Bulletin No. 2009-33August 17, 2009

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

T.D. 9456, page 188.Final regulations under section 482 of the Code provide guid-ance regarding the treatment of controlled services transac-tions and the allocation of income and deductions from intan-gible property, in particular with respect to contributions by acontrolled party to the value of intangible property owned byanother controlled party. The regulations also modify the regu-lations under section 861 concerning stewardship expenses tobe consistent with the changes made to the regulations undersection 482.

REG–113289–08, page 244.Proposed regulations under section 330 of title 31 proposemodifications to section 10.27 of Circular 230 governing prac-tice before the Internal Revenue Service. Notice 2008–43 ob-soleted. A public hearing is scheduled for November 9, 2009.

EXEMPT ORGANIZATIONS

Announcement 2009–61, page 246.The IRS has revoked its determination that Frank and NoraHarty Center of Staten Island, Inc., of Staten Island, NY;Higgs Carter King, Inc., of San Antonio, TX; World Orphanageand Refugee Relief Foundation, Inc., of Ft. Lauderdale, FL;Triple EEE of Long Beach, CA; American Budget Credit DebtServices, Inc., of Spring Valley, NY; Craig Family Foundationof Chicago, IL; Aloha Consumer Credit Counseling Serviceof Kaneohe, HI; Charity Neighborhood Auxiliary of Brooklyn,NY; Lamar Dixon Expo Foundation of Prairieville, LA; Reno& BJ Foundation of Detroit, MI; Reading Enhancement andDevelopment of Tumwater, WA; First Foundation of Petersburg,

VA; The Denis B and Mary Elizabeth O’Donnell Foundation ofWest Orange, NJ; Good Times Foundation of Salt Lake City,UT; Animal Adoption Center of Garland of Garland, TX; Le TulleFoundation of Bay City, TX; YMCA of Manchester Coffee Countyof Manchester, TN; The Light Center, Inc., of Columbus, OH;Seventh Regiment Fund, Inc., of New York, NY; Fair CreditFoundation of Los Angeles, CA; Student Loan Fund of Idaho ofFruitland, ID; Positive Alternatives of Salt Lake City, UT; FamilyBudget Association of America, Inc., of Washington, DC; ScottOlsen Foundation of Alpine, UT; Helping Other People ExcelFaith-Based Coalition, Inc., of Jackson, MS; Changing AttitudesCounseling Services, Inc., of Washington, DC; Christian Centerfor the Performing Arts – Denver of Lakewood, CO; and TheAdvancement of Sound Science Center, Inc., of Potomac, MD,qualify as organizations described in sections 501(c)(3) and170(c)(2) of the Code.

Announcement 2009–62, page 247.This announcement provides procedures that a supporting or-ganization under section 509(a)(3) of the Code may use to re-quest a change in its public charity classification. Announce-ment 2006–93 superseded.

(Continued on the next page)

Announcements of Disbarments and Suspensions begin on page 248.Finding Lists begin on page ii.

EMPLOYMENT TAX

T.D. 9456, page 188.Final regulations under section 482 of the Code provide guid-ance regarding the treatment of controlled services transac-tions and the allocation of income and deductions from intan-gible property, in particular with respect to contributions by acontrolled party to the value of intangible property owned byanother controlled party. The regulations also modify the regu-lations under section 861 concerning stewardship expenses tobe consistent with the changes made to the regulations undersection 482.

ADMINISTRATIVE

T.D. 9455, page 239.Final regulations under section 6503 of the Code provide guid-ance regarding the use of designated summonses and relatedsummonses and the effect on the period of limitations on as-sessment when a case is brought with respect to a designatedor related summons.

REG–113289–08, page 244.Proposed regulations under section 330 of title 31 proposemodifications to section 10.27 of Circular 230 governing prac-tice before the Internal Revenue Service. Notice 2008–43 ob-soleted. A public hearing is scheduled for November 9, 2009.

August 17, 2009 2009–33 I.R.B.

The IRS MissionProvide America’s taxpayers top quality service by helping themunderstand and meet their tax responsibilities and by applying

the tax law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are compiled semiannually into Cumulative Bulletins,which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A,Tax Conventions and Other Related Items, and Subpart B, Leg-islation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Secre-tary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative indexfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

2009–33 I.R.B. August 17, 2009

August 17, 2009 2009–33 I.R.B.

Place missing child here.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 482.—Allocationof Income and DeductionsAmong Taxpayers26 CFR 1.482: Allocations of income and deductionsamong taxpayers.

T.D. 9456

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Parts 1 and 31, and602

Treatment of Services UnderSection 482; Allocation ofIncome and Deductionsfrom Intangible Property;Apportionment of StewardshipExpense

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations and removalof temporary regulations.

SUMMARY: This document contains finalregulations that provide guidance regard-ing the treatment of controlled servicestransactions under section 482 and the al-location of income from intangible prop-erty, in particular with respect to contribu-tions by a controlled party to the value ofintangible property owned by another con-trolled party. This document also containsfinal regulations that modify the regula-tions under section 861 concerning stew-ardship expenses to be consistent with thechanges made to the regulations under sec-tion 482. These final regulations poten-tially affect controlled taxpayers within themeaning of section 482. They provide up-dated guidance necessary to reflect eco-nomic and legal developments since the is-suance of the current guidance.

DATES: Effective Date: These regulationsare effective on July 31, 2009.

Applicability Dates: These regulationsapply to taxable years beginning after July31, 2009.

FOR FURTHER INFORMATIONCONTACT: Carol B. Tan orGregory A. Spring, (202) 435–5265for matters relating to section 482, orRichard L. Chewning (202) 622–3850 formatters relating to stewardship expenses(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information con-tained in these final regulations has beenreviewed and approved by the Office ofManagement and Budget in accordancewith the Paperwork Reduction Act of 1995(44 U.S.C. 3507(d)) under control number1545–2149. The collection of informationin these final regulations is in §1.482–9.This information is required to enable theIRS to verify that a taxpayer is reportingthe correct amount of taxable income. Anagency may not conduct or sponsor, anda person is not required to respond to, acollection of information unless it displaysa valid control number.

Books and records relating to a collec-tion of information must be retained aslong as their contents might become ma-terial in the administration of any internalrevenue law. Generally, tax returns and taxreturn information are confidential, as re-quired by 26 U.S.C. 6103.

Background

Section 482 of the Internal RevenueCode generally provides that the Secre-tary may allocate gross income, deduc-tions, and credits between or among twoor more organizations, trades or businessesowned or controlled by the same inter-ests in order to prevent evasion of taxesor clearly to reflect income of a controlledtaxpayer.

Regulations under section 482 pub-lished in the Federal Register (33 FR5849) on April 16, 1968, provided guid-ance with respect to a wide range ofcontrolled transactions, including trans-fers of tangible and intangible propertyand the provision of services. Revised andupdated transfer pricing regulations werepublished in the Federal Register (T.D.

8552, 1994–2 C.B. 93 [59 FR 34971],T.D. 8632, 1996–1 C.B. 85 [60 FR 65553],T.D. 8670, 1996–1 C.B. 99 [61 FR 21955],and T.D. 9088, 2003–2 C.B. 841 [68 FR51171]) on July 8, 1994, December 20,1995, May 13, 1996, and August 26, 2003.While comprehensive in other respects,these regulations did not modify substan-tively the rules dealing with controlledservices transactions. On September 10,2003, proposed regulations relating to thetreatment of controlled services transac-tions and the allocation of income fromintangible property, in particular with re-spect to contributions by a controlled partyto the value of intangible property ownedby another controlled party (the 2003 pro-posed regulations), were published in theFederal Register (REG–146893–02 andREG–115037–00, 2003–2 C.B. 976 [68FR 53448]).

On August 4, 2006, temporary regula-tions relating to the treatment of controlledservices transactions, the allocation ofincome from intangible property, andstewardship expenses (the 2006 temporaryregulations) were published in the FederalRegister (T.D. 9278, REG–146893–02,REG–115037–00, and REG–138603–03,2006–2 C.B. 256 [71 FR 44465]). A noticeof proposed rulemaking cross-referencingthe temporary regulations was publishedin the Federal Register on the same day(REG–146893–02, REG–115037–00, andREG–138603–03, 2006–2 C.B. 317 [FR44247]). Written comments responding tothe notice of proposed rulemaking werereceived, and a public hearing was held onOctober 27, 2006.

The 2006 temporary regulations aregenerally effective with respect to taxableyears beginning after December 31, 2006,and Notice 2007–5, 2007–1 C.B. 269,published on January 16, 2007, partiallymodified the effective date of the 2006temporary regulations as it pertained tothe identification of controlled servicestransactions eligible to be priced at cost.Accordingly, the 2006 temporary regu-lations related to the new services costmethod in §1.482–9T(b) (described inSection A.1 in this preamble) apply to tax-able years after December 31, 2007, withthe exception of the business judgment

2009–33 I.R.B. 188 August 17, 2009

rule described in §1.482–9T(b)(2), whichhad the same effective date (taxable yearsafter December 31, 2006) as the otherprovisions of the temporary regulations.

By issuing the 2006 temporary regu-lations in temporary and proposed form,the Treasury Department and the IRS pro-vided taxpayers an opportunity to submitadditional comments prior to the timethese regulations became effective. See§601.601(d)(2)(ii)(b). After considerationof all the comments, the proposed regu-lations under section 482 are adopted asrevised by this Treasury decision, and thecorresponding temporary regulations areremoved.

Explanation of Revisions and Summaryof Comments

Introduction

The Treasury Department and the IRSreceived a number of comments on the2006 temporary regulations from taxpay-ers, their representatives, as well as indus-try and professional groups. Commenta-tors generally approved of the 2006 tem-porary regulations and found the changesfrom the 2003 proposed regulations tobe useful. Specifically, commentatorsapproved of the replacement of the simpli-fied cost-based method with the servicescost method (SCM) and the inclusion ofthe shared services arrangement provisionin the SCM rules. Commentators alsogenerally approved of changes made tothe profit split method. However, com-mentators did express concerns with someaspects of the 2006 temporary regulations.

While these final regulations reflectsome modifications in response to com-ments received on the 2006 temporaryregulations, both the format and the sub-stance of the final regulations are generallyconsistent with the 2006 temporary regula-tions. The changes adopted are intended tomake certain clarifications and improve-ments without fundamentally altering thepolicies reflected in the 2006 temporaryregulations.

Explanation of Provisions

A. Controlled Services

1. Services Cost Method—Treas. Reg.§1.482–9(b)

a. Applicability of the Services CostMethod

Most comments focused on the SCM.Several commentators requested confir-mation that application of the SCM is amatter within the control of the taxpayer,provided that the underlying services oth-erwise qualify for the SCM. Some com-mentators stated that the 2006 temporaryregulations could be interpreted as requir-ing a taxpayer to apply the SCM if all theconditions for that method were satisfied.

Notice 2007–5 confirmed that taxpay-ers control whether the SCM applies. Thefinal regulations make this clear. Section1.482–9(b)(1) provides that, if a taxpayerapplies the SCM in accordance with therules of §1.482–9(b), which requires that astatement evidencing the taxpayer’s intentto apply the SCM be contained in the tax-payer’s books and records, then the SCMwill be considered the best method for pur-poses of §1.482–1(c).

b. Specified Covered Services

Several commentators contended thatthe proposed list of specified covered ser-vices in Announcement 2006–50, 2006–2C.B. 321, is too narrow. One commen-tator listed tax planning and public rela-tions activities as examples of activitiesnot on the list that illustrated the narrow-ness of the list. Some commentators sug-gested that the list should refer to depart-ments, cost centers, or accounting classi-fications, rather than to specific activitiesor groups of activities. One commenta-tor suggested that all activities in particulardepartments should be identified as eligi-ble for the SCM. Commentators also statedthat a comprehensive analysis would be re-quired and that it would be too burden-some to track employee time for activ-ities that are specified covered servicesvs. non-specified covered services. See§601.601(d)(2)(ii)(b). The Treasury De-partment and the IRS also received sug-gestions to broaden the general adminis-trative provision and add additional spe-cific activities to the list of specified cov-

ered services, including warehousing anddistribution, quality control and quality as-surance relating to manufacturing and con-struction, and environmental remediation.

The SCM is intended to provide apractical and administrable means of iden-tifying low-margin services that may beevaluated by reference to total servicescost without a markup. The list of ser-vices eligible to be priced at cost in thespecified covered services portion of theSCM was added specifically in responseto requests from commentators that theformer simplified cost-based method beeliminated and replaced with just such alist of eligible services. In response topublic comments, the Treasury Depart-ment and the IRS published Rev. Proc.2007–13, 2007–1 C.B. 295, which addedseveral categories as well as activitieswithin existing categories. In particular,public relations and tax planning serviceswere added to the list, and the individualcategories of specified covered serviceswere expanded to include “other similaractivities.”

After careful consideration, the Trea-sury Department and the IRS believe thatRev. Proc. 2007–13 strikes the appro-priate balance between broadening the listto include services similar to the specificservices described and expanding the cat-egories of services. The Treasury Depart-ment and the IRS do not believe that otheradditional services suggested by commen-tators were appropriate, but will continueto consider other recommendations for ad-ditional services to be added to the list inthe future.

One commentator expressed concernthat a review of services to determine ifthey qualify as specified covered servicesmay require a more extensive analysisthan under previous regulations, includinginterviews of individual employees or ofsmall groups of employees. Although thecovered services list is not applied on a de-partmental basis, a reasonable aggregationof similar services may be appropriate forperforming the specified covered servicesanalysis in some cases. To determine ifthe services cost method should applyto a particular service (or group of ser-vices) performed by a group of employees,the aggregation principle of Treas. Reg.§1.482–1(f)(2)(i)(A) should be followedas appropriate. In certain cases, aggrega-tion may assure a more accurate result,

August 17, 2009 189 2009–33 I.R.B.

especially if it recognizes synergies thatan individual employee analysis mightignore. An aggregation of employee ser-vices may, thus, efficiently evaluate thework of employees engaged in a com-mon function, as well as recognize theadded value that their collaborative effortmight produce. Conversely, analysis onan aggregate basis does not permit char-acterization of an individual service as aspecified covered service if it, in fact, isnot a specified covered service.

c. Low Margin Covered Services

Commentators provided comments onlow margin covered services described in§1.482–9T(b)(4)(ii) of the 2006 temporaryregulations. One commentator believedthat the 7 percent limit is too high forthe SCM. In the commentator’s view, thelimit should be lower because the 7 percentfigure will cover activities that are risky.Most of the commentators, however, be-lieved that the 7 percent limit is an appro-priate measure. The Treasury Departmentand the IRS continue to believe that the 7percent limit is appropriate in light of itspurpose. That is, it minimizes the compli-ance burden on taxpayers and the IRS forrelatively low-margin services.

Several commentators requested moreguidance on low margin covered services.One commentator suggested that the Trea-sury Department and the IRS develop ananalysis to determine if certain serviceshave a markup of 7 percent or less andpublish the results. For example, the IRScould develop a set of comparables for var-ious groups of low margin services, suchas human resources, accounting and fi-nance, information services, and training.Some commentators requested guidanceon when and how often a transfer pricingstudy is needed to support a determina-tion that services are low margin coveredservices. In this regard, some commenta-tors requested that the regulations specifya period of years (such as three years) forwhich a transfer pricing study may be validfor purposes of determining if a service is alow margin covered service. In support ofthis request, one commentator stated thatthe regulations could provide, for exam-ple, that the reliance period could apply totaxpayers whose facts and circumstanceshave not changed materially from the time

the service was most recently establishedas a covered service.

The Treasury Department and IRS didnot adopt this proposal. Because there maybe significant differences among servicesacross different businesses, a standardized,IRS-developed comparables set would notbe feasible and would conflict with the factintensive nature of an appropriately ro-bust transfer pricing analysis. For similarreasons, the Treasury Department and theIRS did not adopt the proposal to specifythe frequency or timing of transfer pricinganalyses to support taxpayer positions. Todo so would be inconsistent with a propercomparability analysis, including consid-eration of the time at which transactionswere undertaken, as well as other relevanteconomic circumstances.

One other commentator requested thatthe midpoint should be used in measuring acomparable markup on total services costsfor purposes of low margin covered ser-vices. While it may be true that, in somecases, the midpoint could be used depend-ing on the statistical method used, the in-terquartile range ordinarily provides an ac-ceptable measure of an arm’s length range.See §1.482–1(e)(2)(iii)(B). Therefore, theTreasury Department and the IRS believethat the interquartile range of the compara-ble median markup is an appropriate mea-sure.

d. Excluded Activities

One commentator requested that en-gineering be removed from the list ofservices that are ineligible for the SCMin §1.482–9T(b)(3) of the 2006 tempo-rary regulations. This comment was notadopted, since, in the view of the Trea-sury Department and the IRS, intragroupengineering services generally should besubject to a robust transfer pricing analy-sis.

e. Business Judgment Rule

Several commentators expressed con-cern over how the business judgment rulewould be administered. Some commen-tators requested that statements in thepreamble about the business judgmentrule in the 2006 temporary regulations beincorporated in final regulations. Othercommentators suggested that the busi-ness judgment rule should be applied by

reference to one or more trades or busi-ness of the controlled group rather thanof the renderer, recipient, or both. Thesecommentators claimed that the businessjudgment rule may yield incorrect resultsin some cases, for example, where a head-quarters services company or other legalentity is established solely to provide cen-tralized support services. The activitiesperformed by such an entity would po-tentially be ineligible for the SCM underthe business judgment rule because theywould constitute the entity’s core capabil-ity.

The Treasury Department and the IRSagree that the business judgment ruleshould be determined on a controlledgroup basis and expressed this view in No-tice 2007–5. The final regulations clarifythat the business judgment rule is deter-mined by reference to a trade or businessof the controlled group.

Section 3.04 of Notice 2007–5 clarifiedthat the business judgment rule “is satis-fied by a reasonable exercise of the tax-payer’s business judgment, not a reason-able exercise of the IRS’s judgment in ex-amining the taxpayer.” The Treasury De-partment and the IRS reiterate that the fi-nal regulations incorporate a high thresh-old for application of the business judg-ment rule to exclude services otherwise el-igible for the SCM. Section 1.482–9(b)(5)provides that the rule is based on a tax-payer’s reasonable conclusion in its busi-ness judgment that the rule is satisfied. Ithas come to the attention of the TreasuryDepartment and the IRS that the clarifi-cation in the notice of the business judg-ment rule has been misconstrued as cre-ating a non-rebuttable presumption that ataxpayer’s determination under the busi-ness judgment rule is always correct. Thisconstruction of the clarification was not in-tended and is not supported by the plainlanguage of the business judgment rule.The business judgment rule requires a rea-sonable conclusion by the taxpayer. Thus,the taxpayer’s business judgment is onlythe starting point of the analysis, and thetaxpayer must make a reasonable conclu-sion in that regard. Whether the taxpayer’sconclusion is reasonable may be subject toexamination by the IRS in the course of anaudit.

One commentator suggested that theregulations adopt a “principal activity”test similar to the test described in the

2009–33 I.R.B. 190 August 17, 2009

Organisation for Economic Cooperationand Development Transfer Pricing Guide-lines for Multinational Enterprises andTax Administrations (OECD Guidelines)in place of the business judgment rule.The Treasury Department and the IRSdecline to adopt this suggestion. Anothercommentator pointed out that the exam-ples illustrating the business judgmentrule more accurately describe a high valueservice or intangible property, rather thana covered service. The Treasury Depart-ment and the IRS agree that some of theexamples in the temporary regulationscould be read as describing transfers ofintangible property rather than provisionsof services involving the intangible prop-erty. Some examples have been edited toimprove clarity, including to ensure thatthey cannot be read as describing transfersof intangible property.

Commentators also raised questionsconcerning how to evidence the necessarybusiness judgment, for example, whetheran executive’s representation must be pre-ferred to the tax director’s. The businessjudgment rule is applied on a case-by-casebasis and takes into account the taxpayer’sfacts and circumstances.

One other commentator requested thatthe business judgment rule take into ac-count whether a particular activity, suchas that of a corporate tax department, con-tributes to the operating profit (as definedin §1.482–5(d)(3)) of one or more con-trolled parties. Notice 2007–5 providedseveral clarifications to the business judg-ment rule, including a clarification that thebusiness judgment rule should take intoaccount whether a particular activity con-tributes to the operating profit of one ormore controlled parties. After further con-sideration, the Treasury Department andthe IRS decided not to add an operatingprofit consideration to the business judg-ment rule because the operating profit con-cept is broader than the intended rule andbecause it would implicitly require tax-payers to do the type of economic anal-ysis (and create the attendant administra-tive burden for taxpayers) that the businessjudgment rule is intended to eliminate.

The Treasury Department and the IRScontinue to believe, however, that the con-clusion in Notice 2007–5 is correct — thatactivities such as back office tax servicesshould not fail the business judgment rulebecause they may affect net income by re-

ducing domestic or foreign income taxes.Depending on the facts and circumstances,tax services may or may not satisfy thebusiness judgment rule.

f. Reorganization of the SCM

Section 1.482–9T(b) of the 2006 tem-porary regulations contains several re-quirements, all of which have to be satis-fied in order for the SCM to be applicable.In other words, the requirements under§1.482–9T(b) are conjunctive; failure tosatisfy one of the requirements rendersa service ineligible for SCM treatmentregardless of whether any of the otherrequirements is satisfied. The TreasuryDepartment and the IRS are aware thatthe rules under §1.482–9T(b) have beenmisinterpreted as disjunctive such that sat-isfaction of only one of the requirementsrenders a service eligible for the SCM.This view is unsupported by the plainlanguage of §1.482–9T(b). To improveclarity, the requirements for the SCM arereorganized in the final regulations. Sec-tion §1.482–9(b)(2) lists the conditionsnecessary for a service to be eligible forthe SCM and provides a cross-referenceto the paragraph in §1.482–9(b) that cor-responds to each condition. In summary,to be eligible for the SCM, a service mustbe a covered service, the service cannotbe an excluded activity, the service cannotbe precluded from constituting a coveredservice by reason of the business judgmentrule, and adequate books and records mustbe maintained with respect to the service.The reorganization does not substantivelychange the SCM rules.

Modifications have also been made tothe list of excluded activities to harmonizeit with Rev. Proc. 2007–13. In particu-lar, instead of referring to “excluded trans-actions,” the regulations now refer to “ex-cluded activities.”

g. Shared Services Arrangements

In general, commentators supported theshared services arrangement (SSA) provi-sion in the 2006 temporary regulations asa useful mechanism for allocation of costsfrom shared or centralized services. Com-mentators called into question, however,the restriction of SSAs to covered servicespriced under the SCM. In response, No-tice 2007–5 provided that a SSA may beused for controlled services transactions

outside of the SCM context. Specifically,Notice 2007–5 states: “This notice con-firms that taxpayers may also make allo-cations of arm’s length charges for servicesineligible for the SCM that yield a benefitto multiple members of a controlled group.In such a case, however, the flexible rulesunder the SCM for establishing the jointbenefits and selecting the allocation keyare inapplicable. Instead, the more robustanalysis under the general transfer pric-ing rules applies for purposes of determin-ing the appropriate arm’s length charges,benefits, allocations keys, etc.” The Trea-sury Department and the IRS consideredproviding additional SSA rules to servicespriced under methods other than the SCM,but concluded that such rules would be un-necessary. In any event, as stated in No-tice 2007–5, the flexible SSA rules for es-tablishing the joint benefits and selectingthe allocation key are inapplicable in thenon-SCM context.

Other commentators requested that aSSA should be respected even if a partythat reasonably anticipates a benefit makesa payment equivalent to its share underan SSA to the service provider pursuantto a different arrangement. For example,assume that a controlled service providerperforms services to ten taxpayers that aremembers of its controlled group. Assumefurther that nine of the service recipientsagree in a single written contract to allo-cate the arm’s length charge based on areasonable allocation basis, but the tenthservice recipient pays for its share of theservices pursuant to a separate agreement.These comments were not adopted be-cause whether an agreement constitutes aSSA requires a case-by-case determina-tion based on the facts and circumstances.

Some commentators observed that theSSA rules require the allocation of costson the basis that “most reliably reflects”the participants’ respective shares of rea-sonably anticipated benefits, but some ofthe examples use the phrase “preciselyknown.” This led the commentators toquestion whether the SSA rules create anunattainable standard or, at least, a higherstandard than the reasonable standard forallocation of costs described in Treas. Reg.§1.482–9T(k) and to suggest a change tothe examples. The examples do not cre-ate a standard based on precisely knownshares of reasonably anticipated benefits.Rather, the examples use hypothetical,

August 17, 2009 191 2009–33 I.R.B.

precisely known reasonably anticipatedbenefits as a measuring stick to providean easily understood comparative analysisof potential allocation keys for illustrativepurposes. The suggested changes are notadopted.

2. Comparable Uncontrolled ServicesPrice Method-Treas. Reg. §1.482–9(c)

The comparable uncontrolled servicesprice (CUSP) method evaluates whetherthe consideration in a controlled servicestransaction is arm’s length by compari-son to the price charged in a compara-ble uncontrolled services transaction. Thismethod is closely analogous to the compa-rable uncontrolled price (CUP) method in§1.482–3(b).

One commentator objected to thestatement in the second sentence of§1.482–9T(c)(1) of the 2006 temporaryregulations that, to be evaluated underthe CUSP method, a controlled serviceordinarily must be “identical to or havea high degree of similarity” to the un-controlled comparable transactions. Thecommentator claimed that such languagecreates a higher standard for determiningthe best method than in the rest of the sec-tion 482 regulations. For example, both§1.482–1(c)(1) and §1.482–9T(c)(2)(i)refer to the “most reliable measure of anarm’s length result” standard. The sen-tence in question was intended merelyas a guide to when the CUSP method isapplicable. It was not intended to changethe standard under the best method rule.To avoid further confusion, the sentence isremoved, but without effecting a substan-tive change.

The CUSP method in these final regu-lations is substantially similar to the cor-responding method in the 2006 temporaryregulations.

3. Cost of Services Plus Method-Treas.Reg. §1.482–9(e)

The cost of services plus method is gen-erally analogous to the cost plus methodfor transfers of tangible property in ex-isting §1.482–3(d). The cost of servicesplus method evaluates whether the amountcharged in a controlled services transac-tion is arm’s length by reference to thegross services profit markup realized incomparable uncontrolled transactions.

Section 1.482–9T(e)(3)(ii)(A) providesthat, if the appropriate gross services profitmarkup is derived from comparable un-controlled services transactions of otherservice providers, then, in evaluating com-parability, the controlled taxpayer mustconsider the results under this methodexpressed as a markup on total servicescosts of the controlled taxpayer becausefunctional differences may be reflectedin differences in service costs other thanthose included in comparable transactionalcosts.

One commentator objected to the re-quired consideration of the results of thecost of services plus method expressed asa markup on total services costs of the con-trolled taxpayer when external compara-bles are utilized. In the commentator’sview, this rule requires a confirming anal-ysis under a comparable profits method(CPM) and, therefore, places an undueburden on taxpayer. The same commen-tator also expressed the concern that therule would create an even greater burdenby requiring two sets of external compara-bles for application of the two methods.

These comments are not adopted forseveral reasons. First, the restatement ofthe price does not require researching twosets of external comparables under two dif-ferent methods. The sole purpose of thecalculation is to determine whether it isnecessary to perform additional evaluationof functional comparability under the costof services plus method. That is, if theprice indicates a markup on the renderer’stotal services cost that is either low or neg-ative when restated, this may indicate dif-ferences in functions that have not been ac-counted for under the traditional compara-bility factors under the cost of services plusmethod. Thus, a low or negative markupmerely suggests the need for additional in-quiry, which may lead to a determinationthat the cost of services plus method isnot the most reliable measure of an arm’slength result under the best method rule.

The cost of services plus method isadopted in the final regulations withoutchange.

4. Profit Split Method-Treas. Reg.§§1.482–9(g) and 1.482–6(c)(3)(i)(B)

The final regulations provide addi-tional guidance concerning applicationof the comparable profit split and the

residual profit split methods to controlledservices transactions in §1.482–9(g) and§1.482–6(c)(3)(i)(B). Generally, the com-parable profit split and the residual profitsplit methods evaluate whether the allo-cation of the combined operating profit orloss attributable to one or more controlledtransactions is arm’s length by referenceto the relative value of each controlledtaxpayer’s contributions to the combinedoperating profit or loss.

The Treasury Department and the IRSreceived several comments on the profitsplit method. One commentator requestedthat §1.482–8T(b), Example 12 of the2006 temporary regulations explain whythe profit split method is preferable tousing the financial results of a set of pub-licly-traded companies engaged in sellingmerchandise and related promotion andmarketing activities. Example 12 is re-vised in the final regulations to addressthis comment.

Another commentator argued that theprofit split method should not apply to aparty that does not own valuable intan-gible property or does not use any suchproperty in the related party transactionbeing evaluated. The commentator notedthat other parts of the regulations, suchas the CPM, CUSP method, and costsof services plus method reference valu-able intangible property in the examples.The same commentator asserted that theprofit split method should be limited toparties that bear substantial risk in theirintercompany transactions. The TreasuryDepartment and the IRS believe that lim-iting application of the profit split methodto contributions of valuable intangibleproperty or the bearing of risks wouldbe inappropriate. The changes in the2006 temporary regulations to routine andnon-routine contributions is an appropriatestandard and conformed to the changes to§1.482–6T(c)(3)(i)(B)(1), which defines anonroutine contribution as “a contributionthat is not accounted for as a routine con-tribution.” In other words, a nonroutinecontribution is one for which the returncannot be determined by reference to mar-ket benchmarks.

The 2006 temporary regulations pro-vide that the residual profit split methodordinarily is used where multiple con-trolled taxpayers make significant non-routine contributions. A commentatorrequested that this provision be removed

2009–33 I.R.B. 192 August 17, 2009

because it suggests that the method al-ways applies where there are no marketbenchmarks. The provision regardingthe residual profit split method that thecommentator requested be removed hasbeen changed to conform to languagein the cost sharing regulations. Accord-ingly, §1.482–9(g)(1) provides that theresidual profit split method may not beused where only one controlled taxpayermakes significant nonroutine contribu-tions. The commentator also claimed thatthe residual profit split method containsan inconsistency because, although themethod applies when there are no marketbenchmarks, the method includes a mar-ket benchmark analysis for comparabilitypurposes. Compare §§1.482–9(g)(1) and1.482–6(c)(3)(i)(B)(2). The Treasury De-partment and the IRS do not consider thatthere is an inconsistency. The methodcontemplates the use of market bench-marks, if available, to determine the profitsplit that will be applied to the return tononroutine contributions already deter-mined under the method. The same com-mentator requested that the sentence in§1.482–6T(c)(2)(ii)(B) of the 2006 tempo-rary regulations relating to the comparableprofit split method that states that “thecomparable profit split method may not beused if the combined operating profit (as apercentage of the combined assets) of theuncontrolled comparables varies signifi-cantly from that earned by the controlledtaxpayers” should be deleted. These com-ments are not adopted, since the statedcondition is fundamental to comparabilityunder the method.

5. Contingent Payments-Treas. Reg.§1.482–9(i)

The 2006 temporary regulations pro-vide detailed guidance concerning contin-gent-payment contractual terms. The rulesbuilt on the principle that, in structuringcontrolled transactions, taxpayers are freeto choose from among a wide range of riskallocations. The provision acknowledgedthat contingent-payment terms — termsrequiring compensation to be paid only ifspecified results are obtained — may beparticularly relevant in the context of con-trolled services transactions.

Commentators raised several concernsabout the substance and scope of this pro-vision. One commentator said that the reg-

ulations do not address whether a taxpayermay, in the absence of a written agreement,present facts to demonstrate that a con-tingent payment arrangement best reflectsthe economic substance of the underlyingtransactions. The Treasury Departmentand the IRS do not agree that an arrange-ment may be treated as a contingent pay-ment arrangement under §1.482–9(i)(2)if the arrangement does not satisfy therequirements of the contingent paymentarrangement provision, including the writ-ten contract requirement. However, wherethe Commissioner exercises its author-ity pursuant to §1.482–1(d)(3)(ii)(B) toimpute contractual terms, the taxpayermay present additional facts to indicateif an alternative agreement best reflectsthe economic substance of the underlyingtransaction, consistent with the parties’course of conduct in a particular case. See§1.482–1(d)(3)(ii)(C), Examples 4 and 6.

The same commentator also pointed outthat the requirement to evaluate whethera specified contingency bears a directrelationship to the controlled servicestransaction based on all of the facts andcircumstances should be combined withthe specified contingency requirement.The Treasury Department and the IRSagree that the language in §1.482–9(i)(2)should be clarified. Accordingly, theregulations remove the last sentence in§1.482–9T(i)(2)(i)(C) of the 2006 tem-porary regulations relating to a specifiedcontingency and combine it with the re-quirement under §1.482–9T(i)(2)(i)(B).Thus, §1.482–9(i)(2)(i)(B) now requiresthat the contract state that payment fora controlled services transaction is con-tingent (in whole or in part) upon thehappening of a future benefit (within themeaning of §1.482–9(l)(3)) for the recipi-ent directly related to the activity or groupof activities. For this purpose, whetherthe future benefit is directly related to theactivity or group of activities is evaluatedbased on all the facts and circumstances.

6. Total Services Costs-Treas. Reg.§1.482–9(j)

In the 2006 temporary regulations, to-tal services costs include all costs directlyidentified with provision of the controlledservices, as well as all other costs rea-sonably allocable to such services under§1.482–9(k). “Costs” must reflect all re-

sources expended, used, or made availableto render the service. Generally acceptedaccounting principles (GAAP) or Federalincome tax accounting rules may providean appropriate starting point, but neitherwould necessarily be conclusive in evalu-ating whether an item must be included intotal services costs.

Another commentator requested thatvalue added costs (that is, labor costsand depreciation) should be distinguishedfrom total services costs. The commen-tator stated that a markup on value addedcosts may be more reliable than a markupon total costs in certain instances and thatthis could be a useful measure for any ofthe transfer pricing methods, includingthe cost of services plus method. Theregulations already provide flexibility inthe context of the cost of services plusmethod, which is determined by refer-ence to comparable transactional costs,the comparable profits method, and un-specified methods. Consequently, thecomment is not adopted. The definition oftotal services costs in these regulations is,thus, similar to the provisions in the 2006temporary regulations.

Section 1.482–9T(j) of the 2006 tem-porary regulations explicitly states thattotal services costs include stock-basedcompensation, and Examples 3 through6 of §1.482–9T(f)(3) illustrate whenstock-based compensation constitutesa material difference requiring adjust-ments for comparability and reliabilitypurposes. Commentators requested fur-ther guidance regarding the valuation,comparability, and reliability considera-tions for stock-based compensation. Othercommentators objected to the explicitstatement that stock-based compensationcan be a total services cost. These finalregulations do not provide further guid-ance regarding stock-based compensation.The Treasury Department and the IRScontinue to consider technical issues in-volving stock-based compensation in theservices and other contexts and intend toaddress those issues in a subsequent guid-ance project.

7. Controlled Services Transactionsand Shareholder Activities-Treas. Reg.§1.482–9(l)

Section 1.482–9(l) sets forth a thresh-old test for determining whether an activ-

August 17, 2009 193 2009–33 I.R.B.

ity constitutes a controlled services trans-action subject to the general framework of§1.482–9. Section 1.482–9(l)(3) providesrules for determining whether an activityprovides a benefit. Paragraphs (l)(3)(ii)through (v) provide guidelines that indi-cate the presence or absence of a bene-fit. Section 1.482–9T(l)(3)(iv) of the 2006temporary regulations provides that an ac-tivity is a shareholder activity if the sole ef-fect of that activity is either to protect therenderer’s capital investment in the recipi-ent or in other members of the controlledgroup, or to facilitate compliance by therenderer with reporting, legal, or regula-tory requirements applicable specificallyto the renderer, or both.

The Treasury Department and the IRSreceived comments on shareholder activi-ties. Some commentators asserted that the“sole effect” language is too restrictive andthat the language should be replaced by a“primary effect” standard. Other commen-tators argued that the language appropri-ately encompasses shareholder activities.Another commentator requested a changeto the regulations such that a shareholderactivity should be considered to have a soleeffect only if the benefits provided to theother controlled group members are either(i) indirect or remote or (ii) duplicative.

The Treasury Department and the IRSbelieve that the “sole effect” language isappropriate. The “primary effect” lan-guage in the 2003 proposed regulationscould inappropriately include activitiesthat are not true shareholder activities andmay even consist of substantial activitiesthat are non-shareholder activities. An ac-tivity that is described in §1.482–9(l)(3)(ii)through (iv) does not produce a benefit,but the mere fact that an activity is notdescribed in §1.482–9(l)(3)(ii) through(iv) does not mean that the activity neces-sarily provides a benefit. An activity notdescribed in §1.482–9(l)(3)(ii) through(iv) provides a benefit only if it satis-fies the incremental value standard of§1.482–9(l)(3)(i). Furthermore, for thatpurpose, it may be more reliable, depend-ing on the facts and circumstances, tomeasure incremental value on a functionalaggregate activity, rather than a compo-nent activity-by-activity basis.

8. Third Party Costs-Treas. Reg.§1.482–9(l)(4)

Under §1.482–9T(l)(4) of the 2006temporary regulations, a controlled ser-vices transaction may be analyzed as asingle transaction or as two separate trans-actions depending on which approachprovides the most reliable measure of thearm’s length result under the best methodrule in existing §1.482–1(c). Two ex-amples are provided illustrating differentalternatives when a controlled servicestransaction included expenses related to athird-party contract (third party costs) witha controlled taxpayer. In both examples,third party costs that could be reliablydisaggregated could be charged at cost.Commentators requested that all thirdparty costs be treated as “pass through”items that are not subject to a markup ap-plicable to costs incurred by the rendererin its capacity as service provider.

The Treasury Department and the IRScontinue to maintain the view that whetherto consider “pass through” items as dis-aggregated from, or aggregated with,other functions and costs, depends onwhich analysis most reliably reflects anarm’s length result. Therefore, the rulesof §1.482–9(l)(4) are adopted withoutchange.

9. Coordination with Other TransferPricing Rules-Treas. Reg. §1.482–9(m)and Guarantees

Section 1.482–9(m) provides coordi-nation rules applicable to a controlledservices transaction that is combined with,or includes elements of, a non-servicestransaction. These coordination rulesrely on the best method rule in exist-ing §1.482–1(c)(1) to determine whichmethod or methods would provide themost reliable measure of an arm’s lengthresult for a particular controlled transac-tion.

a. Services Subject to a QualifiedCost Sharing Arrangement-Treas. Reg.§1.482–9(m)(3)

Section 1.482–9T(m)(3) of the 2006temporary regulations states that servicesprovided by a controlled participant undera qualified cost sharing arrangement aresubject to existing §1.482–7. As part ofthe temporary cost sharing regulations

(T.D. 9441, 2009–7 I.R.B. 460 [74 FR340]) published on January 5, 2009, theTreasury Department and the IRS re-placed the coordination rules with new§1.482–9T(m)(3). Section 1.482–9(m)(3)is reserved pending finalization of the costsharing regulations.

b. Global Dealing Operations

The Treasury Department and the IRSare working on new global dealing regu-lations. The intent of the Treasury De-partment and the IRS is that, when finalglobal dealing regulations are issued, thoseregulations will govern the evaluation ofthe activities performed by a global deal-ing operation. Pending the issuance of newglobal dealing regulations, taxpayers mayrely on the proposed global dealing reg-ulations to govern financial transactionsentered into in connection with a globaldealing operation as defined in proposed§1.482–8. Thus, the cross-reference underproposed §1.482–9(m)(6) (71 FR 44247),which provides that a controlled servicestransaction does not include a financialtransaction entered into in connection witha global dealing operation as defined inproposed §1.482–8, remains in proposedform. Section 1.482–9(m)(6) in these finalregulations is reserved pending issuance ofglobal dealing regulations.

c. Guarantees, Including FinancialGuarantees

Financial transactions, including guar-antees, are explicitly excluded from eligi-bility for the SCM by §1.482–9(b)(4)(viii).However, no inference is intended thatfinancial transactions (including guaran-tees) would otherwise be considered theprovision of services for transfer pricingpurposes. The Treasury Department andthe IRS intend to issue future guidanceregarding financial guarantees.

B. Income Attributable to IntangibleProperty-Treas. Reg. §1.482–4(f)(3) and(4)

Paragraphs (3) and (4) of §1.482–4(f)provide rules for determining the ownerof intangible property for purposes ofsection 482 and also provide rules for de-termining the arm’s length compensationin situations where a controlled party otherthan the owner makes contributions to

2009–33 I.R.B. 194 August 17, 2009

the value of intangible property. Section1.482–4(f)(3)(i)(A) provides that the legalowner of intangible property pursuant tothe intellectual property law of the rele-vant jurisdiction, or the holder of rightsconstituting intangible property pursuantto contractual terms (such as the terms ofa license) or other legal provision, will beconsidered the sole owner of intangibleproperty for purposes of this section un-less such ownership is inconsistent withthe economic substance of the underlyingtransactions. Some commentators believethat the rules should specify that a holderof bare legal title to intangible propertyshould not be presumed to be the ownerwhen other parties have all of the otherbenefits and burdens of ownership. Af-ter considering the public comments, theTreasury Department and the IRS continueto believe that the legal ownership stan-dard as set forth in §1.482–4(f)(3)(i)(A)is the appropriate framework for deter-mining ownership of intangible propertyunder section 482.

The provisions of §1.482–4(f)(3) and(4) are adopted without change.

C. Economic Substance

A number of commentators expressedsimilar and sometimes interrelated con-cerns regarding economic substance con-siderations, imputation of contractualterms, the realistic alternatives principle,and the rules for income attributable tointangible property. The common threadrunning through these comments is a con-cern that the IRS will inappropriately treattaxpayers as having engaged in transac-tions different from those in which theyactually engaged.

Section 1.482–4(f)(3)(i)(A) providesthat, if no owner of intangible property isidentified under the intellectual propertylaw of the relevant jurisdiction, or pursuantto contractual terms (including terms im-puted pursuant to §1.482–1(d)(3)(ii)(B))or other legal provision, then the con-trolled taxpayer that has control of in-tangible property, based on all the factsand circumstances, will be considered thesole owner of intangible property for pur-poses of this section. One commentatorbelieves that the control rule for determin-ing ownership of non-legally protectedintangibles allows the IRS to attributeownership of intangible property in a

manner that is inconsistent with economicsubstance. Accordingly, the commentsuggests that such control determina-tions must be consistent with economicsubstance in all cases. In the context ofthe control rule in §1.482–4(f)(3)(i)(A),this is already reflected in the language“including terms imputed pursuant to§1.482–1(d)(3)(ii)(B).”

