnibus Budget Reconciliation Act of 1993 (Pub. L.

103-66, 107 Stat. 312) to section 6662(e), under which a section 482

adjustment is to be excluded from the calculation of a net section 482

adjustment if the taxpayer reasonably applied one of the specified

section 482 methods (and satisfied the documentation requirements

described below). In selecting the method to apply, a taxpayer should

select the specified method that is most appropriate under the facts

and circumstances. Thus, the taxpayer must reasonably conclude that its

application of the transfer pricing method chosen will provide the most

accurate measure of an arm's length result under the facts and

circumstances of the transaction under review. The application of a

specified method will not satisfy this standard if the taxpayer

concluded, or should have concluded, that a reasonable application of

another specified method would provide a more accurate arm's length

result than the method chosen. For example, a taxpayer might not

satisfy this standard if the taxpayer applied the comparable profits

method to determine its prices but the taxpayer had data relating to a

comparable uncontrolled transaction involving substantially similar

conditions. Given the guidance set forth in the section 482 regulations

and the existence of closely comparable data, a conclusion that a

different analysis would provide a more accurate measure of an arm's

length result, ordinarily would not be reasonable.

A taxpayer's analysis of its transfer prices must include the most

current data that is available at the time that the taxpayer files its

tax return. These regulations require that taxpayers perform a

reasonably thorough search for data. However, this data may not reflect

transactions in the current taxable year. Accordingly, it may be

necessary for taxpayers to make compensating adjustments to reflect

changes in the data between the time that prices were set for the year

and the time that the return is filed.

Factors

The regulations discuss several nonexclusive factors that are to be

taken into account in determining whether the taxpayer reasonably

concluded that its application of the method selected would provide the

most accurate measure of an arm's length result. The first factor is

that a taxpayer's experience and knowledge in transfer pricing will be

relevant in determining how thorough and precise the taxpayer's

analysis must be. In assessing the experience and knowledge of the

taxpayer, the experience and knowledge of the controlled group is taken

into account, rather than the experience and knowledge of any member of

the controlled group. Thus, the larger and more sophisticated a

controlled group of corporations, the more thorough and precise its

analysis should be.

The second factor is the extent to which sufficient accurate data

is available to apply a method reasonably. A taxpayer is obligated to

engage in a reasonably thorough search for comparable transactions and

other data necessary to apply the methods under section 482. A factor

to consider in determining whether a search for data is reasonably

thorough is the cost of searching for the data in relation to the

dollar amount of the intercompany transaction in question. For example,

a taxpayer need not obtain data regarding a comparable uncontrolled

transaction if the intercompany transaction had a value of $50,000 and

the search for and analysis of the data will cost $25,000.

Alternatively, if necessary to reasonably apply a specified method, it

ordinarily would be reasonable to expect that a taxpayer would incur a

similar expense to search for and analyze data if the taxpayer is

engaged in intercompany transactions with a dollar amount of $250

million. If a taxpayer's analysis neglected data that it would have

been expected to obtain under the above criteria, then the analysis

would not be considered reasonable.

The third factor is the extent to which a taxpayer follows the

relevant requirements set forth in regulations under section 482.

Furthermore, in applying the selected method, the extent to which the

taxpayer makes all the adjustments necessary to reasonably conclude

that its application of the method chosen would provide the most

accurate measure of an arm's length result will be taken into account.

The fourth factor is the extent to which the taxpayer relied on the

advice of a qualified professional. The extent to which reliance is

appropriate will depend on the qualifications of the professional and

the quality of the study or other advice that is rendered, rather than

the relationship that the professional has to the taxpayer.

Unspecified Method Applied

Paragraph (d)(3) provides that an adjustment will be excluded from

the calculation of a net section 482 adjustment if the taxpayer

satisfies the unspecified method requirement of paragraph (d)(3)(ii)

and the documentation requirement of paragraph (d)(3)(iii). The

unspecified method requirement is met if a method other than a

specified method was applied and the requirements of paragraph

(d)(3)(ii) (B) or (C) are met, as appropriate.

Paragraph (d)(3)(ii)(B) provides that if the transaction is of a

type for which there are specified methods, then a taxpayer will be

considered to have met the unspecified method requirement if the

taxpayer reasonably concludes that, given the available data, none of

the specified methods was likely to provide an accurate measure of an

arm's length result, and that it selected and applied an unspecified

method in a way that would likely provide an accurate measure of an

arm's length result, given the available data.

Paragraph (d)(3)(ii)(C) provides that if the transaction is of a

type for which there are no specified methods, then a taxpayer will be

considered to have met the unspecified method requirement if it

selected and applied an unspecified method in a reasonable manner. A

taxpayer's selection and application is reasonable if the taxpayer

reasonably concludes that the method (and its application of that

method) provided the most accurate measure of an arm's length result

under the principles of the best method rule in Sec. 1.482-

T(b)(2)(iii).

Documentation Requirement

An examiner cannot effectively examine a taxpayer's transfer

pricing without adequate documentation setting forth the basic transfer

pricing analysis conducted by the taxpayer. Accordingly, the

documentation requirement does not provide a long, rigid list of

documents that must be maintained; rather it focuses on the type of

information necessary to evaluate how the taxpayer determined its

transfer prices. The documentation requirements are essentially the

same regardless of whether the taxpayer uses a specified method or an

unspecified method. They diverge only in what the documentation must

establish rather than the type of information that must be maintained.