Section 1.482–9T(h) of the 2006 tem-porary regulations provides that, consis-tent with the specified methods, an un-specified method should take into accountthe general principle that uncontrolled tax-payers compare the terms of a particulartransaction to the realistic alternatives tothat transaction, including economicallysimilar transactions structured as otherthan services transactions, and only enterinto a transaction if none of the alter-natives is preferable to it. The realisticalternatives concept was imported from§1.482–1(f)(2)(ii) to be consistent withthe general aim to coordinate the analysesunder the various sections of the regula-tions under section 482. This provisionallows flexibility to consider non-servicesalternatives to a services transaction, forexample, a transfer or license of intangibleproperty, if such an approach provides themost reliable measure of an arm’s lengthresult.

Commentators suggested that the real-istic alternative principle be clarified sothat only transactions actually engaged inby the controlled taxpayer can constituterealistic alternatives or that the principlebe removed altogether on the groundsthat it inappropriately treats taxpayersas engaging in transactions other thanthose they chose. The Treasury Depart-ment and the IRS do not agree with theassertion that consideration of realisticalternatives improperly disregards a tax-payer’s chosen arrangement and that therealistic alternative principle is limited tointernal comparables. It is a longstand-ing principle under §1.482–1(f)(2)(ii)(A)and in the valuation field, generally, that,although the Commissioner will evalu-ate the results of a transaction as actuallystructured by the taxpayer unless it lackseconomic substance, the Commissionermay consider alternatives available in de-termining the arm’s length valuation ofthe controlled transaction. The realisticalternatives principle does not recast thetransaction. Rather, it assumes that tax-

payers are rational and will not chooseto price an arrangement in a manner thatmakes them worse off economically thananother available alternative. Thus, if theprice associated with a realistic alternativeappears preferable in comparison with theprice associated with the chosen arrange-ment, the logical implication is that theactual arrangement has been priced incor-rectly through a flawed application of thebest method rule. This is further reflectedin the example in §1.482–9T(h), whichillustrates when realistic alternatives maybe considered to evaluate the arm’s lengthconsideration, and explicitly states that thebest method rule of §1.482–1(c) governsthe analysis.

The unspecified method provisions inthese final regulations are adopted withoutchange.

Section 1.482–9(i)(3) providesthat, consistent with the authority in§1.482–1(d)(3)(ii)(B), the Commissionermay impute contingent-payment con-tractual terms in a controlled servicestransaction if the economic substance ofthe transaction is consistent with the ex-istence of such terms. When the 2003proposed regulations were issued, com-mentators expressed concerns with the rulefor imputing contingent payment termsto the extent that it permits the IRS torecast arrangements if there is a disagree-ment about the pricing of a service. Thetemporary regulations responded to thisconcern by providing a new Example 5 in§1.482–1T(d)(3)(ii)(C) to illustrate that ifa taxpayer’s pricing is outside of the arm’slength range, that fact alone would notsupport imputation of additional contrac-tual terms based on economic substancegrounds. Commentators responded, how-ever, that the last sentence of Example 5perpetuated the same problem of allowingthe IRS to recast arrangements if therewere pricing disputes between a taxpayerand the IRS.

The Treasury Department and the IRSagree that the last sentence of Example 5in §1.482–1T(d)(3)(ii)(C) did not clearlyconvey its intended meaning, which is thata transfer pricing method and the price de-rived from the application of that methoddo not inform the terms of the transactionor the risks borne by the entities. Rather,the selection and application of a trans-fer pricing method should be based ona comparability analysis of the transac-

August 17, 2009 195 2009–33 I.R.B.

tion, which must consider the risks borneby each entity in the transaction. Thus,the last sentence in §1.482–1T(d)(3)(ii)(C)Example 5, paragraph (iv), was intended toexplain that the IRS is not required to ac-cept the transfer pricing method and formof payment terms of a transaction as rep-resented by a taxpayer if they are incon-sistent with the conduct of the entities andthe economic substance of the transaction.Because this sentence caused confusion, ithas been removed. However, the Trea-sury Department and the IRS affirm thatthe IRS may impute contingent-paymentterms where the economic substance of thetransaction is consistent with the existenceof such terms.

D. Apportionment of StewardshipExpenses—§1.861–8

The regulations under §1.861–8(e)(4)conform to, and are consistent with, thelanguage relating to controlled servicestransactions as set forth in §1.482–9(l).The regulations under §1.861–8(e)(4) areapplicable for taxable years beginning af-ter December 31, 2006.

E. Effective/ApplicabilityDate—§1.482–9(n)

These regulations are applicable fortaxable years beginning after July 31,2009. Controlled taxpayers may elect toapply retroactively all of the provisionsof these regulations to any taxable yearbeginning after September 10, 2003. Suchelection will be effective for the year of theelection and all subsequent taxable years.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It also has been determinedthat section 553(b) of the AdministrativeProcedure Act (5 U.S.C. chapter 5) doesnot apply to this regulation. It is herebycertified that the collections of informa-tion in this regulation will not have a sig-nificant economic impact on a substantialnumber of small entities. This certificationis based on the fact that the collections ofinformation are related to elective provi-sions for determining taxable income thatsimplify and reduce compliance burdens in

connection with controlled services trans-actions. When collection of informationis required, it is expected to take taxpay-ers approximately 2 hours to comply, andthe administrative and economic costs willbe nominal in comparison with the result-ing simplification and reduction of compli-ance burdens. Thus, the economic impactof the collections of information will notbe significant. Similarly, while some smallentities may be subject to the collectionsof information if they elect one of the pro-visions, the collections of information arenot expected to affect a substantial num-ber of small entities. Accordingly, a regu-latory flexibility analysis under the Regu-latory Flexibility Act (5 U.S.C. chapter 6)is not required. Pursuant to section 7805(f)of the Internal Revenue Code, the notice ofproposed rulemaking preceding these reg-ulations was submitted to the Small Busi-ness Administration for comment on itsimpact on small business.

Drafting Information

The principal authors of theseregulations are Carol B. Tan andGregory A. Spring, Office of AssociateChief Counsel (International) formatters relating to section 482, andRichard L. Chewning, Office of AssociateChief Counsel (International) for mattersrelating to stewardship expenses.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR parts 1, 31, and602 are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by adding an entry innumerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.482–9 also issued under

26 U.S.C. 482. * * *Par. 2. Section 1.482–0 is amended as

follows:1. The introductory text is revised.2. The entries for §1.482–1(a)(1),

(d)(3)(ii)(C), (d)(3)(v), (f)(2)(ii)(A),(f)(2)(iii)(B), (g)(4)(iii), (i) and (j) are re-vised.

3. The entries for §1.482–2(b), (e) and(f) are revised.

4. The entries for §1.482–4(f)(3),(f)(4), (g), and (h) are revised.

5. The entry for §1.482–4(f)(7) is re-moved.

6. The entries for §1.482–6(c)(2)(ii)(B)(1), (c)(2)(ii)(D), (c)(3)(i)(A),(c)(3)(i)(B), (c)(3)(ii)(D), and (d) arerevised

7. The entry for §1.482–8(c) is added.8. The entries for §1.482–9 are revised.The addition and revisions read as fol-

lows:

§1.482–0 Outline of regulations undersection 482.

This section contains major captions for§§1.482–1 through 1.482–9.

§1.482–1 Allocation of income anddeductions among taxpayers.

(a) * * *(1) Purpose and scope.

* * * * *(d) * * *(3) * * *(ii) * * *(C) Examples.

* * * * *(v) Property or services.

* * * * *(f) * * *(2) * * *(ii) * * *(A) In general.

* * * * *(iii) * * *(A) * * *(B) Circumstances warranting consid-

eration of multiple year data.

* * * * *(g) * * *(4) * * *(iii) Examples.

* * * * *(i) Definitions.(j) Effective/applicability date.

§1.482–2 Determination of taxableincome in specific situations.

* * * * *(b) Rendering of services.

* * * * *(e) [Reserved]. For further guidance,

see §1.482–0T, the entry for §1.482–2T(e).

2009–33 I.R.B. 196 August 17, 2009

(f) Effective/applicability date.

* * * * *

§1.482–4 Methods to determine taxableincome in connection with a transfer ofintangible property.

* * * * *(f) * * *(3) Ownership of intangible property.(i) Identification of owner.(A) In general.(B) [Reserved]. For further guid-

ance, see §1.482–0T, the entry for§1.482–4T(f)(3)(i)(B).

(ii) Examples.(4) Contribution to the value of intangi-

ble property owned by another.(i) In general.(ii) Examples.

* * * * *(g) [Reserved]. For further guidance,

see §1.482–0T, the entry for §1.482–4T(g).(h) Effective/applicability date.

* * * * *

§1.482–6 Profit split method.

* * * * *(c) * * *(2) * * *(ii) * * *(B) * * *.(1) In general.

* * * * *(D) Other factors affecting reliability.

* * * * *(3) * * *(i) * * *(A) Allocate income to routine contri-

butions.(B) Allocate residual profit.(1) Nonroutine contributions generally.(2) Nonroutine contributions of intangi-

ble property.(ii) * * *(D) Other factors affecting reliability.

* * * * *(d) Effective/applicability date.

§1.482–8 Examples of the best methodrule.

* * * * *

(c) Effective/applicability date.

§1.482–9 Methods to determine taxableincome in connection with a controlledservices transaction.

(a) In general.(b) Services cost method.(1) In general.(2) Eligibility for the services cost

method.(3) Covered services.(i) Specified covered services.(ii) Low margin covered services.(4) Excluded activities.(5) Not services that contribute signif-

icantly to fundamental risks of businesssuccess or failure.

(6) Adequate books and records.(7) Shared services arrangement.(i) In general.(ii) Requirements for shared services

arrangement.(A) Eligibility.(B) Allocation.(C) Documentation.(iii) Definitions and special rules.(A) Participant.(B) Aggregation.(C) Coordination with cost sharing ar-

rangements.(8) Examples.(c) Comparable uncontrolled services

price method.(1) In general.(2) Comparability and reliability con-

siderations.(i) In general.(ii) Comparability.(A) In general.(B) Adjustments for differences be-

tween controlled and uncontrolled trans-actions.

(iii) Data and assumptions.(3) Arm’s length range.(4) Examples.(5) Indirect evidence of the price of a

comparable uncontrolled services transac-tion.

(i) In general.(ii) Example.(d) Gross services margin method.(1) In general.(2) Determination of arm’s length price.(i) In general.(ii) Relevant uncontrolled transaction.(iii) Applicable uncontrolled price.(iv) Appropriate gross services profit.

(v) Arm’s length range.(3) Comparability and reliability con-

siderations.(i) In general.(ii) Comparability.(A) Functional comparability.(B) Other comparability factors.(C) Adjustments for differences be-

tween controlled and uncontrolled trans-actions.

(D) Buy-sell distributor.(iii) Data and assumptions.(A) In general.(B) Consistency in accounting.(4) Examples.(e) Cost of services plus method.(1) In general.(2) Determination of arm’s length price.(i) In general.(ii) Appropriate gross services profit.(iii) Comparable transactional costs.(iv) Arm’s length range.(3) Comparability and reliability con-

siderations.(i) In general.(ii) Comparability.(A) Functional comparability.(B) Other comparability factors.(C) Adjustments for differences be-

tween the controlled and uncontrolledtransactions.

(iii) Data and assumptions.(A) In general.(B) Consistency in accounting.(4) Examples.(f) Comparable profits method.(1) In general.(2) Determination of arm’s length re-

sult.(i) Tested party.(ii) Profit level indicators.(iii) Comparability and reliabil-

ity considerations—Data and assump-tions—Consistency in accounting.

(3) Examples.(g) Profit split method.(1) In general.(2) Examples.(h) Unspecified methods.(i) Contingent-payment contractual

terms for services.(1) Contingent-payment contractual

terms recognized in general.(2) Contingent-payment arrangement.(i) General requirements(A) Written contract.(B) Specified contingency.(C) Basis for payment.

August 17, 2009 197 2009–33 I.R.B.

(ii) Economic substance and conduct.(3) Commissioner’s authority to impute

contingent-payment terms.(4) Evaluation of arm’s length charge.(5) Examples.(j) Total services costs.(k) Allocation of costs.(1) In general.(2) Appropriate method of allocation

and apportionment.(i) Reasonable method standard.(ii) Use of general practices.(3) Examples.(l) Controlled services transaction.(1) In general.(2) Activity.(3) Benefit.(i) In general.(ii) Indirect or remote benefit.(iii) Duplicative activities.(iv) Shareholder activities.(v) Passive association.(4) Disaggregation of transactions.(5) Examples.(m) Coordination with transfer pricing

rules for other transactions.(1) Services transactions that include

other types of transactions.(2) Services transactions that effect a

transfer of intangible property.(3) [Reserved]. For further guid-

ance, see §1.482–0T, the entry for§1.482–9T(m)(3).

(4) Other types of transactions that in-clude controlled services transactions.

(5) Examples.(n) Effective/applicability date.(1) In general.(2) Election to apply regulations to ear-

lier taxable years.Par. 3. Section 1.482–0T is amended as

follows:1. Revise the section heading and intro-

ductory text.2. Revise the section headings for

§§1.482–1T, 1.482–4T and 1.482–9T andthe entries for §§1.482–1T, 1.482–2T,1.482–4T and 1.482–9T.

3. Remove the entries for §1.482–6T.The revisions read as follows:

§1.482–0T Outline of regulations undersection 482 (temporary).

This section contains major captionsfor §§1.482–1T, 1.482–2T, 1.482–4T,1.482–7T, 1.482–8T, and 1.482–9T.

§1.482–1T Allocation of income anddeductions among taxpayers (temporary).

(a) through (b)(2) [Reserved]. For fur-ther guidance, see §1.482–0, the entries for§1.482–1(a) through (b)(2).

(i) Methods.(ii) [Reserved]. For further guid-

ance, see §1.482–0, the entry for§1.482–1(b)(2)(ii).

(iii) Coordination of methods applica-ble to certain intangible development ar-rangements.

(c) through (i) [Reserved]. For fur-ther guidance, see §1.482–0, the entries for§1.482–1(c) through (i).

(j) Effective/applicability date.(k) Expiration date.

§1.482–2T Determination of taxableincome in specific situations (temporary).

(a) through (d) [Reserved]. For fur-ther guidance, see §1.482–0, the entries for§1.482–2(a) through (d).

(e) Cost sharing arrangement.(f) Effective/applicability date.(1) In general.(2) Election to apply regulation to ear-

lier taxable years.(3) Expiration date.

§1.482–4T Methods to determine taxableincome in connection with a transfer ofintangible property (temporary).

(a) through (f)(3)(i)(A) [Reserved]. Forfurther guidance, see §1.482–0, the entriesfor §1.482–4(a) through (f)(3)(i)(A).

(B) Cost sharing arrangements.(f)(3)(ii) through (f)(6) [Reserved]. For

further guidance, see §1.482–0, the entriesfor §1.482–4(f)(3)(ii) through (f)(6).

(g) Coordination with rules governingcost sharing arrangements.

(h) Effective/applicability date.(i) Expiration date.

* * * * *

§1.482–9T Methods to determine taxableincome in connection with a controlledservices transaction (temporary).

(a) through (m)(2) [Reserved]. For fur-ther guidance, see §1.482–0, the entries for§1.482–9(a) through (m)(2).

(3) Coordination with rules governingcost sharing arrangements.

(n) Effective/applicability dates.(o) Expiration date.Par. 4. Section 1.482–1 is amended by

revising paragraphs (a)(1), (d)(3)(ii)(C)Examples 3, 4, 5, and 6, (d)(3)(v),(f)(2)(ii)(A), (f)(2)(iii)(B), (g)(4)(i),(g)(4)(iii) Example 1, (i), and (j)(6) to readas follows:

§1.482–1 Allocation of income anddeductions among taxpayers.

(a) In general—(1) Purpose and scope.The purpose of section 482 is to ensure thattaxpayers clearly reflect income attribut-able to controlled transactions and to pre-vent the avoidance of taxes with respectto such transactions. Section 482 places acontrolled taxpayer on a tax parity with anuncontrolled taxpayer by determining thetrue taxable income of the controlled tax-payer. This section sets forth general prin-ciples and guidelines to be followed un-der section 482. Section 1.482–2 providesrules for the determination of the true tax-able income of controlled taxpayers in spe-cific situations, including controlled trans-actions involving loans or advances or theuse of tangible property. Sections 1.482–3through 1.482–6 provide rules for the de-termination of the true taxable income ofcontrolled taxpayers in cases involving thetransfer of property. Section 1.482–7T setsforth the cost sharing provisions applica-ble to taxable years beginning on or af-ter January 5, 2009. Section 1.482–8 pro-vides examples illustrating the applicationof the best method rule. Finally, §1.482–9provides rules for the determination of thetrue taxable income of controlled taxpay-ers in cases involving the performance ofservices.

* * * * *(d) * * *(3) * * *(ii) * * *(C) * * *Example 3. Contractual terms imputed from eco-

nomic substance. (i) FP, a foreign producer of wrist-watches, is the registered holder of the YY trademarkin the United States and in other countries world-wide. In year 1, FP enters the United States mar-ket by selling YY wristwatches to its newly orga-nized United States subsidiary, USSub, for distribu-tion in the United States market. USSub pays FP afixed price per wristwatch. USSub and FP undertake,without separate compensation, marketing activitiesto establish the YY trademark in the United Statesmarket. Unrelated foreign producers of trademarked

2009–33 I.R.B. 198 August 17, 2009

wristwatches and their authorized United States dis-tributors respectively undertake similar marketing ac-tivities in independent arrangements involving dis-tribution of trademarked wristwatches in the UnitedStates market. In years 1 through 6, USSub marketsand sells YY wristwatches in the United States. Fur-ther, in years 1 through 6, USSub undertakes incre-mental marketing activities in addition to the activi-ties similar to those observed in the independent dis-tribution transactions in the United States market. FPdoes not directly or indirectly compensate USSub forperforming these incremental activities during years1 through 6. Assume that, aside from these incremen-tal activities, and after any adjustments are made toimprove the reliability of the comparison, the pricepaid per wristwatch by the independent, authorizeddistributors of wristwatches would provide the mostreliable measure of the arm’s length price paid per YYwristwatch by USSub.

(ii) By year 7, the wristwatches with the YY trade-mark generate a premium return in the United Statesmarket, as compared to wristwatches marketed by theindependent distributors. In year 7, substantially allthe premium return from the YY trademark in theUnited States market is attributed to FP, for exam-ple through an increase in the price paid per watchby USSub, or by some other means.

(iii) In determining whether an allocation of in-come is appropriate in year 7, the Commissioner mayconsider the economic substance of the arrangementsbetween USSub and FP, and the parties’ course ofconduct throughout their relationship. Based onthis analysis, the Commissioner determines that itis unlikely that, ex ante, an uncontrolled taxpayeroperating at arm’s length would engage in the incre-mental marketing activities to develop or enhanceintangible property owned by another party unlessit received contemporaneous compensation or oth-erwise had a reasonable anticipation of receivinga future benefit from those activities. In this case,USSub’s undertaking the incremental marketingactivities in years 1 through 6 is a course of conductthat is inconsistent with the parties’ attribution toFP in year 7 of substantially all the premium returnfrom the enhanced YY trademark in the UnitedStates market. Therefore, the Commissioner mayimpute one or more agreements between USSub andFP, consistent with the economic substance of theircourse of conduct, which would afford USSub anappropriate portion of the premium return from theYY trademark wristwatches. For example, the Com-missioner may impute a separate services agreementthat affords USSub contingent-payment compensa-tion for its incremental marketing activities in years1 through 6, which benefited FP by contributing tothe value of the trademark owned by FP. In the alter-native, the Commissioner may impute a long-term,exclusive agreement to exploit the YY trademark inthe United States that allows USSub to benefit fromthe incremental marketing activities it performed. Asanother alternative, the Commissioner may requireFP to compensate USSub for terminating USSub’simputed long-term, exclusive agreement to exploitthe YY trademark in the United States, an agreementthat USSub made more valuable at its own expenseand risk. The taxpayer may present additional factsthat could indicate which of these or other alternativeagreements best reflects the economic substance

of the underlying transactions, consistent with theparties’ course of conduct in the particular case.

Example 4. Contractual terms imputed from eco-nomic substance. (i) FP, a foreign producer of athleticgear, is the registered holder of the AA trademarkin the United States and in other countries world-wide. In year 1, FP enters into a licensing agree-ment that affords its newly organized United Statessubsidiary, USSub, exclusive rights to certain manu-facturing and marketing intangible property (includ-ing the AA trademark) for purposes of manufactur-ing and marketing athletic gear in the United Statesunder the AA trademark. The contractual terms ofthis agreement obligate USSub to pay FP a royaltybased on sales, and also obligate both FP and USSubto undertake without separate compensation specifiedtypes and levels of marketing activities. Unrelatedforeign businesses license independent United Statesbusinesses to manufacture and market athletic gear inthe United States, using trademarks owned by the un-related foreign businesses. The contractual terms ofthese uncontrolled transactions require the licenseesto pay royalties based on sales of the merchandise,and obligate the licensors and licensees to undertakewithout separate compensation specified types andlevels of marketing activities. In years 1 through 6,USSub manufactures and sells athletic gear under theAA trademark in the United States. Assume that,after adjustments are made to improve the reliabil-ity of the comparison for any material differences re-lating to marketing activities, manufacturing or mar-keting intangible property, and other comparabilityfactors, the royalties paid by independent licenseeswould provide the most reliable measure of the arm’slength royalty owed by USSub to FP, apart from theadditional facts in paragraph (ii) of this Example 4.

(ii) In years 1 through 6, USSub performs incre-mental marketing activities with respect to the AAtrademark athletic gear, in addition to the activities re-quired under the terms of the license agreement withFP, that are also incremental as compared to those ob-served in the comparables. FP does not directly orindirectly compensate USSub for performing theseincremental activities during years 1 through 6. Byyear 7, AA trademark athletic gear generates a pre-mium return in the United States, as compared to sim-ilar athletic gear marketed by independent licensees.In year 7, USSub and FP enter into a separate ser-vices agreement under which FP agrees to compen-sate USSub on a cost basis for the incremental mar-keting activities that USSub performed during years 1through 6, and to compensate USSub on a cost basisfor any incremental marketing activities it may per-form in year 7 and subsequent years. In addition, theparties revise the license agreement executed in year1, and increase the royalty to a level that attributes toFP substantially all the premium return from sales ofthe AA trademark athletic gear in the United States.

(iii) In determining whether an allocation ofincome is appropriate in year 7, the Commissionermay consider the economic substance of the arrange-ments between USSub and FP and the parties’ courseof conduct throughout their relationship. Based onthis analysis, the Commissioner determines that it isunlikely that, ex ante, an uncontrolled taxpayer oper-ating at arm(s length would engage in the incrementalmarketing activities to develop or enhance intangibleproperty owned by another party unless it receivedcontemporaneous compensation or otherwise had a

reasonable anticipation of a future benefit. In thiscase, USSub(s undertaking the incremental mar-keting activities in years 1 through 6 is a course ofconduct that is inconsistent with the parties’ adoptionin year 7 of contractual terms by which FP com-pensates USSub on a cost basis for the incrementalmarketing activities that it performed. Therefore, theCommissioner may impute one or more agreementsbetween USSub and FP, consistent with the eco-nomic substance of their course of conduct, whichwould afford USSub an appropriate portion of thepremium return from the AA trademark athleticgear. For example, the Commissioner may imputea separate services agreement that affords USSubcontingent-payment compensation for the incremen-tal activities it performed during years 1 through 6,which benefited FP by contributing to the value ofthe trademark owned by FP. In the alternative, theCommissioner may impute a long-term, exclusiveUnited States license agreement that allows USSubto benefit from the incremental activities. As anotheralternative, the Commissioner may require FP tocompensate USSub for terminating USSub’s imputedlong-term United States license agreement, a licensethat USSub made more valuable at its own expenseand risk. The taxpayer may present additional factsthat could indicate which of these or other alternativeagreements best reflects the economic substanceof the underlying transactions, consistent with theparties’ course of conduct in this particular case.

Example 5. Non-arm’s length compensation. (i)The facts are the same as in paragraph (i) of Exam-ple 4. As in Example 4, assume that, after adjust-ments are made to improve the reliability of the com-parison for any material differences relating to mar-keting activities, manufacturing or marketing intangi-ble property, and other comparability factors, the roy-alties paid by independent licensees would providethe most reliable measure of the arm’s length royaltyowed by USSub to FP, apart from the additional factsdescribed in paragraph (ii) of this Example 5.

(ii) In years 1 through 4, USSub performs certainincremental marketing activities with respect to theAA trademark athletic gear, in addition to the ac-tivities required under the terms of the basic licenseagreement, that are also incremental as comparedwith those activities observed in the comparables. Atthe start of year 1, FP enters into a separate servicesagreement with USSub, which states that FP willcompensate USSub quarterly, in an amount equal tospecified costs plus X%, for these incremental mar-keting functions. Further, these written agreementsreflect the intent of the parties that USSub receivesuch compensation from FP throughout the term ofthe agreement, without regard to the success or failureof the promotional activities. During years 1 through4, USSub performs marketing activities pursuantto the separate services agreement and in each yearUSSub receives the specified compensation from FPon a cost of services plus basis.

(iii) In evaluating year 4, the Commissioner per-forms an analysis of independent parties that performpromotional activities comparable to those performedby USSub and that receive separately-stated compen-sation on a current basis without contingency. TheCommissioner determines that the magnitude of thespecified cost plus X% is outside the arm’s lengthrange in each of years 1 through 4. Based on an eval-uation of all the facts and circumstances, the Com-

August 17, 2009 199 2009–33 I.R.B.

missioner makes an allocation to require payment ofcompensation to USSub for the promotional activitiesperformed in year 4, based on the median of the in-terquartile range of the arm’s length markups chargedby the uncontrolled comparables described in para-graph (e)(3) of this section.

(iv) Given that based on facts and circumstances,the terms agreed by the controlled parties were thatFP would bear all risks associated with the promo-tional activities performed by USSub to promote theAA trademark product in the United States market,and given that the parties’ conduct during the yearsexamined was consistent with this allocation ofrisk, the fact that the cost of services plus markupon USSub’s services was outside the arm’s lengthrange does not, without more, support imputationof additional contractual terms based on alternativeviews of the economic substance of the transaction,such as terms indicating that USSub, rather than FP,bore the risk associated with these activities.

Example 6. Contractual terms imputed from eco-nomic substance. (i) Company X is a member ofa controlled group that has been in operation in thepharmaceutical sector for many years. In years 1through 4, Company X undertakes research and de-velopment activities. As a result of those activities,Company X developed a compound that may be moreeffective than existing medications in the treatment ofcertain conditions.

(ii) Company Y is acquired in year 4 by the con-trolled group that includes Company X. Once Com-pany Y is acquired, Company X makes available toCompany Y a large amount of technical data concern-ing the new compound, which Company Y uses toregister patent rights with respect to the compoundin several jurisdictions, making Company Y the legalowner of such patents. Company Y then enters intolicensing agreements with group members that affordCompany Y 100% of the premium return attributableto use of the intangible property by its subsidiaries.

(iii) In determining whether an allocation is ap-propriate in year 4, the Commissioner may considerthe economic substance of the arrangements betweenCompany X and Company Y, and the parties’ courseof conduct throughout their relationship. Based onthis analysis, the Commissioner determines that it isunlikely that an uncontrolled taxpayer operating atarm’s length would make available the results of itsresearch and development or perform services that re-sulted in transfer of valuable know how to anotherparty unless it received contemporaneous compen-sation or otherwise had a reasonable anticipation ofreceiving a future benefit from those activities. Inthis case, Company X’s undertaking the research anddevelopment activities and then providing technicaldata and know-how to Company Y in year 4 is incon-sistent with the registration and subsequent exploita-tion of the patent by Company Y. Therefore, the Com-missioner may impute one or more agreements be-tween Company X and Company Y consistent withthe economic substance of their course of conduct,which would afford Company X an appropriate por-tion of the premium return from the patent rights. Forexample, the Commissioner may impute a separateservices agreement that affords Company X contin-gent-payment compensation for its services in year 4for the benefit of Company Y, consisting of makingavailable to Company Y technical data, know-how,and other fruits of research and development con-

ducted in previous years. These services benefitedCompany Y by giving rise to and contributing to thevalue of the patent rights that were ultimately regis-tered by Company Y. In the alternative, the Commis-sioner may impute a transfer of patentable intangibleproperty rights from Company X to Company Y im-mediately preceding the registration of patent rightsby Company Y. The taxpayer may present additionalfacts that could indicate which of these or other al-ternative agreements best reflects the economic sub-stance of the underlying transactions, consistent withthe parties( course of conduct in the particular case.

* * * * *(v) Property or services. Evaluat-

ing the degree of comparability betweencontrolled and uncontrolled transactionsrequires a comparison of the property orservices transferred in the transactions.This comparison may include any intangi-ble property that is embedded in tangibleproperty or services being transferred(embedded intangibles). The compara-bility of the embedded intangibles willbe analyzed using the factors listed in§1.482–4(c)(2)(iii)(B)(1) (comparable in-tangible property). The relevance of prod-uct comparability in evaluating the relativereliability of the results will depend on themethod applied. For guidance concerningthe specific comparability considerationsapplicable to transfers of tangible andintangible property and performance ofservices, see §§1.482–3 through 1.482–6and §1.482–9; see also §§1.482–3(f),1.482–4(f)(4), and 1.482–9(m), dealingwith the coordination of the intangibleand tangible property and performance ofservices rules.

* * * * *(f) * * *(2) * * *(ii) Allocation based on taxpayer’s ac-

tual transactions—(A) In general. TheCommissioner will evaluate the resultsof a transaction as actually structuredby the taxpayer unless its structure lackseconomic substance. However, the Com-missioner may consider the alternativesavailable to the taxpayer in determin-ing whether the terms of the controlledtransaction would be acceptable to an un-controlled taxpayer faced with the samealternatives and operating under compa-rable circumstances. In such cases theCommissioner may adjust the considera-tion charged in the controlled transactionbased on the cost or profit of an alternativeas adjusted to account for material dif-ferences between the alternative and the

controlled transaction, but will not restruc-ture the transaction as if the alternativehad been adopted by the taxpayer. Seeparagraph (d)(3) of this section (factorsfor determining comparability; contractualterms and risk); §§1.482–3(e), 1.482–4(d),and 1.482–9(h) (unspecified methods).

* * * * *(iii) * * *(B) Circumstances warranting consid-

eration of multiple year data. The extentto which it is appropriate to consider multi-ple year data depends on the method beingapplied and the issue being addressed.Circumstances that may warrant consider-ation of data from multiple years includethe extent to which complete and accuratedata are available for the taxable year un-der review, the effect of business cyclesin the controlled taxpayer’s industry, orthe effects of life cycles of the productor intangible property being examined.Data from one or more years before orafter the taxable year under review mustordinarily be considered for purposesof applying the provisions of paragraph(d)(3)(iii) of this section (risk), paragraph(d)(4)(i) of this section (market sharestrategy), §1.482–4(f)(2) (periodic ad-justments), §1.482–5 (comparable profitsmethod), §1.482–9(f) (comparable prof-its method for services), and §1.482–9(i)(contingent-payment contractual terms forservices). On the other hand, multipleyear data ordinarily will not be consideredfor purposes of applying the comparableuncontrolled price method of §1.482–3(b)or the comparable uncontrolled servicesprice method of §1.482–9(c) (except to theextent that risk or market share strategyissues are present).

* * * * *(g) * * *(4) Setoffs—(i) In general. If an al-

location is made under section 482 withrespect to a transaction between con-trolled taxpayers, the Commissioner willtake into account the effect of any othernon-arm’s length transaction between thesame controlled taxpayers in the sametaxable year which will result in a setoffagainst the original section 482 allocation.Such setoff, however, will be taken intoaccount only if the requirements of para-graph (g)(4)(ii) of this section are satisfied.If the effect of the setoff is to change thecharacterization or source of the income

2009–33 I.R.B. 200 August 17, 2009

or deductions, or otherwise distort taxableincome, in such a manner as to affect theU.S. tax liability of any member, adjust-ments will be made to reflect the correctamount of each category of income ordeductions. For purposes of this setoffprovision, the term arm’s length refers tothe amount defined in paragraph (b) of thissection (arm’s length standard), withoutregard to the rules in §1.482–2(a) that treatcertain interest rates as arm’s length ratesof interest.

* * * * *(iii) * * *Example 1. P, a U.S. corporation, renders con-

struction services to S, its foreign subsidiary in Coun-try Y, in connection with the construction of S’s fac-tory. An arm’s length charge for such services de-termined under §1.482–9 would be $100,000. Dur-ing the same taxable year P makes available to S theuse of a machine to be used in the construction ofthe factory, and the arm’s length rental value of themachine is $25,000. P bills S $125,000 for the ser-vices, but does not charge S for the use of the ma-chine. No allocation will be made with respect to theundercharge for the machine if P notifies the districtdirector of the basis of the claimed setoff within 30days after the date of the letter from the district direc-tor transmitting the examination report notifying P ofthe proposed adjustment, establishes that the excessamount charged for services was equal to an arm’slength charge for the use of the machine and that thetaxable income and income tax liabilities of P are notdistorted, and documents the correlative allocationsresulting from the proposed setoff.

* * * * *(i) Definitions. The definitions set forth

in paragraphs (i)(1) through (i)(10) of thissection apply to this section and §§1.482–2through 1.482–9.

* * * * *(j) * * *(6)(i) The provisions of paragraphs

(a)(1), (d)(3)(ii)(C) Example 3, Example4, Example 5, and Example 6, (d)(3)(v),(f)(2)(ii)(A), (f)(2)(iii)(B), (g)(4)(i),(g)(4)(iii), and (i) of this section are gener-ally applicable for taxable years beginningafter July 31, 2009.

(ii) A person may elect to apply theprovisions of paragraphs (a)(1), (b)(2)(i),(d)(3)(ii)(C) Example 3, Example 4,Example 5, and Example 6, (d)(3)(v),(f)(2)(ii)(A), (f)(2)(iii)(B), (g)(4)(i),(g)(4)(iii), and (i) of this section to earliertaxable years in accordance with the rulesset forth in §1.482–9(n)(2).

Par. 5. Section 1.482–1T is amendedby revising paragraphs (a), (b)(1), thefirst sentence in paragraph (b)(2)(i),

(b)(2)(ii), the second sentence in para-graph (b)(2)(iii), (c), (d), (e), (f), (g), (h),(i), and (j) to read as follows:

§1.482–1T Allocation of income anddeductions among taxpayers (temporary).

(a) through (b)(1) [Reserved]. For fur-ther guidance, see §1.482–1(a) through(b)(1).

(b)(2) * * *(i) * * *Sections 1.482–2through 1.482–6, 1.482–7T and 1.482–9provide specific methods to be used toevaluate whether transactions between oramong members of the controlled groupsatisfy the arm’s length standard, and ifthey do not, to determine the arm’s lengthresult. * * *

(ii) [Reserved]. For further guidance,see §1.482–1(b)(2)(ii).

(iii) * * * Sections 1.482–4 and1.482–9, as appropriate, provide the spe-cific methods to be used to determinearm’s length results of arrangements, in-cluding partnerships, for sharing the costsand risks of developing intangible prop-erty, other that a cost sharing arrangementcovered by §1.482–7T. * * *

(c) through (j)(5) [Reserved]. For fur-ther guidance, see §1.482–1(c) through(j)(5).

(j)(6)(i) The provisions of paragraphs(b)(2)(i) and (b)(2)(iii) of this section aregenerally applicable on January 5, 2009.

(ii) [Reserved]. For further guidance,see §1.482–1(j)(6)(ii).

(iii) The applicability of paragraphs(b)(2)(i) and (b)(2)(iii) of this section ex-pires on or before December 30, 2011.

Par. 6. Section 1.482–2 is amendedby revising paragraph (b), (e), and addingparagraph (f) to read as follows:

§1.482–2 Determination of taxableincome in specific situations.

* * * * *(b) Rendering of services. For rules

governing allocations under section 482to reflect an arm’s length charge for con-trolled transactions involving the render-ing of services, see §1.482–9.

* * * * *(e) [Reserved]. For further guidance,

see §1.482–2T(e).(f) Effective/applicability date—(1) In

general. The provision of paragraph (b) of

this section is generally applicable for tax-able years beginning after July 31, 2009.

(2) Election to apply regulation to ear-lier taxable years. A person may electto apply the provisions of paragraph (b)of this section to earlier taxable yearsin accordance with the rules set forth in§1.482–9(n)(2).

Par. 7. Section 1.482–2T is amended asfollows:

1. Revise paragraphs (a), (b), (c), (d),and (f)(2).

2. Remove the first sentence in bothparagraphs (f)(1) and (f)(3).

The revisions read as follows:

§1.482–2T Determination of taxableincome in specific situations (temporary).

(a) through (d) [Reserved]. For furtherguidance, see §1.482–2(a) through (d).

* * * * *(f) * * *(2) [Reserved]. For further guidance,

see §1.482–2(f)(2).

* * * * *Par. 8. Section 1.482–4 is amended as

follows:1. Revise paragraphs (f)(3) and (f)(4).2. Add paragraphs (g) and (h).The revisions and addition read as fol-

lows:

§1.482–4 Methods to determine taxableincome in connection with a transfer ofintangible property.

* * * * *(f) * * *(3) Ownership of intangible prop-

erty—(i) Identification of owner—(A) Ingeneral. The legal owner of intangibleproperty pursuant to the intellectual prop-erty law of the relevant jurisdiction, orthe holder of rights constituting an in-tangible property pursuant to contractualterms (such as the terms of a license) orother legal provision, will be consideredthe sole owner of the respective intangibleproperty for purposes of this section un-less such ownership is inconsistent withthe economic substance of the underlyingtransactions. See (1.482–1(d)(3)(ii)(B)(identifying contractual terms). If noowner of the respective intangible propertyis identified under the intellectual propertylaw of the relevant jurisdiction, or pursuant

August 17, 2009 201 2009–33 I.R.B.

to contractual terms (including terms im-puted pursuant to §1.482–1(d)(3)(ii)(B))or other legal provision, then the con-trolled taxpayer who has control of theintangible property, based on all the factsand circumstances, will be considered thesole owner of the intangible property forpurposes of this section.

(B) [Reserved]. For further guidance,see §1.482–4T(f)(3)(i)(B).

(ii) Examples. The principles of thisparagraph (f)(3) are illustrated by the fol-lowing examples:

Example 1. FP, a foreign corporation, is the regis-tered holder of the AA trademark in the United States.FP licenses to its U.S. subsidiary, USSub, the exclu-sive rights to manufacture and market products in theUnited States under the AA trademark. FP is theowner of the trademark pursuant to intellectual prop-erty law. USSub is the owner of the license pursuantto the terms of the license, but is not the owner of thetrademark. See paragraphs (b)(3) and (4) of this sec-tion (defining an intangible as, among other things, atrademark or a license).

Example 2. The facts are the same as in Exam-ple 1. As a result of its sales and marketing activi-ties, USSub develops a list of several hundred credit-worthy customers that regularly purchase AA trade-marked products. Neither the terms of the contractbetween FP and USSub nor the relevant intellectualproperty law specify which party owns the customerlist. Because USSub has knowledge of the contentsof the list, and has practical control over its use anddissemination, USSub is considered the sole owner ofthe customer list for purposes of this paragraph (f)(3).

(4) Contribution to the value of intangi-ble property owned by another—(i) In gen-eral. The arm(s length consideration fora contribution by one controlled taxpayerthat develops or enhances the value, ormay be reasonably anticipated to developor enhance the value, of intangible prop-erty owned by another controlled taxpayerwill be determined in accordance with theapplicable rules under section 482. If theconsideration for such a contribution isembedded within the contractual terms fora controlled transaction that involves suchintangible property, then ordinarily no sep-arate allocation will be made with respectto such contribution. In such cases, pur-suant to §1.482–1(d)(3), the contributionmust be accounted for in evaluating thecomparability of the controlled transactionto uncontrolled comparables, and accord-ingly in determining the arm’s length con-sideration in the controlled transaction.

(ii) Examples. The principles of thisparagraph (f)(4) are illustrated by the fol-lowing examples:

Example 1. A, a member of a controlled group,allows B, another member of the controlled group,

to use tangible property, such as laboratory equip-ment, in connection with B’s development of an in-tangible that B owns. By furnishing tangible prop-erty, A makes a contribution to the development ofintangible property owned by another controlled tax-payer, B. Pursuant to paragraph (f)(4)(i) of this sec-tion, the arm’s length charge for A’s furnishing of tan-gible property will be determined under the rules foruse of tangible property in (1.482–2(c).

Example 2. (i) Facts. FP, a foreign producerof wristwatches, is the registered holder of the YYtrademark in the United States and in other countriesworldwide. FP enters into an exclusive, five-year,renewable agreement with its newly organized U.S.subsidiary, USSub. The contractual terms of theagreement grant USSub the exclusive right to re-sellYY trademark wristwatches in the United States,obligate USSub to pay a fixed price per wristwatchthroughout the entire term of the contract, and ob-ligate both FP and USSub to undertake withoutseparate compensation specified types and levels ofmarketing activities.

(ii) The consideration for FP’s and USSub’s mar-keting activities, as well as the consideration for theexclusive right to re-sell YY trademarked merchan-dise in the United States, are embedded in the trans-fer price paid for the wristwatches. Accordingly, pur-suant to paragraph (f)(4)(i) of this section, ordinarilyno separate allocation would be appropriate with re-spect to these embedded contributions.

(iii) Whether an allocation is warranted with re-spect to the transfer price for the wristwatches is de-termined under ((1.482–1, 1.482–3, and this sectionthrough §1.482–6. The comparability analysis wouldinclude consideration of all relevant factors, includ-ing the nature of the intangible property embeddedin the wristwatches and the nature of the marketingactivities required under the agreement. This analy-sis would also take into account that the compensa-tion for the activities performed by USSub and FP,as well as the consideration for USSub’s use of theYY trademark, is embedded in the transfer price forthe wristwatches, rather than provided for in separateagreements. See ((1.482–3(f) and 1.482–9(m)(4).