A taxpayer that uses a specified method must maintain sufficient

documentation (that is in existence when the return is filed) to

establish that it met the specified method requirement. A taxpayer that

uses an unspecified method must maintain sufficient documentation (that

is in existence when the return is filed) to establish that it met the

unspecified method requirement. Regardless of the method used by the

taxpayer, it must provide that documentation to the IRS within 30 days

of a request.

The temporary regulations set forth two classifications of

documentation--principal and background documents. Principal documents

consist of the basic transfer pricing analysis conducted by the

taxpayer. Background documents are documents that typically support the

principal documents. Only principal documents must be provided upon the

IRS's request for principal documents. However, both types of

documentation must be produced within thirty days of a request.

A district director has discretion to extend the period for

producing principal documents only if the taxpayer has made a minor or

inadvertent failure to provide the required documents, has otherwise

made a good faith effort to comply, and remedies the failure when it

becomes known. For background documents, a district director has

discretion to extend the production period for a short period.

Foreign-to-Foreign Transactions

Finally, paragraph (d)(4) provides that adjustments that are

attributable to a transaction between foreign corporations are also

excluded from the calculation of a net section 482 adjustment, unless

the treatment of that transaction affects the determination of U.S.

source income or taxable income that is effectively connected with the

conduct of a trade or business within the United States.

Carryovers and Carrybacks

The regulations contain a special rule concerning tax benefits,

such as losses, deductions, or credits, that may be carried to another

taxable year. If a taxpayer's substantial or gross valuation

misstatement gives rise to such a tax benefit that is carried to

another taxable year, then the penalty will be imposed on any resulting

underpayment of tax attributable to such a tax benefit in that other

taxable year. In determining whether there is a substantial or gross

valuation misstatement for a taxable year, no amount carried from

another taxable year shall be included.

Coordination Rules

The coordination rules remain substantively unchanged from the

proposed regulations issued on January 21, 1993. These regulations

provide rules for coordinating imposition of the transactional penalty

and the net adjustment penalty.

Advance Pricing Agreements

If a transfer pricing methodology is developed and applied pursuant

to an Advance Pricing Agreement in any tax year, that methodology may

reasonably be relied upon in the current year if the relevant facts and

circumstances have not changed or if the methodology has been

appropriately modified to reflect any changes in facts and

circumstances.

Effective Date

These regulations apply to taxable years beginning after December

31, 1993. For taxable years ending after November 5, 1990, but

beginning prior to January 1, 1994, the Treasury Department considers

the proposed regulations issued on January 21, 1993, to be a reasonable

interpretation of sections 6662 (e) and (h), except that no requirement

of contemporaneous documentation may be imposed for transactions prior

to April 21, 1993. In any case, contemporaneous documentation may be

helpful in establishing that the taxpayer had reasonable cause and

acted in good faith.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in Executive Order 12866.

Therefore, an initial Regulatory Impact Analysis is not required. It

has also been determined that section 553(b) of the Administrative

Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act

(5 U.S.C. chapter 6) do not apply to these regulations, and, therefore,

an initial Regulatory Flexibility Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue Code, these temporary

regulations will be submitted to the Chief Counsel for Advocacy of the

Small Business Administration for comment on their impact on small

business.

Drafting Information

The principal author of these regulations is Thomas L. Ralph of the

Office of the Associate Chief Counsel (International), Internal Revenue

Service. However, other personnel from the IRS and Treasury Department

participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding

an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * * Secs. 1.6662-0 and 1.6662-6T

also issued under 26 U.S.C. 6662. * * *

Par. 2. Section 1.6662-0 is amended by:

1. Adding the entries for Sec. 1.6662-5T.

2. Adding the entries for Sec. 1.6662-6T.

3. The additions read as follows:

Sec. 1.6662-0 Table of contents. * * *

* * * * *

Section 1.6662-5T Substantial and Gross Valuation Misstatements

Under Chapter 1 (Temporary)

(a) through (d) [Reserved]

(e) Definitions.

(1) Substantial valuation misstatement.

(i) 200 percent test.

(ii) Tests related to section 482.

(2) Gross valuation misstatement.

(i) 400 percent test.

(ii) Tests related to section 482.

(3) Property.

(f) through (i) [Reserved]

(j) Transactions between persons described in section 482 and

net section 482 transfer price adjustments.

Section 1.6662-6T Transactions Between Persons Described in Section

482 and Net Section 482 Transfer Price Adjustments (Temporary)

(a) In general.

(1) Purpose and scope.

(2) Reported results.

(3) Identical terms used in section 482 regulations.

(b) The transactional penalty.

(1) Substantial valuation misstatement.

(2) Gross valuation misstatement.

(3) Reasonable cause and good faith.

(c) Net adjustment penalty.

(1) Net section 482 adjustment.

(2) Substantial valuation misstatement.

(3) Gross valuation misstatement.

(4) Setoff allocation rule.

(5) Gross receipts.

(6) Coordination with reasonable cause exception under section

6664(c).

(7) Examples.

(d) Amounts excluded from net section 482 adjustments.

(1) In general.

(2) Application of a specified section 482 method.

(i) In general.

(ii) Specified method requirement.

(iii) Documentation requirement.

(A) In general.

(B) Principal documents.

(C) Background documents.

(3) Application of an unspecified method.

(i) In general.