Example 3. (i) Facts. FP, a foreign producer ofathletic gear, is the registered holder of the AA trade-mark in the United States and in other countries. Inyear 1, FP licenses to a newly organized U.S. sub-sidiary, USSub, the exclusive rights to use certainmanufacturing and marketing intangible property tomanufacture and market athletic gear in the UnitedStates under the AA trademark. The license agree-ment obligates USSub to pay a royalty based on salesof trademarked merchandise. The license agreementalso obligates FP and USSub to perform without sep-arate compensation specified types and levels of mar-keting activities. In year 1, USSub manufacturesand sells athletic gear under the AA trademark in theUnited States.

(ii) The consideration for FP’s and USSub’s re-spective marketing activities is embedded in the con-tractual terms of the license for the AA trademark.Accordingly, pursuant to paragraph (f)(4)(i) of thissection, ordinarily no separate allocation would beappropriate with respect to the embedded contribu-tions in year 1. See (1.482–9(m)(4).

(iii) Whether an allocation is warranted withrespect to the royalty under the license agreementwould be analyzed under (1.482–1, and this section

through (1.482–6. The comparability analysis wouldinclude consideration of all relevant factors, such asthe term and geographical exclusivity of the license,the nature of the intangible property subject to thelicense, and the nature of the marketing activitiesrequired to be undertaken pursuant to the license.Pursuant to paragraph (f)(4)(i) of this section, theanalysis would also take into account the fact that thecompensation for the marketing services is embed-ded in the royalty paid for use of the AA trademark,rather than provided for in a separate services agree-ment. For illustrations of application of the bestmethod rule, see (1.482–8 Examples 10, 11, and 12.

Example 4. (i) Facts. The year 1 facts are thesame as in Example 3, with the following exceptions.In year 2, USSub undertakes certain incremental mar-keting activities in addition to those required by thecontractual terms of the license for the AA trademarkexecuted in year 1. The parties do not execute a sepa-rate agreement with respect to these incremental mar-keting activities performed by USSub. The licenseagreement executed in year 1 is of sufficient dura-tion that it is reasonable to anticipate that USSub willobtain the benefit of its incremental activities, in theform of increased sales or revenues of trademarkedproducts in the U.S. market.

(ii) To the extent that it was reasonable to antic-ipate that USSub’s incremental marketing activitieswould increase the value only of USSub’s intangi-ble property (that is, USSub’s license to use the AAtrademark for a specified term), and not the value ofthe AA trademark owned by FP, USSub’s incremen-tal activities do not constitute a contribution for whichan allocation is warranted under paragraph (f)(4)(i) ofthis section.

Example 5. (i) Facts. The year 1 facts are thesame as in Example 3. In year 2, FP and USSub en-ter into a separate services agreement that obligatesUSSub to perform certain incremental marketing ac-tivities to promote AA trademark athletic gear in theUnited States, above and beyond the activities spec-ified in the license agreement executed in year 1. Inyear 2, USSub begins to perform these incrementalactivities, pursuant to the separate services agreementwith FP.

(ii) Whether an allocation is warranted with re-spect to USSub’s incremental marketing activitiescovered by the separate services agreement wouldbe evaluated under ((1.482–1 and 1.482–9, includinga comparison of the compensation provided for theservices with the results obtained under a methodpursuant to (1.482–9, selected and applied in accor-dance with the best method rule of §1.482–1(c).

(iii) Whether an allocation is warranted with re-spect to the royalty under the license agreement isdetermined under (1.482–1, and this section through§1.482–6. The comparability analysis would includeconsideration of all relevant factors, such as the termand geographical exclusivity of the license, the natureof the intangible property subject to the license, andthe nature of the marketing activities required to beundertaken pursuant to the license. The comparabil-ity analysis would take into account that the compen-sation for the incremental activities by USSub is pro-vided for in the separate services agreement, ratherthan embedded in the royalty paid for use of the AAtrademark. For illustrations of application of the bestmethod rule, see §1.482–8 Examples 10, 11, and 12.

2009–33 I.R.B. 202 August 17, 2009

Example 6. (i) Facts. The year 1 facts are thesame as in Example 3. In year 2, FP and USSub enterinto a separate services agreement that obligates FP toperform incremental marketing activities, not speci-fied in the year 1 license, by advertising AA trade-marked athletic gear in selected international sport-ing events, such as the Olympics and the soccer WorldCup. FP(s corporate advertising department developsand coordinates these special promotions. The sep-arate services agreement obligates USSub to pay anamount to FP for the benefit to USSub that may rea-sonably be anticipated as the result of FP’s incremen-tal activities. The separate services agreement is not aqualified cost sharing arrangement under (1.482–7T.FP begins to perform the incremental activities inyear 2 pursuant to the separate services agreement.

(ii) Whether an allocation is warranted withrespect to the incremental marketing activities per-formed by FP under the separate services agreementwould be evaluated under §1.482–9. Under thecircumstances, it is reasonable to anticipate thatFP(s activities would increase the value of USSub’slicense as well as the value of FP(s trademark.Accordingly, the incremental activities by FP mayconstitute in part a controlled services transactionfor which USSub must compensate FP. The analysisof whether an allocation is warranted would includea comparison of the compensation provided for theservices with the results obtained under a methodpursuant to §1.482–9, selected and applied in accor-dance with the best method rule of §1.482–1(c).

(iii) Whether an allocation is appropriate withrespect to the royalty under the license agree-ment would be evaluated under (§1.482–1 through1.482–3, this section, and §§1.482–5 and 1.482–6.The comparability analysis would include consid-eration of all relevant factors, such as the term andgeographical exclusivity of USSub(s license, thenature of the intangible property subject to the li-cense, and the marketing activities required to beundertaken by both FP and USSub pursuant to thelicense. This comparability analysis would take intoaccount that the compensation for the incrementalactivities performed by FP was provided for in theseparate services agreement, rather than embeddedin the royalty paid for use of the AA trademark.For illustrations of application of the best methodrule, see §1.482–8, Example 10, Example 11, andExample 12.

* * * * *(g) [Reserved]. For further guidance,

see §1.482–4T(g).(h) Effective/applicability date—(1) In

general. The provisions of paragraphs(f)(3)(i)(A), (f)(3)(ii), and (f)(4) of thissection are generally applicable for tax-able years beginning after July 31, 2009.

(2) Election to apply regulation toearlier taxable years. A person mayelect to apply the provisions of para-graphs (f)(3)(i)(A), (f)(3)(ii), and (f)(4)of this section to earlier taxable yearsin accordance with the rules set forth in§1.482–9(n)(2).

Par. 9. Section 1.482–4T is amended asfollows:

1. Revise paragraphs (a), (b), (c), (d),(e), (f)(1), (f)(2), (f)(3)(i)(A), (f)(3)(ii),(f)(4), (f)(5), (f)(6), and (h)(3).

2. Redesignate paragraph (h)(1) asparagraph (h), revise the heading andremove the first sentence in newly-desig-nated paragraph (h).

3. Remove paragraph (h)(2).4. Redesignate paragraph (h)(3) as

paragraph (i).The revisions read as follows:

§1.482–4T Methods to determine taxableincome in connection with a transfer ofintangible property (temporary).

(a) through (f)(3)(i)(A) [Reserved]. Forfurther guidance, see §1.482–4(a) through(f)(3)(i)(A).

(B) * * *(f)(3)(ii) through (f)(6) [Reserved]. For

further guidance, see §1.482–4(f)(3)(ii)through (f)(6)

(g) * * *(h) Effective/applicability date. * * *

* * * * *Par. 10. Section 1.482–6 is amended

by revising paragraphs (c)(2)(ii)(B)(1),(c)(2)(ii)(D), (c)(3)(i)(A), (c)(3)(i)(B),(c)(3)(ii)(D), and adding paragraph (d) toread as follows:

§1.482–6 Profit split method.

* * * * *(c) * * *(2) * * *(ii) * * *(B) Comparability—(1) In general.

The degree of comparability between thecontrolled and uncontrolled taxpayers isdetermined by applying the comparabilityprovisions of §1.482–1(d). The compa-rable profit split compares the divisionof operating profits among the controlledtaxpayers to the division of operatingprofits among uncontrolled taxpayers en-gaged in similar activities under similarcircumstances. Although all of the fac-tors described in §1.482–1(d)(3) mustbe considered, comparability under thismethod is particularly dependent on theconsiderations described under the com-parable profits method in §1.482–5(c)(2)or §1.482–9(f)(2)(iii) because this method

is based on a comparison of the operatingprofit of the controlled and uncontrolledtaxpayers. In addition, because the con-tractual terms of the relationship amongthe participants in the relevant businessactivity will be a principal determinant ofthe allocation of functions and risks amongthem, comparability under this methodalso depends particularly on the degreeof similarity of the contractual terms ofthe controlled and uncontrolled taxpayers.Finally, the comparable profit split maynot be used if the combined operatingprofit (as a percentage of the combinedassets) of the uncontrolled comparablesvaries significantly from that earned bythe controlled taxpayers.

* * * * *(D) Other factors affecting reliability.

Like the methods described in §§1.482–3,1.482–4, 1.482–5, and 1.482–9, the com-parable profit split relies exclusively onexternal market benchmarks. As indi-cated in §1.482–1(c)(2)(i), as the degreeof comparability between the controlledand uncontrolled transactions increases,the relative weight accorded the analysisunder this method will increase. In addi-tion, the reliability of the analysis underthis method may be enhanced by the factthat all parties to the controlled transactionare evaluated under the comparable profitsplit. However, the reliability of the re-sults of an analysis based on informationfrom all parties to a transaction is affectedby the reliability of the data and the as-sumptions pertaining to each party to thecontrolled transaction. Thus, if the dataand assumptions are significantly morereliable with respect to one of the partiesthan with respect to the others, a differentmethod, focusing solely on the results ofthat party, may yield more reliable results.

* * * * *(3) * * *(i) * * *(A) Allocate income to routine contri-

butions. The first step allocates operatingincome to each party to the controlledtransactions to provide a market return forits routine contributions to the relevantbusiness activity. Routine contributionsare contributions of the same or a sim-ilar kind to those made by uncontrolledtaxpayers involved in similar business ac-tivities for which it is possible to identify

August 17, 2009 203 2009–33 I.R.B.

market returns. Routine contributions or-dinarily include contributions of tangibleproperty, services and intangible propertythat are generally owned by uncontrolledtaxpayers engaged in similar activities.A functional analysis is required to iden-tify these contributions according to thefunctions performed, risks assumed, andresources employed by each of the con-trolled taxpayers. Market returns for theroutine contributions should be deter-mined by reference to the returns achievedby uncontrolled taxpayers engaged in sim-ilar activities, consistent with the methodsdescribed in §§1.482–3, 1.482–4, 1.482–5and 1.482–9.

(B) Allocate residual profit—(1) Non-routine contributions generally. Theallocation of income to the controlledtaxpayer’s routine contributions will notreflect profits attributable to each con-trolled taxpayer’s contributions to the rel-evant business activity that are not routine(nonroutine contributions). A nonroutinecontribution is a contribution that is notaccounted for as a routine contribution.Thus, in cases where such nonroutinecontributions are present there normallywill be an unallocated residual profit af-ter the allocation of income described inparagraph (c)(3)(i)(A) of this section. Un-der this second step, the residual profitgenerally should be divided among thecontrolled taxpayers based upon the rela-tive value of their nonroutine contributionsto the relevant business activity. The rela-tive value of the nonroutine contributionsof each taxpayer should be measured ina manner that most reliably reflects eachnonroutine contribution made to the con-trolled transaction and each controlledtaxpayer’s role in the nonroutine contri-butions. If the nonroutine contribution byone of the controlled taxpayers is also usedin other business activities (such as trans-actions with other controlled taxpayers),an appropriate allocation of the value ofthe nonroutine contribution must be madeamong all the business activities in whichit is used.

(2) Nonroutine contributions of intan-gible property. In many cases, nonrou-tine contributions of a taxpayer to the rel-evant business activity may be contribu-tions of intangible property. For purposesof paragraph (c)(3)(i)(B)(1) of this section,the relative value of nonroutine intangible

property contributed by taxpayers may bemeasured by external market benchmarksthat reflect the fair market value of suchintangible property. Alternatively, the rel-ative value of nonroutine intangible prop-erty contributions may be estimated by thecapitalized cost of developing the intangi-ble property and all related improvementsand updates, less an appropriate amountof amortization based on the useful life ofeach intangible property. Finally, if theintangible property development expendi-tures of the parties are relatively constantover time and the useful life of the intan-gible property contributed by all parties isapproximately the same, the amount of ac-tual expenditures in recent years may beused to estimate the relative value of non-routine intangible property contributions.

* * * * *(ii) * * *(D) Other factors affecting reliability.

Like the methods described in §§1.482–3,1.482–4, 1.482–5, and 1.482–9, the firststep of the residual profit split relies ex-clusively on external market benchmarks.As indicated in §1.482–1(c)(2)(i), as thedegree of comparability between the con-trolled and uncontrolled transactions in-creases, the relative weight accorded theanalysis under this method will increase.In addition, to the extent the allocation ofprofits in the second step is not based onexternal market benchmarks, the reliabil-ity of the analysis will be decreased in rela-tion to an analysis under a method that re-lies on market benchmarks. Finally, the re-liability of the analysis under this methodmay be enhanced by the fact that all par-ties to the controlled transaction are eval-uated under the residual profit split. How-ever, the reliability of the results of an anal-ysis based on information from all partiesto a transaction is affected by the reliabilityof the data and the assumptions pertainingto each party to the controlled transaction.Thus, if the data and assumptions are sig-nificantly more reliable with respect to oneof the parties than with respect to the oth-ers, a different method, focusing solely onthe results of that party, may yield more re-liable results.

* * * * *(d) Effective/applicability date—(1) In

general. The provisions of paragraphs(c)(2)(ii)(B)(1) and (D), (c)(3)(i)(A) and(B), and (c)(3)(ii)(D) of this section are

generally applicable for taxable years be-ginning after July 31, 2009.

(2) Election to apply regulation to ear-lier taxable years. A person may electto apply the provisions of paragraphs(c)(2)(ii)(B)(1) and (D), (c)(3)(i)(A) and(B), and (c)(3)(ii)(D) of this section toearlier taxable years in accordance withthe rules set forth in §1.482–9(n)(2).

§1.482–6T [Removed]

Par. 11. Section 1.482–6T is removed.Par. 12. Section 1.482–8 is amended

by revising paragraph (b) Examples 10, 11,12, 13, 14, 15, 16, 17 and 18, and addingparagraph (c) to read as follows:

§1.482–8 Examples of the best methodrule.

* * * * *(b) * * *Example 10. Cost of services plus method pre-

ferred to other methods. (i) FP designs and man-ufactures consumer electronic devices that incorpo-rate advanced technology. In year 1, FP introducesProduct X, an entertainment device targeted primar-ily at the youth market. FP’s wholly-owned, exclu-sive U.S. distributor, USSub, sells Product X in theU.S. market. USSub hires an independent marketingfirm, Agency A, to promote Product X in the U.S.market. Agency A has successfully promoted otherelectronic products on behalf of other uncontrolledparties. USSub executes a one-year, renewable con-tract with Agency A that requires it to develop themarket for Product X, within an annual budget set byUSSub. In years 1 through 3, Agency A develops ad-vertising, buys media, and sponsors events featuringProduct X. Agency A receives a markup of 25% on allexpenses of promoting Product X, with the exceptionof media buys, which are reimbursed at cost. Duringyear 3, sales of Product X decrease sharply, as Prod-uct X is displaced by competitors’ products. At theend of year 3, sales of Product X are discontinued.

(ii) Prior to the start of year 4, FP develops anew entertainment device, Product Y. Like ProductX, Product Y is intended for sale to the youth mar-ket, but it is marketed under a new trademark dis-tinct from that used for Product X. USSub decidesto perform all U.S. market promotion for Product Y.USSub hires key Agency A staff members who han-dled the successful Product X campaign. To pro-mote Product Y, USSub intends to use methods sim-ilar to those used successfully by Agency A to pro-mote Product X (print advertising, media, event spon-sorship, etc.). FP and USSub enter into a one-year,renewable agreement concerning promotion of Prod-uct Y in the U.S. market. Under the agreement, FPcompensates USSub for promoting Product Y, basedon a cost of services plus markup of A%. Third-partymedia buys by USSub in connection with Product Yare reimbursed at cost.

(iii) Assume that under the contractual arrange-ments between FP and USSub, the arm’s length con-sideration for Product Y and the trademark or other

2009–33 I.R.B. 204 August 17, 2009

intangible property may be determined reliably un-der one or more transfer pricing methods. At issue inthis example is the separate evaluation of the arm’slength compensation for the year 4 promotional ac-tivities performed by USSub pursuant to its contractwith FP.

(iv) USSub’s accounting records contain reliabledata that separately state the costs incurred to promoteProduct Y. A functional analysis indicates that US-Sub’s activities to promote Product Y in year 4 aresimilar to activities performed by Agency A duringyears 1 through 3 under the contract with FP. In otherrespects, no material differences exist in the marketconditions or the promotional activities performed inyear 4, as compared to those years 1 through 3.

(v) It is possible to identify uncontrolled distribu-tors or licensees of electronic products that perform,as one component of their business activities, pro-motional activities similar to those performed byUSSub. However, it is unlikely that publicly avail-able accounting data from these companies wouldallow computation of the comparable transactionalcosts or total services costs associated with the mar-keting or promotional activities that these entitiesperform, as one component of business activities. Ifthat were possible, the comparable profits methodfor services might provide a reliable measure of anarm’s length result. The functional analysis of themarketing activities performed by USSub in year 4indicates that they are similar to the activities per-formed by Agency A in years 1 through 3 for ProductX. Because reliable information is available concern-ing the markup on costs charged in a comparableuncontrolled transaction, the most reliable measureof an arm’s length price is the cost of services plusmethod in §1.482–9(e).

Example 11. CPM for services preferred to othermethods. (i) FP manufactures furniture and acces-sories for residential use. FP sells its products toretailers in Europe under the trademark, “Moda.” FPholds all worldwide rights to the trademark, includingin the United States. USSub is FP’s wholly-ownedsubsidiary in the U.S. market and the exclusiveU.S. distributor of FP’s merchandise. Historically,USSub dealt only with specialized designers in theU.S. market and advertised in trade publicationstargeted to this market. Although items sold in theU.S. and Europe are physically identical, USSub’sU.S. customers generally resell the merchandise asnon-branded merchandise.

(ii) FP retains an independent firm to evaluate thefeasibility of selling FP’s trademarked merchandisein the general wholesale and retail market in theUnited States. The study concludes that this seg-ment of the U.S. market, which is not exploited byUSSub, may generate substantial profits. Based onthis study, FP enters into a separate agreement withUSSub, which provides that USSub will develop thismarket in the United States for the benefit of FP.USSub separately accounts for personnel expenses,overhead, and out-of-pocket costs attributable to theinitial stage of the marketing campaign (Phase I).USSub receives as compensation its costs, plus amarkup of X%, for activities in Phase I. At the endof Phase I, FP will evaluate the program. If successappears likely, USSub will begin full-scale distribu-tion of trademarked merchandise in the new marketsegment, pursuant to agreements negotiated with FPat that time.

(iii) Assume that under the contractual arrange-ments in effect between FP and USSub, the arm’slength consideration for the merchandise and thetrademark or other intangible property may be de-termined reliably under one or more transfer pricingmethods. At issue in this example is the separateevaluation of the arm’s length compensation for themarketing activities conducted by USSub in years 1and following.

(iv) A functional analysis reveals that USSub’sactivities consist primarily of modifying the promo-tional materials created by FP, negotiating mediabuys, and arranging promotional events. FP sepa-rately compensates USSub for all Phase I activities,and detailed accounting information is availableregarding the costs of these activities. The Phase I ac-tivities of USSub are similar to those of uncontrolledcompanies that perform, as their primary businessactivity, a range of advertising and media relationsactivities on a contract basis for uncontrolled parties.

(v) No information is available concerning thecomparable uncontrolled prices for services in trans-actions similar to those engaged in by FP and USSub.Nor is any information available concerning uncon-trolled transactions that would allow application ofthe cost of services plus method. It is possible to iden-tify uncontrolled distributors or licensees of homefurnishings that perform, as one component of theirbusiness activities, promotional activities similar tothose performed by USSub. However, it is unlikelythat publicly available accounting data from thesecompanies would allow computation of the compara-ble transactional costs or total services costs associ-ated with the marketing or promotional activities thatthese entities performed, as one component of theirbusiness activities. On the other hand, it is possible toidentify uncontrolled advertising and media relationscompanies, the principal business activities of whichare similar to the Phase I activities of USSub. Underthese circumstances, the most reliable measure of anarm’s length price is the comparable profits methodof §1.482–9(f). The uncontrolled advertising compa-rables’ treatment of material items, such as classifica-tion of items as cost of goods sold or selling, general,and administrative expenses, may differ from that ofUSSub. Such inconsistencies in accounting treatmentbetween the uncontrolled comparables and the testedparty, or among the comparables, are less importantwhen using the ratio of operating profit to total ser-vices costs under the comparable profits method forservices in §1.482–9(f). Under this method, the op-erating profit of USSub from the Phase I activities iscompared to the operating profit of uncontrolled par-ties that perform general advertising and media rela-tions as their primary business activity.

Example 12. Residual profit split preferred toother methods. (i) USP is a manufacturer of athleticapparel sold under the AA trademark, to which FPowns the worldwide rights. USP sells AA trademarkapparel in countries throughout the world, but prior toyear 1, USP did not sell its merchandise in CountryX. In year 1, USP acquires an uncontrolled CountryX company which becomes its wholly-owned sub-sidiary, XSub. USP enters into an exclusive distri-bution arrangement with XSub in Country X. Beforebeing acquired by USP in year 1, XSub distributedathletic apparel purchased from uncontrolled suppli-ers and resold that merchandise to retailers. After be-ing acquired by USP in year 1, XSub continues to dis-

tribute merchandise from uncontrolled suppliers andalso begins to distribute AA trademark apparel. Un-der a separate agreement with USP, XSub uses its bestefforts to promote the AA trademark in Country X,with the goal of maximizing sales volume and rev-enues from AA merchandise.

(ii) Prior to year 1, USP executed long-term en-dorsement contracts with several prominent profes-sional athletes. These contracts give USP the rightto use the names and likenesses of the athletes in anycountry in which AA merchandise is sold during theterm of the contract. These contracts remain in ef-fect for five years, starting in year 1. Before beingacquired by USP, XSub renewed a long-term agree-ment with SportMart, an uncontrolled company thatowns a nationwide chain of sporting goods retailersin Country X. XSub has been SportMart’s primarysupplier from the time that SportMart began opera-tions. Under the agreement, SportMart will provideAA merchandise preferred shelf-space and will fea-ture AA merchandise at no charge in its print ads andseasonal promotions. In consideration for these com-mitments, USP and XSub grant SportMart advanceaccess to new products and the right to use the profes-sional athletes under contract with USP in SportMartadvertisements featuring AA merchandise (subject toapproval of content by USP).

(iii) Assume that it is possible to segregate alltransactions by XSub that involve distribution ofmerchandise acquired from uncontrolled distributors(non-controlled transactions). In addition, assumethat, apart from the activities undertaken by USP andXSub to promote AA apparel in Country X, the arm’slength compensation for other functions performedby USP and XSub in the Country X market in years1 and following can be reliably determined. At issuein this Example 12 is the application of the residualprofit split analysis to determine the appropriatedivision between USP and XSub of the balance ofthe operating profits from the Country X market, thatis the portion attributable to nonroutine contributionsto the marketing and promotional activities.

(iv) A functional analysis of the marketing andpromotional activities conducted in the Country Xmarket, as described in this example, indicates thatboth USP and XSub made nonroutine contribu-tions to the business activity. USP contributed thelong-term endorsement contracts with professionalathletes. XSub contributed its long-term contractualrights with SportMart, which were made more valu-able by its successful, long-term relationship withSportMart.

(v) Based on the facts and circumstances, includ-ing the fact that both USP and XSub made valuablenonroutine contributions to the marketing and pro-motional activities and an analysis of the availabil-ity (or lack thereof) of comparable and reliable mar-ket benchmarks, the Commissioner determines thatthe most reliable measure of an arm’s length result isthe residual profit split method in §1.482–9(g). Theresidual profit split analysis would take into accountboth routine and nonroutine contributions by USPand XSub, in order to determine an appropriate allo-cation of the combined operating profits in the Coun-try X market from the sale of AA merchandise andfrom related promotional and marketing activities.

August 17, 2009 205 2009–33 I.R.B.

Examples 13 through 18. [Reserved].For further guidance, see §1.482–8T(b)Examples 13 through 18.

(c) Effective/applicability date—(1) Ingeneral. The provisions of paragraph (b)Examples 10, 11, and 12 of this sectionare generally applicable for taxable yearsbeginning after July 31, 2009.

(2) Election to apply regulation to ear-lier taxable years. A person may elect toapply the provisions of paragraph (b) Ex-amples 10, 11, and 12 of this section toearlier taxable years in accordance with therules set forth in §1.482–9(n)(2).

Par. 13. Section 1.482–8T is amendedas follows:

1. Revise paragraph (b) Examples 1, 2,3, 4, 5, 6, 7, 8, 9, 10, 11 and 12.

2. Redesignate paragraph (c)(1) asparagraph (c), revise the heading andremove the first sentence in newly-desig-nated paragraph (c).

3. Remove paragraph (c)(2).4. Redesignate paragraph (c)(3) as

paragraph (d) and remove the first sen-tence.

The revisions read as follows:

§1.482–8T Examples of the best methodrule (temporary).

* * * * *(b) Examples 1 through 12. [Reserved].

For further guidance, see §1.482–8(b) Ex-amples 1 through 12.

* * * * *(c) Effective/applicability date. * * *

* * * * *Par. 14. Section 1.482–9 is added to

read as follows:

§1.482–9 Methods to determine taxableincome in connection with a controlledservices transaction.

(a) In general. The arm’s length amountcharged in a controlled services transac-tion must be determined under one of themethods provided for in this section. Eachmethod must be applied in accordancewith the provisions of §1.482–1, includingthe best method rule of §1.482–1(c), thecomparability analysis of §1.482–1(d),and the arm’s length range of §1.482–1(e),except as those provisions are modified inthis section. The methods are—

(1) The services cost method, describedin paragraph (b) of this section;

(2) The comparable uncontrolled ser-vices price method, described in paragraph(c) of this section;

(3) The gross services margin method,described in paragraph (d) of this section;

(4) The cost of services plus method,described in paragraph (e) of this section;

(5) The comparable profits method, de-scribed in §1.482–5 and in paragraph (f) ofthis section;

(6) The profit split method, describedin §1.482–6 and in paragraph (g) of thissection; and

(7) Unspecified methods, described inparagraph (h) of this section.

(b) Services cost method—(1) In gen-eral. The services cost method evaluateswhether the amount charged for certainservices is arm’s length by reference tothe total services costs (as defined in para-graph (j) of this section) with no markup.If a taxpayer applies the services costmethod in accordance with the rules ofthis paragraph (b), then it will be con-sidered the best method for purposes of§1.482–1(c), and the Commissioner’s al-locations will be limited to adjusting theamount charged for such services to theproperly determined amount of such totalservices costs.

(2) Eligibility for the services costmethod. To apply the services cost methodto a service in accordance with the rules ofthis paragraph (b), all of the following re-quirements must be satisfied with respectto the service—

(i) The service is a covered service asdefined in paragraph (b)(3) of this section;

(ii) The service is not an excluded ac-tivity as defined in paragraph (b)(4) of thissection;

(iii) The service is not precluded fromconstituting a covered service by the busi-ness judgment rule described in paragraph(b)(5) of this section; and

(iv) Adequate books and records aremaintained as described in paragraph(b)(6) of this section.

(3) Covered services. For purposesof this paragraph (b), covered servicesconsist of a controlled service transactionor a group of controlled service transac-tions (see §1.482–1(f)(2)(i) (aggregationof transactions)) that meet the definition ofspecified covered services or low margincovered services.

(i) Specified covered services. Speci-fied covered services are controlled ser-

vices transactions that the Commissionerspecifies by revenue procedure. Serviceswill be included in such revenue pro-cedure based upon the Commissioner’sdetermination that the specified coveredservices are support services commonamong taxpayers across industry sectorsand generally do not involve a signifi-cant median comparable markup on totalservices costs. For the definition of themedian comparable markup on total ser-vices costs, see paragraph (b)(3)(ii) ofthis section. The Commissioner may addto, subtract from, or otherwise revise thespecified covered services described in therevenue procedure by subsequent revenueprocedure, which amendments will ordi-narily be prospective only in effect.

(ii) Low margin covered services. Lowmargin covered services are controlled ser-vices transactions for which the mediancomparable markup on total services costsis less than or equal to seven percent. Forpurposes of this paragraph (b), the mediancomparable markup on total services costsmeans the excess of the arm’s length priceof the controlled services transaction deter-mined under the general section 482 reg-ulations without regard to this paragraph(b), using the interquartile range describedin §1.482–1(e)(2)(iii)(C) and as necessaryadjusting to the median of such interquar-tile range, over total services costs, ex-pressed as a percentage of total servicescosts.

(4) Excluded activity. The followingtypes of activities are excluded activities:

(i) Manufacturing.(ii) Production.(iii) Extraction, exploration, or process-

ing of natural resources.(iv) Construction.(v) Reselling, distribution, acting as a

sales or purchasing agent, or acting under acommission or other similar arrangement.

(vi) Research, development, or experi-mentation.

(vii) Engineering or scientific.(viii) Financial transactions, including

guarantees.(ix) Insurance or reinsurance.(5) Not services that contribute signif-

icantly to fundamental risks of businesssuccess or failure. A service cannot con-stitute a covered service unless the tax-payer reasonably concludes in its businessjudgment that the service does not con-tribute significantly to key competitive ad-

2009–33 I.R.B. 206 August 17, 2009

vantages, core capabilities, or fundamen-tal risks of success or failure in one ormore trades or businesses of the controlledgroup, as defined in §1.482–1(i)(6). Inevaluating the reasonableness of the con-clusion required by this paragraph (b)(5),consideration will be given to all the factsand circumstances.

(6) Adequate books and records. Per-manent books of account and records aremaintained for as long as the costs with re-spect to the covered services are incurredby the renderer. Such books and recordsmust include a statement evidencing thetaxpayer’s intention to apply the servicescost method to evaluate the arm’s lengthcharge for such services. Such books andrecords must be adequate to permit ver-ification by the Commissioner of the to-tal services costs incurred by the renderer,including a description of the services inquestion, identification of the renderer andthe recipient of such services, and suffi-cient documentation to allow verificationof the methods used to allocate and appor-tion such costs to the services in questionin accordance with paragraph (k) of thissection.

(7) Shared services arrangement—(i)In general. If the services cost method isused to evaluate the amount charged forcovered services, and such services are thesubject of a shared services arrangement,then the arm’s length charge to each partic-ipant for such services will be the portionof the total costs of the services otherwisedetermined under the services cost methodof this paragraph (b) that is properly allo-cated to such participant pursuant to the ar-rangement.

(ii) Requirements for shared servicesarrangement. A shared services arrange-ment must meet the requirements de-scribed in this paragraph (b)(7).

(A) Eligibility. To be eligible for treat-ment under this paragraph (b)(7), a sharedservices arrangement must—

(1) Include two or more participants;(2) Include as participants all controlled

taxpayers that reasonably anticipate a ben-efit (as defined under paragraph (l)(3)(i) ofthis section) from one or more covered ser-vices specified in the shared services ar-rangement; and

(3) Be structured such that each coveredservice (or each reasonable aggregation ofservices within the meaning of paragraph(b)(7)(iii)(B) of this section) confers a ben-

efit on at least one participant in the sharedservices arrangement.

(B) Allocation. The costs for coveredservices must be allocated among the par-ticipants based on their respective sharesof the reasonably anticipated benefits fromthose services, without regard to whetherthe anticipated benefits are in fact real-ized. Reasonably anticipated benefits arebenefits as defined in paragraph (l)(3)(i)of this section. The allocation of costsmust provide the most reliable measure ofthe participants’ respective shares of thereasonably anticipated benefits under theprinciples of the best method rule. See§1.482–1(c). The allocation must be ap-plied on a consistent basis for all partici-pants and services. The allocation to eachparticipant in each taxable year must rea-sonably reflect that participant’s respec-tive share of reasonably anticipated bene-fits for such taxable year. If the taxpayerreasonably concluded that the shared ser-vices arrangement (including any aggre-gation pursuant to paragraph (b)(7)(iii)(B)of this section) allocated costs for coveredservices on a basis that most reliably re-flects the participants’ respective shares ofthe reasonably anticipated benefits attrib-utable to such services, as provided for inthis paragraph (b)(7), then the Commis-sioner may not adjust such allocation ba-sis.

(C) Documentation. The taxpayer mustmaintain sufficient documentation to es-tablish that the requirements of this para-graph (b)(7) are satisfied, and include—

(1) A statement evidencing the tax-payer’s intention to apply the services costmethod to evaluate the arm’s length chargefor covered services pursuant to a sharedservices arrangement;

(2) A list of the participants and therenderer or renderers of covered servicesunder the shared services arrangement;

(3) A description of the basis of allo-cation to all participants, consistent withthe participants’ respective shares of rea-sonably anticipated benefits; and

(4) A description of any aggregation ofcovered services for purposes of the sharedservices arrangement, and an indicationwhether this aggregation (if any) differsfrom the aggregation used to evaluate themedian comparable markup for any lowmargin covered services described in para-graph (b)(3)(ii) of this section.

(iii) Definitions and special rules—(A)Participant. A participant is a controlledtaxpayer that reasonably anticipates ben-efits from covered services subject to ashared services arrangement that substan-tially complies with the requirements de-scribed in this paragraph (b)(7).

(B) Aggregation. Two or more coveredservices may be aggregated in a reasonablemanner taking into account all the factsand circumstances, including whether therelative magnitude of reasonably antici-pated benefits of the participants sharingthe costs of such aggregated services maybe reasonably reflected by the allocationbasis employed pursuant to paragraph(b)(7)(ii)(B) of this section. The aggre-gation of services under a shared servicesarrangement may differ from the aggrega-tion used to evaluate the median compa-rable markup for any low margin coveredservices described in paragraph (b)(3)(ii)of this section, provided that such alterna-tive aggregation can be implemented on areasonable basis, including appropriatelyidentifying and isolating relevant costs, asnecessary.

(C) Coordination with cost sharingarrangements. To the extent that an allo-cation is made to a participant in a sharedservices arrangement that is also a partici-pant in a cost sharing arrangement subjectto §1.482–7T, such amount with respect tocovered services is first allocated pursuantto the shared services arrangement un-der this paragraph (b)(7). Costs allocatedpursuant to a shared services arrangementmay (if applicable) be further allocatedbetween the intangible property develop-ment activity under §1.482–7T and otheractivities of the participant.

(8) Examples. The application of thissection is illustrated by the following ex-amples. No inference is intended whetherthe presence or absence of one or morefacts is determinative of the conclusionin any example. For purposes of Exam-ples 1 through 14, assume that Company Pand its subsidiaries, Company Q and Com-pany R, are corporations and members ofthe same group of controlled entities (PQRControlled Group). For purposes of Ex-ample 15, assume that Company P and itssubsidiary, Company S, are corporationsand members of the same group of con-trolled entities (PS Controlled Group). Forpurposes of Examples 16 through 24, as-sume that Company P and its subsidiaries,

August 17, 2009 207 2009–33 I.R.B.

Company X, Company Y, and CompanyZ, are corporations and members of thesame group of controlled entities (PXYZGroup) and that Company P and its sub-sidiaries satisfy all of the requirements fora shared services arrangement specified inparagraphs (b)(7)(ii) and (iii) of this sec-tion.

Example 1. Data entry services. (i) Company P,Company Q, and Company R own and operate hos-pitals. Each owns an electronic database of medi-cal information gathered by doctors and nurses dur-ing interviews and treatment of its patients. All threedatabases are maintained and updated by CompanyP’s administrative support employees who performdata entry activities by entering medical informationfrom the paper records of Company P, Company Q,and Company R into their respective databases.

(ii) Assume that these services relating to data en-try are specified covered services within the mean-ing of paragraph (b)(3)(i) of this section. Under thefacts and circumstances of the business of the PQRControlled Group, the taxpayer could reasonably con-clude that these services do not contribute signifi-cantly to the controlled group’s key competitive ad-vantages, core capabilities, or fundamental risks ofsuccess or failure in the group’s business. If these ser-vices meet the other requirements of this paragraph(b), Company P will be eligible to charge these ser-vices to Company Q and Company R in accordancewith the services cost method.

Example 2. Data entry services. (i) Company P,Company Q, and Company R specialize in data en-try, data processing, and data conversion. CompanyQ and Company R’s data entry activities involve con-verting medical information data contained in paperrecords to a digital format. Company P specializes indata entry activities. This specialization reflects, inpart, proprietary quality control systems and speciallytrained data entry experts used to ensure the highestdegree of accuracy of data entry services. CompanyP is engaged by Company Q and Company R to per-form these data entry activities for them. Company Qand Company R then charge their customers for thedata entry activities performed by Company P.

(ii) Assume that these services performed byCompany P relating to data entry are specifiedcovered services within the meaning of paragraph(b)(3)(i) of this section. Under the facts and cir-cumstances, the taxpayer is unable to reasonablyconclude that these services do not contribute sig-nificantly to the controlled group’s key competitiveadvantages, core capabilities, or fundamental risks ofsuccess or failure in the group’s business. CompanyP is not eligible to charge these services to CompanyQ and Company R in accordance with the servicescost method.

Example 3. Recruiting services. (i) CompanyP, Company Q, and Company R are manufacturingcompanies that sell their products to unrelated retailestablishments. Company P’s human resources de-partment recruits mid-level managers and engineersfor itself as well as for Company Q and Company Rby attending job fairs and other recruitment events.For recruiting higher-level managers and engineers,each of these companies uses recruiters from unre-lated executive search firms.

(ii) Assume that these services relating to recruit-ing are specified covered services within the mean-ing of paragraph (b)(3)(i) of this section. Under thefacts and circumstances of the business of the PQRControlled Group, the taxpayer could reasonably con-clude that these services do not contribute signifi-cantly to the controlled group’s key competitive ad-vantages, core capabilities, or fundamental risks ofsuccess or failure in the group’s business. If these ser-vices meet the other requirements of this paragraph(b), Company P will be eligible to charge these ser-vices to Company Q and Company R in accordancewith the services cost method.

Example 4. Recruiting services. (i) Company Qand Company R are executive recruiting service com-panies that are hired by other companies to recruitprofessionals. Company P is a recruiting agency thatis engaged by Company Q and Company R to per-form recruiting activities on their behalf in certain ge-ographic areas.

(ii) Assume that the services performed by Com-pany P are specified covered services within themeaning of paragraph (b)(3)(i) of this section. Underthe facts and circumstances, the taxpayer is unableto reasonably conclude that these services do notcontribute significantly to the controlled group’skey competitive advantages, core capabilities, orfundamental risks of success or failure in the group’sbusiness. Company P is not eligible to charge theseservices to Company Q and Company R in accor-dance with the services cost method.

Example 5. Credit analysis services. (i) Com-pany P is a manufacturer and distributor of clothingfor retail stores. Company Q and Company R are dis-tributors of clothing for retail stores. As part of itsoperations, personnel in Company P perform creditanalysis on its customers. Most of the customershave a history of purchases from Company P, and thecredit analysis involves a review of the recent pay-ment history of the customer’s account. For new cus-tomers, the personnel in Company P perform a ba-sic credit check of the customer using reports froma credit reporting agency. On behalf of Company Qand Company R, Company P performs credit analy-sis on customers who order clothing from CompanyQ and Company R using the same method as Com-pany P uses for itself.

(ii) Assume that these services relating to creditanalysis are specified covered services within themeaning of paragraph (b)(3)(i) of this section. Underthe facts and circumstances of the business of thePQR Controlled Group, the taxpayer could reason-ably conclude that these services do not contributesignificantly to the controlled group’s key compet-itive advantages, core capabilities, or fundamentalrisks of success or failure in the group’s business.If these services meet the other requirements of thisparagraph (b), Company P will be eligible to chargethese services to Company Q and Company R inaccordance with the services cost method.

Example 6. Credit analysis services. (i) Com-pany P, Company Q, and Company R lease furnitureto retail customers who present a significant creditrisk and are generally unable to lease furniture fromother providers. As part of its leasing operations,personnel in Company P perform credit analysis oneach of the potential lessees. The personnel have de-veloped special expertise in determining whether aparticular customer who presents a significant credit

risk (as indicated by credit reporting agencies) willbe likely to make the requisite lease payments on atimely basis. Also, as part of its operations, CompanyP performs similar credit analysis services for Com-pany Q and Company R, which charge correspond-ingly high monthly lease payments.

(ii) Assume that these services relating to creditanalysis are specified covered services within themeaning of paragraph (b)(3)(i) of this section. Underthe facts and circumstances, the taxpayer is unableto reasonably conclude that these services do notcontribute significantly to the controlled group’skey competitive advantages, core capabilities, orfundamental risks of success or failure in the group’sbusiness. Company P is not eligible to charge theseservices to Company Q and Company R in accor-dance with the services cost method.

Example 7. Credit analysis services. (i) Com-pany P is a large full-service bank, which providesproducts and services to corporate and consumer mar-kets, including unsecured loans, secured loans, linesof credit, letters of credit, conversion of foreign cur-rency, consumer loans, trust services, and sales of cer-tificates of deposit. Company Q makes routine con-sumer loans to individuals, such as auto loans andhome equity loans. Company R makes only businessloans to small businesses.

(ii) Company P performs credit analysis and pre-pares credit reports for itself, as well as for Com-pany Q and Company R. Company P, Company Q andCompany R regularly employ these credit reports inthe ordinary course of business in making decisionsregarding extensions of credit to potential customers(including whether to lend, rate of interest, and loanterms).

(iii) Assume that these services relating to creditanalysis are specified covered services within themeaning of paragraph (b)(3)(i) of this section. Un-der the facts and circumstances, the credit analysisservices constitute part of a “financial transaction”described in paragraph (b)(4)(viii) of this section.Company P is not eligible to charge these services toCompany Q and Company R in accordance with theservices cost method.

Example 8. Data verification services. (i) Com-pany P, Company Q and Company R are manufac-turers of industrial supplies. Company P’s account-ing department performs periodic reviews of the ac-counts payable information of Company P, CompanyQ and Company R, and identifies any inaccuraciesin the records, such as double-payments and dou-ble-charges.

(ii) Assume that these services relating to verifi-cation of data are specified covered services withinthe meaning of paragraph (b)(3)(i) of this section.Under the facts and circumstances of the business ofthe PQR Controlled Group, the taxpayer could rea-sonably conclude that these services do not contributesignificantly to the controlled group’s key compet-itive advantages, core capabilities, or fundamentalrisks of success or failure in the group’s business.If these services meet the other requirements of thisparagraph (b), Company P will be eligible to chargethese services to Company Q and Company R in ac-cordance with the services cost method.

Example 9. Data verification services. (i) Com-pany P gathers and inputs information regarding ac-counts payable and accounts receivable from unre-lated parties and utilizes its own computer system

2009–33 I.R.B. 208 August 17, 2009

to analyze that information for purposes of identi-fying errors in payment and receipts (data mining).Company P is compensated for these services basedon a fee that reflects a percentage of amounts col-lected by customers as a result of the data mining ser-vices. These activities constitute a significant portionof Company P’s business. Company P performs sim-ilar activities for Company Q and Company R by ana-lyzing their accounts payable and accounts receivablerecords.

(ii) Assume that these services relating to datamining are specified covered services within themeaning of paragraph (b)(3)(i) of this section. Underthe facts and circumstances, the taxpayer is unableto reasonably conclude that these services do notcontribute significantly to the controlled group’skey competitive advantages, core capabilities, orfundamental risks of success or failure in the group’sbusiness. Company P is not eligible to charge theseservices to Company Q and Company R in accor-dance with the services cost method.

Example 10. Legal services. (i) Company P isa domestic corporation with two wholly-owned for-eign subsidiaries, Company Q and Company R. Com-pany P and its subsidiaries manufacture and distributeequipment used by industrial customers. CompanyP maintains an in-house legal department consistingof attorneys experienced in a wide range of businessand commercial matters. Company Q and CompanyR maintain small legal departments, consisting of at-torneys experienced in matters that most frequentlyarise in the normal course of business of Company Qand Company R in their respective jurisdictions.

(ii) Company P seeks to maintain in-house legalstaff with the ability to address the majority of legalmatters that arise in the United States with respect tothe operations of Company P, as well as any U.S. re-porting or compliance obligations of Company Q orCompany R. These include the preparation and re-view of corporate contracts relating to, for example,product sales, equipment purchases and leases, busi-ness liability insurance, real estate, employee salariesand benefits. Company P relies on outside attorneysfor major business transactions and highly technicalmatters such as patent licenses. The in-house legalstaffs of Company Q and Company R are much morelimited. It is necessary for Company P to retain sev-eral local law firms to handle litigation and businessdisputes arising from the activities of Company Q andCompany R. Although Company Q and Company Rpay the fees of these law firms, the hiring authorityand general oversight of the firms’ representation isin the legal department of Company P.

(iii) In determining what portion of the legal ex-penses of Company P may be allocated to CompanyQ and Company R, Company P first excludes any ex-penses relating to legal services that constitute share-holder activities and other items that are not prop-erly analyzed as controlled services. Assume thatthe remaining services relating to general legal func-tions performed by in-house legal counsel are spec-ified covered services within the meaning of para-graph (b)(3)(i) of this section. Under the facts andcircumstances of the business of the PQR ControlledGroup, the taxpayer could reasonably conclude thatthese latter services do not contribute significantly tothe controlled group’s key competitive advantages,core capabilities, or fundamental risks of success orfailure in the group’s business. If these services meet

the other requirements of this paragraph (b), Com-pany P will be eligible to charge these services toCompany Q and Company R in accordance with theservices cost method.

Example 11. Legal services. (i) Company P isa domestic holding company whose operating com-panies, Company Q and Company R, generate elec-tric power for consumers by operating nuclear plants.Assume that, although Company P owns 100% of thestock of Companies Q and R, the companies do notelect to file a consolidated Federal income tax returnwith Company P.

(ii) Company P maintains an in-house legal de-partment that includes attorneys who are experts inthe areas of Federal utilities regulation, Federal laborand environmental law, and securities law. Compa-nies Q and R maintain their own, smaller in-houselegal staffs comprising experienced attorneys in theareas of state and local utilities regulation, state laborand employment law, and general commercial law.The legal department of Company P performs generaloversight of the legal affairs of the company and de-termines whether a particular matter would be moreefficiently handled by the Company P legal depart-ment, by the legal staffs in the operating companies,or in rare cases, by retained outside counsel. In gen-eral, Company P has succeeded in minimizing du-plication and overlap of functions between the legalstaffs of the various companies or by retained outsidecounsel.

(iii) The domestic nuclear power plant operationsof Companies Q and R are subject to extensive reg-ulation by the U.S. Nuclear Regulatory Commission(NRC). Operators are required to obtain pre-construc-tion approval, operating licenses, and, at the end ofthe operational life of the nuclear reactor, nuclear de-commissioning certificates. Company P files consol-idated financial statements on behalf of itself, as wellas Companies Q and R, with the United States Securi-ties and Exchange Commission (SEC). In these SECfilings, Company P discloses that failure to obtain anyof these licenses (and the related periodic renewals)or agreeing to licenses on terms less favorable thanthose granted to competitors would have a materialadverse impact on the operations of Company Q orCompany R. Company Q and Company R do not havein-house legal staff with experience in the NRC area.Company P maintains a group of in-house attorneyswith specialized expertise in the NRC area that exclu-sively represents Company Q and Company R beforethe NRC. Although Company P occasionally hires anoutside law firm or industry expert to assist on par-ticular NRC matters, the majority of the work is per-formed by the specialized legal staff of Company P.

(iv) Certain of the legal services performed byCompany P constitute duplicative or shareholder ac-tivities that do not confer a benefit on the other com-panies and therefore do not need to be allocated to theother companies, while certain other legal servicesare eligible to be charged to Company Q and Com-pany R in accordance with the services cost method.

(v) Assume that the specialized legal services re-lating to nuclear licenses performed by in-house le-gal counsel of Company P are specified covered ser-vices within the meaning of paragraph (b)(3)(i) of thissection. Under the facts and circumstances, the tax-payer is unable to reasonably conclude that these ser-vices do not contribute significantly to the controlledgroup’s key competitive advantages, core capabili-

ties, or fundamental risks of success or failure in thegroup’s business. Company P is not eligible to chargethese services to Company Q and Company R in ac-cordance with the services cost method.

Example 12. Group of services. (i) CompanyP, Company Q, and Company R are manufacturingcompanies that sell their products to unrelated re-tail establishments. Company P has an enterprise re-source planning (ERP) system that maintains data re-lating to accounts payable and accounts receivableinformation for all three companies. Company P’spersonnel perform the daily operations on this ERPsystem such as inputting data relating to accountspayable and accounts receivable into the system andextracting data relating to accounts receivable and ac-counts payable in the form of reports or electronicmedia and providing those data to all three compa-nies. Periodically, Company P’s computer special-ists also modify the ERP system to adapt to changingbusiness functions in all three companies. CompanyP’s computer specialists make these changes by ei-ther modifying the underlying software program orby purchasing additional software or hardware fromunrelated third party vendors.

(ii) Assume that the services relating to ac-counts payable and accounts receivable are specifiedcovered services within the meaning of paragraph(b)(3)(i) of this section. Under the facts and cir-cumstances of the business of the PQR ControlledGroup, the taxpayer could reasonably conclude thatthese services do not contribute significantly to thecontrolled group’s key competitive advantages, corecapabilities, or fundamental risks of success or fail-ure in the group’s business. If these services meet theother requirements of this paragraph (b), Company Pwill be eligible to charge these services to CompanyQ and Company R in accordance with the servicescost method.

(iii) Assume that the services performed by Com-pany P’s computer specialists that relate to modifyingthe ERP system are specifically excluded from theservices described in a revenue procedure referencedin paragraph (b)(3) of this section as developinghardware or software solutions (such as systemsintegration, website design, writing computer pro-grams, modifying general applications software, orrecommending the purchase of commercially avail-able hardware or software). If these services do notconstitute low margin covered services within themeaning of paragraph (b)(3)(ii) of this section, thenCompany P is not eligible to charge these services toCompany Q and Company R in accordance with theservices cost method.

Example 13. Group of services. (i) Company Pmanufactures and sells widgets under an exclusivecontract to Customer 1. Company Q and CompanyR sell widgets under exclusive contracts to Customer2 and Customer 3, respectively. At least one yearin advance, each of these customers can accuratelyforecast its need for widgets. Using these forecasts,each customer over the course of the year places or-ders for widgets with the appropriate company, Com-pany P, Company Q, or Company R. A customer’s ac-tual need for widgets seldom deviates from that cus-tomer’s forecasted need.

(ii) It is most efficient for the PQR ControlledGroup companies to manufacture and store an inven-tory of widgets in advance of delivery. Although allthree companies sell widgets, only Company P main-

August 17, 2009 209 2009–33 I.R.B.

tains a centralized warehouse for widgets. Pursuantto a contract, Company P provides storage of thesewidgets to Company Q and Company R at an arm’slength price.

(iii) Company P’s personnel also obtain ordersfrom all three companies’ customers to draw up pur-chase orders for widgets as well as make payment tosuppliers for widget replacement parts. In addition,Company P’s personnel use data entry to input infor-mation regarding orders and sales of widgets and re-placement parts for all three companies into a central-ized computer system. Company P’s personnel alsomaintain the centralized computer system and extractdata for all three companies when necessary.

(iv) Assume that these services relating to track-ing purchases and sales of inventory are specifiedcovered services within the meaning of paragraph(b)(3)(i) of this section. Under the facts and circum-stances of the business of the PQR Controlled Group,the taxpayer could reasonably conclude that these ser-vices do not contribute significantly to the controlledgroup’s key competitive advantages, core capabili-ties, or fundamental risks of success or failure in thegroup’s business. If these services meet the other re-quirements of this paragraph (b), Company P willbe eligible to charge these services to Company Qand Company R in accordance with the services costmethod.

Example 14. Group of services. (i) Company P,Company Q, and Company R assemble and sell gad-gets to unrelated customers. Each of these companiespurchases the components necessary for assembly ofthe gadgets from unrelated suppliers. As a serviceto its subsidiaries, Company P’s personnel obtain or-ders for components from all three companies, pre-pare purchase orders, and make payment to unrelatedsuppliers for the components. In addition, CompanyP’s personnel use data entry to input information re-garding orders and sales of gadgets for all three com-panies into a centralized computer. Company P’s per-sonnel also maintain the centralized computer sys-tem and extract data for all three companies on anas-needed basis. The services provided by CompanyP personnel, in conjunction with the centralized com-puter system, constitute a state-of-the-art inventorymanagement system that allows Company P to ordercomponents necessary for assembly of the gadgets ona “just-in-time” basis.

(ii) Unrelated suppliers deliver the componentsdirectly to Company P, Company Q and Company R.Each company stores the components in its own fa-

cilities for use in filling specific customer orders. Thecompanies do not maintain any inventory that is notidentified in specific customer orders. Because of theefficiencies associated with services provided by per-sonnel of Company P, all three companies are ableto significantly reduce their inventory-related costs.Company P’s Chief Executive Officer makes a state-ment in one of its press conferences with industry an-alysts that its inventory management system is criticalto the company’s success.

(iii) Assume that these services relating to track-ing purchases and sales of inventory are specifiedcovered services within the meaning of paragraph(b)(3)(i) of this section. Under the facts and circum-stances, the taxpayer is unable to reasonably con-clude that these services do not contribute signifi-cantly to the controlled group’s key competitive ad-vantages, core capabilities, or fundamental risks ofsuccess or failure in the group’s business. CompanyP is not eligible to charge these services to CompanyQ and Company R in accordance with the servicescost method.

Example 15. Low margin covered services. Com-pany P renders certain accounting services to Com-pany S. Company P uses the services cost method forthe accounting services, and determines the amountcharged as its total cost of rendering the services, withno markup. Based on an application of the section482 regulations without regard to this paragraph (b),the interquartile range of arm’s length markups on to-tal services costs for these accounting services is be-tween 3% and 9%, and the median is 6%. Becausethe median comparable markup on total services costsis 6%, which is less than 7%, the accounting ser-vices constitute low margin covered services withinthe meaning of paragraph (b)(3)(ii) of this section.

Example 16. Shared services arrangement andreliable measure of reasonably anticipated benefit(allocation key). (i) Company P operates a central-ized data processing facility that performs automatedinvoice processing and order generation for all of itssubsidiaries, Companies X, Y, Z, pursuant to a sharedservices arrangement.

(ii) In evaluating the shares of reasonably antic-ipated benefits from the centralized data processingservices, the total value of the merchandise on the in-voices and orders may not provide the most reliablemeasure of reasonably anticipated benefits shares, be-cause value of merchandise sold does not bear a rela-tionship to the anticipated benefits from the underly-ing covered services.

(iii) The total volume of orders and invoices pro-cessed may provide a more reliable basis for eval-uating the shares of reasonably anticipated benefitsfrom the data processing services. Alternatively, de-pending on the facts and circumstances, total centralprocessing unit time attributable to the transactions ofeach subsidiary may provide a more reliable basis onwhich to evaluate the shares of reasonably anticipatedbenefits.

Example 17. Shared services arrangement andreliable measure of reasonably anticipated benefit(allocation key). (i) Company P operates a central-ized center that performs human resources functions,such as administration of pension, retirement, andhealth insurance plans that are made available toemployees of its subsidiaries, Companies X, Y, Z,pursuant to a shared services arrangement.

(ii) In evaluating the shares of reasonably antici-pated benefits from these centralized services, the to-tal revenues of each subsidiary may not provide themost reliable measure of reasonably anticipated ben-efit shares, because total revenues do not bear a rela-tionship to the shares of reasonably anticipated bene-fits from the underlying services.

(iii) Employee headcount or total compensationpaid to employees may provide a more reliable ba-sis for evaluating the shares of reasonably anticipatedbenefits from the covered services.

Example 18. Shared services arrangement andreliable measure of reasonably anticipated benefit(allocation key). (i) Company P performs humanresource services (service A) on behalf of the PXYZGroup that qualify for the services cost method.Under that method, Company P determines theamount charged for these services pursuant to ashared services arrangement based on an applica-tion of paragraph (b)(7) of this section. Service Aconstitutes a specified covered service described ina revenue procedure pursuant to paragraph (b)(3)(i)of this section. The total services costs for service Aotherwise determined under the services cost methodis 300.

(ii) Companies X, Y and Z reasonably anticipatebenefits from service A. Company P does not reason-ably anticipate benefits from service A. Assume thatif relative reasonably anticipated benefits were pre-cisely known, the appropriate allocation of chargespursuant to paragraph (k) of this section to CompanyX, Y and Z for service A is as follows:

Service A[Total cost 300]

Company

X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75Z . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

(iii) The total number of employees (employeeheadcount) in each company is as follows:

Company X — 600 employeesCompany Y — 250 employeesCompany Z — 250 employees

2009–33 I.R.B. 210 August 17, 2009

(iv) Company P allocates the 300 total servicescosts of service A based on employee headcount asfollows:

Service A[Total cost 300]

CompanyAllocation key

Headcount Amount

X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600 164Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 68Z . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 68

(v) Based on these facts, Company P may reason-ably conclude that the employee headcount allocationbasis most reliably reflects the participants’ respec-tive shares of the reasonably anticipated benefits at-tributable to service A.

Example 19. Shared services arrangement andreliable measure of reasonably anticipated benefit(allocation key). (i) Company P performs accountspayable services (service B) on behalf of the PXYZ

Group and determines the amount charged for theservices under such method pursuant to a sharedservices arrangement based on an application ofparagraph (b)(7) of this section. Service B is aspecified covered service described in a revenueprocedure pursuant to paragraph (b)(3)(i) of this sec-tion. The total services costs for service B otherwisedetermined under the services cost method is 500.

(ii) Companies X, Y and Z reasonably anticipatebenefits from service B. Company P does not reason-ably anticipate benefits from service B. Assume thatif relative reasonably anticipated benefits were pre-cisely known, the appropriate allocation of chargespursuant to paragraph (k) of this section to Compa-nies X, Y and Z for service B is as follows:

Service B[Total cost 500]

Company

X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205Z . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170

(iii) The total number of employees (employeeheadcount) in each company is as follows:

Company X — 600Company Y — 200Company Z — 200

(iv) The total number of transactions (transactionvolume) with uncontrolled customers by each com-pany is as follows:

Company X — 2,000Company Y — 4,000Company Z — 3,500

(v) If Company P allocated the 500 total servicescosts of service B based on employee headcount, theresulting allocation would be as follows:

August 17, 2009 211 2009–33 I.R.B.

Service B[Total cost 500]

CompanyAllocation key

Headcount Amount

X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600 300Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 100Z . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 100

(vi) In contrast, if Company P used volume oftransactions with uncontrolled customers as the allo-cation basis under the shared services arrangement,the allocation would be as follows:

Service B[Total cost 500]

CompanyAllocation key

Transaction Volume Amount

X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 105Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 211Z . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500 184

(vii) Based on these facts, Company P may rea-sonably conclude that the transaction volume, but notthe employee headcount, allocation basis most reli-ably reflects the participants’ respective shares of thereasonably anticipated benefits attributable to serviceB.

Example 20. Shared services arrangement andaggregation. (i) Company P performs human re-source services (service A) and accounts payableservices (service B) on behalf of the PXYZ Groupthat qualify for the services cost method. Company

P determines the amount charged for these servicesunder such method pursuant to a shared servicesarrangement based on an application of paragraph(b)(7) of this section. Service A and service B arespecified covered services described in a revenueprocedure pursuant to paragraph (b)(3)(i) of this sec-tion. The total services costs otherwise determinedunder the services cost method for service A is 300and for service B is 500; total services costs forservices A and B are 800. Company P determines

that aggregation of services A and B for purposes ofthe arrangement is appropriate.

(ii) Companies X, Y and Z reasonably anticipatebenefits from services A and B. Company P does notreasonably anticipate benefits from services A and B.Assume that if relative reasonably anticipated bene-fits were precisely known, the appropriate allocationof total charges pursuant to paragraph (k) of this sec-tion to Companies X, Y and Z for services A and B isas follows:

Services A and B[Total cost 800]

Company

X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100Z . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350

(iii) The total volume of transactions with uncon-trolled customers in each company is as follows:

Company X — 2,000Company Y — 4,000Company Z — 4,000

(iv) The total number of employees in each com-pany is as follows:

2009–33 I.R.B. 212 August 17, 2009

Company X — 600Company Y — 200Company Z — 200

(v) If Company P allocated the 800 total servicescosts of services A and B based on transaction vol-

ume or employee headcount, the resulting allocationwould be as follows:

Aggregated Services AB[Total cost 800]

Allocation key Allocation key

Company TransactionVolume

Amount Headcount Amount

X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 160 600 480Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 320 200 160Z . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 320 200 160

(vi) In contrast, if aggregated services AB wereallocated by reference to the total U.S. dollar value

of sales to uncontrolled parties (trade sales) by eachcompany, the following results would obtain:

Aggregated Services AB[Total costs 800]

Allocation keyCompany

Trade sales (millions) Amount

X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $400 314Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120 94Z . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $500 392

(vii) Based on these facts, Company P may rea-sonably conclude that the trade sales, but not thetransaction volume or the employee headcount, al-location basis most reliably reflects the participants’respective shares of the reasonably anticipated bene-fits attributable to services AB.

Example 21. Shared services arrangement andaggregation. (i) Company P performs services Athrough P on behalf of the PXYZ Group that qual-ify for the services cost method. Company P deter-mines the amount charged for these services undersuch method pursuant to a shared services arrange-

ment based on an application of paragraph (b)(7) ofthis section. All of these services A through P con-stitute either specified covered services or low mar-gin covered services described in paragraph (b)(3) ofthis section. The total services costs for services Athrough P otherwise determined under the servicescost method is 500. Company P determines that ag-gregation of services A through P for purposes of thearrangement is appropriate.

(ii) Companies X and Y reasonably anticipatebenefits from services A through P and CompanyZ reasonably anticipates benefits from services

A through M but not from services N through P(Company Z performs services similar to servicesN through P on its own behalf). Company P doesnot reasonably anticipate benefits from services Athrough P. Assume that if relative reasonably antici-pated benefits were precisely known, the appropriateallocation of total charges pursuant to paragraph (k)of this section to Company X, Y, and Z for servicesA through P is as follows:

CompanyServices A — M

(cost 490)Services N — P

(cost 10)Services A — P(total cost 500)

X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 5 95Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240 5 245Z . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 . . . . . . . . . . . . . . . . . . . . . . . . 160

(iii) The total volume of transactions with uncon-trolled customers in each company is as follows:

Company X — 2,000Company Y — 4,500Company Z — 3,500

(iv) Company P allocates the 500 total servicescosts of services A through P based on transactionvolume as follows:

August 17, 2009 213 2009–33 I.R.B.

Aggregated Services A — Z[Total costs 500]

Allocation keyCompany

Trade sales (millions) Amount

X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 100Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500 225Z . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500 175

(v) Based on these facts, Company P may reason-ably conclude that the transaction volume allocationbasis most reliably reflects the participants’ respec-tive shares of the reasonably anticipated benefits at-tributable to services A through P.

Example 22. Renderer reasonably anticipatesbenefits. (i) Company P renders services on behalfof the PXYZ Group that qualify for the services costmethod. Company P determines the amount chargedfor these services under such method. Company P’sshare of reasonably anticipated benefits from ser-vices A, B, C, and D is 20% of the total reasonablyanticipated benefits of all participants. Company

P’s total services cost for services A, B, C, and Dcharged within the Group is 100.

(ii) Based on an application of paragraph (b)(7) ofthis section, Company P charges 80 which is allocatedamong Companies X, Y, and Z. No charge is madeto Company P under the shared services arrangementfor activities that it performs on its own behalf.

Example 23. Coordination with cost sharing ar-rangement. (i) Company P performs human resourceservices (service A) on behalf of the PXYZ Groupthat qualify for the services cost method. CompanyP determines the amount charged for these servicesunder such method pursuant to a shared services

arrangement based on an application of paragraph(b)(7) of this section. Service A constitutes a speci-fied covered service described in a revenue procedurepursuant to paragraph (b)(3)(i) of this section. Thetotal services costs for service A otherwise deter-mined under the services cost method is 300.

(ii) Company X, Y, Z, and P reasonably anticipatebenefits from service A. Using a basis of allocationthat is consistent with the controlled participants’ re-spective shares of the reasonably anticipated benefitsfrom the shared services, the total charge of 300 is al-located as follows:

X — 100Y — 50Z — 25P — 125

(iii) In addition to performing services, P un-dertakes 500 of R&D and incurs manufacturing andother costs of 1,000.

(iv) Companies P and X enter into a cost sharingarrangement in accordance with §1.482–7T. Underthe arrangement, Company P will undertake all intan-gible property development activities. All of Com-pany P’s research and development (R&D) activity isdevoted to the intangible property development activ-ity under the cost sharing arrangement. Company Pwill manufacture, market, and otherwise exploit theproduct in its defined territory. Companies P andX will share intangible property development costsin accordance with their reasonably anticipated ben-efits from the intangible property, and Company Xwill make payments to Company P as required un-

der §1.482–7T. Company X will manufacture, mar-ket, and otherwise exploit the product in the rest ofthe world.

(v) A portion of the charge under the shared ser-vices arrangement is in turn allocable to the intan-gible property development activity undertaken byCompany P. The most reliable estimate of the pro-portion allocable to the intangible property develop-ment activity is determined to be 500 (Company P’sR&D expenses) divided by 1,500 (Company P’s to-tal non-covered services costs), or one-third. Accord-ingly, one-third of Company P’s charge of 125, or 42,is allocated to the intangible property developmentactivity. Companies P and X must share the intan-gible property development costs of the cost sharedintangible property (including the charge of 42 that is

allocated under the shared services arrangement) inproportion to their respective shares of reasonably an-ticipated benefits under the cost sharing arrangement.That is, the reasonably anticipated benefit shares un-der the cost sharing arrangement are determined sep-arately from reasonably anticipated benefit shares un-der the shared services arrangement.

Example 24. Coordination with cost sharing ar-rangement. (i) The facts and analysis are the same asin Example 25, except that Company X also performsintangible property development activities related tothe cost sharing arrangement. Using a basis of alloca-tion that is consistent with the controlled participants’respective shares of the reasonably anticipated bene-fits from the shared services, the 300 of service costsis allocated as follows:

X — 100Y — 50Z — 25P — 125

(ii) In addition to performing services, CompanyP undertakes 500 of R&D and incurs manufacturingand other costs of 1,000. Company X undertakes 400of R&D and incurs manufacturing and other costs of600.

(iii) Companies P and X enter into a cost sharingarrangement in accordance with §1.482–7T. Underthe arrangement, both Companies P and X will under-take intangible property development activities. Allof the research and development activity conductedby Companies P and X is devoted to the intangibleproperty development activity under the cost sharingarrangement. Both Companies P and X will man-ufacture, market, and otherwise exploit the product

in their respective territories and will share intangi-ble property development costs in accordance withtheir reasonably anticipated benefits from the intan-gible property, and both will make payments as re-quired under §1.482–7T.

(iv) A portion of the charge under the shared ser-vices arrangement is in turn allocable to the intan-gible property development activities undertaken byCompanies P and X. The most reliable estimate of theportion allocable to Company P’s intangible propertydevelopment activity is determined to be 500 (Com-pany P’s R&D expenses) divided by 1,500 (P’s totalnon-covered services costs), or one-third. Accord-ingly, one-third of Company P’s allocated services

cost method charge of 125, or 42, is allocated to itsintangible property development activity.

(v) In addition, it is necessary to determine theportion of the charge under the shared services ar-rangement to Company X that should be further al-located to Company X’s intangible property develop-ment activities under the cost sharing arrangement.The most reliable estimate of the portion allocable toCompany X’s intangible property development activ-ity is 400 (Company X’s R&D expenses) divided by1,000 (Company X’s costs), or 40%. Accordingly,40% of the 100 that was allocated to Company X,or 40, is allocated in turn to Company X’s intangibleproperty development activities. Company X makes

2009–33 I.R.B. 214 August 17, 2009

a payment to Company P of 100 under the shared ser-vices arrangement and includes 40 of services cost

method charges in the pool of intangible property de-velopment costs.

(vi) The parties’ respective contributions to intan-gible property development costs under the cost shar-ing arrangement are as follows:

P: 500 + (0.333 * 125) = 542

X: 400 + (0.40 * 100) = 440

(c) Comparable uncontrolled servicesprice method—(1) In general. The compa-rable uncontrolled services price methodevaluates whether the amount charged ina controlled services transaction is arm’slength by reference to the amount chargedin a comparable uncontrolled servicestransaction.

(2) Comparability and reliability con-siderations—(i) In general. Whetherresults derived from application of thismethod are the most reliable measure ofthe arm’s length result must be determinedusing the factors described under the bestmethod rule in §1.482–1(c). The applica-tion of these factors under the comparableuncontrolled services price method is dis-cussed in paragraphs (c)(2)(ii) and (iii) ofthis section.

(ii) Comparability—(A) In general.The degree of comparability between con-trolled and uncontrolled transactions isdetermined by applying the provisionsof §1.482–1(d). Although all of the fac-tors described in §1.482–1(d)(3) mustbe considered, similarity of the servicesrendered, and of the intangible property(if any) used in performing the services,generally will have the greatest effects oncomparability under this method. In ad-dition, because even minor differences incontractual terms or economic conditionscould materially affect the amount chargedin an uncontrolled transaction, compara-bility under this method depends on closesimilarity with respect to these factors, oradjustments to account for any differences.The results derived from applying thecomparable uncontrolled services pricemethod generally will be the most directand reliable measure of an arm’s lengthprice for the controlled transaction if anuncontrolled transaction has no differ-ences from the controlled transaction thatwould affect the price, or if there are onlyminor differences that have a definite andreasonably ascertainable effect on priceand for which appropriate adjustmentsare made. If such adjustments cannot bemade, or if there are more than minor

differences between the controlled anduncontrolled transactions, the comparableuncontrolled services price method maybe used, but the reliability of the results asa measure of the arm’s length price willbe reduced. Further, if there are materialdifferences for which reliable adjustmentscannot be made, this method ordinarilywill not provide a reliable measure of anarm’s length result.

(B) Adjustments for differences betweencontrolled and uncontrolled transactions.If there are differences between the con-trolled and uncontrolled transactions thatwould affect price, adjustments should bemade to the price of the uncontrolled trans-action according to the comparability pro-visions of §1.482–1(d)(2). Specific ex-amples of factors that may be particularlyrelevant to application of this method in-clude—

(1) Quality of the services rendered;(2) Contractual terms (for example,

scope and terms of warranties or guaran-tees regarding the services, volume, creditand payment terms, allocation of risks,including any contingent-payment termsand whether costs were incurred without aprovision for current reimbursement);

(3) Intangible property (if any) used inrendering the services;

(4) Geographic market in which the ser-vices are rendered or received;

(5) Risks borne (for example, costs in-curred to render the services, without pro-vision for current reimbursement);

(6) Duration or quantitative measure ofservices rendered;

(7) Collateral transactions or ongo-ing business relationships between therenderer and the recipient, including ar-rangement for the provision of tangibleproperty in connection with the services;and

(8) Alternatives realistically availableto the renderer and the recipient.

(iii) Data and assumptions. The re-liability of the results derived from thecomparable uncontrolled services pricemethod is affected by the completeness

and accuracy of the data used and the re-liability of the assumptions made to applythe method. See §1.482–1(c) (best methodrule).

(3) Arm’s length range. See§1.482–1(e)(2) for the determination of anarm’s length range.

(4) Examples. The principles of thisparagraph (c) are illustrated by the follow-ing examples:

Example 1. Internal comparable uncontrolledservices price. Company A, a United States corpo-ration, performs shipping, stevedoring, and relatedservices for controlled and uncontrolled parties on ashort-term or as-needed basis. Company A chargesuncontrolled parties in Country X a uniform fee of$60 per container to place loaded cargo containersin Country X on oceangoing vessels for marinetransportation. Company A also performs identicalservices in Country X for its wholly-owned sub-sidiary, Company B, and there are no substantialdifferences between the controlled and uncontrolledtransactions. In evaluating the appropriate measureof the arm’s length price for the container-load-ing services performed for Company B, becauseCompany A renders substantially identical servicesin Country X to both controlled and uncontrolledparties, it is determined that the comparable uncon-trolled services price constitutes the best method fordetermining the arm’s length price for the controlledservices transaction. Based on the reliable data pro-vided by Company A concerning the price chargedfor services in comparable uncontrolled transactions,a loading charge of $60 per cargo container will beconsidered the most reliable measure of the arm’slength price for the services rendered to Company B.See paragraph (c)(2)(ii)(A) of this section.

Example 2. External comparable uncontrolledservices price. (i) The facts are the same as in Ex-ample 1, except that Company A performs servicesfor Company B, but not for uncontrolled parties.Based on information obtained from unrelated par-ties (which is determined to be reliable under thecomparability standards set forth in paragraph (c)(2)of this section), it is determined that uncontrolledparties in Country X perform services comparable tothose rendered by Company A to Company B, andthat such parties charge $60 per cargo container.

(ii) In evaluating the appropriate measure of anarm’s length price for the loading services that Com-pany A renders to Company B, the $60 per cargocontainer charge is considered evidence of a com-parable uncontrolled services price. See paragraph(c)(2)(ii)(A) of this section.

Example 3. External comparable uncontrolledservices price. The facts are the same as in Exam-ple 2, except that uncontrolled parties in Country Xrender similar loading and stevedoring services, but

August 17, 2009 215 2009–33 I.R.B.

only under contracts that have a minimum term of oneyear. If the difference in the duration of the serviceshas a material effect on prices, adjustments to accountfor these differences must be made to the results of theuncontrolled transactions according to the provisionsof §1.482–1(d)(2), and such adjusted results may beused as a measure of the arm’s length result.

Example 4. Use of valuable intangible property.(i) Company A, a United States corporation in thebiotechnology sector, renders research and develop-ment services exclusively to its affiliates. CompanyB is Company A’s wholly-owned subsidiary in Coun-try X. Company A renders research and developmentservices to Company B.

(ii) In performing its research and developmentservices function, Company A uses proprietarysoftware that it developed internally. Company Auses the software to evaluate certain geneticallyengineered compounds developed by Company B.

Company A owns the copyright on this software anddoes not license it to uncontrolled parties.

(iii) No uncontrolled parties can be identified thatperform services identical or with a high degree ofsimilarity to those performed by Company A. Be-cause there are material differences for which reliableadjustments cannot be made, the comparable uncon-trolled services price method is unlikely to provide areliable measure of the arm’s length price. See para-graph (c)(2)(ii)(A) of this section.

Example 5. Internal comparable. (i) CompanyA, a United States corporation, and its subsidiariesrender computer consulting services relating to sys-tems integration and networking to business clientsin various countries. Company A and its subsidiariesrender only consulting services, and do not manu-facture computer hardware or software nor distributesuch products. The controlled group is organized ac-cording to industry specialization, with key industry

specialists working for Company A. These personneltypically form the core consulting group that teamswith consultants from the local-country subsidiariesto serve clients in the subsidiaries’ respective coun-tries.

(ii) Company A and its subsidiaries sometimesundertake engagements directly for clients, andsometimes work as subcontractors to unrelatedparties on more extensive supply-chain consultingengagements for clients. In undertaking the latterengagements with third party consultants, CompanyA typically prices its services based on consultinghours worked multiplied by a rate determined foreach category of employee. The company alsocharges, at no markup, for out-of-pocket expensessuch as travel, lodging, and data acquisition charges.The Company has established the following scheduleof hourly rates:

Category Rate

Project managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $400 per hourTechnical staff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300 per hour

(iii) Thus, for example, a project involving 100hours of the time of project managers and 400 hoursof technical staff time would result in the follow-ing project fees (without regard to any out-of-pocketexpenses): ([100 hrs. × $400/hr.] + [400 hrs. ×$300/hr.]) = $40,000 + $120,000 = $160,000.

(iv) Company B, a Country X subsidiary of Com-pany A, contracts to perform consulting services for aCountry X client in the banking industry. In undertak-ing this engagement, Company B uses its own consul-tants and also uses Company A project managers andtechnical staff that specialize in the banking industryfor 75 hours and 380 hours, respectively. In determin-ing an arm’s length charge, the price that Company Acharges for consulting services as a subcontractor incomparable uncontrolled transactions will be consid-ered evidence of a comparable uncontrolled servicesprice. Thus, in this case, a payment of $144,000,(or [75 hrs. × $400/hr.] + [380 hrs. × $300/hr.] =$30,000 + $114,000) may be used as a measure of thearm’s length price for the work performed by Com-pany A project mangers and technical staff. In ad-dition, if the comparable uncontrolled services pricemethod is used, then, consistent with the practicesemployed by the comparables with respect to similartypes of expenses, Company B must reimburse Com-pany A for appropriate out-of-pocket expenses. Seeparagraph (c)(2)(ii)(A) of this section.

Example 6. Adjustments for differences. (i) Thefacts are the same as in Example 5, except that the en-gagement is undertaken with the client on a fixed feebasis. That is, prior to undertaking the engagementCompany B and Company A estimate the resourcesrequired to undertake the engagement, and, based onhourly fee rates, charge the client a single fee for com-pletion of the project. Company A’s portion of the en-gagement results in fees of $144,000.

(ii) The engagement, once undertaken, requires20% more hours by each of Companies A and Bthan originally estimated. Nevertheless, the unrelatedclient pays the fixed fee that was agreed upon at thestart of the engagement. Company B pays Company

A $144,000, in accordance with the fixed fee arrange-ment.

(iii) Company A often enters into similar fixed feeengagements with clients. In addition, Company A’srecords for similar engagements show that when it ex-periences cost overruns, it does not collect additionalfees from the client for the difference between pro-jected and actual hours. Accordingly, in evaluatingwhether the fees paid by Company B to Company Aare arm’s length, it is determined that no adjustmentsto the intercompany service charge are warranted.See §1.482–1(d)(3)(ii) and paragraph (c)(2)(ii)(A) ofthis section.

(5) Indirect evidence of the price of acomparable uncontrolled services transac-tion—(i) In general. The price of a com-parable uncontrolled services transactionmay be derived based on indirect measuresof the price charged in comparable uncon-trolled services transactions, but only if—

(A) The data are widely and routinelyused in the ordinary course of business inthe particular industry or market segmentfor purposes of determining prices actuallycharged in comparable uncontrolled ser-vices transactions;

(B) The data are used to set prices inthe controlled services transaction in thesame way they are used to set prices inuncontrolled services transactions of thecontrolled taxpayer, or in the same waythey are used by uncontrolled taxpayers toset prices in uncontrolled services transac-tions; and

(C) The amount charged in the con-trolled services transaction may be reliablyadjusted to reflect differences in qualityof the services, contractual terms, mar-

ket conditions, risks borne (includingcontingent-payment terms), duration orquantitative measure of services rendered,and other factors that may affect the priceto which uncontrolled taxpayers wouldagree.

(ii) Example. The following exampleillustrates this paragraph (c)(5):

Example. Indirect evidence of comparableuncontrolled services price. (i) Company A is aUnited States insurance company. Company A’swholly-owned Country X subsidiary, Company B,performs specialized risk analysis for Company Aas well as for uncontrolled parties. In determiningthe price actually charged to uncontrolled entities forperforming such risk analysis, Company B uses aproprietary, multi-factor computer program, whichrelies on the gross value of the policies in the cus-tomer’s portfolio, the relative composition of thosepolicies, their location, and the estimated number ofpersonnel hours necessary to complete the project.Uncontrolled companies that perform comparablerisk analysis in the same industry or market-seg-ment use similar proprietary computer programs toprice transactions with uncontrolled customers (thecompetitors’ programs may incorporate differentinputs, or may assign different weights or values toindividual inputs, in arriving at the price).

(ii) During the taxable year subject to audit,Company B performed risk analysis for uncontrolledparties as well as for Company A. Because pricescharged to uncontrolled customers reflected the com-position of each customer’s portfolio together withother factors, the prices charged in Company B’s un-controlled transactions do not provide a reliable basisfor determining the comparable uncontrolled servicesprice for the similar services rendered to CompanyA. However, in evaluating an arm’s length price forthe studies performed by Company B for CompanyA, Company B’s proprietary computer program maybe considered as indirect evidence of the comparableuncontrolled services price that would be charged to

2009–33 I.R.B. 216 August 17, 2009

perform the services for Company A. The reliabilityof the results obtained by application of this internalcomputer program as a measure of an arm’s lengthprice for the services will be increased to the extentthat Company A used the internal computer programto generate actual transaction prices for risk-analysisstudies performed for uncontrolled parties during thesame taxable year under audit; Company A used datathat are widely and routinely used in the ordinarycourse of business in the insurance industry to de-termine the price charged; and Company A reliablyadjusted the price charged in the controlled servicestransaction to reflect differences that may affect theprice to which uncontrolled taxpayers would agree.

(d) Gross services margin method—(1)In general. The gross services marginmethod evaluates whether the amountcharged in a controlled services trans-action is arm’s length by reference tothe gross profit margin realized in com-parable uncontrolled transactions. Thismethod ordinarily is used in cases wherea controlled taxpayer performs servicesor functions in connection with an uncon-trolled transaction between a member ofthe controlled group and an uncontrolledtaxpayer. This method may be used wherea controlled taxpayer renders services(agent services) to another member ofthe controlled group in connection witha transaction between that other mem-ber and an uncontrolled taxpayer. Thismethod also may be used in cases wherea controlled taxpayer contracts to provideservices to an uncontrolled taxpayer (in-termediary function) and another memberof the controlled group actually performsa portion of the services provided.

(2) Determination of arm’s lengthprice—(i) In general. The gross servicesmargin method evaluates whether theprice charged or amount retained by a con-trolled taxpayer in the controlled servicestransaction in connection with the relevantuncontrolled transaction is arm’s length bydetermining the appropriate gross profit ofthe controlled taxpayer.

(ii) Relevant uncontrolled transaction.The relevant uncontrolled transaction is atransaction between a member of the con-trolled group and an uncontrolled taxpayeras to which the controlled taxpayer per-forms agent services or an intermediaryfunction.

(iii) Applicable uncontrolled price. Theapplicable uncontrolled price is the pricepaid or received by the uncontrolled tax-payer in the relevant uncontrolled transac-tion.

(iv) Appropriate gross services profit.The appropriate gross services profit iscomputed by multiplying the applicableuncontrolled price by the gross servicesprofit margin in comparable uncontrolledtransactions. The determination of the ap-propriate gross services profit will takeinto account any functions performed byother members of the controlled group, aswell as any other relevant factors describedin §1.482–1(d)(3). The comparable grossservices profit margin may be determinedby reference to the commission in an un-controlled transaction, where that commis-sion is stated as a percentage of the pricecharged in the uncontrolled transaction.

(v) Arm’s length range. See§1.482–1(e)(2) for determination of thearm’s length range.

(3) Comparability and reliability con-siderations—(i) In general. Whetherresults derived from application of thismethod are the most reliable measure ofthe arm’s length result must be determinedusing the factors described under the bestmethod rule in §1.482–1(c). The appli-cation of these factors under the grossservices margin method is discussed inparagraphs (d)(3)(ii) and (iii) of this sec-tion.

(ii) Comparability—(A) Functionalcomparability. The degree of compara-bility between an uncontrolled transactionand a controlled transaction is determinedby applying the comparability provisionsof §1.482–1(d). A gross services profitprovides compensation for services orfunctions that bear a relationship to therelevant uncontrolled transaction, includ-ing an operating profit in return for theinvestment of capital and the assumptionof risks by the controlled taxpayer per-forming the services or functions underreview. Therefore, although all of thefactors described in §1.482–1(d)(3) mustbe considered, comparability under thismethod is particularly dependent on simi-larity of services or functions performed,risks borne, intangible property (if any)used in providing the services or functions,and contractual terms, or adjustments toaccount for the effects of any such differ-ences. If possible, the appropriate grossservices profit margin should be derivedfrom comparable uncontrolled transac-tions by the controlled taxpayer underreview, because similar characteristics aremore likely found among different trans-

actions by the same controlled taxpayerthan among transactions by other parties.In the absence of comparable uncontrolledtransactions involving the same controlledtaxpayer, an appropriate gross servicesprofit margin may be derived from transac-tions of uncontrolled taxpayers involvingcomparable services or functions with re-spect to similarly related transactions.