(ii) Unspecified method requirement.

(A) In general.

(B) Specified method potentially applicable.

(C) No specified method applicable.

(iii) Documentation requirement.

(A) In general.

(B) Principal and background documents.

(4) Certain foreign to foreign transactions.

(5) Special rule.

(6) Examples.

(e) Special rules in the case of carrybacks and carryovers.

(f) Rules for coordinating between the transactional penalty and

the net adjustment penalty.

(1) Coordination of a net section 482 adjustment subject to the net

adjustment penalty and a gross valuation misstatement subject to the

transactional penalty.

(2) Coordination of net section 482 adjustment subject to the net

adjustment penalty and substantial valuation misstatements subject to

the transactional penalty.

(3) Examples.

(g) Effective date.

Par. 3. Section 1.6662-5T is added to read as follows:

Sec. 1.6662-5T Substantial and gross valuation misstatements under

chapter 1 (temporary).

(a) through (d) [Reserved]

(e) Definitions--(1) Substantial valuation misstatement. There is

a substantial valuation misstatement if--

(i) 200 percent test. The value or adjusted basis of any property

claimed on a return of tax imposed under chapter 1 of the Internal

Revenue Code is 200 percent or more of the correct amount; or

(ii) Tests related to section 482. There is a misstatement

described in Sec. 1.6662-6T (b)(1) or (c)(1) (concerning substantial

valuation misstatements pertaining to transactions between related

persons).

(2) Gross valuation misstatement. There is a gross valuation

misstatement if--

(i) 400 percent test. The value or adjusted basis of any property

claimed on a return of tax imposed under chapter 1 of the Internal

Revenue Code is 400 percent or more of the correct amount; or

(ii) Tests related to section 482. There is a misstatement

described in Sec. 1.6662-6T (b)(2) or (c)(2) (concerning gross

valuation misstatements pertaining to transactions between related

persons).

(3) Property. For purposes of this section, the term property

refers to both tangible and intangible property. Tangible property

includes property such as money, land, buildings, fixtures, and

inventory. Intangible property includes property such as goodwill,

covenants not to compete, leaseholds, patents, contract rights, debts,

choses in action, and any other item of intangible property described

in Sec. 1.482-4T(b).

(f) through (i) [Reserved]

(j) Transactions between persons described in section 482 and net

section 482 transfer price adjustments. For rules relating to the

penalty imposed with respect to a substantial or gross valuation

misstatement arising from a section 482 allocation, see Sec. 1.6662-6T.

Par. 4. Section 1.6662-6T is added to read as follows:

Sec. 1.6662-6T Transactions between persons described in section 482

and net section 482 transfer price adjustments.

(a) In general--(1) Purpose and scope. Pursuant to section 6662(e)

a penalty is imposed on any underpayment attributable to a substantial

valuation misstatement pertaining to either a transaction between

persons described in section 482 (the transactional penalty) or a net

section 482 transfer price adjustment (the net adjustment penalty). The

penalty is equal to 20 percent of the underpayment of tax attributable

to that substantial valuation misstatement. Pursuant to section 6662(h)

the penalty is increased to 40 percent of the underpayment in the case

of a gross valuation misstatement with respect to either penalty.

Paragraph (b) of this section provides specific rules related to the

transactional penalty. Paragraph (c) of this section provides specific

rules related to the net adjustment penalty, and paragraph (d) of this

section describes amounts that will be excluded for purposes of

calculating the net adjustment penalty. Paragraph (e) of this section

sets forth special rules in the case of carrybacks and carryovers.

Paragraph (f) of this section provides coordination rules between

penalties. Paragraph (g) of this section provides the effective date of

this section.

(2) Reported results. Whether an underpayment is attributable to a

substantial or gross valuation misstatement must be determined from the

results of controlled transactions that are reported on an income tax

return, regardless of whether the amount reported differs from the

transaction price initially reflected in the taxpayer's books and

records. The results of controlled transactions that are reported on an

amended return will be used only if the amended return is filed before

the Internal Revenue Service has contacted the taxpayer regarding the

corresponding original return. A written statement furnished by a

taxpayer subject to the Coordinated Examination Program will be

considered an amended return for purposes of this section if it

satisfies either the requirements of a qualified amended return for

purposes of Sec. 1.6664-2(c)(3) or such requirements as the

Commissioner may prescribe by revenue procedure. In the case of a

taxpayer that is a member of a consolidated group, the rules of this

paragraph (a)(2) apply to the consolidated income tax return of the

group.

(3) Identical terms used in section 482 regulations. For purposes

of this section, the terms used in these regulations shall have the

same meaning as identical terms used in regulations under section 482.

(b) The transactional penalty--(1) Substantial valuation

misstatement. In the case of any transaction between related persons,

there is a substantial valuation misstatement if the price for any

property or services (or for the use of property) claimed on any return

is 200 percent or more (or 50 percent or less) of the amount determined

under section 482 to be the correct price.

(2) Gross valuation misstatement. In the case of any transaction

between related persons, there is a gross valuation misstatement if the

price for any property or services (or for the use of property) claimed

on any return is 400 percent or more (or 25 percent or less) of the

amount determined under section 482 to be the correct price.