(B) Other comparability factors. Com-parability under this method is not depen-dent on close similarity of the relevantuncontrolled transaction to the relatedtransactions involved in the uncontrolledcomparables. However, substantial dif-ferences in the nature of the relevantuncontrolled transaction and the relevanttransactions involved in the uncontrolledcomparables, such as differences in thetype of property transferred or service pro-vided in the relevant uncontrolled transac-tion, may indicate significant differencesin the services or functions performed bythe controlled and uncontrolled taxpayerswith respect to their respective relevanttransactions. Thus, it ordinarily would beexpected that the services or functions per-formed in the controlled and uncontrolledtransactions would be with respect to rel-evant transactions involving the transferof property within the same product cat-egories or the provision of services ofthe same general type (for example, in-formation-technology systems design).Furthermore, significant differences inthe intangible property (if any) used bythe controlled taxpayer in the controlledservices transaction as distinct from theuncontrolled comparables may also affectthe reliability of the comparison. Finally,the reliability of profit measures basedon gross services profit may be adverselyaffected by factors that have less effecton prices. For example, gross servicesprofit may be affected by a variety ofother factors, including cost structures orefficiency (for example, differences in thelevel of experience of the employees per-forming the service in the controlled anduncontrolled transactions). Accordingly,if material differences in these factors areidentified based on objective evidence, thereliability of the analysis may be affected.

(C) Adjustments for differences betweencontrolled and uncontrolled transactions.If there are material differences betweenthe controlled and uncontrolled transac-tions that would affect the gross services

August 17, 2009 217 2009–33 I.R.B.

profit margin, adjustments should be madeto the gross services profit margin, ac-cording to the comparability provisions of§1.482–1(d)(2). For this purpose, consid-eration of the total services costs associ-ated with functions performed and risksassumed may be necessary because dif-ferences in functions performed are of-ten reflected in these costs. If there aredifferences in functions performed, how-ever, the effect on gross services profit ofsuch differences is not necessarily equalto the differences in the amount of relatedcosts. Specific examples of factors thatmay be particularly relevant to this methodinclude—

(1) Contractual terms (for example,scope and terms of warranties or guaran-tees regarding the services or function,volume, credit and payment terms, andallocation of risks, including any contin-gent-payment terms);

(2) Intangible property (if any) used inperforming the services or function;

(3) Geographic market in which the ser-vices or function are performed or in whichthe relevant uncontrolled transaction takesplace; and

(4) Risks borne, including, if applica-ble, inventory-type risk.

(D) Buy-sell distributor. If a controlledtaxpayer that performs an agent service orintermediary function is comparable to adistributor that takes title to goods and re-sells them, the gross profit margin earnedby such distributor on uncontrolled sales,stated as a percentage of the price for thegoods, may be used as the comparablegross services profit margin.

(iii) Data and assumptions—(A) Ingeneral. The reliability of the resultsderived from the gross services marginmethod is affected by the completenessand accuracy of the data used and thereliability of the assumptions made to ap-ply this method. See §1.482–1(c) (bestmethod rule).

(B) Consistency in accounting. The de-gree of consistency in accounting practicesbetween the controlled transaction and theuncontrolled comparables that materiallyaffect the gross services profit margin af-fects the reliability of the results under thismethod.

(4) Examples. The principles of thisparagraph (d) are illustrated by the follow-ing examples:

Example 1. Agent services. Company A andCompany B are members of a controlled group.Company A is a foreign manufacturer of industrialequipment. Company B is a U.S. company thatacts as a commission agent for Company A by ar-ranging for Company A to make direct sales of theequipment it manufactures to unrelated purchasers inthe U.S. market. Company B does not take title tothe equipment but instead receives from CompanyA commissions that are determined as a specifiedpercentage of the sales price for the equipment thatis charged by Company A to the unrelated purchaser.Company B also arranges for direct sales of similarequipment by unrelated foreign manufacturers tounrelated purchasers in the U.S. market. CompanyB charges these unrelated foreign manufacturers acommission fee of 5% of the sales price charged bythe unrelated foreign manufacturers to the unrelatedU.S. purchasers for the equipment. Informationregarding the comparable agent services providedby Company B to unrelated foreign manufacturers issufficiently complete to conclude that it is likely thatall material differences between the controlled anduncontrolled transactions have been identified andadjustments for such differences have been made.If the comparable gross services profit margin is5% of the price charged in the relevant transactionsinvolved in the uncontrolled comparables, then theappropriate gross services profit that Company Bmay earn and the arm’s length price that it maycharge Company A for its agent services is equal to5% of the applicable uncontrolled price charged byCompany A in sales of equipment in the relevantuncontrolled transactions.

Example 2. Agent services. The facts are thesame as in Example 1, except that Company B doesnot act as a commission agent for unrelated partiesand it is not possible to obtain reliable informationconcerning commission rates charged by uncon-trolled commission agents that engage in comparabletransactions with respect to relevant sales of property.It is possible, however, to obtain reliable informationregarding the gross profit margins earned by unre-lated parties that briefly take title to and then resellsimilar property in uncontrolled transactions, inwhich they purchase the property from foreign man-ufacturers and resell the property to purchasers in theU.S. market. Analysis of the facts and circumstancesindicates that, aside from certain minor differencesfor which adjustments can be made, the uncontrolledparties that resell property perform similar functionsand assume similar risks as Company B performsand assumes when it acts as a commission agentfor Company A’s sales of property. Under thesecircumstances, the gross profit margin earned by theunrelated distributors on the purchase and resale ofproperty may be used, subject to any adjustments forany material differences between the controlled anduncontrolled transactions, as a comparable gross ser-vices profit margin. The appropriate gross servicesprofit that Company B may earn and the arm’s lengthprice that it may charge Company A for its agentservices is therefore equal to this comparable grossservices margin, multiplied by the applicable uncon-trolled price charged by Company A in its sales ofequipment in the relevant uncontrolled transactions.

Example 3. Agent services. (i) Company A andCompany B are members of a controlled group.Company A is a U.S. corporation that renders

computer consulting services, including systemsintegration and networking, to business clients.

(ii) In undertaking engagements with clients,Company A in some cases pays a commission of3% of its total fees to unrelated parties that assistCompany A in obtaining consulting engagements.Typically, such fees are paid to non-computer con-sulting firms that provide strategic managementservices for their clients. When Company A ob-tains a consulting engagement with a client of anon-computer consulting firm, Company A does notsubcontract with the other consulting firm, nor doesthe other consulting firm play any role in CompanyA’s consulting engagement.

(iii) Company B, a Country X subsidiary of Com-pany A, assists Company A in obtaining an engage-ment to perform computer consulting services for aCompany B banking industry client in Country X.Although Company B has an established relationshipwith its Country X client and was instrumental in ar-ranging for Company A’s engagement with the client,Company A’s particular expertise was the primaryconsideration in motivating the client to engage Com-pany A. Based on the relative contributions of Com-panies A and B in obtaining and undertaking the en-gagement, Company B’s role was primarily to facili-tate the consulting engagement between Company Aand the Country X client. Information regarding thecommissions paid by Company A to unrelated par-ties for providing similar services to facilitate Com-pany A’s consulting engagements is sufficiently com-plete to conclude that it is likely that all material dif-ferences between these uncontrolled transactions andthe controlled transaction between Company B andCompany A have been identified and that appropriateadjustments have been made for any such differences.If the comparable gross services margin earned by un-related parties in providing such agent services is 3%of total fees charged in the relevant transactions in-volved in the uncontrolled comparables, then the ap-propriate gross services profit that Company B mayearn and the arm’s length price that it may chargeCompany A for its agent services is equal to this com-parable gross services margin (3%), multiplied by theapplicable uncontrolled price charged by CompanyA in its relevant uncontrolled consulting engagementwith Company B’s client.

Example 4. Intermediary function. (i) The factsare the same as in Example 3, except that CompanyB contracts directly with its Country X client to pro-vide computer consulting services and Company Aperforms the consulting services on behalf of Com-pany B. Company A does not enter into a consultingengagement with Company B’s Country X client. In-stead, Company B charges its Country X client an un-controlled price for the consulting services, and Com-pany B pays a portion of the uncontrolled price toCompany A for performing the consulting serviceson behalf of Company B.

(ii) Analysis of the relative contributions of Com-panies A and B in obtaining and undertaking the con-sulting contract indicates that Company B functionedprimarily as an intermediary contracting party, andthe gross services margin method is the most reliablemethod for determining the amount that Company Bmay retain as compensation for its intermediary func-tion with respect to Company A’s consulting services.In this case, therefore, because Company B enteredinto the relevant uncontrolled transaction to provide

2009–33 I.R.B. 218 August 17, 2009

services, Company B receives the applicable uncon-trolled price that is paid by the Country X client forthe consulting services. Company A technically per-forms services for Company B when it performs, onbehalf of Company B, the consulting services Com-pany B contracted to provide to the Country X client.The arm’s length amount that Company A may chargeCompany B for performing the consulting serviceson Company B’s behalf is equal to the applicable un-controlled price received by Company B in the rele-vant uncontrolled transaction, less Company B’s ap-propriate gross services profit, which is the amountthat Company B may retain as compensation for per-forming the intermediary function.

(iii) Reliable data concerning the commissionsthat Company A paid to uncontrolled parties for as-sisting it in obtaining engagements to provide con-sulting services similar to those it has provided onbehalf of Company B provide useful information inapplying the gross services margin method. How-ever, consideration should be given to whether thethird party commission data may need to be adjustedto account for any additional risk that Company Bmay have assumed as a result of its function as an in-termediary contracting party, compared with the riskit would have assumed if it had provided agent ser-vices to assist Company A in entering into an en-gagement to provide its consulting service directly. Inthis case, the information regarding the commissionspaid by Company A to unrelated parties for provid-ing agent services to facilitate its performance of con-sulting services for unrelated parties is sufficientlycomplete to conclude that all material differences be-tween these uncontrolled transactions and the con-trolled performance of an intermediary function, in-cluding possible differences in the amount of risk as-sumed in connection with performing that function,have been identified and that appropriate adjustmentshave been made. If the comparable gross servicesmargin earned by unrelated parties in providing suchagent services is 3% of total fees charged in Com-pany B’s relevant uncontrolled transactions, then theappropriate gross services profit that Company B mayretain as compensation for performing an intermedi-ary function (and the amount, therefore, that is de-ducted from the applicable uncontrolled price to ar-rive at the arm’s length price that Company A maycharge Company B for performing consulting ser-vices on Company B’s behalf) is equal to this com-parable gross services margin (3%), multiplied by theapplicable uncontrolled price charged by Company Bin its contract to provide services to the uncontrolledparty.

Example 5. External comparable. (i) The factsare the same as in Example 4, except that neitherCompany A nor Company B engages in transactionswith third parties that facilitate similar consulting en-gagements.

(ii) Analysis of the relative contributions of Com-panies A and B in obtaining and undertaking the con-tract indicates that Company B’s role was primarily tofacilitate the consulting arrangement between Com-pany A and the Country X client. Although no reli-able internal data are available regarding comparabletransactions with uncontrolled entities, reliable dataexist regarding commission rates for similar facilitat-ing services between uncontrolled parties. These dataindicate that a 3% commission (3% of total engage-ment fee) is charged in such transactions. Informa-

tion regarding the uncontrolled comparables is suffi-ciently complete to conclude that it is likely that allmaterial differences between the controlled and un-controlled transactions have been identified and ad-justed for. If the appropriate gross services profit mar-gin is 3% of total fees, then an arm’s length result ofthe controlled services transaction is for Company Bto retain an amount equal to 3% of total fees paid toit.

(e) Cost of services plus method—(1) Ingeneral. The cost of services plus methodevaluates whether the amount charged ina controlled services transaction is arm’slength by reference to the gross servicesprofit markup realized in comparableuncontrolled transactions. The cost ofservices plus method is ordinarily used incases where the controlled service rendererprovides the same or similar services toboth controlled and uncontrolled parties.This method is ordinarily not used in caseswhere the controlled services transactioninvolves a contingent-payment arrange-ment, as described in paragraph (i)(2) ofthis section.

(2) Determination of arm’s lengthprice—(i) In general. The cost of servicesplus method measures an arm’s lengthprice by adding the appropriate gross ser-vices profit to the controlled taxpayer’scomparable transactional costs.

(ii) Appropriate gross services profit.The appropriate gross services profit iscomputed by multiplying the controlledtaxpayer’s comparable transactional costsby the gross services profit markup, ex-pressed as a percentage of the compara-ble transactional costs earned in compara-ble uncontrolled transactions.

(iii) Comparable transactional costs.Comparable transactional costs consist ofthe costs of providing the services underreview that are taken into account as thebasis for determining the gross servicesprofit markup in comparable uncontrolledtransactions. Depending on the facts andcircumstances, such costs typically in-clude all compensation attributable toemployees directly involved in the per-formance of such services, materials andsupplies consumed or made available inrendering such services, and may includeas well other costs of rendering the ser-vices. Comparable transactional costsmust be determined on a basis that willfacilitate comparison with the comparableuncontrolled transactions. For that reason,comparable transactional costs may notnecessarily equal total services costs, as

defined in paragraph (j) of this section,and in appropriate cases may be a subsetof total services costs. Generally acceptedaccounting principles or Federal incometax accounting rules (where Federal in-come tax data for comparable transactionsor business activities are available) mayprovide useful guidance but will not con-clusively establish the appropriate compa-rable transactional costs for purposes ofthis method.

(iv) Arm’s length range. See§1.482–1(e)(2) for determination of anarm’s length range.

(3) Comparability and reliability con-siderations—(i) In general. Whether re-sults derived from the application of thismethod are the most reliable measure ofthe arm’s length result must be determinedusing the factors described under the bestmethod rule in §1.482–1(c).

(ii) Comparability—(A) Functionalcomparability. The degree of comparabil-ity between controlled and uncontrolledtransactions is determined by applying thecomparability provisions of §1.482–1(d).A service renderer’s gross services profitprovides compensation for performingservices related to the controlled servicestransaction under review, including anoperating profit for the service renderer’sinvestment of capital and assumptionsof risks. Therefore, although all of thefactors described in §1.482–1(d)(3) mustbe considered, comparability under thismethod is particularly dependent on simi-larity of services or functions performed,risks borne, intangible property (if any)used in providing the services or functions,and contractual terms, or adjustments toaccount for the effects of any such differ-ences. If possible, the appropriate grossservices profit markup should be derivedfrom comparable uncontrolled transac-tions of the same taxpayer participating inthe controlled services transaction becausesimilar characteristics are more likely tobe found among services provided by thesame service provider than among ser-vices provided by other service providers.In the absence of such services transac-tions, an appropriate gross services profitmarkup may be derived from compara-ble uncontrolled services transactions ofother service providers. If the appropriategross services profit markup is derivedfrom comparable uncontrolled servicestransactions of other service providers, in

August 17, 2009 219 2009–33 I.R.B.

evaluating comparability the controlledtaxpayer must consider the results underthis method expressed as a markup ontotal services costs of the controlled tax-payer, because differences in functionsperformed may be reflected in differencesin service costs other than those includedin comparable transactional costs.

(B) Other comparability factors. Com-parability under this method is less de-pendent on close similarity between theservices provided than under the compa-rable uncontrolled services price method.Substantial differences in the services may,however, indicate significant functionaldifferences between the controlled anduncontrolled taxpayers. Thus, it ordinar-ily would be expected that the controlledand uncontrolled transactions would in-volve services of the same general type(for example, information-technologysystems design). Furthermore, if a signif-icant amount of the controlled taxpayer’scomparable transactional costs consists ofservice costs incurred in a tax account-ing period other than the tax accountingperiod under review, the reliability of theanalysis would be reduced. In addition,significant differences in the value of theservices rendered, due for example tothe use of valuable intangible property,may also affect the reliability of the com-parison. Finally, the reliability of profitmeasures based on gross services profitmay be adversely affected by factors thathave less effect on prices. For example,gross services profit may be affected bya variety of other factors, including coststructures or efficiency-related factors (forexample, differences in the level of expe-rience of the employees performing theservice in the controlled and uncontrolledtransactions). Accordingly, if materialdifferences in these factors are identifiedbased on objective evidence, the reliabilityof the analysis may be affected.

(C) Adjustments for differences be-tween the controlled and uncontrolledtransactions. If there are material dif-ferences between the controlled and un-controlled transactions that would affectthe gross services profit markup, adjust-ments should be made to the gross servicesprofit markup earned in the comparableuncontrolled transaction according to theprovisions of §1.482–1(d)(2). For thispurpose, consideration of the compara-ble transactional costs associated with the

functions performed and risks assumedmay be necessary, because differences inthe functions performed are often reflectedin these costs. If there are differences infunctions performed, however, the effecton gross services profit of such differencesis not necessarily equal to the differencesin the amount of related comparable trans-actional costs. Specific examples of thefactors that may be particularly relevant tothis method include—

(1) The complexity of the services;(2) The duration or quantitative mea-

sure of services;(3) Contractual terms (for example,

scope and terms of warranties or guaran-tees provided, volume, credit and paymentterms, allocation of risks, including anycontingent-payment terms);

(4) Economic circumstances; and(5) Risks borne.(iii) Data and assumptions—(A) In

general. The reliability of the results de-rived from the cost of services plus methodis affected by the completeness and ac-curacy of the data used and the reliabilityof the assumptions made to apply thismethod. See §1.482–1(c) (Best methodrule).

(B) Consistency in accounting. The de-gree of consistency in accounting practicesbetween the controlled transaction and theuncontrolled comparables that materiallyaffect the gross services profit markup af-fects the reliability of the results underthis method. Thus, for example, if differ-ences in cost accounting practices wouldmaterially affect the gross services profitmarkup, the ability to make reliable ad-justments for such differences would affectthe reliability of the results obtained un-der this method. Further, reliability underthis method depends on the extent to whichthe controlled and uncontrolled transac-tions reflect consistent reporting of compa-rable transactional costs. For purposes ofthis paragraph (e)(3)(iii)(B), the term com-parable transactional costs includes thecost of acquiring tangible property that istransferred (or used) with the services, tothe extent that the arm’s length price of thetangible property is not separately evalu-ated as a controlled transaction under an-other provision.

(4) Examples. The principles of thisparagraph (e) are illustrated by the follow-ing examples:

Example 1. Internal comparable. (i) Company Adesigns and assembles information-technology net-works and systems. When Company A renders ser-vices for uncontrolled parties, it receives compensa-tion based on time and materials as well as certainother related costs necessary to complete the project.This fee includes the cost of hardware and softwarepurchased from uncontrolled vendors and incorpo-rated in the final network or system, plus a reason-able allocation of certain specified overhead costs in-curred by Company A in providing these services.Reliable accounting records maintained by CompanyA indicate that Company A earned a gross servicesprofit markup of 10% on its time, materials and spec-ified overhead in providing design services during theyear under examination on information technologyprojects for uncontrolled entities.

(ii) Company A designed an information-technol-ogy network for its Country X subsidiary, CompanyB. The services rendered to Company B are similarin scope and complexity to services that CompanyA rendered to uncontrolled parties during the yearunder examination. Using Company A’s accountingrecords (which are determined to be reliable underparagraph (e)(3) of this section), it is possible to iden-tify the comparable transactional costs involved inthe controlled services transaction with reference tothe costs incurred by Company A in rendering simi-lar design services to uncontrolled parties. CompanyA’s records indicate that it does not incur any addi-tional types of costs in rendering similar services touncontrolled customers. The data available are suffi-ciently complete to conclude that it is likely that allmaterial differences between the controlled and un-controlled transactions have been identified and ad-justed for. Based on the gross services profit markupdata derived from Company A’s uncontrolled trans-actions involving similar design services, an arm’slength result for the controlled services transaction isequal to the price that will allow Company A to earna 10% gross services profit markup on its comparabletransactional costs.

Example 2. Inability to adjust for differences incomparable transactional costs. The facts are thesame as in Example 1, except that Company A’s staffthat rendered the services to Company B consistedprimarily of engineers in training status or on tem-porary rotation from other Company A subsidiaries.In addition, the Company B network incorporated in-novative features, including specially designed soft-ware suited to Company B’s requirements. The use ofless-experienced personnel and staff on temporary ro-tation, together with the special features of the Com-pany B network, significantly increased the time andcosts associated with the project as compared to timeand costs associated with similar projects completedfor uncontrolled customers. These factors constitutematerial differences between the controlled and theuncontrolled transactions that affect the determina-tion of Company A’s comparable transactional costsassociated with the controlled services transaction,as well as the gross services profit markup. More-over, it is not possible to perform reliable adjustmentsfor these differences on the basis of the available ac-counting data. Under these circumstances, the relia-bility of the cost of services plus method as a measureof an arm’s length price is substantially reduced.

Example 3. Operating loss by reference to to-tal services costs. The facts and analysis are the

2009–33 I.R.B. 220 August 17, 2009

same as in Example 1, except that an unrelatedCompany C, instead of Company A, renders similarservices to uncontrolled parties and publicly avail-able information indicates that Company C earneda gross services profit markup of 10% on its time,materials and certain specified overhead in provid-ing those services. As in Example 1, Company Astill provides services for its Country X subsidiary,Company B. In accordance with the requirementsin paragraph (e)(3)(ii) of this section, the taxpayerperforms additional analysis and restates the resultsof Company A’s controlled services transaction withits Country X subsidiary, Company B, in the formof a markup on Company A’s total services costs.This analysis by reference to total services costsshows that Company A generated an operating losson the controlled services transaction, which indi-

cates that functional differences likely exist betweenthe controlled services transaction performed byCompany A and uncontrolled services transactionsperformed by Company C, and that these differencesmay not be reflected in the comparable transactionalcosts. Upon further scrutiny, the presence of suchfunctional differences between the controlled anduncontrolled transactions may indicate that the costof services plus method does not provide the mostreliable measure of an arm’s length result under thefacts and circumstances.

Example 4. Internal comparable. (i) CompanyA, a U.S. corporation, and its subsidiaries performcomputer consulting services relating to systems in-tegration and networking for business clients in vari-ous countries. Company A and its subsidiaries renderonly consulting services and do not manufacture or

distribute computer hardware or software to clients.The controlled group is organized according to indus-try specialization, with key industry specialists work-ing for Company A. These personnel typically formthe core consulting group that teams with consultantsfrom the local-country subsidiaries to serve clients inthe subsidiaries’ respective countries.

(ii) On some occasions, Company A and its sub-sidiaries undertake engagements directly for clients.On other occasions, they work as subcontractors foruncontrolled parties on more extensive consulting en-gagements for clients. In undertaking the latter en-gagements with third-party consultants, Company Atypically prices its services at four times the compen-sation costs of its consultants, defined as the consul-tants’ base salary plus estimated fringe benefits, asdefined in this table:

Category Rate

Project managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100 per hourTechnical staff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $75 per hour

(iii) In uncontrolled transactions, CompanyA also charges the customer, at no markup, forout-of-pocket expenses such as travel, lodging, anddata acquisition charges. Thus, for example, a projectinvolving 100 hours of time from project managers,and 400 hours of technical staff time would resultin total compensation costs to Company A of (100hrs. × $100/hr.) + (400 hrs. × $75/hr.) = $10,000 +$30,000 = $40,000. Applying the markup of 300%,the total fee charged would thus be (4 × $40,000), or$160,000, plus out-of-pocket expenses.

(iv) Company B, a Country X subsidiary of Com-pany A, contracts to render consulting services to aCountry X client in the banking industry. In undertak-ing this engagement, Company B uses its own consul-tants and also uses the services of Company A projectmanagers and technical staff that specialize in thebanking industry for 75 hours and 380 hours, respec-tively. The data available are sufficiently complete toconclude that it is likely that all material differencesbetween the controlled and uncontrolled transactionshave been identified and adjusted for. Based on reli-able data concerning the compensation costs to Com-pany A, an arm’s length result for the controlled ser-vices transaction is equal to $144,000. This is calcu-lated as follows: [4 × (75 hrs. × $100/hr.)] + [4 × (380hrs. × $75/hr.)] = $30,000 + $114,000 = $144,000,reflecting a 300% markup on the total compensationcosts for Company A project managers and technicalstaff. In addition, consistent with Company A’s pric-ing of uncontrolled transactions, Company B mustreimburse Company A for appropriate out-of-pocketexpenses incurred in performing the services.

(f) Comparable profits method—(1) Ingeneral. The comparable profits methodevaluates whether the amount charged ina controlled transaction is arm’s length,based on objective measures of profitabil-ity (profit level indicators) derived fromuncontrolled taxpayers that engage in sim-ilar business activities under similar cir-cumstances. The rules in §1.482–5 relat-ing to the comparable profits method apply

to controlled services transactions, exceptas modified in this paragraph (f).

(2) Determination of arm’s length re-sult—(i) Tested party. This paragraph (f)applies where the relevant business activ-ity of the tested party as determined un-der §1.482–5(b)(2) is the rendering of ser-vices in a controlled services transaction.Where the tested party determined under§1.482–5(b)(2) is instead the recipient ofthe controlled services, the rules under thisparagraph (f) are not applicable to deter-mine the arm’s length result.

(ii) Profit level indicators. In additionto the profit level indicators provided in§1.482–5(b)(4), a profit level indicator thatmay provide a reliable basis for compar-ing operating profits of the tested party in-volved in a controlled services transactionand uncontrolled comparables is the ratioof operating profit to total services costs(as defined in paragraph (j) of this section).

(iii) Comparability and reliabil-ity considerations—Data and assump-tions—Consistency in accounting. Con-sistency in accounting practices betweenthe relevant business activity of thetested party and the uncontrolled serviceproviders is particularly important in de-termining the reliability of the resultsunder this method, but less than in ap-plying the cost of services plus method.Adjustments may be appropriate if ma-terially different treatment is applied toparticular cost items related to the relevantbusiness activity of the tested party andthe uncontrolled service providers. Forexample, adjustments may be appropriate

where the tested party and the uncontrolledcomparables use inconsistent approachesto classify similar expenses as “cost ofgoods sold” and “selling, general, andadministrative expenses.” Although dis-tinguishing between these two categoriesmay be difficult, the distinction is lessimportant to the extent that the ratio ofoperating profit to total services costs isused as the appropriate profit level indi-cator. Determining whether adjustmentsare necessary under these or similar cir-cumstances requires thorough analysis ofthe functions performed and considerationof the cost accounting practices of thetested party and the uncontrolled compa-rables. Other adjustments as provided in§1.482–5(c)(2)(iv) may also be necessaryto increase the reliability of the resultsunder this method.

(3) Examples. The principles of thisparagraph (f) are illustrated by the follow-ing examples:

Example 1. Ratio of operating profit to total ser-vices costs as the appropriate profit level indicator.(i) A Country T parent firm, Company A, and itsCountry Y subsidiary, Company B, both engage inmanufacturing as their principal business activity.Company A also performs certain advertising ser-vices for itself and its affiliates. In year 1, CompanyA renders advertising services to Company B.

(ii) Based on the facts and circumstances, it is de-termined that the comparable profits method will pro-vide the most reliable measure of an arm’s length re-sult. Company A is selected as the tested party. Nodata are available for comparable independent man-ufacturing firms that render advertising services tothird parties. Financial data are available, however,for ten independent firms that render similar adver-tising services as their principal business activity inCountry X. The ten firms are determined to be compa-

August 17, 2009 221 2009–33 I.R.B.

rable under §1.482–5(c). Neither Company A nor thecomparable companies use valuable intangible prop-erty in rendering the services.

(iii) Based on the available financial data ofthe comparable companies, it cannot be determinedwhether these comparable companies report costs forfinancial accounting purposes in the same manner asthe tested party. The publicly available financial dataof the comparable companies segregate total servicescosts into cost of goods sold and sales, general andadministrative costs, with no further segmentation ofcosts provided. Due to the limited information avail-able regarding the cost accounting practices usedby the comparable companies, the ratio of operatingprofits to total services costs is determined to be themost appropriate profit level indicator. This ratioincludes total services costs to minimize the effect ofany inconsistency in accounting practices betweenCompany A and the comparable companies.

Example 2. Application of the operating profit tototal services costs profit level indicator. (i) Com-pany A is a foreign subsidiary of Company B, a U.S.

corporation. Company B is under examination forits year 1 taxable year. Company B renders manage-ment consulting services to Company A. CompanyB’s consulting function includes analyzing CompanyA’s operations, benchmarking Company A’s financialperformance against companies in the same indus-try, and to the extent necessary, developing a strategyto improve Company A’s operational performance.The accounting records of Company B allow reliableidentification of the total services costs of the consult-ing staff associated with the management consultingservices rendered to Company A. Company A reim-burses Company B for its costs associated with ren-dering the consulting services, with no markup.

(ii) Based on all the facts and circumstances, it isdetermined that the comparable profits method willprovide the most reliable measure of an arm’s lengthresult. Company B is selected as the tested party, andits rendering of management consulting services isidentified as the relevant business activity. Data areavailable from ten domestic companies that operatein the industry segment involving management con-

sulting and that perform activities comparable to therelevant business activity of Company B. These com-parables include entities that primarily perform man-agement consulting services for uncontrolled parties.The comparables incur similar risks as Company Bincurs in performing the consulting services and donot make use of valuable intangible property or spe-cial processes.

(iii) Based on the available financial data of thecomparables, it cannot be determined whether thecomparables report their costs for financial account-ing purposes in the same manner as Company B re-ports its costs in the relevant business activity. Theavailable financial data for the comparables reportonly an aggregate figure for costs of goods sold andoperating expenses, and do not segment the underly-ing services costs. Due to this limitation, the ratio ofoperating profits to total services costs is determinedto be the most appropriate profit level indicator.

(iv) For the taxable years 1 through 3, CompanyB shows the following results for the services per-formed for Company A:

Year 1 Year 2 Year 3 Average

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200,000 1,100,000 1,300,000 1,200,000Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 100,000 N/A 66,667Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100,000 1,000,000 1,300,000 1,133,333Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0 0

(v) After adjustments have been made to ac-count for identified material differences between therelevant business activity of Company B and thecomparables, the average ratio for the taxable years

1 through 3 of operating profit to total services costsis calculated for each of the uncontrolled serviceproviders. Applying each ratio to Company B’s av-erage total services costs from the relevant business

activity for the taxable years 1 through 3 would leadto the following comparable operating profit (COP)for the services rendered by Company B:

Uncontrolled Service Provider OP/Total Company B Service Costs COP

Company 1 15.75% $189,000Company 2 15.00% $180,000Company 3 14.00% $168,000Company 4 13.30% $159,600Company 5 12.00% $144,000Company 6 11.30% $135,600Company 7 11.25% $135,000Company 8 11.18% $134,160Company 9 11.11% $133,320Company 10 10.75% $129,000

(vi) The available data are not sufficiently com-plete to conclude that it is likely that all materialdifferences between the relevant business activity ofCompany B and the comparables have been identi-fied. Therefore, an arm’s length range can be estab-lished only pursuant to §1.482–1(e)(2)(iii)(B). Thearm’s length range is established by reference to theinterquartile range of the results as calculated under

§1.482–1(e)(2)(iii)(C), which consists of the resultsranging from $168,000, to $134,160. Company B’sreported average operating profit of zero ($0) fallsoutside this range. Therefore, an allocation may beappropriate.

(vii) Because Company B reported income ofzero, to determine the amount, if any, of the alloca-tion, Company B’s reported operating profit for year

3 is compared to the comparable operating profitsderived from the comparables’ results for year 3.The ratio of operating profit to total services costs inyear 3 is calculated for each of the comparables andapplied to Company B’s year 3 total services costs toderive the following results:

2009–33 I.R.B. 222 August 17, 2009

Uncontrolled Service Provider OP/Total Company B Service Costs (for year 3) COP

Company 1 15.00% $195,000Company 2 14.75% $191,750Company 3 14.00% $182,000Company 4 13.50% $175,500Company 5 12.30% $159,900Company 6 11.05% $143,650Company 7 11.03% $143,390Company 8 11.00% $143,000Company 9 10.50% $136,500Company 10 10.25% $133,250

(viii) Based on these results, the median of thecomparable operating profits for year 3 is $151,775.Therefore, Company B’s income for year 3 is in-creased by $151,775, the difference between Com-pany B’s reported operating profit for year 3 of zeroand the median of the comparable operating profitsfor year 3.

Example 3. Material difference in accounting forstock-based compensation. (i) Taxpayer, a U.S. cor-poration the stock of which is publicly traded, per-forms controlled services for its wholly-owned sub-sidiaries. The arm’s length price of these controlledservices is evaluated under the comparable profitsmethod for services in paragraph (f) of this sectionby reference to the net cost plus profit level indicator(PLI). Taxpayer is the tested party under paragraph(f)(2)(i) of this section. The Commissioner identifiesthe most narrowly identifiable business activity of thetested party for which data are available that incor-

porate the controlled transaction (the relevant busi-ness activity). The Commissioner also identifies fouruncontrolled domestic service providers, CompaniesA, B, C, and D, each of which performs exclusivelyactivities similar to the relevant business activity ofTaxpayer that is subject to analysis under paragraph(f) of this section. The stock of Companies A, B, C,and D is publicly traded on a U.S. stock exchange.Assume that Taxpayer makes an election to applythese regulations to earlier taxable years.

(ii) Stock options are granted to the employees ofTaxpayer that engage in the relevant business activ-ity. Assume that, as determined under a method inaccordance with U.S. generally accepted accountingprinciples, the fair value of such stock options attrib-utable to the employees’ performance of the relevantbusiness activity is 500 for the taxable year in ques-tion. In evaluating the controlled services, Taxpayerincludes salaries, fringe benefits, and related compen-

sation of these employees in “total services costs,” asdefined in paragraph (j) of this section. Taxpayer doesnot include any amount attributable to stock optionsin total services costs, nor does it deduct that amountin determining “reported operating profit” within themeaning of §1.482–5(d)(5), for the year under exam-ination.

(iii) Stock options are granted to the employees ofCompanies A, B, C, and D. Under a fair value methodin accordance with U.S. generally accepted account-ing principles, the comparables include in total com-pensation the value of the stock options attributable tothe employees’ performance of the relevant businessactivity for the annual financial reporting period, andtreat this amount as an expense in determining oper-ating profit for financial accounting purposes. Thetreatment of employee stock options is summarizedin the following table:

Salaries and othernon-option compensation

Stock optionsfair value

Stock optionsexpensed

Taxpayer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 500 0Company A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 2,000 2,000Company B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300 250 250Company C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 4,500 4,500Company D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 2,000 2,000

(iv) A material difference in accounting forstock-based compensation (within the meaning of§1.482–7T(d)(3)(i)) exists. Analysis indicates thatthis difference would materially affect the measureof an arm’s length result under this paragraph (f).In making an adjustment to improve comparabilityunder §§1.482–1(d)(2) and 1.482–5(c)(2)(iv), theCommissioner includes in total services costs of thetested party the total compensation costs of 1,500(including stock option fair value). In addition, theCommissioner calculates the net cost plus PLI by

reference to the financial-accounting data of Com-panies A, B, C, and D, which take into accountcompensatory stock options.

Example 4. Material difference in utilization ofstock-based compensation.

(i) The facts are the same as in paragraph (i) ofExample 3.

(ii) No stock options are granted to the employeesof Taxpayer that engage in the relevant business ac-tivity. Thus, no deduction for stock options is madein determining “reported operating profit” (within the

meaning of §1.482–5(d)(5)) for the taxable year un-der examination.

(iii) Stock options are granted to the employees ofCompanies A, B, C, and D, but none of these compa-nies expense stock options for financial accountingpurposes. Under a method in accordance with U.S.generally accepted accounting principles, however,Companies A, B, C, and D disclose the fair value ofthe stock options for financial accounting purposes.The utilization and treatment of employee stock op-tions is summarized in the following table:

Salaries and othernon-option compensation

Stock optionsfair value

Stock optionsexpensed

Taxpayer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 0 N/ACompany A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 2,000 0Company B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300 250 0Company C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 4,500 0Company D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 2,000 0

(iv) A material difference in the utilization ofstock-based compensation (within the meaning of

§1.482–7T(d)(3)(i)) exists. Analysis indicates thatthese differences would materially affect the measure

of an arm’s length result under this paragraph (f). Inevaluating the comparable operating profits of the

August 17, 2009 223 2009–33 I.R.B.

tested party, the Commissioner uses Taxpayer’s totalservices costs, which include total compensationcosts of 1,000. In considering whether an adjust-ment is necessary to improve comparability under§§1.482–1(d)(2) and 1.482–5(c)(2)(iv), the Com-missioner recognizes that the total compensationprovided to employees of Taxpayer is comparable

to the total compensation provided to employeesof Companies A, B, C, and D. Because CompaniesA, B, C, and D do not expense stock-based com-pensation for financial accounting purposes, theirreported operating profits must be adjusted in orderto improve comparability with the tested party. TheCommissioner increases each comparable’s total

services costs, and also reduces its reported operatingprofit, by the fair value of the stock-based compen-sation incurred by the comparable company.

(v) The adjustments to the data of Companies A,B, C, and D described in paragraph (iv) of this Exam-ple 4 are summarized in the following table:

Salaries and othernon-option

compensation

Stock optionsfair value

Total servicescosts(A)

Operatingprofit(B)

Net cost plusPLI

(B/A)

Per financial statements:

Company A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 2,000 25,000 6,000 24.00%Company B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300 250 12,500 2,500 20.00%Company C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 4,500 36,000 11,000 30.56%Company D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 2,000 27,000 7,000 25.93%

As adjusted:

Company A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 2,000 27,000 4,000 14.81%Company B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300 250 12,750 2,250 17.65%Company C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 4,500 40,500 6,500 16.05%Company D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 2,000 29,000 5,000 17.24%

Example 5. Non-material difference in utilizationof stock-based compensation.

(i) The facts are the same as in paragraph (i) ofExample 3.

(ii) Stock options are granted to the employees ofTaxpayer that engage in the relevant business activity.Assume that, as determined under a method in accor-dance with U.S. generally accepted accounting prin-ciples, the fair value of such stock options attributable

to the employees’ performance of the relevant busi-ness activity is 50 for the taxable year. Taxpayer in-cludes salaries, fringe benefits, and all other compen-sation of these employees (including the stock optionfair value) in “total services costs,” as defined in para-graph (j) of this section, and deducts these amountsin determining “reported operating profit” within themeaning of §1.482–5(d)(5), for the taxable year un-der examination.

(iii) Stock options are granted to the employees ofCompanies A, B, C, and D, but none of these compa-nies expense stock options for financial accountingpurposes. Under a method in accordance with U.S.generally accepted accounting principles, however,Companies A, B, C, and D disclose the fair value ofthe stock options for financial accounting purposes.The utilization and treatment of employee stock op-tions is summarized in the following table:

Salaries and othernon-option compensation

Stock optionsfair value

Stock optionsexpensed

Taxpayer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 50 50Company A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 100 0Company B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300 40 0Company C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 130 0Company D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 75 0

(iv) Analysis of the data reported by CompaniesA, B, C, and D indicates that an adjustment for dif-

ferences in utilization of stock-based compensation would not have a material effect on the determinationof an arm’s length result.

Salaries and othernon-option

compensation

Stock optionsfair value

Total servicescosts(A)

Operatingprofit(B)

Net cost plusPLI

(B/A)

Per financial statements:

Company A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 100 25,000 6,000 24.00%Company B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300 40 12,500 2,500 20.00%Company C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 130 36,000 11,000 30.56%Company D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 75 27,000 7,000 25.93%

As adjusted:

Company A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 100 25,100 5,900 23.51%Company B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300 40 12,540 2,460 19.62%Company C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 130 36,130 10,870 30.09%Company D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 75 27,075 6,925 25.58%

2009–33 I.R.B. 224 August 17, 2009

(v) Under the circumstances, the difference in uti-lization of stock-based compensation would not ma-terially affect the determination of the arm’s lengthresult under this paragraph (f). Accordingly, in calcu-lating the net cost plus PLI, no comparability adjust-ment is made to the data of Companies A, B, C, or Dpursuant to §§1.482–1(d)(2) and 1.482–5(c)(2)(iv).

Example 6. Material difference in comparables’accounting for stock-based compensation. (i) Thefacts are the same as in paragraph (i) of Example 3.

(ii) Stock options are granted to the employees ofTaxpayer that engage in the relevant business activity.

Assume that, as determined under a method in accor-dance with U.S. generally accepted accounting prin-ciples, the fair value of such stock options attributableto employees’ performance of the relevant businessactivity is 500 for the taxable year. Taxpayer includessalaries, fringe benefits, and all other compensationof these employees (including the stock option fairvalue) in “total services costs,” as defined in para-graph (j) of this section, and deducts these amountsin determining “reported operating profit” (within themeaning of §1.482–5(d)(5)) for the taxable year un-der examination.

(iii) Stock options are granted to the employeesof Companies A, B, C, and D. Companies A andB expense the stock options for financial account-ing purposes in accordance with U.S. generally ac-cepted accounting principles. Companies C and D donot expense the stock options for financial account-ing purposes. Under a method in accordance withU.S. generally accepted accounting principles, how-ever, Companies C and D disclose the fair value ofthese options in their financial statements. The uti-lization and accounting treatment of options are de-picted in the following table:

Salaries and othernon-option compensation

Stock optionsfair value

Stock optionsexpensed

Taxpayer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 500 500Company A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 2,000 2,000Company B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300 250 250Company C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 4,500 0Company D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 2,000 0

(iv) A material difference in accounting forstock-based compensation (within the meaning of§1.482–7T(d)(3)(i)) exists. Analysis indicates thatthis difference would materially affect the measure ofthe arm’s length result under paragraph (f) of this sec-tion. In evaluating the comparable operating profitsof the tested party, the Commissioner includes in totalservices costs Taxpayer’s total compensation costsof 1,500 (including stock option fair value of 500).In considering whether an adjustment is necessary to

improve comparability under §§1.482–1(d)(2) and1.482–5(c)(2)(iv), the Commissioner recognizes thatthe total employee compensation (including stockoptions provided by Taxpayer and Companies A, B,C, and D) provides a reliable basis for comparison.Because Companies A and B expense stock-basedcompensation for financial accounting purposes,whereas Companies C and D do not, an adjustmentto the comparables’ operating profit is necessary. Incomputing the net cost plus PLI, the Commissioner

uses the financial-accounting data of Companies Aand B, as reported. The Commissioner increasesthe total services costs of Companies C and D byamounts equal to the fair value of their respectivestock options, and reduces the operating profits ofCompanies C and D accordingly.

(v) The adjustments described in paragraph (iv)of this Example 6 are depicted in the following table.For purposes of illustration, the unadjusted data ofCompanies A and B are also included.

Salaries and othernon-option

compensation

Stock optionsfair value

Total servicescosts(A)

Operatingprofit(B)

Net cost plusPLI

(B/A)

Per financial statements:

Company A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 2,000 27,000 4,000 14.80%Company B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300 250 12,750 2,250 17.65%

As adjusted:

Company C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 4,500 40,500 6,500 16.05%Company D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 2,000 29,000 5,000 17.24%

(g) Profit split method—(1) In general.The profit split method evaluates whetherthe allocation of the combined operatingprofit or loss attributable to one or morecontrolled transactions is arm’s length byreference to the relative value of eachcontrolled taxpayer’s contribution to thatcombined operating profit or loss. The rel-ative value of each controlled taxpayer’scontribution is determined in a mannerthat reflects the functions performed, risksassumed and resources employed by suchcontrolled taxpayer in the relevant busi-ness activity. For application of the profitsplit method (both the comparable profitsplit and the residual profit split), see§1.482–6. The residual profit split methodmay not be used where only one controlled

taxpayer makes significant nonroutinecontributions.

(2) Examples. The principles of thisparagraph (g) are illustrated by the follow-ing examples:

Example 1. Residual profit split. (i) Company A,a corporation resident in Country X, auctions spareparts by means of an interactive database. CompanyA maintains a database that lists all spare parts avail-able for auction. Company A developed the soft-ware used to run the database. Company A’s data-base is managed by Company A employees in a datacenter located in Country X, where storage and ma-nipulation of data also take place. Company A hasa wholly-owned subsidiary, Company B, located inCountry Y. Company B performs marketing and ad-vertising activities to promote Company A’s interac-tive database. Company B solicits unrelated compa-nies to auction spare parts on Company A’s database,and solicits customers interested in purchasing spare

parts online. Company B owns and maintains a com-puter server in Country Y, where it receives informa-tion on spare parts available for auction. Company Bhas also designed a specialized communications net-work that connects its data center to Company A’sdata center in Country X. The communications net-work allows Company B to enter data from uncon-trolled companies on Company A’s database locatedin Country X. Company B’s communications net-work also allows uncontrolled companies to accessCompany A’s interactive database and purchase spareparts. Company B bore the risks and cost of develop-ing this specialized communications network. Com-pany B enters into contracts with uncontrolled com-panies and provides the companies access to Com-pany A’s database through the Company B network.

(ii) Analysis of the facts and circumstances indi-cates that both Company A and Company B possessvaluable intangible property that they use to conductthe spare parts auction business. Company A borethe economic risks of developing and maintaining

August 17, 2009 225 2009–33 I.R.B.

software and the interactive database. Company Bbore the economic risks of developing the necessarytechnology to transmit information from its server toCompany A’s data center, and to allow uncontrolledcompanies to access Company A’s database. Com-pany B helped to enhance the value of Company A’strademark and to establish a network of customersin Country Y. In addition, there are no market com-parables for the transactions between Company Aand Company B to reliably evaluate them separately.Given the facts and circumstances, the Commissionerdetermines that a residual profit split method will pro-vide the most reliable measure of an arm’s length re-sult.

(iii) Under the residual profit split method, profitsare first allocated based on the routine contributionsof each taxpayer. Routine contributions include gen-eral sales, marketing or administrative functions per-formed by Company B for Company A for which itis possible to identify market returns. Any residualprofits will be allocated based on the nonroutine con-tributions of each taxpayer. Since both Company Aand Company B provided nonroutine contributions,the residual profits are allocated based on these con-tributions.

Example 2. Residual profit split. (i) CompanyA, a Country 1 corporation, provides specializedservices pertaining to the processing and storageof Level 1 hazardous waste (for purposes of thisexample, the most dangerous type of waste). Un-der long-term contracts with private companies andgovernmental entities in Country 1, Company Aperforms multiple services, including transportationof Level 1 waste, development of handling andstorage protocols, recordkeeping, and supervisionof waste-storage facilities owned and maintained bythe contracting parties. Company A’s research anddevelopment unit has also developed new and uniqueprocesses for transport and storage of Level 1 wastethat minimize environmental and occupational ef-fects. In addition to this novel technology, CompanyA has substantial know-how and a long-term recordof safe operations in Country 1.

(ii) Company A’s subsidiary, Company B, hasbeen in operation continuously for a number of yearsin Country 2. Company B has successfully com-pleted several projects in Country 2 involving Level2 and Level 3 waste, including projects with gov-ernment-owned entities. Company B has a licensein Country 2 to handle Level 2 waste (Level 3 doesnot require a license). Company B has established areputation for completing these projects in a respon-sible manner. Company B has cultivated contactswith procurement officers, regulatory and licensingofficials, and other government personnel in Country2.

(iii) Country 2 government publishes invitationsto bid on a project to handle the country’s burgeon-ing volume of Level 1 waste, all of which is gener-ated in government-owned facilities. Bidding is lim-ited to companies that are domiciled in Country 2 andthat possess a license from the government to handleLevel 1 or Level 2 waste. In an effort to submit a win-ning bid to secure the contract, Company B points toits Level 2 license and its record of successful com-pletion of projects, and also demonstrates to these of-ficials that it has access to substantial technical exper-tise pertaining to processing of Level 1 waste.

(iv) Company A enters into a long-term techni-cal services agreement with Company B. Under thisagreement, Company A agrees to supply to Com-pany B project managers and other technical staffwho have detailed knowledge of Company A’s pro-prietary Level 1 remediation techniques. CompanyA commits to perform under any long-term contractsentered into by Company B. Company B agrees tocompensate Company A based on a markup on Com-pany A’s marginal costs (pro rata compensation andcurrent expenses of Company A personnel). In thebid on the Country 2 contract for Level 1 waste re-mediation, Company B proposes to use a multi-dis-ciplinary team of specialists from Company A andCompany B. Project managers from Company A willdirect the team, which will also include employeesof Company B and will make use of physical assetsand facilities owned by Company B. Only CompanyA and Company B personnel will perform servicesunder the contract. Country 2 grants Company B alicense to handle Level 1 waste.

(v) Country 2 grants Company B a five-year, ex-clusive contract to provide processing services for allLevel 1 hazardous waste generated in County 2. Un-der the contract, Company B is to be paid a fixed priceper ton of Level 1 waste that it processes each year.Company B undertakes that all services provided willmeet international standards applicable to processingof Level 1 waste. Company B begins performanceunder the contract.

(vi) Analysis of the facts and circumstancesindicates that both Company A and Company Bmake nonroutine contributions to the Level 1 wasteprocessing activity in Country 2. In addition, it isdetermined that reliable comparables are not avail-able for the services that Company A provides underthe long-term contract, in part because those servicesincorporate specialized knowledge and process in-tangible property developed by Company A. It isalso determined that reliable comparables are notavailable for the Level 2 license in Country 2, thesuccessful track record, the government contactswith Country 2 officials, and other intangible prop-erty that Company B provided. In view of thesefacts, the Commissioner determines that the residualprofit split method for services in paragraph (g) ofthis section provides the most reliable means of eval-uating the arm’s length results for the transaction. Inevaluating the appropriate returns to Company A andCompany B for their respective contributions, theCommissioner takes into account that the controlledparties incur different risks, because the contractbetween the controlled parties provides that Com-pany A will be compensated on the basis of marginalcosts incurred, plus a markup, whereas the contractbetween Company B and the government of Country2 provides that Company B will be compensated on afixed-price basis per ton of Level 1 waste processed.

(vii) In the first stage of the residual profit split,an arm’s length return is determined for routine ac-tivities performed by Company B in Country 2, suchas transportation, recordkeeping, and administration.In addition, an arm’s length return is determined forroutine activities performed by Company A (admin-istrative, human resources, etc.) in connection withproviding personnel to Company B. After the arm’slength return for these functions is determined, resid-ual profits may be present. In the second stage of theresidual profit split, any residual profit is allocated by

reference to the relative value of the nonroutine con-tributions made by each taxpayer. Company A’s non-routine contributions include its commitment to per-form under the contract and the specialized technicalknowledge made available through the project man-agers under the services agreement with Company B.Company B’s nonroutine contributions include its li-censes to handle Level 1 and Level 2 waste in Country2, its knowledge of and contacts with procurement,regulatory and licensing officials in the governmentof Country 2, and its record in Country 2 of success-fully handling non-Level 1 waste.

(h) Unspecified methods. Methods notspecified in paragraphs (b) through (g)of this section may be used to evaluatewhether the amount charged in a con-trolled services transaction is arm’s length.Any method used under this paragraph(h) must be applied in accordance withthe provisions of §1.482–1. Consistentwith the specified methods, an unspeci-fied method should take into account thegeneral principle that uncontrolled tax-payers evaluate the terms of a transactionby considering the realistic alternatives tothat transaction, including economicallysimilar transactions structured as otherthan services transactions, and only enterinto a particular transaction if none of thealternatives is preferable to it. For exam-ple, the comparable uncontrolled servicesprice method compares a controlled ser-vices transaction to similar uncontrolledtransactions to provide a direct estimate ofthe price to which the parties would haveagreed had they resorted directly to a mar-ket alternative to the controlled servicestransaction. Therefore, in establishingwhether a controlled services transactionachieved an arm’s length result, an unspec-ified method should provide informationon the prices or profits that the controlledtaxpayer could have realized by choosinga realistic alternative to the controlled ser-vices transaction (for example, outsourc-ing a particular service function, ratherthan performing the function itself). Aswith any method, an unspecified methodwill not be applied unless it provides themost reliable measure of an arm’s lengthresult under the principles of the bestmethod rule. See §1.482–1(c). Therefore,in accordance with §1.482–1(d) (compa-rability), to the extent that an unspecifiedmethod relies on internal data rather thanuncontrolled comparables, its reliabilitywill be reduced. Similarly, the reliabilityof a method will be affected by the relia-bility of the data and assumptions used to

2009–33 I.R.B. 226 August 17, 2009

apply the method, including any projec-tions used.

Example. (i) Company T, a U.S. corporation, de-velops computer software programs including a realestate investment program that performs financialanalysis of commercial real properties. CompaniesU, V, and W are owned by Company T. The pri-mary business activity of Companies U, V, and W iscommercial real estate development. For businessreasons, Company T does not sell the computerprogram to its customers (on a compact disk or viadownload from Company T’s server through the In-ternet). Instead, Company T maintains the softwareprogram on its own server and allows customers toaccess the program through the Internet by usinga password. The transactions between Company Tand Companies U, V, and W are structured as con-trolled services transactions whereby Companies U,V, and W obtain access via the Internet to CompanyT’s software program for financial analysis. Eachyear, Company T provides a revised version of thecomputer program including the most recent data onthe commercial real estate market, rendering the oldversion obsolete.

(ii) In evaluating whether the consideration paidby Companies U, V, and W to Company T was arm’slength, the Commissioner may consider, subjectto the best method rule of §1.482–1(c), CompanyT’s alternative of selling the computer program toCompanies U, V, and W on a compact disk or viadownload through the Internet. The Commissionerdetermines that the controlled services transactionsbetween Company T and Companies U, V, and Ware comparable to the transfer of a similar softwareprogram on a compact disk or via download throughthe Internet between uncontrolled parties. Subjectto adjustments being made for material differencesbetween the controlled services transactions and thecomparable uncontrolled transactions, the uncon-trolled transfers of tangible property may be used toevaluate the arm’s length results for the controlledservices transactions between Company T and Com-panies U, V, and W.

(i) Contingent-payment contractualterms for services—(1) Contingent-pay-ment contractual terms recognized ingeneral. In the case of a contingent-pay-ment arrangement, the arm’s length resultfor the controlled services transaction gen-erally would not require payment by therecipient to the renderer in the tax account-ing period in which the service is renderedif the specified contingency does not occurin that period. If the specified contingencyoccurs in a tax accounting period subse-quent to the period in which the serviceis rendered, the arm’s length result for thecontrolled services transaction generallywould require payment by the recipientto the renderer on a basis that reflects therecipient’s benefit from the services ren-dered and the risks borne by the rendererin performing the activities in the absenceof a provision that unconditionally obli-

gates the recipient to pay for the activitiesperformed in the tax accounting period inwhich the service is rendered.

(2) Contingent-payment arrangement.For purposes of this paragraph (i), anarrangement will be treated as a contin-gent-payment arrangement if it meets allof the requirements in paragraph (i)(2)(i)of this section and is consistent with theeconomic substance and conduct require-ment in paragraph (i)(2)(ii) of this section.

(i) General requirements—(A) Writtencontract. The arrangement is set forth ina written contract entered into prior to, orcontemporaneous with the start of the ac-tivity or group of activities constituting thecontrolled services transaction.

(B) Specified contingency. The contractstates that payment for a controlled ser-vices transaction is contingent (in whole orin part) upon the happening of a future ben-efit (within the meaning of §1.482–9(l)(3))for the recipient directly related to the ac-tivity or group of activities. For purposesof the preceding sentence, whether the fu-ture benefit is directly related to the activ-ity or group of activities is evaluated basedon all the facts and circumstances.

(C) Basis for payment. The contractprovides for payment on a basis that re-flects the recipient’s benefit from the ser-vices rendered and the risks borne by therenderer.

(ii) Economic substance and con-duct. The arrangement, including thecontingency and the basis for payment,is consistent with the economic sub-stance of the controlled transaction andthe conduct of the controlled parties. See§1.482–1(d)(3)(ii)(B).

(3) Commissioner’s authority toimpute contingent-payment terms.Consistent with the authority in§1.482–1(d)(3)(ii)(B), the Commissionermay impute contingent-payment contrac-tual terms in a controlled services trans-action if the economic substance of thetransaction is consistent with the existenceof such terms.

(4) Evaluation of arm’s length charge.Whether the amount charged in a contin-gent-payment arrangement is arm’s lengthwill be evaluated in accordance with thissection and other applicable regulationsunder section 482. In evaluating whetherthe amount charged in a contingent-pay-ment arrangement for the manufacture,construction, or development of tangible

or intangible property owned by the recip-ient is arm’s length, the charge determinedunder the rules of §§1.482–3 and 1.482–4for the transfer of similar property may beconsidered. See §1.482–1(f)(2)(ii).

(5) Examples. The principles of thisparagraph (i) are illustrated by the follow-ing examples:

Example 1. (i) Company X is a member of a con-trolled group that has operated in the pharmaceuti-cal sector for many years. In year 1, Company X en-ters into a written services agreement with CompanyY, another member of the controlled group, wherebyCompany X will perform certain research and devel-opment activities for Company Y. The parties enterinto the agreement before Company X undertakes anyof the research and development activities covered bythe agreement. At the time the agreement is enteredinto, the possibility that any new products will be de-veloped is highly uncertain and the possible market ormarkets for any products that may be developed arenot known and cannot be estimated with any reliabil-ity. Under the agreement, Company Y will own anypatent or other rights that result from the activitiesof Company X under the agreement and CompanyY will make payments to Company X only if suchactivities result in commercial sales of one or morederivative products. In that event, Company Y willpay Company X, for a specified period, x% of Com-pany Y’s gross sales of each of such products. Pay-ments are required with respect to each jurisdictionin which Company Y has sales of such a derivativeproduct, beginning with the first year in which thesale of a product occurs in the jurisdiction and con-tinuing for six additional years with respect to salesof that product in that jurisdiction.

(ii) As a result of research and development ac-tivities performed by Company X for Company Yin years 1 through 4, a compound is developed thatmay be more effective than existing medications inthe treatment of certain conditions. Company Y reg-isters the patent rights with respect to the compoundin several jurisdictions in year 4. In year 6, CompanyY begins commercial sales of the product in Jurisdic-tion A and, in that year, Company Y makes the pay-ment to Company X that is required under the agree-ment. Sales of the product continue in Jurisdiction Ain years 7 through 9 and Company Y makes the pay-ments to Company X in years 7 through 9 that arerequired under the agreement.

(iii) The years under examination are years 6through 9. In evaluating whether the contingent-pay-ment terms will be recognized, the Commissionerconsiders whether the conditions of paragraph (i)(2)of this section are met and whether the arrangement,including the specified contingency and basis ofpayment, is consistent with the economic substanceof the controlled services transaction and with theconduct of the controlled parties. The Commissionerdetermines that the contingent-payment arrangementis reflected in the written agreement between Com-pany X and Company Y; that commercial sales ofproducts developed under the arrangement representfuture benefits for Company Y directly related tothe controlled services transaction; and that the basisfor the payment provided for in the event such salesoccur reflects the recipient’s benefit and the ren-derer’s risk. Consistent with §1.482–1(d)(3)(ii)(B)

August 17, 2009 227 2009–33 I.R.B.

and (iii)(B), the Commissioner determines that theparties’ conduct over the term of the agreement hasbeen consistent with their contractual allocation ofrisk; that Company X has the financial capacity tobear the risk that its research and development ser-vices may be unsuccessful and that it may not receivecompensation for such services; and that CompanyX exercises managerial and operational control overthe research and development, such that it is rea-sonable for Company X to assume the risk of thoseactivities. Based on all these facts, the Commissionerdetermines that the contingent-payment arrangementis consistent with economic substance.

(iv) In determining whether the amount chargedunder the contingent-payment arrangement in eachof years 6 through 9 is arm’s length, the Commis-sioner evaluates under this section and other appli-cable rules under section 482 the compensation paidin each year for the research and development ser-vices. This analysis takes into account that under thecontingent-payment terms Company X bears the riskthat it might not receive payment for its services in theevent that those services do not result in marketableproducts and the risk that the magnitude of its pay-ment depends on the magnitude of product sales, ifany. The Commissioner also considers the alterna-tives reasonably available to the parties in connectionwith the controlled services transaction. One such al-ternative, in view of Company X’s willingness andability to bear the risk and expenses of research anddevelopment activities, would be for Company X toundertake such activities on its own behalf and to li-cense the rights to products successfully developedas a result of such activities. Accordingly, in evalu-ating whether the compensation of x% of gross salesthat is paid to Company X during the first four yearsof commercial sales of derivative products is arm’slength, the Commissioner may consider the royal-ties (or other consideration) charged for intangibleproperty that are comparable to those incorporated inthe derivative products and that resulted from Com-pany X’s research and development activities underthe contingent-payment arrangement.

Example 2. (i) The facts are the same as in Ex-ample 1, except that no commercial sales ever mate-rialize with regard to the patented compound so that,consistent with the agreement, Company Y makes nopayments to Company X in years 6 through 9.

(ii) Based on all the facts and circumstances, theCommissioner determines that the contingent-pay-ment arrangement is consistent with economicsubstance, and the result (no payments in years 6through 9) is consistent with an arm’s length result.

Example 3. (i) The facts are the same as in Ex-ample 1, except that, in the event that Company X’sactivities result in commercial sales of one or morederivative products by Company Y, Company Y willpay Company X a fee equal to the research and devel-opment costs borne by Company X plus an amountequal to x% of such costs, with the payment to bemade in the first year in which any such sales occur.The x% markup on costs is within the range, ascer-tainable in year 1, of markups on costs of indepen-dent contract researchers that are compensated underterms that unconditionally obligate the recipient topay for the activities performed in the tax account-ing period in which the service is rendered. In year 6,Company Y makes the single payment to CompanyX that is required under the arrangement.

(ii) The years under examination are years 6through 9. In evaluating whether the contingent-pay-ment terms will be recognized, the Commissionerconsiders whether the requirements of paragraph(i)(2) of this section were met at the time the writtenagreement was entered into and whether the ar-rangement, including the specified contingency andbasis for payment, is consistent with the economicsubstance of the controlled services transaction andwith the conduct of the controlled parties. The Com-missioner determines that the contingent-paymentterms are reflected in the written agreement betweenCompany X and Company Y and that commercialsales of products developed under the arrangementrepresent future benefits for Company Y directly re-lated to the controlled services transaction. However,in this case, the Commissioner determines that thebasis for payment provided for in the event such salesoccur (costs of the services plus x%, representingthe markup for contract research in the absence ofany nonpayment risk) does not reflect the recipient’sbenefit and the renderer’s risks in the controlledservices transaction. Based on all the facts and cir-cumstances, the Commissioner determines that thecontingent-payment arrangement is not consistentwith economic substance.

(iii) Accordingly, the Commissioner determinesto exercise its authority to impute contingent-pay-ment contractual terms that accord with economicsubstance, pursuant to paragraph (i)(3) of this sectionand §1.482–1(d)(3)(ii)(B). In this regard, the Com-missioner takes into account that at the time the ar-rangement was entered into, the possibility that anynew products would be developed was highly uncer-tain and the possible market or markets for any prod-ucts that may be developed were not known and couldnot be estimated with any reliability. In such circum-stances, it is reasonable to conclude that one possiblebasis of payment, in order to reflect the recipient’sbenefit and the renderer’s risks, would be a chargeequal to a percentage of commercial sales of one ormore derivative products that result from the researchand development activities. The Commissioner inthis case may impute terms that require Company Yto pay Company X a percentage of sales of the prod-ucts developed under the agreement in each of years6 through 9.

(iv) In determining an appropriate arm’s lengthcharge under such imputed contractual terms, theCommissioner conducts an analysis under this sec-tion and other applicable rules under section 482,and considers the alternatives reasonably available tothe parties in connection with the controlled servicestransaction. One such alternative, in view of Com-pany X’s willingness and ability to bear the risksand expenses of research and development activities,would be for Company X to undertake such activ-ities on its own behalf and to license the rights toproducts successfully developed as a result of suchactivities. Accordingly, for purposes of its determi-nation, the Commissioner may consider the royalties(or other consideration) charged for intangible prop-erty that are comparable to those incorporated inthe derivative products that resulted from CompanyX’s research and development activities under thecontingent-payment arrangement.

(j) Total services costs. For purposesof this section, total services costs means

all costs of rendering those services forwhich total services costs are being de-termined. Total services costs include allcosts in cash or in kind (including stock-based compensation) that, based on anal-ysis of the facts and circumstances, aredirectly identified with, or reasonably al-located in accordance with the principlesof paragraph (k)(2) of this section to, theservices. In general, costs for this pur-pose should comprise provision for all re-sources expended, used, or made availableto achieve the specific objective for whichthe service is rendered. Reference to gen-erally accepted accounting principles orFederal income tax accounting rules mayprovide a useful starting point but will notnecessarily be conclusive regarding inclu-sion of costs in total services costs. Totalservices costs do not include interest ex-pense, foreign income taxes (as defined in§1.901–2(a)), or domestic income taxes.

(k) Allocation of costs—(1) In general.In any case where the renderer’s activitythat results in a benefit (within the mean-ing of paragraph (l)(3) of this section) forone recipient in a controlled services trans-action also generates a benefit for one ormore other members of a controlled group(including the benefit, if any, to the ren-derer), and the amount charged under thissection in the controlled services transac-tion is determined under a method thatmakes reference to costs, costs must be al-located among the portions of the activityperformed for the benefit of the first men-tioned recipient and such other members ofthe controlled group under this paragraph(k). The principles of this paragraph (k)must also be used whenever it is appropri-ate to allocate and apportion any class ofcosts (for example, overhead costs) in or-der to determine the total services costs ofrendering the services. In no event will anallocation of costs based on a generalizedor non-specific benefit be appropriate.

(2) Appropriate method of alloca-tion and apportionment—(i) Reasonablemethod standard. Any reasonable methodmay be used to allocate and apportioncosts under this section. In establishingthe appropriate method of allocation andapportionment, consideration should begiven to all bases and factors, including,for example, total services costs, totalcosts for a relevant activity, assets, sales,compensation, space utilized, and timespent. The costs incurred by support-

2009–33 I.R.B. 228 August 17, 2009

ing departments may be apportioned toother departments on the basis of rea-sonable overall estimates, or such costsmay be reflected in the other departments’costs by applying reasonable departmentaloverhead rates. Allocations and appor-tionments of costs must be made on thebasis of the full cost, as opposed to theincremental cost.

(ii) Use of general practices. The prac-tices used by the taxpayer to apportioncosts in connection with preparation ofstatements and analyses for the use of man-agement, creditors, minority shareholders,joint venturers, clients, customers, poten-tial investors, or other parties or agenciesin interest will be considered as poten-tial indicators of reliable allocation meth-ods, but need not be accorded conclusiveweight by the Commissioner. In determin-ing the extent to which allocations are to bemade to or from foreign members of a con-trolled group, practices employed by thedomestic members in apportioning costsamong themselves will also be considered

if the relationships with the foreign mem-bers are comparable to the relationshipsamong the domestic members of the con-trolled group. For example, if for purposesof reporting to public stockholders or toa governmental agency, a corporation ap-portions the costs attributable to its execu-tive officers among the domestic membersof a controlled group on a reasonable andconsistent basis, and such officers exercisecomparable control over foreign membersof the controlled group, such domestic ap-portionment practice will be considered indetermining the allocations to be made tothe foreign members.

(3) Examples. The principles of thisparagraph (k) are illustrated by the follow-ing examples:

Example 1. Company A pays an annual licensefee of 500x to an uncontrolled taxpayer for unlimiteduse of a database within the corporate group. Un-der the terms of the license with the uncontrolled tax-payer, Company A is permitted to use the databasefor its own use and in rendering research services toits subsidiary, Company B. Company B obtains ben-efits from the database that are similar to those that

it would obtain if it had independently licensed thedatabase from the uncontrolled taxpayer. Evaluationof the arm’s length charge (under a method in whichcosts are relevant) to Company B for the controlledservices that incorporate use of the database must takeinto account the full amount of the license fee of 500xpaid by Company A, as reasonably allocated and ap-portioned to the relevant benefits, although the incre-mental use of the database for the benefit of CompanyB did not result in an increase in the license fee paidby Company A.

Example 2. (i) Company A is a consumer prod-ucts company located in the United States. Compa-nies B and C are wholly-owned subsidiaries of Com-pany A and are located in Countries B and C, respec-tively. Company A and its subsidiaries manufactureproducts for sale in their respective markets. Com-pany A hires a consultant who has expertise regard-ing a manufacturing process used by Company A andits subsidiary, Company B. Company C, the CountryC subsidiary, uses a different manufacturing process,and accordingly will not receive any benefit from theoutside consultant hired by Company A. In allocatingand apportioning the cost of hiring the outside consul-tant (100), Company A determines that sales consti-tute the most appropriate allocation key.

(ii) Company A and its subsidiaries have the fol-lowing sales:

Company A B C D

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 100 200 700

(iii) Because Company C does not obtain any ben-efit from the consultant, none of the costs are allo-cated to it. Rather, the costs of 100 are allocated and

apportioned ratably to Company A and Company Bas the entities that obtain a benefit from the campaign,based on the total sales of those entities (500). An ap-

propriate allocation of the costs of the consultant is asfollows:

Company A B Total

Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400/500 100/500 . . . . . . . . . . . . . . . . . . . . . . .

Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 20 100

(l) Controlled services transaction—(1)In general. A controlled services trans-action includes any activity (as defined inparagraph (l)(2) of this section) by onemember of a group of controlled taxpay-ers (the renderer) that results in a benefit(as defined in paragraph (l)(3) of this sec-tion) to one or more other members of thecontrolled group (the recipient(s)).

(2) Activity. An activity includes theperformance of functions, assumptions ofrisks, or use by a renderer of tangible or in-tangible property or other resources, capa-bilities, or knowledge, such as knowledgeof and ability to take advantage of partic-ularly advantageous situations or circum-stances. An activity also includes makingavailable to the recipient any property orother resources of the renderer.

(3) Benefit—(i) In general. An activityis considered to provide a benefit to the re-cipient if the activity directly results in areasonably identifiable increment of eco-nomic or commercial value that enhancesthe recipient’s commercial position, or thatmay reasonably be anticipated to do so. Anactivity is generally considered to confer abenefit if, taking into account the facts andcircumstances, an uncontrolled taxpayer incircumstances comparable to those of therecipient would be willing to pay an un-controlled party to perform the same orsimilar activity on either a fixed or con-tingent-payment basis, or if the recipientotherwise would have performed for itselfthe same activity or a similar activity. Abenefit may result to the owner of intan-gible property if the renderer engages in

an activity that is reasonably anticipated toresult in an increase in the value of thatintangible property. Paragraphs (l)(3)(ii)through (v) of this section provide guide-lines that indicate the presence or absenceof a benefit for the activities in the con-trolled services transaction.

(ii) Indirect or remote benefit. An ac-tivity is not considered to provide a ben-efit to the recipient if, at the time the ac-tivity is performed, the present or reason-ably anticipated benefit from that activityis so indirect or remote that the recipientwould not be willing to pay, on either afixed or contingent-payment basis, an un-controlled party to perform a similar ac-tivity, and would not be willing to per-form such activity for itself for this pur-pose. The determination whether the ben-

August 17, 2009 229 2009–33 I.R.B.

efit from an activity is indirect or remote isbased on the nature of the activity and thesituation of the recipient, taking into con-sideration all facts and circumstances.

(iii) Duplicative activities. If an activityperformed by a controlled taxpayer dupli-cates an activity that is performed, or thatreasonably may be anticipated to be per-formed, by another controlled taxpayer onor for its own account, the activity is gen-erally not considered to provide a benefitto the recipient, unless the duplicative ac-tivity itself provides an additional benefitto the recipient.

(iv) Shareholder activities. An activityis not considered to provide a benefit if thesole effect of that activity is either to pro-tect the renderer’s capital investment in therecipient or in other members of the con-trolled group, or to facilitate complianceby the renderer with reporting, legal, orregulatory requirements applicable specif-ically to the renderer, or both. Activities inthe nature of day-to-day management gen-erally do not relate to protection of the ren-derer’s capital investment. Based on anal-ysis of the facts and circumstances, activ-ities in connection with a corporate reor-ganization may be considered to provide abenefit to one or more controlled taxpay-ers.

(v) Passive association. A controlledtaxpayer generally will not be consideredto obtain a benefit where that benefit re-sults from the controlled taxpayer’s sta-tus as a member of a controlled group. Acontrolled taxpayer’s status as a memberof a controlled group may, however, betaken into account for purposes of evaluat-ing comparability between controlled anduncontrolled transactions.

(4) Disaggregation of transactions. Acontrolled services transaction may be an-alyzed as two separate transactions for pur-poses of determining the arm’s length con-sideration, if that analysis is the most reli-able means of determining the arm’s lengthconsideration for the controlled servicestransaction. See the best method rule un-der §1.482–1(c).

(5) Examples. The principles of thisparagraph (l) are illustrated by the follow-ing examples. In each example, assumethat Company X is a U.S. corporation andCompany Y is a wholly-owned subsidiaryof Company X in Country B.

Example 1. In general. In developing a world-wide advertising and promotional campaign for a

consumer product, Company X pays for and obtainsdesignation as an official sponsor of the Olympics.This designation allows Company X and all itssubsidiaries, including Company Y, to identify them-selves as sponsors and to use the Olympic logoin advertising and promotional campaigns. TheOlympic sponsorship campaign generates benefits toCompany X, Company Y, and other subsidiaries ofCompany X.

Example 2. Indirect or remote benefit. Basedon recommendations contained in a study performedby its internal staff, Company X implements certainchanges in its management structure and the compen-sation of managers of divisions located in the UnitedStates. No changes were recommended or consideredfor Company Y in Country B. The internal study andthe resultant changes in its management may increasethe competitiveness and overall efficiency of Com-pany X. Any benefits to Company Y as a result of thestudy are, however, indirect or remote. Consequently,Company Y is not considered to obtain a benefit fromthe study.

Example 3. Indirect or remote benefit. Basedon recommendations contained in a study performedby its internal staff, Company X decides to makechanges to the management structure and manage-ment compensation of its subsidiaries, in order toincrease their profitability. As a result of the rec-ommendations in the study, Company X implementssubstantial changes in the management structure andmanagement compensation scheme of Company Y.The study and the changes implemented as a result ofthe recommendations are anticipated to increase theprofitability of Company X and its subsidiaries. Theincreased management efficiency of Company Y thatresults from these changes is considered to be a spe-cific and identifiable benefit, rather than remote orspeculative.

Example 4. Duplicative activities. At its corpo-rate headquarters in the United States, Company Xperforms certain treasury functions for Company Xand for its subsidiaries, including Company Y. Thesetreasury functions include raising capital, arrangingmedium and long-term financing for general corpo-rate needs, including cash management. Under thesecircumstances, the treasury functions performed byCompany X do not duplicate the functions performedby Company Y’s staff. Accordingly, Company Y isconsidered to obtain a benefit from the functions per-formed by Company X.

Example 5. Duplicative activities. The facts arethe same as in Example 4, except that Company Y’sfunctions include ensuring that the financing require-ments of its own operations are met. Analysis ofthe facts and circumstances indicates that CompanyY independently administers all financing and cash-management functions necessary to support its op-erations, and does not utilize financing obtained byCompany X. Under the circumstances, the treasuryfunctions performed by Company X are duplicativeof similar functions performed by Company Y’s staff,and the duplicative functions do not enhance Com-pany Y’s position. Accordingly, Company Y is notconsidered to obtain a benefit from the duplicative ac-tivities performed by Company X.

Example 6. Duplicative activities. Company X’sin-house legal staff has specialized expertise in sev-eral areas, including intellectual property. The in-tellectual property legal staff specializes in technol-

ogy licensing, patents, copyrights, and negotiatingand drafting intellectual property agreements. Com-pany Y is involved in negotiations with an unrelatedparty to enter into a complex joint venture that in-cludes multiple licenses and cross-licenses of patentsand copyrights. Company Y retains outside coun-sel that specializes in intellectual property law to re-view the transaction documents. Company Y doesnot have in-house counsel of its own to review in-tellectual property transaction documents. Outsidecounsel advises that the terms for the proposed trans-action are advantageous to Company Y and that thecontracts are valid and fully enforceable. CompanyX’s intellectual property legal staff possess valuableknowledge of Company Y’s patents and technolog-ical achievements. They are capable of identifyingparticular scientific attributes protected under patentthat strengthen Company Y’s negotiating position,and of discovering flaws in the patents offered by theunrelated party. To reduce risk associated with thetransaction, Company X’s intellectual property legalstaff reviews the transaction documents before Com-pany Y executes the contracts. Company X’s intellec-tual property legal staff also separately evaluates thepatents and copyrights with respect to the licensingarrangements and concurs in the opinion provided byoutside counsel. The activities performed by Com-pany X substantially duplicate the legal services ob-tained by Company Y, but they also reduce risk as-sociated with the transaction in a way that confers anadditional benefit on Company Y.

Example 7. Shareholder activities. Company Xis a publicly held corporation. U.S. laws and regula-tions applicable to publicly held corporations such asCompany X require the preparation and filing of peri-odic reports that show, among other things, profit andloss statements, balance sheets, and other material fi-nancial information concerning the company’s opera-tions. Company X, Company Y and each of the othersubsidiaries maintain their own separate accountingdepartments that record individual transactions andprepare financial statements in accordance with theirlocal accounting practices. Company Y, and the othersubsidiaries, forward the results of their financial per-formance to Company X, which analyzes and com-piles these data into periodic reports in accordancewith U.S. laws and regulations. Because CompanyX’s preparation and filing of the reports relate solelyto its role as an investor of capital or shareholder inCompany Y or to its compliance with reporting, legal,or regulatory requirements, or both, these activitiesconstitute shareholder activities and therefore Com-pany Y is not considered to obtain a benefit from thepreparation and filing of the reports.

Example 8. Shareholder activities. The facts arethe same as in Example 7, except that Company Y’saccounting department maintains a general ledgerrecording individual transactions, but does not pre-pare any financial statements (such as profit and lossstatements and balance sheets). Instead, CompanyY forwards the general ledger data to Company X,and Company X analyzes and compiles financialstatements for Company Y, as well as for CompanyX’s overall operations, for purposes of complyingwith U.S. reporting requirements. Company Y issubject to reporting requirements in Country B sim-ilar to those applicable to Company X in the UnitedStates. Much of the data that Company X analyzesand compiles regarding Company Y’s operations for

2009–33 I.R.B. 230 August 17, 2009

purposes of complying with the U.S. reporting re-quirements are made available to Company Y for itsuse in preparing reports that must be filed in CountryB. Company Y incorporates these data, after minoradjustments for differences in local accounting prac-tices, into the reports that it files in Country B. Underthese circumstances, because Company X’s analysisand compilation of Company Y’s financial data doesnot relate solely to its role as an investor of capitalor shareholder in Company Y, or to its compliancewith reporting, legal, or regulatory requirements, orboth, these activities do not constitute shareholderactivities.

Example 9. Shareholder activities. Members ofCompany X’s internal audit staff visit Company Y ona semiannual basis in order to review the subsidiary’sadherence to internal operating procedures issued byCompany X and its compliance with U.S. anti-briberylaws, which apply to Company Y on account of itsownership by a U.S. corporation. Because the soleeffect of the reviews by Company X’s audit staff isto protect Company X’s investment in Company Y,or to facilitate Company X’s compliance with U.S.anti-bribery laws, or both, the visits are shareholderactivities and therefore Company Y is not consideredto obtain a benefit from the visits.

Example 10. Shareholder activities. Country Brecently enacted legislation that changed the foreigncurrency exchange controls applicable to foreignshareholders of Country B corporations. Company Xconcludes that it may benefit from changing the cap-ital structure of Company Y, thus taking advantageof the new foreign currency exchange control lawsin Country B. Company X engages an investmentbanking firm and a law firm to review the CountryB legislation and to propose possible changes to thecapital structure of Company Y. Because CompanyX’s retention of the firms facilitates Company Y’sability to pay dividends and other amounts and hasthe sole effect of protecting Company X’s investmentin Company Y, these activities constitute shareholderactivities and Company Y is not considered to obtaina benefit from the activities.

Example 11. Shareholder activities. The facts arethe same as in Example 10, except that Company Ybears the full cost of retaining the firms to evaluate thenew foreign currency control laws in Country B andto make appropriate changes to its stock ownershipby Company X. Company X is considered to obtain abenefit from the rendering by Company Y of theseactivities, which would be shareholder activities ifconducted by Company X (see Example 10).

Example 12. Shareholder activities. The facts arethe same as in Example 10, except that the new lawsrelate solely to corporate governance in Country B,and Company X retains the law firm and investmentbanking firm in order to evaluate whether restructur-ing would increase Company Y’s profitability, reducethe number of legal entities in Country B, and in-crease Company Y’s ability to introduce new prod-ucts more quickly in Country B. Because CompanyX retained the law firm and the investment bankingfirm primarily to enhance Company Y’s profitabilityand the efficiency of its operations, and not solely toprotect Company X’s investment in Company Y orto facilitate Company X’s compliance with CountryB’s corporate laws, or to both, these activities do notconstitute shareholder activities.

Example 13. Shareholder activities. CompanyX establishes detailed personnel policies for its sub-sidiaries, including Company Y. Company X also re-views and approves the performance appraisals ofCompany Y’s executives, monitors levels of compen-sation paid to all Company Y personnel, and is in-volved in hiring and firing decisions regarding thesenior executives of Company Y. Because this per-sonnel-related activity by Company X involves day-to-day management of Company Y, this activity doesnot relate solely to Company X’s role as an investorof capital or a shareholder of Company Y, and there-fore does not constitute a shareholder activity.

Example 14. Shareholder activities. Each year,Company X conducts a two-day retreat for its seniorexecutives. The purpose of the retreat is to refinethe long-term business strategy of Company X andits subsidiaries, including Company Y, and to pro-duce a confidential strategy statement. The strategystatement identifies several potential growth initia-tives for Company X and its subsidiaries and listsgeneral means of increasing the profitability of thecompany as a whole. The strategy statement is madeavailable without charge to Company Y and the othersubsidiaries of Company X. Company Y indepen-dently evaluates whether to implement some, all, ornone of the initiatives contained in the strategy state-ment. Because the preparation of the strategy state-ment does not relate solely to Company X’s role asan investor of capital or a shareholder of Company Y,the expense of preparing the document is not a share-holder expense.

Example 15. Passive association/benefit. Com-pany X is the parent corporation of a large controlledgroup that has been in operation in the information-technology sector for ten years. Company Y is asmall corporation that was recently acquired by theCompany X controlled group from local Country Bowners. Several months after the acquisition of Com-pany Y, Company Y obtained a contract to redesignand assemble the information-technology networksand systems of a large financial institution in Coun-try B. The project was significantly larger and morecomplex than any other project undertaken to date byCompany Y. Company Y did not use Company X’smarketing intangible property to solicit the contract,and Company X had no involvement in the solicita-tion, negotiation, or anticipated execution of the con-tract. For purposes of this section, Company Y is notconsidered to obtain a benefit from Company X orany other member of the controlled group becausethe ability of Company Y to obtain the contract, orto obtain the contract on more favorable terms thanwould have been possible prior to its acquisition bythe Company X controlled group, was due to Com-pany Y’s status as a member of the Company X con-trolled group and not to any specific activity by Com-pany X or any other member of the controlled group.

Example 16. Passive association/benefit. Thefacts are the same as in Example 15, except that Com-pany X executes a performance guarantee with re-spect to the contract, agreeing to assist in the projectif Company Y fails to meet certain mileposts. Thisperformance guarantee allowed Company Y to obtainthe contract on materially more favorable terms thanotherwise would have been possible. Company Y isconsidered to obtain a benefit from Company X’s ex-ecution of the performance guarantee.

Example 17. Passive association/benefit. Thefacts are the same as in Example 15, except that Com-pany X began the process of negotiating the contractwith the financial institution in Country B before ac-quiring Company Y. Once Company Y was acquiredby Company X, the contract with the financial insti-tution was entered into by Company Y. Company Yis considered to obtain a benefit from Company X’snegotiation of the contract.

Example 18. Passive association/benefit. Thefacts are the same as in Example 15, except that Com-pany X sent a letter to the financial institution inCountry B, which represented that Company X hada certain percentage ownership in Company Y andthat Company X would maintain that same percent-age ownership interest in Company Y until the con-tract was completed. This letter allowed Company Yto obtain the contract on more favorable terms thanotherwise would have been possible. Since this letterfrom Company X to the financial institution simplyaffirmed Company Y’s status as a member of the con-trolled group and represented that this status would bemaintained until the contract was completed, Com-pany Y is not considered to obtain a benefit fromCompany X’s furnishing of the letter.

Example 19. Passive association/benefit. (i) S isa company that supplies plastic containers to compa-nies in various industries. S establishes the prices forits containers through a price list that offers customersdiscounts based solely on the volume of containerspurchased.