(3) Reasonable cause and good faith. Pursuant to section 6664(c),

the transactional penalty will not be imposed on any portion of an

underpayment with respect to which the requirements of Sec. 1.6664-4

are met. A taxpayer that meets the requirements of paragraph (d) of

this section with respect to an allocation under section 482 will be

treated as having established that there was reasonable cause and good

faith with respect to that item for purposes of Sec. 1.6664-4. If a

substantial or gross valuation misstatement under the transactional

penalty also constitutes (or is part of) a substantial or gross

valuation misstatement under the net adjustment penalty, then the rules

of section (d) (and not the rules of Sec. 1.6664-4) will be applied to

determine whether the adjustment is excluded from calculation of the

net section 482 adjustment.

(c) Net adjustment penalty--(1) Net section 482 adjustment. For

purposes of this section, the term net section 482 adjustment means the

sum of all increases in the taxable income of a taxpayer for a taxable

year resulting from allocations under section 482 (determined without

regard to any amount carried to such taxable year from another taxable

year) less any decreases in taxable income attributable to collateral

adjustments as described in Sec. 1.482-1T(e). For purposes of this

section, amounts that meet the requirements of paragraph (d) of this

section will be excluded from the calculation of the net section 482

adjustment. Substantial and gross valuation misstatements that are

subject to the transactional penalty under paragraphs (b) (1) or (2)

are included in determining the amount of the net section 482

adjustment. See paragraph (f) of this section for coordination rules

between penalties.

(2) Substantial valuation misstatement. There is a substantial

valuation misstatement if a net section 482 adjustment is greater than

the lesser of 5 million dollars or ten percent of gross receipts.

(3) Gross valuation misstatement. There is a gross valuation

misstatement if a net section 482 adjustment is greater than the lesser

of 20 million dollars or twenty percent of gross receipts.

(4) Setoff allocation rule. If a taxpayer meets the requirements of

paragraph (d) of this section with respect to some, but not all of the

allocations made under section 482, then for purposes of determining

the net section 482 adjustment, setoffs, as taken into account under

Sec. 1.482-1T(e)(5), must be applied ratably against all such

allocations. The following example illustrates the principle of this

paragraph (c)(4).

Example. (i) The Internal Revenue Service makes the following

section 482 adjustments for the taxable year:

(1)........................................................ $9,000,000

(2)........................................................ 6,000,000

(3) Because of a setoff under Sec. 1.482-1T(e)(5).......... (5,000,000)

------------

Total section 482 adjustments.......................... 10,000,000

(ii) The taxpayer meets the requirements of paragraph (d) with

respect to adjustment number one, but not with respect to adjustment

number two. The five million dollar setoff will be allocated ratably

against the nine million dollar adjustment ($9,000,000/$15,000,000

x $5,000,000 = $3,000,000) and the six million dollar adjustment

($6,000,000/$15,000,000 x $5,000,000 = $2,000,000). Accordingly,

in determining the net section 482 adjustment, the nine million

dollar adjustment is reduced to six million dollars ($9,000,000 -

$3,000,000) and the six million dollar adjustment is reduced to four

million dollars ($6,000,000 - $2,000,000). Therefore, the net

section 482 adjustment equals four million dollars.

(5) Gross receipts. For purposes of this section, gross receipts

must be computed pursuant to the rules contained in Sec. 1.448-

1T(f)(2)(iv), as adjusted to reflect allocations under section 482.

(6) Coordination with reasonable cause exception under section

6664(c). Pursuant to section 6662(e)(3)(D), a taxpayer will be treated

as having reasonable cause under section 6664(c) for any portion of an

underpayment attributable to a net section 482 adjustment only if the

taxpayer meets the requirements of paragraph (d) of this section with

respect to that portion.

(7) Examples. The principles of this paragraph (c) are illustrated

by the following examples.

Example 1. (i) The Internal Revenue Service makes the following

section 482 adjustments for the taxable year:

(1) Attributable to an increase in gross income because of

an increase in royalty payments........................... $2,000,000

(2) Attributable to an increase in sales proceeds due to a

decrease in the profit margin of a related buyer.......... 2,500,000

(3) Attributable to a decrease in the cost of goods sold

because of a decrease in the cost plus mark-up of a

related seller............................................ 2,000,000

------------

Total section 482 adjustments.......................... 6,500,000

(ii) None of the adjustments are excluded under paragraph (d) of

this section. The net section 482 adjustment ($6.5 million) is

greater than five million dollars. Therefore, there is a substantial

valuation misstatement.

Example 2. (i) The Internal Revenue Service makes the following

section 482 adjustments for the taxable year:

(1)....................................................... $11,000,000

(2)....................................................... 2,000,000

(3) Because of a setoff under Sec. 1.482-1T(e)(5)......... 9,000,000)

-------------

Total section 482 adjustments......................... 4,000,000

(ii) The taxpayer has gross receipts of sixty million dollars

after taking into account all section 482 adjustments. None of the

adjustments are excluded under paragraph (d) of this section. The

net section 482 adjustment ($4 million) is less than the lesser of

five million dollars or ten percent of gross receipts ($60 million

x 10% = $6 million). Therefore, there is no substantial valuation

misstatement.

Example 3. (i) The Internal Revenue Service makes the following

section 482 adjustments to the income of an affiliated group that

files a consolidated return for the taxable year:

(1) Attributable to Member A................................ $1,500,000

(2) Attributable to Member B................................ 1,000,000

(3) Attributable to Member C................................ 2,000,000

-----------

Total section 482 adjustments........................... 4,500,000

(ii) Members A, B, and C have gross receipts of 20 million

dollars, 12 million dollars, and 11 million dollars, respectively.