(ii) Company X is the parent corporation of a largecontrolled group in the information technology sec-tor. Company Y is a wholly-owned subsidiary ofCompany X located in Country B. Company X andCompany Y both purchase plastic containers fromunrelated supplier S. In year 1, Company X purchases1 million units and Company Y purchases 100,000units. S, basing its prices on purchases by the entiregroup, completes the order for 1.1 million units at aprice of $0.95 per unit, and separately bills and shipsthe orders to each company. Companies X and Y un-dertake no bargaining with supplier S with respectto the price charged, and purchase no other productsfrom supplier S.

(iii) R1 and its wholly-owned subsidiary R2 are acontrolled group of taxpayers (unrelated to CompanyX or Company Y) each of which carries out functionscomparable to those of Companies X and Y and un-dertakes purchases of plastic containers from supplierS, identical to those purchased from S by CompanyX and Company Y, respectively. S, basing its priceson purchases by the entire group, charges R1 and R2$0.95 per unit for the 1.1 million units ordered. R1and R2 undertake no bargaining with supplier S withrespect to the price charged, and purchase no otherproducts from supplier S.

(iv) U is an uncontrolled taxpayer that carries outcomparable functions and undertakes purchases ofplastic containers from supplier S identical to Com-pany Y. U is not a member of a controlled group, un-dertakes no bargaining with supplier S with respectto the price charged, and purchases no other productsfrom supplier S. U purchases 100,000 plastic contain-ers from S at the price of $1.00 per unit.

(v) Company X charges Company Y a feeof $5,000, or $0.05 per unit of plastic containerspurchased by Company Y, reflecting the fact that

August 17, 2009 231 2009–33 I.R.B.

Company Y receives the volume discount from sup-plier S.

(vi) In evaluating the fee charged by Company Xto Company Y, the Commissioner considers whetherthe transactions between R1, R2, and S or the trans-actions between U and S provide a more reliablemeasure of the transactions between Company X,Company Y and S. The Commissioner determinesthat Company Y’s status as a member of a controlledgroup should be taken into account for purposes ofevaluating comparability of the transactions, andconcludes that the transactions between R1, R2,and S are more reliably comparable to the transac-tions between Company X, Company Y, and S. Thecomparable charge for the purchase was $0.95 perunit. Therefore, obtaining the plastic containers ata favorable rate (and the resulting $5,000 savings)is entirely due to Company Y’s status as a memberof the Company X controlled group and not to anyspecific activity by Company X or any other memberof the controlled group. Consequently, Company Yis not considered to obtain a benefit from CompanyX or any other member of the controlled group.

Example 20. Disaggregation of transactions. (i)X, a domestic corporation, is a pharmaceutical com-pany that develops and manufactures ethical phar-maceutical products. Y, a Country B corporation, isa distribution and marketing company that also per-forms clinical trials for X in Country B. Because Ydoes not possess the capability to conduct the trials,it contracts with a third party to undertake the trials ata cost of $100. Y also incurs $25 in expenses relatedto the third-party contract (for example, in hiring andworking with the third party).

(ii) Based on a detailed functional analysis, theCommissioner determines that Y performed func-tions beyond merely facilitating the clinical trials forX, such as audit controls of the third party performingthose trials. In determining the arm’s length price,the Commissioner may consider a number of alter-natives. For example, for purposes of determiningthe arm’s length price, the Commissioner may deter-mine that the intercompany service is most reliablyanalyzed on a disaggregated basis as two separatetransactions: in this case, the contract between Yand the third party could constitute an internal CUSPwith a price of $100. Y would be further entitledto an arm’s length remuneration for its facilitatingservices. If the most reliable method is one thatprovides a markup on Y’s costs, then “total servicescost” in this context would be $25. Alternatively, theCommissioner may determine that the intercompanyservice is most reliably analyzed as a single transac-tion, based on comparable uncontrolled transactionsinvolving the facilitation of similar clinical trial ser-vices performed by third parties. If the most reliablemethod is one that provides a markup on all of Y’scosts, and the base of the markup determined bythe comparable companies includes the third-partyclinical trial costs, then such a markup would beapplied to Y’s total services cost of $125.

Example 21. Disaggregation of transactions. (i)X performs a number of administrative functions forits subsidiaries, including Y, a distributor of widgetsin Country B. These services include those relatingto working capital (inventory and accounts receiv-able/payable) management. To facilitate provision ofthese services, X purchases an ERP system specifi-cally dedicated to optimizing working capital man-

agement. The system, which entails significant third-party costs and which includes substantial intellectualproperty relating to its software, costs $1000.

(ii) Based on a detailed functional analysis, theCommissioner determines that in providing adminis-trative services for Y, X performed functions beyondmerely operating the ERP system itself, since X waseffectively using the ERP as an input to the adminis-trative services it was providing to Y. In determiningarm’s length price for the services, the Commissionermay consider a number of alternatives. For example,if the most reliable uncontrolled data is derived fromcompanies that use similar ERP systems purchasedfrom third parties to perform similar administrativefunctions for uncontrolled parties, the Commissionermay determine that a CPM is the best method formeasuring the functions performed by X, and, in ad-dition, that a markup on total services costs, basedon the markup from the comparable companies, isthe most reliable PLI. In this case, total services cost,and the basis for the markup, would include appro-priate reflection of the ERP costs of $1000. Alter-natively, X’s functions may be most reliably mea-sured based on comparable uncontrolled companiesthat perform similar administrative functions usingtheir customers’ own ERP systems. Under these cir-cumstances, the total services cost would equal X’scosts of providing the administrative services exclud-ing the ERP cost of $1000.

(m) Coordination with transfer pricingrules for other transactions—(1) Servicestransactions that include other types oftransactions. A transaction structured asa controlled services transaction may in-clude other elements for which a sepa-rate category or categories of methods areprovided, such as a loan or advance, arental, or a transfer of tangible or intan-gible property. See §§1.482–1(b)(2) and1.482–2(a), (c), and (d). Whether suchan integrated transaction is evaluated as acontrolled services transaction under thissection or whether one or more elementsshould be evaluated separately under othersections of the section 482 regulations de-pends on which approach will provide themost reliable measure of an arm’s lengthresult. Ordinarily, an integrated transac-tion of this type may be evaluated underthis section and its separate elements neednot be evaluated separately, provided thateach component of the transaction may beadequately accounted for in evaluating thecomparability of the controlled transactionto the uncontrolled comparables and, ac-cordingly, in determining the arm’s lengthresult in the controlled transaction. See§1.482–1(d)(3).

(2) Services transactions that effect atransfer of intangible property. A trans-action structured as a controlled servicestransaction may in certain cases include an

element that constitutes the transfer of in-tangible property or may result in a trans-fer, in whole or in part, of intangible prop-erty. Notwithstanding paragraph (m)(1) ofthis section, if such element relating to in-tangible property is material to the evalu-ation, the arm’s length result for the ele-ment of the transaction that involves intan-gible property must be corroborated or de-termined by an analysis under §1.482–4.

(3) [Reserved]. For further guidance,see §1.482–9T(m)(3).

(4) Other types of transactions thatinclude controlled services transactions.A transaction structured other than as acontrolled services transaction may in-clude one or more elements for whichseparate pricing methods are provided inthis section. Whether such an integratedtransaction is evaluated under anothersection of the section 482 regulations orwhether one or more elements should beevaluated separately under this section de-pends on which approach will provide themost reliable measure of an arm’s lengthresult. Ordinarily, a single method maybe applied to such an integrated transac-tion, and the separate services componentof the transaction need not be separatelyanalyzed under this section, provided thatthe controlled services may be adequatelyaccounted for in evaluating the compa-rability of the controlled transaction tothe uncontrolled comparables and, ac-cordingly, in determining the arm’s lengthresults in the controlled transaction. See§1.482–1(d)(3).

(5) Examples. The principles of thisparagraph (m) are illustrated by the follow-ing examples:

Example 1. (i) U.S. parent corporation CompanyX enters into an agreement to maintain equipmentof Company Y, a foreign subsidiary. The mainte-nance of the equipment requires the use of spare parts.The cost of the spare parts necessary to maintain theequipment amounts to approximately 25 percent ofthe total costs of maintaining the equipment. Com-pany Y pays a fee that includes a charge for labor andparts.

(ii) Whether this integrated transaction is eval-uated as a controlled services transaction or isevaluated as a controlled services transaction and thetransfer of tangible property depends on which ap-proach will provide the most reliable measure of anarm’s length result. If it is not possible to find compa-rable uncontrolled services transactions that involvesimilar services and tangible property transfers asthe controlled transaction between Company X andCompany Y, it will be necessary to determine thearm’s length charge for the controlled services, andthen to evaluate separately the arm’s length charge for

2009–33 I.R.B. 232 August 17, 2009

the tangible property transfers under §1.482–1 and§§1.482–3 through 1.482–6. Alternatively, it maybe possible to apply the comparable profits methodof §1.482–5 to evaluate the arm’s length profit ofCompany X or Company Y from the integrated con-trolled transaction. The comparable profits methodmay provide the most reliable measure of an arm’slength result if uncontrolled parties are identified thatperform similar, combined functions of maintainingand providing spare parts for similar equipment.

Example 2. (i) U.S. parent corporation CompanyX sells industrial equipment to its foreign subsidiary,Company Y. In connection with this sale, CompanyX renders to Company Y services that consist ofdemonstrating the use of the equipment and assistingin the effective start-up of the equipment. CompanyX structures the integrated transaction as a sale oftangible property and determines the transfer priceunder the comparable uncontrolled price method of§1.482–3(b).

(ii) Whether this integrated transaction is evalu-ated as a transfer of tangible property or is evaluatedas a controlled services transaction and a transfer oftangible property depends on which approach willprovide the most reliable measure of an arm’s lengthresult. In this case, the controlled services may besimilar to services rendered in the transactions usedto determine the comparable uncontrolled price, orthey may appropriately be considered a differencebetween the controlled transaction and comparabletransactions with a definite and reasonably ascertain-able effect on price for which appropriate adjustmentscan be made. See §1.482–1(d)(3)(ii)(A)(6). In eithercase, application of the comparable uncontrolledprice method to evaluate the integrated transactionmay provide a reliable measure of an arm’s lengthresult, and application of a separate transfer pricingmethod for the controlled services element of thetransaction is not necessary.

Example 3. (i) The facts are the same as in Ex-ample 2 except that, after assisting Company Y instart-up, Company X also renders ongoing services,including instruction and supervision regarding Com-pany Y’s ongoing use of the equipment. Company Xstructures the entire transaction, including the incre-mental ongoing services, as a sale of tangible prop-erty, and determines the transfer price under the com-parable uncontrolled price method of §1.482–3(b).

(ii) Whether this integrated transaction is evalu-ated as a transfer of tangible property or is evalu-ated as a controlled services transaction and a trans-fer of tangible property depends on which approachwill provide the most reliable measure of an arm’slength result. It may not be possible to identify com-parable uncontrolled transactions in which a seller ofmerchandise renders services similar to the ongoingservices rendered by Company X to Company Y. Insuch a case, the incremental services in connectionwith ongoing use of the equipment could not be takeninto account as a comparability factor because theyare not similar to the services rendered in connectionwith sales of similar tangible property. Accordingly,it may be necessary to evaluate separately the transferprice for such services under this section in order toproduce the most reliable measure of an arm’s lengthresult. Alternatively, it may be possible to apply thecomparable profits method of §1.482–5 to evaluatethe arm’s length profit of Company X or Company Y

from the integrated controlled transaction. The com-parable profits method may provide the most reliablemeasure of an arm’s length result if uncontrolled par-ties are identified that perform the combined func-tions of selling equipment and rendering ongoing af-ter-sale services associated with such equipment. Inthat case, it would not be necessary to separately eval-uate the transfer price for the controlled services un-der this section.

Example 4. (i) Company X, a U.S. corporation,and Company Y, a foreign corporation, are membersof a controlled group. Both companies perform re-search and development activities relating to inte-grated circuits. In addition, Company Y manufac-tures integrated circuits. In years 1 through 3, Com-pany X engages in substantial research and develop-ment activities, gains significant know-how regard-ing the development of a particular high-temperatureresistant integrated circuit, and memorializes that re-search in a written report. In years 1 through 3, Com-pany X generates overall net operating losses as a re-sult of the expenditures associated with this researchand development effort. At the beginning of year 4,Company X enters into a technical assistance agree-ment with Company Y. As part of this agreement,the researchers from Company X responsible for thisproject meet with the researchers from Company Yand provide them with a copy of the written report.Three months later, the researchers from CompanyY apply for a patent for a high-temperature resis-tant integrated circuit based in large part upon theknow-how obtained from the researchers from Com-pany X.

(ii) The controlled services transaction betweenCompany X and Company Y includes an element thatconstitutes the transfer of intangible property (suchas, know-how). Because the element relating to theintangible property is material to the arm’s lengthevaluation, the arm’s length result for that elementmust be corroborated or determined by an analysisunder §1.482–4.

(6) Global dealing operations. [Re-served].

(n) Effective/applicability date—(1) Ingeneral. This section is generally applica-ble for taxable years beginning after July31, 2009. In addition, a person may electto apply the provisions of this section toearlier taxable years. See paragraph (n)(2)of this section.

(2) Election to apply regulations toearlier taxable years—(i) Scope of elec-tion. A taxpayer may elect to apply§1.482–1(a)(1), (b)(2)(i), (d)(3)(ii)(C) Ex-amples 3 through 6, (d)(3)(v), (f)(2)(ii)(A),(f)(2)(iii)(B), (g)(4)(i), (g)(4)(iii) Example1, (i), (j)(6)(i) and (j)(6)(ii), §1.482–2(b),(f)(1) and (2), §1.482–4(f)(3)(i)(A),(f)(3)(ii) Examples 1 and 2, (f)(4),(h)(1) and (2), §1.482–6(c)(2)(ii)(B)(1),(c)(2)(ii)(D), (c)(3)(i)(A), (c)(3)(i)(B),(c)(3)(ii)(D), and (d), §1.482–8(b)Examples 10 through 12, (c)(1) and(c)(2), §1.482–9(a) through (m)(2), and

(m)(4) through (n)(2), §1.861–8(a)(5)(ii),(b)(3), (e)(4), (f)(4)(i), (g) Examples17, 18, and 30, §1.6038A–3(a)(3) Ex-ample 4 and (i), §1.6662–6(d)(2)(ii)(B),(d)(2)(iii)(B)(4), (d)(2)(iii)(B)(6), and (g),and §31.3121(s)–1(c)(2)(iii) and (d) ofthis chapter to any taxable year beginningafter September 10, 2003. Such electionrequires that all of the provisions of suchsections be applied to such taxable yearand all subsequent taxable years (earliertaxable years) of the taxpayer making theelection.

(ii) Effect of election. An election to ap-ply the regulations to earlier taxable yearshas no effect on the limitations on assess-ment and collection or on the limitationson credit or refund (see Chapter 66 of theInternal Revenue Code).

(iii) Time and manner of making elec-tion. An election to apply the regula-tions to earlier taxable years must be madeby attaching a statement to the taxpayer’stimely filed U.S. tax return (including ex-tensions) for its first taxable year begin-ning after July 31, 2009.

(iv) Revocation of election. An electionto apply the regulations to earlier taxableyears may not be revoked without the con-sent of the Commissioner.

Par. 15. Section 1.482–9T is amendedby revising paragraphs (a), (b), (c), (d),(e), (f), (g), (h), (i), (j), (k), (l), (m)(1),(m)(2), (m)(4), (m)(5), and (n), and addingparagraph (o) to read as follows:

§1.482–9T Methods to determine taxableincome in connection with a controlledservices transaction (temporary).

(a) through (m)(2) [Reserved]. Forfurther guidance, see §1.482–9(a) through(m)(2).

(3) * * *(4) and (m)(5) [Reserved]. For further

guidance, see §1.482–9(m)(4) and (m)(5).(n) Effective/applicability date. Para-

graph (m)(3) of this section is generally ap-plicable on January 5, 2009.

(o) Expiration date. The applicabilityof paragraph (m)(3) of this section expireson December 30, 2011.

Par. 16. Section 1.861–8 is amendedby revising paragraphs (a)(5)(ii), (b)(3),(e)(4), (f)(4), (g) Examples 17, 18 and 30,and (h) to read as follows:

August 17, 2009 233 2009–33 I.R.B.

§1.861–8 Computation of taxable incomefrom sources within the United States andfrom other sources and activities.

* * * * *(a) * * *(5) * * *(ii) Paragraph (e)(4), the last sentence

of paragraph (f)(4)(i), and paragraph (g),Examples 17, 18, and 30 of this section aregenerally applicable for taxable years be-ginning after July 31, 2009. In addition,a person may elect to apply the provisionsof paragraph (e)(4) of this section to ear-lier years. Such election shall be madein accordance with the rules set forth in§1.482–9(n)(2).

* * * * *(b) * * *(3) Supportive functions. Deductions

which are supportive in nature (such asoverhead, general and administrative, andsupervisory expenses) may relate to otherdeductions which can more readily be al-located to gross income. In such instance,such supportive deductions may be allo-cated and apportioned along with the de-ductions to which they relate. On theother hand, it would be equally accept-able to attribute supportive deductions onsome reasonable basis directly to activi-ties or property which generate, have gen-erated or could reasonably be expected togenerate gross income. This would ordi-narily be accomplished by allocating thesupportive expenses to all gross incomeor to another broad class of gross incomeand apportioning the expenses in accor-dance with paragraph (c)(1) of this section.For this purpose, reasonable departmentaloverhead rates may be utilized. For ex-amples of the application of the principlesof this paragraph (b)(3) to expenses otherthan expenses attributable to stewardshipactivities, see Examples 19 through 21 ofparagraph (g) of this section. See para-graph (e)(4)(ii) of this section for the allo-cation and apportionment of deductions at-tributable to stewardship expenses. How-ever, supportive deductions that are de-scribed in §1.861–14T(e)(3) shall be allo-cated and apportioned in accordance withthe rules of §1.861–14T and shall not be al-located and apportioned by reference onlyto the gross income of a single member ofan affiliated group of corporations as de-fined in §1.861–14T(d).

* * * * *(e) * * *(4) Stewardship and controlled ser-

vices—(i) Expenses attributable to con-trolled services. If a corporation performsa controlled services transaction (as de-fined in §1.482–9(l)(3)), which includesany activity by one member of a groupof controlled taxpayers that results in abenefit to a related corporation, and therendering corporation charges the relatedcorporation for such services, section 482and these regulations provide for an allo-cation where the charge is not consistentwith an arm’s length result as determined.The deductions for expenses of the cor-poration attributable to the controlledservices transaction are considered defi-nitely related to the amounts so chargedand are to be allocated to such amounts.

(ii) Stewardship expenses attributableto dividends received. Stewardship ex-penses, which result from “overseeing”functions undertaken for a corporation’sown benefit as an investor in a relatedcorporation, shall be considered defi-nitely related and allocable to dividendsreceived, or to be received, from the re-lated corporation. For purposes of thissection, stewardship expenses of a corpo-ration are those expenses resulting from“duplicative activities” (as defined in§1.482–9(l)(3)(iii)) or “shareholder activ-ities” (as defined in §1.482–9(l)(3)(iv))of the corporation with respect to the re-lated corporation. Thus, for example,stewardship expenses include expensesof an activity the sole effect of which iseither to protect the corporation’s capitalinvestment in the related corporation orto facilitate compliance by the corpora-tion with reporting, legal, or regulatoryrequirements applicable specifically tothe corporation, or both. If a corporationhas a foreign or international departmentwhich exercises overseeing functions withrespect to related foreign corporationsand, in addition, the department per-forms other functions that generate otherforeign-source income (such as fees forservices rendered outside of the UnitedStates for the benefit of foreign relatedcorporations, foreign-source royalties, andgross income of foreign branches), somepart of the deductions with respect to thatdepartment are considered definitely re-lated to the other foreign-source income.In some instances, the operations of a

foreign or international department willalso generate United States source income(such as fees for services performed in theUnited States). Permissible methods ofapportionment with respect to stewardshipexpenses include comparisons of timespent by employees weighted to take intoaccount differences in compensation, orcomparisons of each related corporation’sgross receipts, gross income, or unit salesvolume, assuming that stewardship activ-ities are not substantially disproportionateto such factors. See paragraph (f)(5) ofthis section for the type of verificationthat may be required in this respect. See§1.482–9(l)(5) for examples that illustratethe principles of §1.482–9(l)(3). See Ex-ample 17 and Example 18 of paragraph(g) of this section for the allocation andapportionment of stewardship expenses.See paragraph (b)(3) of this section for theallocation and apportionment of deduc-tions attributable to supportive functionsother than stewardship expenses, suchas expenses in the nature of day-to-daymanagement, and paragraph (e)(5) of thissection generally for the allocation andapportionment of deductions attributableto legal and accounting fees and expenses.

* * * * *(f) * * *(4) Adjustments made under other pro-

visions of the Code—(i) In general. If anadjustment which affects the taxpayer ismade under section 482 or any other pro-vision of the Code, it may be necessaryto recompute the allocations and appor-tionments required by this section in or-der to reflect changes resulting from theadjustment. The recomputation made bythe Commissioner shall be made using thesame method of allocation and apportion-ment as was originally used by the tax-payer, provided such method as originallyused conformed with paragraph (a)(2) ofthis section and, in light of the adjustment,such method does not result in a mate-rial distortion. In addition to adjustmentswhich would be made aside from this sec-tion, adjustments to the taxpayer’s incomeand deductions which would not otherwisebe made may be required before applyingthis section in order to prevent a distortionin determining taxable income from a par-ticular source of activity. For example, ifan item included as a part of the cost ofgoods sold has been improperly attributed

2009–33 I.R.B. 234 August 17, 2009

to specific sales, and, as a result, gross in-come under one of the operative sectionsreferred to in paragraph (f)(1) of this sec-tion is improperly determined, it may benecessary for the Commissioner to makean adjustment to the cost of goods sold,consistent with the principles of this sec-tion, before applying this section. Sim-ilarly, if a domestic corporation transfersthe stock in its foreign subsidiaries to a do-mestic subsidiary and the parent corpora-

tion continues to incur expenses in con-nection with protecting its capital invest-ment in the foreign subsidiaries (see para-graph (e)(4) of this section), it may be nec-essary for the Commissioner to make an al-location under section 482 with respect tosuch expenses before making allocationsand apportionments required by this sec-tion, even though the section 482 alloca-tion might not otherwise be made.

* * * * *

(g) * * *Example 17. Stewardship expenses (consoli-

dation). (i) (A) Facts. X, a domestic corporation,wholly owns M, N, and O, also domestic corpora-tions. X, M, N, and O file a consolidated income taxreturn. All the income of X and O is from sourceswithin the United States, all of M’s income is gen-eral category income from sources within SouthAmerica, and all of N’s income is general categoryincome from sources within Africa. X receivesno dividends from M, N, or O. During the taxableyear, the consolidated group of corporations earnedconsolidated gross income of $550,000 and incurredtotal deductions of $370,000 as follows:

Gross income Deductions

Corporations:

X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000 $50,000M . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,000 100,000N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000 200,000O . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 20,000

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550,000 370,000

(B) Of the $50,000 of deductions incurred byX, $15,000 relates to X’s ownership of M; $10,000relates to X’s ownership of N; $5,000 relates to X’sownership of O; and the sole effect of the entire$30,000 of deductions is to protect X’s capital in-vestment in M, N, and O. X properly categorizesthe $30,000 of deductions as stewardship expenses.The remainder of X’s deductions ($20,000) relates toproduction of United States source income from itsplant in the United States.

(ii) (A) Allocation. X’s deductions of $50,000 aredefinitely related and thus allocable to the types ofgross income to which they give rise; namely $25,000wholly to general category income from sources out-side the United States ($15,000 for stewardship of Mand $10,000 for stewardship of N) and the remain-der ($25,000) wholly to gross income from sourceswithin the United States. Expenses incurred by Mand N are entirely related and thus wholly allocableto general category income earned from sources with-out the United States, and expenses incurred by O are

entirely related and thus wholly allocable to incomeearned within the United States. Hence, no appor-tionment of expenses of X, M, N, or O is necessary.For purposes of applying the foreign tax credit limita-tion, the statutory grouping is general category grossincome from sources without the United States andthe residual grouping is gross income from sourceswithin the United States. As a result of the allocationof deductions, the X consolidated group has taxableincome from sources without the United States in theamount of $75,000, computed as follows:

Foreign source general category gross income ($250,000 from M + $150,000 from N) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $400,000

Less: Deductions allocable to foreign source general category gross income ($25,000 from X, $100,000 from M, and $200,000from N) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (325,000)

Total foreign-source taxable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000

(B) Thus, in the combined computation of thegeneral category limitation, the numerator of the lim-iting fraction (taxable income from sources outsidethe United States) is $75,000.

Example 18. Stewardship and supportive ex-penses. (i) (A) Facts. X, a domestic corporation,manufactures and sells pharmaceuticals in the UnitedStates. X’s domestic subsidiary S, and X’s foreignsubsidiaries T, U, and V perform similar functions

in the United States and foreign countries T, U, andV, respectively. Each corporation derives substantialnet income during the taxable year that is generalcategory income described in section 904(d)(1). X’sgross income for the taxable year consists of:

Domestic sales income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,000,000Dividends from S (before dividends received deduction) . . . . . . . . . . . . . . . . . . 3,000,000Dividends from T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000Dividends from U . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000Dividends from V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0Royalties from T and U . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000Fees from U for services performed by X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000Total gross income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000,000

(B) In addition, X incurs expenses of its supervi-sion department of $1,500,000.

(C) X’s supervision department (the Depart-ment) is responsible for the supervision of its foursubsidiaries and for rendering certain services tothe subsidiaries, and this Department provides allthe supportive functions necessary for X’s foreign

activities. The Department performs three principaltypes of activities. The first type consists of ser-vices for the direct benefit of U for which a fee ispaid by U to X. The cost of the services for U is$900,000 (which results in a total charge to U of$1,000,000). The second type consists of activitiesdescribed in §1.482–9(l)(3)(iii) that are in the nature

of shareholder oversight that duplicate functionsperformed by the subsidiaries’ own employees andthat do not provide an additional benefit to the sub-sidiaries. For example, a team of auditors fromX’s accounting department periodically audits thesubsidiaries’ books and prepares internal reports foruse by X’s management. Similarly, X’s treasurer

August 17, 2009 235 2009–33 I.R.B.

periodically reviews for the board of directors of Xthe subsidiaries’ financial policies. These activitiesdo not provide an additional benefit to the relatedcorporations. The cost of the duplicative servicesand related supportive expenses is $540,000. Thethird type of activity consists of providing serviceswhich are ancillary to the license agreements whichX maintains with subsidiaries T and U. The cost ofthe ancillary services is $60,000.

(ii) Allocation. The Department’s outlay of$900,000 for services rendered for the benefit of Uis allocated to the $1,000,000 in fees paid by U. Theremaining $600,000 in the Department’s deductionsare definitely related to the types of gross income towhich they give rise, namely dividends from sub-sidiaries S, T, U, and V and royalties from T and

U. However, $60,000 of the $600,000 in deductionsare found to be attributable to the ancillary servicesand are definitely related (and therefore allocable)solely to royalties received from T and U, while theremaining $540,000 in deductions are definitely re-lated (and therefore allocable) to dividends receivedfrom all the subsidiaries.

(iii) (A) Apportionment. For purposes of applyingthe foreign tax credit limitation, the statutory group-ing is general category gross income from sourcesoutside the United States and the residual grouping isgross income from sources within the United States.X’s deduction of $540,000 for the Department’s ex-penses and related supportive expenses which are al-locable to dividends received from the subsidiariesmust be apportioned between the statutory and resid-

ual groupings before the foreign tax credit limita-tion may be applied. In determining an appropriatemethod for apportioning the $540,000, a basis otherthan X’s gross income must be used since the divi-dend payment policies of the subsidiaries bear no re-lationship either to the activities of the Department orto the amount of income earned by each subsidiary.This is evidenced by the fact that V paid no divi-dends during the year, whereas S, T, and U paid div-idends of $1 million or more each. In the absenceof facts that would indicate a material distortion re-sulting from the use of such method, the stewardshipexpenses ($540,000) may be apportioned on the basisof the gross receipts of each subsidiary.

(B) The gross receipts of the subsidiaries were asfollows:

S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,000,000T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000U . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000,000

(C) Thus, the expenses of the Department are ap-portioned for purposes of the foreign tax credit limi-tation as follows:

Apportionment of stewardship expenses to the statutory grouping of gross income: $540,000 x [($3,000,000 + $500,000 +$1,500,000)/$9,000,000] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000

Apportionment of supervisory expenses to the residual grouping of gross income: $540,000 x [$4,000,000/9,000,000] . . . . . . . . 240,000

Total: Apportioned stewardship expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $540,000

* * * * *Example 30. Income taxes. (i) (A) Facts. As

in Example 17 of this paragraph (g), X is a domes-tic corporation that wholly owns M, N, and O, alsodomestic corporations. X, M, N, and O file a con-solidated income tax return. All the income of Xand O is from sources within the United States, all ofM’s income is general category income from sourceswithin South America, and all of N’s income is gen-eral category income from sources within Africa. Xreceives no dividends from M, N, or O. During thetaxable year, the consolidated group of corporationsearned consolidated gross income of $550,000 and in-curred total deductions of $370,000. X has gross in-come of $100,000 and deductions of $50,000, with-out regard to its deduction for state income tax. Ofthe $50,000 of deductions incurred by X, $15,000 re-lates to X’s ownership of M; $10,000 relates to X’sownership of N; $5,000 relates to X’s ownership ofO; and the entire $30,000 constitutes stewardship ex-penses. The remainder of X’s $20,000 of deductions(which is assumed not to include state income tax)relates to production of U. S. source income from itsplant in the United States. M has gross income of$250,000 and deductions of $100,000, which yieldforeign-source general category taxable income of$150,000. N has gross income of $150,000 and de-ductions of $200,000, which yield a foreign-sourcegeneral category loss of $50,000. O has gross incomeof $50,000 and deductions of $20,000, which yieldU.S. source taxable income of $30,000.

(B) Unlike Example 17 of this paragraph (g),however, X also has a deduction of $1,800 for state

A income taxes. X’s state A taxable income is com-puted by first making adjustments to the Federaltaxable income of X to derive apportionable taxableincome for state A tax purposes. An analysis of stateA law indicates that state A law also includes in itsdefinition of the taxable business income of X whichis apportionable to X’s state A activities, the taxableincome of M, N, and O, which is related to X’sbusiness. As in Example 25 of this paragraph (g), theamount of apportionable taxable income attributableto business activities conducted in state A is deter-mined by multiplying apportionable taxable incomeby a fraction (the “state apportionment fraction”) thatcompares the relative amounts of payroll, property,and sales within state A with worldwide payroll,property, and sales. Assuming that X’s apportion-able taxable income equals $180,000, $100,000 ofwhich is from sources without the United States, and$80,000 is from sources within the United States,and that the state apportionment fraction is equal to10 percent, X has state A taxable income of $18,000.The state A income tax of $1,800 is then derived byapplying the state A income tax rate of 10 percent tothe $18,000 of state A taxable income.

(ii) Allocation and apportionment. Assume thatunder Example 29 of this paragraph (g), it is deter-mined that X’s deduction for state A income tax isdefinitely related to a class of gross income consist-ing of income from sources both within and withoutthe United States, and that the state A tax is appor-tioned $1,000 to sources without the United States,and $800 to sources within the United States. Un-der Example 17 of this paragraph (g), without regard

to the deduction for X’s state A income tax, X has aseparate loss of ($25,000) from sources without theUnited States. After taking into account the deduc-tion for state A income tax, X’s separate loss fromsources without the United States is increased by the$1,000 state A tax apportioned to sources without theUnited States, and equals a loss of ($26,000), for pur-poses of computing the numerator of the consolidatedgeneral category foreign tax credit limitation.

Par. 17. Section 1.861–8T is amendedby revising paragraphs (a)(3), (a)(4),(a)(5), (b), (e)(3), (e)(4), (e)(5), (e)(6),(e)(7), (e)(8), (e)(9), (e)(10), (e)(11),(f)(1)(i), (f)(1)(iii), (f)(2), (f)(3), (f)(4),(f)(5), (g) Examples 1, 2, 3, 4, 5, 6, 7, 8, 9,10, 11, 12, 13,14, 15, 16, 17, 18, 19, 20,21, 22, 22, 23, and 30, and (h) to read asfollows:

§1.861–8T Computation of taxableincome from sources within the UnitedStates and from other sources andactivities (temporary).

* * * * *(a)(3) through (b) [Reserved]. For fur-

ther guidance, see §1.861–8(a)(3) through(b).

* * * * *

2009–33 I.R.B. 236 August 17, 2009

(e) * * *(3) through (f)(1)(i) [Reserved]. For

further guidance, see §1.861–8(e)(3)through (f)(1)(i).

* * * * *(f)(1)(iii) through (g) Examples 1

through 23 [Reserved]. For further guid-ance, see §1.861–8(f)(1)(iii) through (g)Examples 1 through 23.

* * * * *Example 30. [Reserved]. For further

guidance, see §1.861–8(g) Example 30.(h) Effective/applicability date. (1)

Paragraphs (f)(1)(vi)(E), (f)(1)(vi)(F), and(f)(1)(vi)(G) of this section apply to tax-able years ending after April 9, 2008.

(2) Paragraph (e)(4), the last sentenceof paragraph (f)(4)(i), and paragraph (g),Examples 17, 18, and 30 of this sectionapply to taxable years beginning after July31, 2009.

(3) Also, see paragraph (e)(12)(iv) ofthis section and 1.861–14(e)(6) for rulesconcerning the allocation and apportion-ment of deductions for charitable contribu-tions.

Par. 18. Section 1.861–9T(k) isamended by adding new first and secondsentences to read as follows:

§1.861–9T Allocation and apportionmentof interest expense (temporary).

* * * * *(k) * * *In general, the rules of this sec-

tion apply for taxable years beginning af-ter December 31, 1986. Paragraphs (b)(2)(concerning the treatment of certain for-eign currency) and (d)(2) (concerning thetreatment of interest incurred by nonresi-dent aliens) of this section are applicablefor taxable years commencing after De-cember 31, 1988. * * *

Par. 19. Section 1.861–10T is amendedby revising the section heading and addingnew paragraph (f) to read as follows:

§1.861–10T Special allocations of interestexpense (temporary).

* * * * *(f) Effective/applicability date. (1) In

general, the rules of this section apply fortaxable years beginning after December31, 1986.

(2) Paragraphs (b)(3)(ii) (providing anoperating costs test for purposes of thenonrecourse indebtedness exception) and

(b)(6) (concerning excess collaterizationof nonrecourse borrowings) of this sectionare applicable for taxable years commenc-ing after December 31, 1988.

(3) Paragraph (e) (concerning the treat-ment of related controlled foreign corpora-tion indebtedness) of this section is appli-cable for taxable years commencing afterDecember 31, 1987. For rules for taxableyears beginning before January 1, 1987,and for later years to the extent permittedby §1.861–13T, see §1.861–8 (revised asof April 1, 1986).

Par. 20. Section 1.861–11T is amendedby revising the section heading and addingnew paragraph (h) to read as follows:

§1.861–11T Special rules for allocatingand apportioning interest expense ofan affiliated group of corporations(temporary).

* * * * *(h) Effective/applicability date. The

rules of this section apply for taxable yearsbeginning after December 31, 1986.

Par. 21. Section 1.861–12T is amendedby revising the section heading and addingnew paragraph (k) to read as follows:

§1.861–12T Characterization rulesand adjustments for certain assets(temporary).

* * * * *(k) Effective/applicability date. The

rules of this section apply for taxable yearsbeginning after December 31, 1986.

Par. 22. Section 1.861–14T is amendedby adding new paragraph (k) to read asfollows:

§1.861–14T Special rules for allocatingand apportioning certain expenses (otherthan interest expense) of an affiliatedgroup of corporations (temporary).

* * * * *(k) Effective/applicability date. The

rules of this section apply for taxable yearsbeginning after December 31, 1986.

§1.6038A–1 [Amended]

Par. 23. Section 1.6038A–1 is amendedby removing paragraph (n)(3) and redesig-nating paragraphs (n)(4), (n)(5), (n)(6) and(n)(7) as paragraphs (n)(3), (n)(4), (n)(5)and (n)(6), respectively.

Par. 24. Section 1.6038A–3 is amendedby revising paragraphs (a)(3) Example 4,and (i) to read as follows:

§1.6038A–3 Record maintenance.

(a) * * *(3) * * *Example 4. S, a U.S. reporting corporation, pro-

vides computer consulting services for its foreign par-ent, X. Based on the application of section 482 andthe regulations, it is determined that the cost of ser-vices plus method, as described in §1.482–9(e), willprovide the most reliable measure of an arm’s lengthresult, based on the facts and circumstances of thecontrolled transaction between S and X. S is requiredto maintain records to permit verification upon auditof the comparable transactional costs (as described in§1.482–9(e)(2)(iii)) used to calculate the arm’s lengthprice. Based on the facts and circumstances, if it isdetermined that X’s records are relevant to determinethe correct U.S. tax treatment of the controlled trans-action between S and X, the record maintenance re-quirements under section 6038A(a) and this sectionwill be applicable to the records of X.

* * * * *(i) Effective/applicability date—(1) In

general. This section is generally appli-cable on December 10, 1990. However,records described in this section in exis-tence on or after March 20, 1990, mustbe maintained, without regard to when thetaxable year to which the records relate be-gan. Paragraph (a)(3) Example 4 of thissection is generally applicable for taxableyears beginning after July 31, 2009.

(2) Election to apply regulation to ear-lier taxable years. A person may elect toapply the provisions of paragraph (a)(3)Example 4 of this section to earlier taxableyears in accordance with the rules set forthin §1.482–9(n)(2).

§1.6038A–3T [Removed]

Par. 25. Section 1.6038A–3T is re-moved.

Par. 26. Section 1.6662–6 is amendedby revising paragraphs (d)(2)(ii)(B),(d)(2)(iii)(B)(4), (d)(2)(iii)(B)(6), and (g)to read as follows:

§1.6662–6 Transactions between personsdescribed in section 482 and net section482 transfer price adjustments.

* * * * *(d) * * *(2) * * *(ii) * * *(B) Services cost method. A taxpayer’s

selection of the services cost method for

August 17, 2009 237 2009–33 I.R.B.

certain services, described in §1.482–9(b),and its application of that method to acontrolled services transaction will beconsidered reasonable for purposes ofthe specified method requirement onlyif the taxpayer reasonably allocated andapportioned costs in accordance with§1.482–9(k), and reasonably concludedthat the controlled services transactionsatisfies the requirements described in§1.482–9(b)(2). Whether the taxpayer’sconclusion was reasonable must be de-termined from all the facts and circum-stances. The factors relevant to this de-termination include those described inparagraph (d)(2)(ii)(A) of this section, tothe extent applicable.

* * * * *(iii) * * *(B) * * *(4) A description of the method selected

and an explanation of why that methodwas selected, including an evaluation ofwhether the regulatory conditions and re-quirements for application of that method,if any, were met;

* * * * *(6) A description of the controlled

transactions (including the terms of sale)and any internal data used to analyze thosetransactions. For example, if a profitsplit method is applied, the documenta-tion must include a schedule providingthe total income, costs, and assets (withadjustments for different accounting prac-tices and currencies) for each controlledtaxpayer participating in the relevant busi-ness activity and detailing the allocationsof such items to that activity. Similarly,if a cost-based method (such as the costplus method, the services cost method forcertain services, or a comparable prof-its method with a cost-based profit levelindicator) is applied, the documentationmust include a description of the mannerin which relevant costs are determinedand are allocated and apportioned to therelevant controlled transaction.

* * * * *

(g) Effective/applicability date—(1) Ingeneral. This section is generally applica-ble on February 9, 1996. However, tax-payers may elect to apply this section toall open taxable years beginning after De-cember 31, 1993.

(2) Special rules. The provisions ofparagraphs (d)(2)(ii)(B), (d)(2)(iii)(B)(4)and (d)(2)(iii)(B)(6) of this section areapplicable for taxable years beginningafter July 31, 2009. However, taxpayersmay elect to apply the provisions of para-graphs (d)(2)(ii)(B), (d)(2)(iii)(B)(4) and(d)(2)(iii)(B)(6) of this section to earliertaxable years in accordance with the rulesset forth in §1.482–9(n)(2).

§1.6662–6T [Removed]

Par. 27. Section 1.6662–6T is removed.

PART 31—EMPLOYMENT TAXESAND COLLECTION OF INCOME TAXAT THE SOURCE

Par. 28. The authority citation for part31 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 29. Section 31.3121(s)–1 is

amended by revising paragraphs (c)(2)(iii)and (d) to read as follows:

§31.3121(s)–1 Concurrent employmentby related corporations with commonpaymaster.

* * * * *(c) * * *(2) * * *(iii) Group-wide allocation rules. Un-

der the group-wide method of allocation,the Commissioner may allocate the taxesimposed by sections 3102 and 3111 in anappropriate manner to a related corpora-tion that remunerates an employee througha common paymaster if the common pay-master fails to remit the taxes to the Inter-nal Revenue Service. Allocation in an ap-propriate manner varies according to thecircumstances. It may be based on sales,property, corporate payroll, or any other

basis that reflects the distribution of theservices performed by the employee, or acombination of the foregoing bases. Tothe extent practicable, the Commissionermay use the principles of §1.482–2(b) ofthis chapter in making the allocations withrespect to wages paid after December 31,1978, and on or before July 31, 2009. Tothe extent practicable, the Commissionermay use the principles of §1.482–9 of thischapter in making the allocations with re-spect to wages paid after July 31, 2009.

(d) Effective/applicability date—(1) Ingeneral. This section is applicable withrespect to wages paid after December 31,1978. The fourth sentence of paragraph(c)(2)(iii) of this section is applicable withrespect to wages paid after December 31,1978, and on or before July 31, 2009. Thefifth sentence of paragraph (c)(2)(iii) ofthis section is applicable with respect towages paid after July 31, 2009.

(2) Election to apply regulation to ear-lier taxable years. A person may electto apply the fifth sentence of paragraph(c)(2)(iii) of this section to earlier taxableyears in accordance with the rules set forthin §1.482–9(n)(2) of this chapter.

§31.3121(s)–1T [Removed]

Par. 30. Section 31.3121(s)–1T is re-moved.