Thus, the total gross receipts are 43 million dollars. None of the

adjustments are excluded under paragraph (d) of this section. The

net section 482 adjustment ($4.5 million) is greater than the lesser

of five million dollars or ten percent of gross receipts ($43

million x 10%=$4.3 million). Therefore, there is a substantial

valuation misstatement.

Example 4. (i) The Internal Revenue Service makes the following

section 482 adjustments to the income of an affiliated group that

files a consolidated return for the taxable year:

(1) Attributable to Member A................................ $1,500,000

(2) Attributable to Member B................................ 3,000,000

(3) Attributable to Member C................................ 2,500,000

-----------

Total section 482 adjustments........................... 7,000,000

(ii) Members A, B, and C have gross receipts of 20 million

dollars, 35 million dollars, and 40 million dollars, respectively.

Thus, the total gross receipts are 95 million dollars. None of the

adjustments are excluded under paragraph (d) of this section. The

net section 482 adjustment (7 million dollars) is greater than the

lesser of five million dollars or ten percent of gross receipts ($95

million x 10%=$9.5 million). Therefore, there is a substantial

valuation misstatement.

Example 5. (i) The Internal Revenue Service makes the following

section 482 adjustments to the income of an affiliated group that

files a consolidated return for the taxable year:

(1) Attributable to Member A................................ $2,000,000

(2) Attributable to Member B................................ 1,000,000

(3) Attributable to Member C................................ 1,500,000

-----------

Total section 482 adjustments........................... 4,500,000

(ii) Members A, B, and C have gross receipts of 10 million

dollars, 35 million dollars, and 40 million dollars, respectively.

Thus, the total gross receipts are 85 million dollars. None of the

adjustments are excluded under paragraph (d) of this section. The

net section 482 adjustment ($4.5 million) is less than the lesser of

five million dollars or ten percent of gross receipts ($85

million x 10%=$8.5 million). Therefore, there is no substantial

valuation misstatement even though individual member A's adjustment

($2 million) is greater than ten percent of its individual gross

receipts ($10 million x 10%=$1 million).

(d) Amounts excluded from net section 482 adjustments--(1) In

general. An amount is excluded from the calculation of a net section

482 adjustment if the requirements of paragraph (d)(2), (3), or (4) of

this section are met with respect to that amount.

(2) Application of a specified section 482 method--(i) In general.

An amount is excluded from the calculation of a net section 482

adjustment if the taxpayer establishes that both the specified method

and documentation requirements of this paragraph (d)(2) are met with

respect to that amount. For purposes of this paragraph (d), a method

will be considered a specified method if it is described in the

regulations under section 482 and the method applies to transactions of

the type under review. A bona fide cost sharing arrangement is

considered a specified method. See Sec. 1.482-2A(d)(4). An unspecified

method is not considered a specified method. See Sec. 1.482-3T(e) and

Sec. 1.482-4T(d).

(ii) Specified method requirement. The specified method requirement

is met if the taxpayer selects and applies a specified method in a

reasonable manner. The taxpayer's selection and application of a

specified method is reasonable only if, given the available data and

the applicable pricing methods, the taxpayer reasonably concluded that

the method (and its application of that method) provided the most

accurate measure of an arm's length result under the principles of the

best method rule in Sec. 1.482-1T(b)(2)(iii). For examples illustrating

the selection of a specified method consistent with this paragraph

(d)(2)(ii), see Sec. 1.482-1T(b)(2)(iii)(C). An application of a

specified method provides the most accurate measure of an arm's length

result if it provides a more accurate measure of an arm's length result

than any alternative specified method and any alternative application

of the method chosen. Thus, it is not necessary for a taxpayer to

conclude that the selected specified method provides a more accurate

measure of an arm's length result than any unspecified method. Whether

the taxpayer's conclusion was reasonable must be determined from all

the facts and circumstances. The factors relevant to this determination

include the following:

(A) The experience and knowledge of the taxpayer, including all

members of the taxpayer's controlled group.

(B) The extent to which accurate data was available and the data

was analyzed in a reasonable manner. A taxpayer must engage in a

reasonably thorough search for the data necessary to determine which

method should be selected and how it should be applied. Furthermore, a

taxpayer must use the most current reliable data that is available

before the return is filed. In this regard, the expense of collecting

data relative to the dollar amount of the transactions in question is a

factor that may be taken into account in determining the scope of a

reasonably thorough search for data.

(C) The extent to which the taxpayer followed the relevant

requirements set forth in regulations under section 482 with respect to

the application of the method.

(D) The extent to which the taxpayer reasonably relied on the

analysis of, or a study done by, a professional qualified to conduct

such an analysis or study, including an attorney, accountant, or

economist. Whether the professional is an employee of, or related to,

the taxpayer is not determinative in evaluating the reliability of that

analysis or study, as long as the analysis or study is objective,

thorough, and well reasoned. Such reliance is reasonable only if the

taxpayer disclosed to the professional all relevant information

regarding the controlled transactions at issue. A transfer pricing

study or analysis that was reasonably relied upon in a prior year may

reasonably be relied upon in the current year if the relevant facts and

circumstances have not changed or if the study or analysis has been

appropriately modified to reflect any change in facts and

circumstances.

(iii) Documentation requirement--(A) In general. The documentation

requirement of this paragraph (d)(2)(iii) is met if the taxpayer

maintains sufficient documentation to establish that the taxpayer

reasonably concluded that, given the available data and the applicable

pricing methods, the method (and its application of that method)

provided the most accurate measure of an arm's-length result under the

principles of the best method rule in Sec. 1.482-1T(b)(2)(iii), and

provides that documentation to the Internal Revenue Service within 30

days of a request for it. That documentation must be in existence when

the return is filed. The district director may, in his discretion,

excuse a minor or inadvertent failure to provide required documents,

but only if the taxpayer has made a good faith effort to comply, and

the taxpayer promptly remedies the failure when it becomes known. The

required documentation is divided into two categories, principal and

background documents, as described in paragraphs (d)(2)(iii) (B) and

(C) of this section.

(B) Principal documents. The principal documents should accurately

and completely describe the basic transfer pricing analysis conducted

by the taxpayer. The documentation must include the following--

(1) An overview of the taxpayer's business, including an analysis

of the economic and legal factors that affect the pricing of its

property or services;

(2) A description of the taxpayer's organizational structure

(including an organization chart) covering all related parties engaged

in transactions potentially relevant under section 482, including

foreign affiliates whose transactions directly or indirectly affect the

pricing of property or services in the United States;

(3) Any documentation explicitly required by the regulations under

section 482;

(4) A description of the specified method selected and an

explanation of why that method was selected;

(5) A description of the unspecified methods that were considered

and an explanation of why they were not selected;

(6) A description of the controlled transactions (including the

terms of sale) and any internal data used to analyze those

transactions;

(7) A description of the comparables that were used, how

comparability was evaluated, and what (if any) adjustments were made;

(8) An explanation of the economic analysis and projections relied

upon in developing the method; and

(9) A general index of the principal and background documents and a

description of the recordkeeping system used for cataloging and

accessing those documents.

(C) Background documents. The assumptions, conclusions, and

positions contained in principal documents ordinarily will be based on,

and supported by, additional background documents. Documents that

support the principal documentation may include the documents listed in

Sec. 1.6038A-3(c) that are not otherwise described in paragraph

(d)(2)(iii)(B) of this section. Every document listed in those

regulations may not be relevant to pricing determinations under the

taxpayer's specific facts and circumstances and, therefore, each of

those documents need not be maintained in all circumstances. Moreover,

other documents not listed in those regulations may be necessary to

establish that the taxpayer's method was selected and applied in the

way that provided the most accurate measure of an arm's length result

under the principles of the best method rule in Sec. 1.482-

1T(b)(2)(iii). Background documents need not be provided to the

Internal Revenue Service in response to a request for principal

documents. If the Internal Revenue Service subsequently requests

background documents, a taxpayer must provide that documentation to the

Internal Revenue Service within 30 days of the request. However, the

district director may, in his discretion, extend the period for

producing the background documentation.

(3) Application of an unspecified method--(i) In general. An

adjustment is excluded from the calculation of a net section 482

adjustment if the taxpayer establishes that both the unspecified method

and documentation requirements of this paragraph (d)(3) are met with

respect to that amount.

(ii) Unspecified method requirement--(A) In general. If a method

other than a specified method was applied, the unspecified method

requirement is met if the requirements of paragraph (d)(3)(ii) (B) or

(C), as appropriate, are met.

(B) Specified method potentially applicable. If the transaction is

of a type for which methods are specified in the regulations under

section 482, then a taxpayer will be considered to have met the

unspecified method requirement if the taxpayer reasonably concludes

that, given the available data, none of the specified methods was

likely to provide an accurate measure of an arm's length result, and

that it selected and applied an unspecified method in a way that would

likely provide an accurate measure of an arm's length result, given the

available data. This conclusion must be based on all the facts and

circumstances. The factors relevant to this conclusion include those

set forth in paragraph (d)(2)(ii) of this section.

(C) No specified method applicable. If the transaction is of a type

for which no methods are specified in the regulations under section

482, then a taxpayer will be considered to have met the unspecified

method requirement if it selected and applied an unspecified method in

a reasonable manner. For purposes of this paragraph (d)(3)(ii)(C), a

taxpayer's selection and application is reasonable if the taxpayer

reasonably concludes that the method (and its application of that

method) provided the most accurate measure of an arm's length result

under the principles of the best method rule in Sec. 1.482-

1T(b)(2)(iii). This conclusion must be based on all the facts and

circumstances. The factors relevant to this conclusion include those

set forth in paragraph (d)(2)(ii) of this section.

(iii) Documentation requirement--(A) In general. The documentation

requirement of this paragraph (d)(3) is met if the taxpayer maintains

sufficient documentation to establish that the unspecified method

requirement of paragraph (d)(3)(ii) of this section is met and provides

that documentation to the Internal Revenue Service within 30 days of a

request for it. That documentation must be in existence when the return

is filed. The district director may, in his discretion, excuse a minor

or inadvertent failure to provide required documents, but only if the

taxpayer has made a good faith effort to comply, and the taxpayer

promptly remedies the failure when it becomes known.

(B) Principal and background documents. See paragraphs (d)(2)(iii)

(B) and (C) of this section for rules regarding these two categories of

required documentation.

(4) Certain foreign to foreign transactions. For purposes of

calculating a net section 482 adjustment, any increase in taxable

income resulting from an allocation under section 482 that is

attributable to any controlled transaction solely between foreign

corporations will be excluded unless the treatment of that transaction

affects the determination of either corporation's income from sources

within the United States or taxable income effectively connected with

the conduct of a trade or business within the United States.

(5) Special rule. If the regular tax (as defined in section 55(c))

imposed on the taxpayer is determined by reference to an amount other

than taxable income, that amount shall be treated as the taxable income

of the taxpayer for purposes of section 6662(e)(3). Accordingly, for

taxpayers whose regular tax is determined by reference to an amount

other than taxable income, the increase in that amount resulting from

section 482 allocations is the taxpayer's net section 482 adjustment.

(6) Examples. The principles of this paragraph (d) are

illustrated by the following examples.

Example 1. (i) The Internal Revenue Service makes the following

section 482 adjustments for the taxable year:

(1)........................................................ $9,000,000

(2) Not a 200 percent or 400 percent adjustment............ 2,000,000

(3)........................................................ 9,000,000

------------

Total section 482 adjustments.......................... 20,000,000

(ii) The taxpayer has gross receipts of seventy-five million

dollars after all section 482 adjustments. The taxpayer establishes

that for adjustments number one and three, it applied a transfer

pricing method specified in section 482, the selection and

application of the method was reasonable, it documented the pricing

analysis, and turned that documentation over to the IRS within 30

days of a request. Accordingly, eighteen million dollars is excluded

from the calculation of the net section 482 adjustment. Because the

net section 482 adjustment is two million dollars, there is no

substantial valuation misstatement.

Example 2. (i) The Internal Revenue Service makes the following

section 482 adjustments for the taxable year:

(1)......................................................... $9,000,000

(2) Attributable to an adjustment that is 200 percent or

more of the correct section 482 price...................... 2,000,000

(3)......................................................... 9,000,000

-----------

Total section 482 adjustments........................... 20,000,000

(ii) The taxpayer has gross receipts of seventy-five million

dollars after all section 482 adjustments. The taxpayer establishes

that for adjustments number one and three it applied a transfer

pricing method specified in section 482, the selection and

application of the method was reasonable, it documented that

analysis, and turned the documentation over to the IRS within 30

days. Accordingly, eighteen million dollars is excluded from the

calculation of the section 482 transfer pricing adjustments for

purposes of applying the five million dollar or 10% of gross

receipts test. Because the net section 482 adjustment is only two

million dollars, the taxpayer is not subject to the net adjustment

penalty. However, the taxpayer may be subject to the transactional

penalty on the underpayment of tax attributable to the two million

dollar adjustment.

Example 3. CFC1 and CFC2 are controlled foreign corporations

within the meaning of section 957. Applying section 482, the IRS

disallows a deduction for twenty five million dollars of the

interest that CFCI paid to CFC2, which results in CFC1's U.S.

shareholder having a subpart F inclusion in excess of five million

dollars. No other adjustments under section 482 are made with

respect to the controlled taxpayers. However, the increase has no

effect upon the determination of CFC1's or CFC2's income from

sources within the United States or taxable income effectively

connected with the conduct of a trade or business within the United

States. Accordingly, there is no substantial valuation misstatement.

(e) Special rules in the case of carrybacks and carryovers. If

there is a substantial or gross valuation misstatement for a taxable

year that gives rise to a loss, deduction or credit that is carried to

another taxable year, the transactional penalty and the net adjustment

penalty will be imposed on any resulting underpayment of tax in that

other taxable year. In determining whether there is a substantial or

gross valuation misstatement for a taxable year, no amount carried from

another taxable year shall be included. The following example

illustrates the principle of this paragraph (e).

Example. The Internal Revenue Service makes a section 482

adjustment of six million dollars in taxable year 1, no portion of

which is excluded under paragraph (d) of this section. The

taxpayer's income tax return for year 1 reported a loss of three

million dollars, which was carried to taxpayer's year 2 year income

tax return and used to reduce income taxes otherwise due with

respect to year 2. A determination is made that the six million

dollar allocation constitutes a substantial valuation misstatement,

and a penalty is imposed on the underpayment of tax in year 1

attributable to the substantial valuation misstatement and on the

underpayment of tax in year 2 attributable to the disallowance of

the net operating loss in year 2. For purposes of determining

whether there is a substantial or gross valuation misstatement for

year 2, the three million dollar reduction of the net operating loss

will not be added to any section 482 adjustments made with respect

to year 2.

(f) Rules for coordinating between the transactional penalty and

the net adjustment penalty--(1) Coordination of a net section 482

adjustment subject to the net adjustment penalty and a gross valuation

misstatement subject to the transactional penalty. In determining

whether a net section 482 adjustment exceeds five million dollars or 10

percent of gross receipts, an adjustment attributable to a substantial

or gross valuation misstatement that is subject to the transactional

penalty will be taken into account. If the net section 482 adjustment

exceeds five million dollars or ten percent of gross receipts, any

portion of such amount that is attributable to a gross valuation

misstatement will be subject to the transactional penalty at the forty

percent rate, but will not also be subject to net adjustment penalty at

a twenty percent rate. The remaining amount is subject to the net

adjustment penalty at the twenty percent rate, even if such amount is

less than the lesser of five million dollars or ten percent of gross

receipts.

(2) Coordination of net section 482 adjustment subject to the net

adjustment penalty and substantial valuation misstatements subject to

the transactional penalty. If the net section 482 adjustment exceeds

twenty million dollars or 20 percent of gross receipts, the entire

amount of the adjustment is subject to the net adjustment penalty at a

forty percent rate. No portion of the adjustment is subject to the

transactional penalty at a twenty percent rate.

(3) Examples. The following examples illustrate the principles

of this paragraph (f).

Example 1. (i) Applying section 482, the Internal Revenue

Service makes the following adjustments for the taxable year:

(1) Attributable to an adjustment that is 400 percent or

more of the correct section 482 arm's length result........ $2,000,000

(2) Not a 200 or 400 percent adjustment..................... 2,500,000

-----------

Total................................................... 4,500,000

(ii) The taxpayer has gross receipts of 75 million dollars after

all section 482 adjustments. None of the adjustments is excluded

under paragraph (d) (Amounts excluded from net section 482

adjustments) of this section, in determining the five million dollar

or 10% of gross receipts test under section 6662(e)(1)(B)(ii). The

net section 482 adjustment (4.5 million dollars) is less than the

lesser of five million dollars or ten percent of gross receipts ($75

million x 10% = $7.5 million). Thus, there is no substantial

valuation misstatement. However, the two million dollar adjustment

is attributable to a gross valuation misstatement. Accordingly, the

taxpayer may be subject to a penalty, under section 6662(h), equal

to 40 percent of the underpayment of tax attributable to the gross

valuation misstatement of two million dollars. The 2.5 million

dollar adjustment is not subject to a penalty under section

6662(b)(3).

Example 2. The facts are the same as in Example 1, except the

taxpayer has gross receipts of 40 million dollars. The net section

482 adjustment ($4.5 million) is greater than the lesser of five

million dollars or ten percent of gross receipts ($40 million x

10% = $4 million). Thus, the five million dollar or 10% of gross

receipts test has been met. The two million dollar adjustment is

attributable to a gross valuation misstatement. Accordingly, the

taxpayer is subject to a penalty, under section 6662(h), equal to 40

percent of the underpayment of tax attributable to the gross

valuation misstatement of two million dollars. The 2.5 million

dollar adjustment is subject to a penalty under sections 6662(a) and

6662(b)(3), equal to 20 percent of the underpayment of tax

attributable to the substantial valuation misstatement.

Example 3. (i) Applying section 482, the Internal Revenue

Service makes the following transfer pricing adjustments for the

taxable year:

(1) Attributable to an adjustment that is 400 percent or

more of the correct section 482 arm's length result........ $6,000,000

(2) Not a 200 or 400 percent adjustment..................... 15,000,000

-----------

Total................................................... 21,000,000

(ii) None of the adjustments are excluded under paragraph (d)

(Amounts excluded from net section 482 adjustments) in determining

the twenty million dollar or 20% of gross receipts test under

section 6662(h). The net section 482 adjustment (21 million dollars)

is greater than twenty million dollars and thus constitutes a gross

valuation misstatement. Accordingly, the total adjustment is subject

to the net adjustment penalty equal to 40 percent of the

underpayment of tax attributable to the 21 million dollar gross

valuation misstatement. The six million dollar adjustment will not

be separately included for purposes of any additional penalty under

section 6662.

(g) Effective date. This section applies to taxable years beginning

after December 31, 1993.

Par. 5. Section 1.6664-O is amended by adding an entry for

Sec. 1.6664-4T to read as follows:

Sec. 1.6664-O Table of contents.

* * * * *

Sec. 1.6664-4T Reasonable cause and good faith exception to section

6662 penalties

(a) through (c) [Reserved]

(d) Transactions between persons described in section 482 and

net section 482 transfer price adjustments.

Par. 6. Section 1.6664-4T is added to read as follows:

Sec. 1.6664-4T Reasonable cause and good faith exception to section

6662 penalties.

(a) through (c) [Reserved]

(d) Transactions between persons described in section 482 and net

section 482 transfer price adjustments. For purposes of applying the

reasonable cause and good faith exception of section 6664(c) to net

section 482 adjustments, the rules of Sec. 1.6662-6T(d) of the

regulations apply. A taxpayer that does not satisfy the rules of

Sec. 1.6662-T(d) for a net section 482 adjustment cannot satisfy the

reasonable cause and good faith exception under section 6664(c). The

rules of this section apply to underpayments subject to the

transactional penalty in Sec. 1.6662-6T(b). If the standards of the net

section 482 penalty exclusion provisions under Sec. 1.6662-6T(d) are

met with respect to such underpayments, then the taxpayer will be

considered to have acted with reasonable cause and good faith for

purposes of this section.

Par. 7. The authority citation for part 602 continues to read as

follows:

Authority: 26 U.S.C. 7805.

Par. 7. Section 602.101(c) is amended by adding an entry in

numerical order to the table to read as follows:

Sec. 602.101 OMB Control numbers.

* * * * *

(c) * * *

------------------------------------------------------------------------

Current OMB

CFR part or section where identified and described control No.

------------------------------------------------------------------------

*****

1.6662-6T................................................. 1545-1365

*****

------------------------------------------------------------------------

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved:

Leslie B. Samuels,

Assistant Secretary of the Treasury (Tax Policy).

[FR Doc. 94-2078 Filed 1-27-94; 11:10 am]

BILLING CODE 4830-01-U