PART 602—OMB CONTROLNUMBERS UNDER THE PAPERWORKREDUCTION ACT

Par. 31. The authority citation for part602 continues to read as follows:

Authority: 26 U.S.C. 7805.Par. 32. In §602.101, paragraph

(b) is amended by adding an entry for“§1.482–9(b)” to the table to read follows:

§602.101 OMB Control numbers.

* * * * *(b) * * *

2009–33 I.R.B. 238 August 17, 2009

CFR part or section whereidentified and described

Current OMBControl No.

* * * * *

1.482–9(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–2149

* * * * *

Linda E. Stiff,Deputy Commissioner forServices and Enforcement.

Approved July 25, 2009.

Michael Mundaca,Acting Assistant Secretary

of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on July 31, 2009,8:45 a.m., and published in the issue of the Federal Registerfor August 4, 2009, 74 F.R. 38830)

Section 6503.—Suspensionof Running of Periodof Limitation26 CFR 301.6503(j)–1: Suspension of running of pe-riod of limitations; extension in case of designatedand related summonses.

T.D. 9455

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 301

Suspension of Running ofPeriod of Limitations Duringa Proceeding To Enforceor Quash a Designated orRelated Summons

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document containsfinal regulations regarding the use ofdesignated summonses and related sum-monses and the effect on the period oflimitations on assessment when a caseis brought with respect to a designatedor related summons. These final regula-tions reflect changes to section 6503 ofthe Internal Revenue Code of 1986 made

by the Omnibus Budget ReconciliationAct of 1990 and the Small Business JobProtection Act of 1996. These final regu-lations affect corporate taxpayers that areexamined under the coordinated industrycase (CIC) program and are served withdesignated or related summonses. Thesefinal regulations also affect third partiesthat are served with designated or relatedsummonses for information pertaining tothe corporate examination.

DATES: Effective Date: These regulationsare effective on July 31, 2009.

Applicability Date: For the date of ap-plicability, see §301.6503(j)–1(e).

FOR FURTHER INFORMATIONCONTACT: Elizabeth Rawlins, (202)622–3620 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains final regula-tions amending the Procedure and Admin-istration regulations (26 CFR part 301)under section 6503. Section 11311 ofthe Omnibus Budget Reconciliation Actof 1990 (Public Law 101–508, 104 Stat.1388) amended section 6503(k) to suspendthe period of limitations on assessmentwhen a case is brought with respect toa designated or related summons. Sec-tion 6503(k) was redesignated as section6503(j) by section 1702(h)(17)(A) of theSmall Business Job Protection Act of 1996(Public Law 104–188, 110 Stat. 1874).

On April 28, 2008, the IRS published inthe Federal Register a notice of proposedrulemaking (REG–208199–91, 2008–21I.R.B. 1017 [73 FR 22879]), interpret-ing section 6503(j) and withdrawing aprior notice of proposed rulemaking, here-inafter referred to as the 2003 proposedregulations, published in the Federal Reg-ister on July 31, 2003 (REG–208199–91,2003–2 C.B. 755 [68 FR 44905]). Writtencomments from one commentator were

received. No request for a public hear-ing was received, nor was one held. Theproposed regulations are adopted as fi-nal regulations with one minor clarifyingchange.

As described more fully in the pream-ble to the proposed regulations, these reg-ulations generally provide that the periodof limitations on assessment provided forin section 6501 is suspended with respectto any return of tax by a corporation that isthe subject of a designated or related sum-mons if a court proceeding to enforce orquash is instituted with respect to that sum-mons. These final regulations define a des-ignated summons, a related summons, andthe period of suspension. The final regula-tions also provide guidance regarding thecomponent concepts of judicial enforce-ment period, court proceeding, the datewhen the proceeding is no longer pending,final resolution, compliance, and the datewhen compliance occurs. These regula-tions also provide special rules on the num-ber of designated and related summonsesthat may be issued, the time within whichcourt proceedings must be brought to sus-pend the period of limitations on assess-ment, the computation of the suspensionperiod if multiple court proceedings are in-stituted, the effect on the suspension provi-sions under section 7609(e), and the appli-cation of section 7503 when the last day ofan assessment period falls on a Saturday,Sunday, or legal holiday.

Comments on the Proposed Regulations

§301.6503(j)–1(c)(5)(ii)—DateCompliance Occurs

Proposed §301.6503(j)–1(c)(5)(ii) pro-vides, in pertinent part, that “[c]ompli-ance with a court order that grants en-forcement, in whole or in part, of a des-ignated or related summons, occurs on thedate it is determined that the testimonygiven, or the books, papers, records, orother data produced, or both, by the sum-moned party fully satisfy the court order

August 17, 2009 239 2009–33 I.R.B.

concerning the summons. The determina-tion of whether there has been full com-pliance will be made within a reasonabletime, given the volume and complexity ofthe records produced, after the later of thegiving of all testimony or the production ofall records requested by the summons orrequired by any order enforcing any partof the summons.” The commentator sug-gested that this provision be changed toconform to the language appearing in the2003 proposed regulation, which in per-tinent part provides “[c]ompliance with acourt order that grants enforcement ... oc-curs on the date the Commissioner or hisdelegate (Commissioner) determines that... the summoned party fully satisf[ied] thecourt order ... . The determination whetherthere has been compliance will be madeas soon as practicable after the testimonyis given or the materials are produced.” Inparticular, the commentator recommendedthat the phrase “as soon as practicable,”used in the 2003 proposed regulations, besubstituted for the phrase “within a reason-able time,” used in the 2008 proposed reg-ulations. The commentator indicated thissuggestion was intended to protect cooper-ative taxpayers from uncertainty about thesuspension of their period of limitations.

This suggestion has not been adopted.The 2008 proposed regulations identifythe facts and circumstances to whichthe phrase “within a reasonable time” isintended to relate, including whether a de-termination is “practicable,” by adding thephrase “given the volume and complexityof the records produced.” Moreover, theterm “reasonable” is a term that is rou-tinely interpreted by the courts.

The commentator also expressed con-cern over the 2008 proposed regulatoryphrase “it is determined,” appearing in thephrase “occurs on the date it is determinedthat the testimony given ... or other dataproduced ... by the summoned party fullysatisfy the court order.” Although the com-mentator did not expressly suggest otherlanguage, the commentator did note thatthe 2003 proposed regulations had pro-vided “the Commissioner or his delegatedetermines” and expressed the view thatthe 2008 phrase “it is determined” is am-biguous and will leave the taxpayer with-out guidance as to who will actually makethe determination.

CIC corporate taxpayers and their taxadvisors are aware that the first point of

inquiry for any matter involving the exam-ination is the examination team conductingthe audit and the team’s management andsupervisory chain of command. These arethe persons who will examine the sum-moned information and, under InternalRevenue Manual (IRM) procedures thatwill be issued based on these regulations,will decide whether the summoned per-son’s production satisfies the court’s order.The final regulations amend the proposedregulations to clarify this understandingand practice.

§301.6503(j)–1(d)—Special Rules

Proposed §301.6503(j)–1(d)(1)through (5) provides several special rulesthat apply to designated and related sum-monses, such as the rule limiting the num-ber of designated summonses that maybe issued. Proposed §301.6503(j)–1(d)does not include provisions appearingin the 2003 proposed regulations as§301.6503(j)–1(d)(6) and (7), containinga procedure whereby a summoned personcould request from the IRS a determina-tion that the summoned person had fullycomplied with a designated or related sum-mons to the extent required by court order.According to this 2003 proposed regu-latory procedure, unless the taxpayer’srequest was responded to timely, the sum-mons would be treated as having beenfully complied with as of the 180th day.This proposed procedure was not includedin the 2008 proposed regulations.

The commentator suggested that thisprovision be revised to include 2003 pro-posed §301.6503(j)–1(d)(6) and (7), withone modification. The commentator sug-gested that the “fully complied with” pro-cedure be reinstated and that a new pro-vision be added to permit the taxpayer torequest a “fully complied with” determi-nation in cases where the summons wasserved on a third party. The commenta-tor suggested that reinserting the proce-dure would protect cooperative CIC tax-payers from receiving unnecessary desig-nated summonses, assist CIC taxpayers inknowing the date on which the suspensionterminates, and avoid unnecessary litiga-tion.

This commentator’s suggestion has notbeen adopted. The final regulations andexisting extensive safeguard protect co-operative CIC taxpayers from receiving

unnecessary designated summonses. Forexample, pursuant to section 1003 of theTaxpayer Bill of Rights 2 of 1996 (Pub-lic Law 104–168, 110 Stat.1468), Con-gress requires the Treasury Departmentto report on an annual basis the numberof designated summonses issued in thepreceding year. Also, pursuant to sec-tion 6503(j)(2)(A)(i), Congress requirespreissuance review by a high ranking ex-ecutive of the Office of Chief Counsel.The IRS and these regulations requirepreissuance review by both the DivisionCounsel of the Office of Chief Counseland the Division Commissioner for theorganizations that have jurisdiction overthe corporate taxpayer. Additionally, theOffice of Chief Counsel requires that theNational Office provide preissuance re-view of all designated summonses. IRM34.6.3.1(6)c. The public may access theIRM at http://www.irs.gov/irm/index.html.To obtain approval for the issuance of adesignated summons, the issuing officemust explain why the corporate taxpayerrefused to extend the period of limitationson assessment, and if the summons is to beissued near the end of the period permittedby section 6503(j), the issuing office mustexplain why the summons was not issuedat an earlier date. IRM 25.5.3.3(3)b. Theeffectiveness of these safeguards is evi-denced by the IRS’s circumspect use ofthe designated summons authority.

The IRS also will issue IRM provisionsthat will include procedures whereby theCIC taxpayer will be promptly informedof whether the production of summonedinformation fully complies with the sum-mons. The IRM procedures depend on theissuance of the interpretative rules in theseregulations, particularly the definition offinal resolution and compliance, and can-not be published until these final regula-tions are effective. Once these regulationsare effective, the IRM procedures will bepublished. Moreover, even without suchIRM procedures, a CIC taxpayer may as-certain when the IRS determined full com-pliance and when the suspension termi-nated by contacting the examining agent.

The final regulations also effectivelyprevent unnecessary litigation. In addi-tion to the extensive safeguards discussedabove, the IRS is committed to examiningthe summoned information and determin-ing whether the production satisfies the en-forcement order within a reasonable time

2009–33 I.R.B. 240 August 17, 2009

given the volume and complexity of theinformation produced. The CIC taxpayermay contact the IRS at any time to inquireabout the status of the suspension.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It has been determined thatsection 553(b) of the Administrative Pro-cedure Act (5 U.S.C. chapter 5) does notapply to this regulation, and because theregulation does not impose a collection ofinformation requirement on small entities,the Regulatory Flexibility Act (5 U.S.C.chapter 6) does not apply. Pursuant to sec-tion 7805(f), the notice of proposed rule-making preceding this final regulation wassubmitted to the Chief Counsel for Advo-cacy of the Small Business Administrationfor comment on its impact on small busi-ness.

Drafting Information

The principal author of these regula-tions is Elizabeth Rawlins of the Officeof the Associate Chief Counsel, Procedureand Administration, Internal Revenue Ser-vice.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 301 isamended as follows:

PART 301—PROCEDURE ANDADMINISTRATION

Paragraph 1. The authority citation forpart 301 continues to read in part as fol-lows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 301.6503(j)–1 is added

to read as follows:

§301.6503(j)–1 Suspension of running ofperiod of limitations; extension in case ofdesignated and related summonses.

(a) General rule. The running of theapplicable period of limitations on assess-ment provided for in section 6501 is sus-pended with respect to any return of tax by

a corporation that is the subject of a desig-nated or related summons if a court pro-ceeding is instituted with respect to thatsummons.

(b) Period of suspension. The periodof suspension is the time during which therunning of the applicable period of limita-tions on assessment provided for in section6501 is suspended under section 6503(j).If a court requires any compliance with adesignated or related summons by order-ing that any record, document, paper, ob-ject, or items be produced, or the testi-mony of any person be given, the periodof suspension consists of the judicial en-forcement period plus 120 days. If a courtdoes not require any compliance with adesignated or related summons, the periodof suspension consists of the judicial en-forcement period, and the period of limi-tations on assessment provided in section6501 shall not expire before the 60th dayafter the close of the judicial enforcementperiod.

(c) Definitions—(1) A designated sum-mons is a summons issued to a corporation(or to any other person to whom the corpo-ration has transferred records) with respectto any return of tax by such corporation fora taxable period for which such corpora-tion is being examined under the coordi-nated industry case program or any othersuccessor to the coordinated examinationprogram if—

(i) The Division Commissioner and theDivision Counsel of the Office of ChiefCounsel (or their successors) for the or-ganizations that have jurisdiction over thecorporation whose tax liability is the sub-ject of the summons have reviewed thesummons before it is issued;

(ii) The Internal Revenue Service (IRS)issues the summons at least 60 days beforethe day the period prescribed in section6501 for the assessment of tax expires (de-termined with regard to extensions); and

(iii) The summons states that it is a des-ignated summons for purposes of section6503(j).

(2) A related summons is any summonsissued that—

(i) Relates to the same return of the cor-poration under examination as the desig-nated summons; and

(ii) Is issued to any person, includingthe person to whom the designated sum-mons was issued, during the 30-day period

that begins on the day the designated sum-mons is issued.

(3) The judicial enforcement period isthe period that begins on the day on whicha court proceeding is instituted with re-spect to a designated or related summonsand ends on the day on which there is a fi-nal resolution as to the summoned person’sresponse to that summons.

(4) Court proceeding—(i) In general.For purposes of this section, a court pro-ceeding is a proceeding filed in a UnitedStates district court either to quash a des-ignated or related summons under section7609(b)(2) or to enforce a designated orrelated summons under section 7604. Acourt proceeding includes any collateralproceeding, such as a civil contempt pro-ceeding.

(ii) Date when proceeding is no longerpending. A proceeding to quash or to en-force a designated or related summons isno longer pending when all appeals (in-cluding review by the Supreme Court) aredisposed of or after the expiration of theperiod in which an appeal may be takenor a request for further review (includ-ing review by the Supreme Court) maybe made. If, however, following an en-forcement order, a collateral proceedingis brought challenging whether the testi-mony given or production made by thesummoned party fully satisfied the courtorder and whether sanctions should be im-posed against the summoned party for afailure to so testify or produce, the pro-ceeding to quash or to enforce the sum-mons shall include the time from whichthe proceeding to quash or to enforce thesummons was brought until the decisionin the collateral proceeding becomes final.The decision becomes final on the datewhen all appeals (including review by theSupreme Court) are disposed of or whenall appeal periods or all periods for furtherreview (including review by the SupremeCourt) expire. A decision in a collateralproceeding becomes final when all appeals(including review by the Supreme Court)are disposed of or when all appeal periodsor all periods for further review (includingreview by the Supreme Court) expire.

(5) Compliance—(i) In general. Com-pliance is the giving of testimony or theperformance of an act or acts of produc-tion, or both, in response to a court orderconcerning the designated or related sum-

August 17, 2009 241 2009–33 I.R.B.

mons and the determination that the termsof the court order have been satisfied.

(ii) Date compliance occurs. Compli-ance with a court order that wholly de-nies enforcement of a designated or relatedsummons is deemed to occur on the datewhen all appeals (including review by theSupreme Court) are disposed of or whenthe period in which an appeal may be takenor a request for further review (includ-ing review by the Supreme Court) may bemade expires. Compliance with a court or-der that grants enforcement, in whole or inpart, of a designated or related summons,occurs on the date the IRS determines thatthe testimony given, or the books, papers,records, or other data produced, or both,by the summoned party fully satisfy thecourt order concerning the summons. TheIRS will determine whether there has beenfull compliance within a reasonable time,given the volume and complexity of therecords produced, after the later of the giv-ing of all testimony or the production ofall records requested by the summons orrequired by any order enforcing any partof the summons. If, following an en-forcement order, collateral proceedings arebrought challenging whether the produc-tion made by the summoned party fullysatisfied the court order and whether sanc-tions should be imposed against the sum-moned party for a failing to do so, the sus-pension of the periods of limitations shallcontinue until the order enforcing any partof the summons is fully complied with andthe decision in the collateral proceedingbecomes final. A decision in a collateralproceeding becomes final when all appealsare disposed of, the period in which an ap-peal may be taken has expired or the periodin which a request for further review maybe made has expired.

(6) Final resolution occurs when thedesignated or related summons or any or-der enforcing any part of the designatedor related summons is fully complied withand all appeals or requests for further re-view are disposed of, the period in whichan appeal may be taken has expired or theperiod in which a request for further re-view may be made has expired.

(d) Special rules—(1) Number of sum-monses that may be issued—(i) Desig-nated summons. Only one designatedsummons may be issued in connectionwith the examination of a specific taxableyear or other period of a corporation. A

designated summons may cover more thanone year or other period of a corporation.The designated summons may require pro-duction of information that was previouslysought in a summons (other than a desig-nated summons) issued in the course ofthe examination of that particular corpora-tion if that information was not previouslyproduced.

(ii) Related summonses. There is norestriction on the number of related sum-monses that may be issued in connectionwith the examination of a corporation. Asprovided in paragraph (c)(2) of this sec-tion, however, a related summons must beissued within the 30-day period that be-gins on the date on which the designatedsummons to which it relates is issued andmust relate to the same return as the desig-nated summons. A related summons mayrequest the same information as the desig-nated summons.

(2) Time within which court proceed-ings must be brought. In order for theperiod of limitations on assessment to besuspended under section 6503(j), a courtproceeding to enforce or to quash a des-ignated or related summons must be insti-tuted within the period of limitations on as-sessment provided in section 6501 that isotherwise applicable to the tax return.

(3) Computation of suspension periodif multiple court proceedings are insti-tuted. If multiple court proceedings areinstituted to enforce or to quash a desig-nated or one or more related summonsesconcerning the same tax return, the periodof limitations on assessment is suspendedbeginning on the date the first court pro-ceeding is brought. The suspension shallend on the date that is the latest date onwhich the judicial enforcement period,plus the 120 day or 60 day period (de-pending on whether the court requires anycompliance) as provided in paragraph (b)of this section, expires with respect to eachsummons.

(4) Effect on other suspension peri-ods—(i) In general. Suspensions of theperiod of limitations under section 6501provided for under subsections 7609(e)(1)and (e)(2) do not apply to any summonsthat is issued pursuant to section 6503(j).The suspension under section 6503(j) ofthe running of the period of limitations onassessment under section 6501 is indepen-dent of, and may run concurrent with, anyother suspension of the period of limita-

tions on assessment that applies to the taxreturn to which the designated or relatedsummons relates.

(ii) Examples. The rules of paragraph(d)(4)(i) of this section are illustrated bythe following examples:

Example 1. The period of limitations on assess-ment against Corporation P, a calendar year taxpayer,for its 2007 return is scheduled to end on March 17,2011. (Ordinarily, Corporation P’s returns are filedon March 15th of the following year, but March 15,2008, was a Saturday, and Corporation P timely filedits return on the subsequent Monday, March 17, 2008,making March 17, 2011 the last day of the period oflimitations on assessment for Corporation P’s 2007tax year.) On January 4, 2011, a designated sum-mons is issued to Corporation P concerning its 2007return. On March 3, 2011 (14 days before the periodof limitations on assessment would otherwise expirewith respect to Corporation P’s 2007 return), a courtproceeding is brought to enforce the designated sum-mons issued to Corporation P. On June 6, 2011, thecourt orders Corporation P to comply with the des-ignated summons. Corporation P does not appealthe court’s order. On September 6, 2011, agents forCorporation P deliver material that they state are therecords requested by the designated summons. OnOctober 13, 2011, a final resolution to CorporationP’s response to the designated summons occurs whenit is determined that Corporation P has fully com-plied with the court’s order. The suspension periodapplicable with respect to the designated summonsissued to Corporation P consists of the judicial en-forcement period (March 3, 2011, through October13, 2011) and an additional 120-day period under sec-tion 6503(j)(1)(B), because the court required Cor-poration P to comply with the designated summons.Thus, the suspension period applicable with respectto the designated summons issued to Corporation Pbegins on March 3, 2011, and ends on February 10,2012. Under the facts of this Example 1, the period oflimitations on assessment against Corporation P fur-ther extends to February 24, 2012, to account for theadditional 14 days that remained on the period of lim-itations on assessment under section 6501 when thesuspension period under section 6503(j) began.

Example 2. Assume the same facts set forth inExample 1, except that in addition to the issuanceof the designated summons and related enforcementproceedings, on April 5, 2011, a summons concern-ing Corporation P’s 2007 return is issued and servedon individual A, a third party. This summons is nota related summons because it was not issued duringthe 30-day period that began on the date the desig-nated summons was issued. The third-party sum-mons served on individual A is subject to the noticerequirements of section 7609(a). Final resolution ofindividual A’s response to this summons does not oc-cur until February 15, 2012. Because there is no finalresolution of individual A’s response to this summonsby October 5, 2011, which is six months from the dateof service of the summons, the period of limitationson assessment against Corporation P is suspended un-der section 7609(e)(2) to the date on which there is afinal resolution to that response for the purposes ofsection 7609(e)(2). Moreover, because final resolu-tion to the summons served on individual A does notoccur until after February 10, 2012, the end of the sus-

2009–33 I.R.B. 242 August 17, 2009

pension period for the designated summons, the pe-riod of limitations on assessment against CorporationP expires 14 days after the date that the final resolu-tion as provided for in section 7609(e)(2) occurs withrespect to the summons served on individual A.

(5) Computation of 60-day period whenlast day of assessment period falls on aweekend or holiday. For purposes of para-graph (c)(1)(ii) of this section, in deter-mining whether a designated summons hasbeen issued at least 60 days before the dateon which the period of limitations on as-

sessment prescribed in section 6501 ex-pires, the provisions of section 7503 applywhen the last day of the assessment periodfalls on a Saturday, Sunday, or legal holi-day.

(e) Effective/applicability date. Thissection is applicable on July 31, 2009.

Linda E. Stiff,Deputy Commissioner forServices and Enforcement.

Approved July 15, 2009.

Michael Mundaca,Acting Assistant Secretary

of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on July 30, 2009,8:45 a.m., and published in the issue of the Federal Registerfor July 31, 2009, 74 F.R. 38095)

August 17, 2009 243 2009–33 I.R.B.

Part IV. Items of General InterestNotice of ProposedRulemaking and Notice ofPublic Hearing

Contingent Fees UnderCircular 230

REG–113289–08

AGENCY: Office of the Secretary, Trea-sury.

ACTION: Notice of proposed rulemakingand notice of public hearing.

SUMMARY: This document proposesmodifications of the regulations govern-ing practice before the Internal RevenueService (Circular 230). These proposedregulations affect individuals who practicebefore the IRS. The proposed amendmentsmodify the rules relating to contingentfees under Circular 230. This documentalso provides notice of a public hearing onthe proposed regulations.

DATES: Written or electronically gen-erated comments must be received bySeptember 10, 2009. Outlines of topics tobe discussed at the public hearing sched-uled for November 20, 2009 at 10 a.m.must be received by September 10, 2009.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–113289–08), room5203, Internal Revenue Service, P.O. Box7604, Ben Franklin Station, Washing-ton, DC 20044. Submissions may behand delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to: CC:PA:LPD:PR (REG–113289–08),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington, DC, or sent electroni-cally via the Federal eRulemaking Por-tal at www.regulations.gov (IRS andREG–113289–08). The public hearingwill be held in Auditorium, InternalRevenue Building, 1111 ConstitutionAvenue, NW, Washington DC.

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, Amy L. Mielke at (202)622–4940; concerning submissionsof comments and the public hearing,

Regina Johnson at (202) 622–7180; (nottoll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

Section 330 of title 31 of the UnitedStates Code authorizes the Secretary ofthe Treasury to regulate practice beforethe Treasury Department. The Secretaryhas published the regulations in Circular230 (31 CFR part 10). On September 26,2007, the Treasury Department and theIRS published final regulations in the Fed-eral Register (REG–138637–07, 2007–45I.R.B. 977 [72 FR 54540]) modifying rulesgoverning the general standards of prac-tice before the IRS, including the rules re-lating to contingent fees in §10.27 of Cir-cular 230. Section 10.27 of the final reg-ulations generally preclude a practitionerfrom charging a contingent fee for servicesrendered in connection with any matter be-fore the Internal Revenue Service, includ-ing the preparation or filing of a tax re-turn, amended tax return or claim for re-fund or credit. The final regulations, how-ever, permit a practitioner to charge a con-tingent fee for services rendered in connec-tion with the IRS examination of, or chal-lenge to: (i) an original tax return, or (ii)an amended return or claim for refund orcredit when the amended return or claimfor refund or credit was filed within 120days of the taxpayer receiving a writtennotice of the examination of, or a writtenchallenge to, the original tax return. Thefinal regulations also permit a practitionerto charge a contingent fee for services ren-dered in connection with a claim for refundor credit of interest and penalties assessedby the IRS, and for services rendered inconnection with a judicial proceeding aris-ing under the Internal Revenue Code. Thefinal amendments to §10.27 made by thefinal regulations apply to fee arrangementsentered into after March 26, 2008.

Section 406 of the Tax Relief andHealth Care Act of 2006, Public Law109–432 (120 Stat. 2958) (December 20,2006) (the Act) amended section 7623of the Internal Revenue Code concerningthe payment of awards to certain personswho detect underpayments of tax. Priorstatutory authority to pay awards at the

discretion of the Secretary was re-desig-nated as section 7623(a), and a new section7623(b) was added to the Code. Addi-tional off-Code provisions in section 406of the Act established a WhistleblowerOffice within the IRS and addressed re-ward program administration issues. SeeNotice 2008–4, 2008–2 I.R.B. 253, for in-terim guidance applicable to award claimssubmitted under the authority of section7623.

After consideration of comments re-ceived following the publication of thefinal regulations on contingent fees andthe Act, on March 26, 2008, the TreasuryDepartment and the IRS published Notice2008–43, 2008–15 I.R.B. 748, providinginterim guidance and information concern-ing contingent fees under Circular 230.The interim guidance in Notice 2008–43clarified that §10.27(b)(2)(ii) of Circular230 does not require the IRS to furnish awritten notice of examination to a taxpayeras a prerequisite to a practitioner charginga contingent fee for services rendered inconnection with an IRS examination of,or challenge to, an amended return. Theinterim guidance also clarified that §10.27permits practitioners to charge a contin-gent fee with respect to whistleblowerclaims under section 7623. The interimrules in Notice 2008–43 are applicable tofee arrangements entered into after March26, 2008, and will remain in effect untilthese proposed regulations are finalized.

Explanation of Provisions

This document proposes modificationsto the standards for contingent fees con-sistent with the interim guidance providedin Notice 2008–43. Section 10.27 gener-ally prohibits a practitioner from charginga contingent fee for services rendered inconnection with any matter before theIRS. The primary rationales behind theprohibition on contingent fees is to pre-clude any fee arrangement that is relatedto or requires a favorable ruling by theIRS and that has the potential to exploitthe audit selection process or compro-mise a practitioner’s duty of independentjudgment. Consistent with the interimguidance provided in Notice 2008–43,proposed revisions to §10.27 provide thata practitioner may charge a contingent

2009–33 I.R.B. 244 August 17, 2009

fee in three limited exceptions. Underproposed §10.27(b)(2)(i) and (ii), a prac-titioner may charge a contingent fee forservices rendered in connection with theIRS’s examination of, or challenge to: (i)an original tax return; or (ii) an amendedreturn or claim for refund or credit filedbefore the taxpayer received a writtennotice of examination of, or a written chal-lenge to, the original tax return (or filedno later than 120 days after the receipt ofsuch written notice or written challenge).The intent of this exception is to discour-age the tactical preparation of a refundclaim or amended return filed late in theexamination process. The exception forcontingent fee arrangements with respectto an amended return or claim for refundor credit may be used if the amended re-turn or claim for refund or credit is filedbefore the taxpayer receives written noticeof the examination or written challenge tothe original return (or if the taxpayer neverreceives such notice or writing) or within120 days of the taxpayer receiving the no-tice or writing. For purposes of proposed§10.27(b)(2)(ii), the 120 days is computedfrom the earlier of a written notice of theexamination, if any, or a written challengeto the original return. Further, under pro-posed §10.27(b)(3) and (4), practitionersalso may charge a contingent fee for ser-vices rendered in connection with a claimfor refund or credit of interest and penal-ties assessed by the IRS, and for servicesrendered in connection with a claim undersection 7623.

In response to comments received fol-lowing the publication of the final regu-lations on contingent fees, this documentalso clarifies the definition of a contingentfee in §10.27(c)(1) to provide that a con-tingent fee includes a fee that is based on apercentage of the refund reported on a re-turn, that is based on a percentage of thetaxes saved, or that otherwise depends onthe specific tax result attained. The def-inition in §10.27(c)(1) states that a con-tingent fee depends on the specific resultattained without directly providing that itis the specific tax result that is relevant tothe definition of a contingent fee. Contin-gent fees based on the closing of a transac-tion or other non-tax contingencies do notpresent the same concerns posed by tax-re-lated contingent fees. Accordingly, thisdocument clarifies the existing definition

to provide that a contingent fee includes,but is not limited to, any fee that dependson the specific tax result obtained in anygiven transaction.

The scope of these regulations is limitedto the rules relating to contingent fees un-der the general standards of practice beforethe IRS. These regulations do not alter orsupplant other ethical standards applicableto practitioners.

Effect on Other Documents

Notice 2008–43, 2008–15 I.R.B. 257,will be obsolete when regulations final-izing these proposed regulations are pub-lished in the Federal Register.

Special Analyses

It has been determined that this pro-posed rule is not a significant regulatoryaction as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It is hereby certified thatthese regulations will not have a signif-icant economic impact on a substantialnumber of small entities. Persons autho-rized to practice before the IRS have longbeen required to comply with certain stan-dards of conduct. These regulations donot alter the basic nature of the obligationsand responsibilities of these practitioners.These regulations clarify when a practi-tioner may charge a contingent fee under§10.27(b)(2) in response to public com-ments. Therefore, a regulatory flexibilityanalysis under the Regulatory FlexibilityAct (5 U.S.C. chapter 6) is not required.Pursuant to section 7805(f) of the InternalRevenue Code, this notice of proposedrulemaking will be submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small businesses.

Comments and Public Hearing

Before the regulations are adopted as fi-nal regulations, consideration will be givento any written comments (a signed orig-inal and eight (8) copies) and electroniccomments that are submitted timely to theIRS. The Treasury Department and the IRSspecifically request comments on the clar-ity of the proposed regulations and howthey can be made easier to understand. Allcomments will be available for public in-spection and copying.

The public hearing is scheduled forNovember 20, 2009, at 10 a.m., and willbe held in the Auditorium, Internal Rev-enue Building, 1111 Constitution Avenue,NW, Washington, DC. Due to buildingsecurity procedures, visitors must enterat the Constitution Avenue entrance. Allvisitors must present photo identificationto enter the building. Because of accessrestrictions, visitors will not be admittedbeyond the immediate entrance area morethan 30 minutes before the hearing starts.For information about having your nameplaced on the building access list to attendthe hearing, see the FOR FURTHER IN-FORMATION CONTACT section of thispreamble.

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wish topresent oral comments at the hearing mustsubmit written or electronic comments bySeptember 10, 2009 and an outline of thetopics to be discussed and the time to bedevoted to each topic by September 10,2009. A period of 10 minutes will be al-located to each person for making com-ments.

An agenda showing the scheduling ofthe speakers will be prepared after thedeadline for receiving outlines has passed.Copies of the agenda will be available freeof charge at the hearing.

Drafting Information

The principal author of the regulationsis Amy L. Mielke of the Office of the As-sociate Chief Counsel (Procedure and Ad-ministration).

* * * * *

Proposed Amendments to theRegulations

Accordingly, 31 CFR part 10 is pro-posed to be amended as follows:

Paragraph 1. The authority citation for31 CFR part 10 continues to read as fol-lows:

Authority: Sec. 3, 23 Stat. 258, secs.2–12, 60 Stat. 237 et. seq.; 5 U.S.C. 301,500, 551–559; 31 U.S.C. 321; 31 U.S.C.330; Reorg. Plan No. 26 of 1950, 15 FR4935, 64 Stat. 1280, 3 CFR, 1949–1953Comp., p. 1017.

Par. 2. Section 10.27 is amended by re-vising (b),(c)(1) and (d) and adding para-graph (e) to read as follows:

August 17, 2009 245 2009–33 I.R.B.

§10.27 Fees.

* * * * *(b) Contingent fees—(1) Except as pro-

vided in paragraphs (b)(2), (3), (4), and(5) of this section, a practitioner may notcharge a contingent fee for services ren-dered in connection with any matter beforethe Internal Revenue Service.

(2) A practitioner may charge a contin-gent fee for services rendered in connec-tion with the Internal Revenue Service’sexamination of, or challenge to—

(i) An original tax return; or(ii) An amended return or claim for re-

fund or credit filed before the taxpayer re-ceived a written notice of examination of,or a written challenge to, the original taxreturn; or filed no later than 120 days afterthe receipt of such written notice or writ-ten challenge. The 120 days is computedfrom the earlier of a written notice of theexamination, if any, or a written challengeto the original return.

(3) A practitioner may charge a contin-gent fee for services rendered in connec-tion with a claim for credit or refund filedsolely in connection with the determina-tion of statutory interest or penalties as-sessed by the Internal Revenue Service.

(4) A practitioner may charge a contin-gent fee for services rendered in connec-tion with a claim under section 7623 of theInternal Revenue Code.

(5) A practitioner may charge a contin-gent fee for services rendered in connec-tion with any judicial proceeding arisingunder the Internal Revenue Code.

(c) * * * For purposes of this section—(1) Contingent fee is any fee that is

based, in whole or in part, on whetheror not a position taken on a tax return orother filing avoids challenge by the Inter-nal Revenue Service or is sustained eitherby the Internal Revenue Service or in liti-gation. A contingent fee includes a fee thatis based on a percentage of the refund re-ported on a return, that is based on a per-centage of the taxes saved, or that other-wise depends on the specific tax result at-tained. A contingent fee also includes anyfee arrangement in which the practitionerwill reimburse the client for all or a por-tion of the client’s fee in the event that aposition taken on a tax return or other fil-ing is challenged by the Internal RevenueService or is not sustained, whether pur-suant to an indemnity agreement, a guaran-

tee, rescission rights, or any other arrange-ment with a similar effect.

(2) * * *(d) Applicability date. This section is

applicable to fee arrangements entered intoafter March 26, 2008.

(e) Effective date. This section is effec-tive on the date that the final regulationsare published in the Federal Register.

Linda E. Stiff,Deputy Commissioner forServices and Enforcement.

(Filed by the Office of the Federal Register on July 27, 2009,8:45 a.m., and published in the issue of the Federal Registerfor July 28, 2009, 74 F.R. 37183)

Deletions From CumulativeList of OrganizationsContributions to Whichare Deductible Under Section170 of the Code

Announcement 2009–61

The Internal Revenue Service has re-voked its determination that the organi-zations listed below qualify as organiza-tions described in sections 501(c)(3) and170(c)(2) of the Internal Revenue Code of1986.

Generally, the Service will not disallowdeductions for contributions made to alisted organization on or before the dateof announcement in the Internal RevenueBulletin that an organization no longerqualifies. However, the Service is notprecluded from disallowing a deductionfor any contributions made after an or-ganization ceases to qualify under section170(c)(2) if the organization has not timelyfiled a suit for declaratory judgment undersection 7428 and if the contributor (1) hadknowledge of the revocation of the rulingor determination letter, (2) was aware thatsuch revocation was imminent, or (3) wasin part responsible for or was aware of theactivities or omissions of the organizationthat brought about this revocation.

If on the other hand a suit for declara-tory judgment has been timely filed, con-tributions from individuals and organiza-tions described in section 170(c)(2) thatare otherwise allowable will continue tobe deductible. Protection under section7428(c) would begin on August 17, 2009,and would end on the date the court first

determines that the organization is not de-scribed in section 170(c)(2) as more partic-ularly set forth in section 7428(c)(1). Forindividual contributors, the maximum de-duction protected is $1,000, with a hus-band and wife treated as one contributor.This benefit is not extended to any indi-vidual, in whole or in part, for the acts oromissions of the organization that were thebasis for revocation.

Frank and Nora Harty Center of StatenIsland, Inc.Staten Island, NY

Higgs Carter King, IncSan Antonio, TX

World Orphanage and Refugee ReliefFoundation, Inc.Ft. Lauderdale, FL

Triple EEELong Beach, CA

American Budget Credit Debt Services,Inc.Spring Valley, NY

Craig Family FoundationChicago, Illinois

Aloha Consumer Credit CounselingServiceKaneohe, HI

Charity Neighborhood AuxiliaryBrooklyn, NY

Lamar Dixon Expo FoundationPrairieville, LA

Reno & BJ FoundationDetroit, MI

Reading Enhancement and DevelopmentTumwater, WA

First FoundationPetersburg, VA

The Denis B and Mary ElizabethO’Donnell FoundationWest Orange, NJ

Good Times FoundationSalt Lake City, UT

Animal Adoption Center of GarlandGarland, TX

Le Tulle FoundationBay City, TX

YMCA of Manchester Coffee CountyManchester, TN

The Light Center, Inc.Columbus, OH

Seventh Regiment Fund, Inc.New York, NY

Fair Credit FoundationLos Angeles, CA

Student Loan Fund of IdahoFruitland, ID

2009–33 I.R.B. 246 August 17, 2009

Positive AlternativesSalt Lake City, UT

Family Budget Association of America,Inc.Washington, DC

Scott Olsen FoundationAlpine, UT

Helping Other People Excel Faith-BasedCoalition, Inc.Jackson, MS

Changing Attitudes Counseling Services,Inc.Washington, DC

Christian Center for the Performing Arts— DenverLakewood, CO

Advancement of Sound Science Center,Inc.Potomac, MD

Procedures for Section509(a)(3) SupportingOrganizations to ChangePublic Charity Classification

Announcement 2009–62

This announcement provides proce-dures that a section 509(a)(3) supportingorganization may use to request a changein its public charity classification. Thisannouncement supersedes Announcement2006–93, 2006–2 C.B. 1017.

Background

In the Pension Protection Act of 2006,Pub. L. 109–280 (PPA), Congress enacteda number of changes to the tax law affect-ing supporting organizations described insection 509(a)(3) of the Internal RevenueCode (Code). In recognition of the factthat organizations classified as support-ing organizations under section 509(a)(3)might wish to seek reclassification undersections 509(a)(1) and 170(b)(1)(A)(vi) orsection 509(a)(2) of the Code, the InternalRevenue Service (IRS) issued Announce-ment 2006–93, 2006–2 C.B. 1017, toprovide procedures under which support-ing organizations could request a changein public charity classification for reasonsrelated to the changes made by the PPA.The IRS processed status change requestssubmitted under Announcement 2006–93on an expedited basis.

On September 9, 2008, the TreasuryDepartment and the IRS issued temporaryand proposed regulations to implement theredesign of the Form 990, Return of Or-ganization Exempt From Income Tax. 73Fed. Reg. 52,528. The new regulationsprovide for the elimination of the advanceruling process and a change in the publicsupport computation period from the fouryears preceding the tested year to a fiveyear-period that includes the tested year.An organization that meets a public sup-port test for the tested year is a public char-ity for the tested year and the next suc-ceeding year. The new regulations alsomade changes to the method of account-ing for computing public support. Thisannouncement provides procedures con-sistent with the new regulations for sup-porting organizations to request changesin public charity classification. In addi-tion, this announcement provides that theIRS will no longer process classificationchanges on an expedited basis unless therequest otherwise meets the expedite crite-ria set forth in Revenue Procedure 2009–4,2009–1 I.R.B. 118.

Procedures for Supporting Organizationsto Request Change in Public CharityClassification

Organizations that are seeking tochange their public charity classificationfrom a section 509(a)(3) supporting or-ganization to a section 509(a)(1) or (a)(2)organization should submit a written re-quest for a determination as to publiccharity status pursuant to Revenue Proce-dure 2009–4, 2009–1 I.R.B. 118.

The request for reclassification must in-clude the following:

1. A subject line or other indicator onthe first page of the request in bold,underlined, or all capitals font indi-cating “REQUEST FOR DETERMI-NATION AS TO PUBLIC CHARITYSTATUS.”

2. A statement requesting reclassifi-cation from section 509(a)(3) toanother public charity classifica-tion under sections 509(a)(1) and170(b)(1)(A)(vi) or section 509(a)(2);and

3. Eithera. A copy of the organization’s

signed Form 990, Parts I through

XI, or Form 990–EZ, Parts Ithrough VI, with the completedSchedule A, Public Charity Sta-tus and Public Support, as filedwith the Internal Revenue Ser-vice for the taxable year immedi-ately preceding the taxable yearin which the request is made; or

b. The organization’s support in-formation for the past five com-pleted tax years, using the or-ganization’s overall method ofaccounting used to complete theForm 990 or Form 990–EZ forsuch years. This informationmay be provided to the InternalRevenue Service on a completedSchedule A, Public Charity Sta-tus and Public Support, to theForm 990 or Form 990–EZ (2008or later year, as appropriate).

Like all requests for a determination,the request must be signed under penal-ties of perjury by the organization’s officer,director, trustee, or other authorized offi-cial. The complete reclassification requestshould be mailed to:

IRS-TEGEAttn: Correspondence Unit,Room 4024

P.O. Box 2508Cincinnati, OH 45201

If an organization previously submit-ted a request for reclassification pursuantto Announcement 2006–93 before the is-suance of this announcement, that requestwill still be processed. Organizations willreceive a determination letter in responseto their request for reclassification indi-cating whether a change in public charityclassification has been made. There is nouser fee for this determination letter.

This announcement supersedes An-nouncement 2006–93, which is revoked.

For further information, contactMelinda Williams at (202) 283–9467 (nota toll-free call).

August 17, 2009 247 2009–33 I.R.B.

Announcement of Disciplinary Sanctions From the Officeof Professional ResponsibilityAnnouncement 2009-63

The Office of Professional Responsi-bility (OPR) announces recent disciplinarysanctions involving attorneys, certifiedpublic accountants, enrolled agents, en-rolled actuaries, enrolled retirement planagents, and appraisers. These individualsare subject to the regulations governingpractice before the Internal Revenue Ser-vice (IRS), which are set out in Title 31,Code of Federal Regulations, Part 10, andwhich are published in pamphlet form asTreasury Department Circular No. 230.The regulations prescribe the duties andrestrictions relating to such practice andprescribe the disciplinary sanctions forviolating the regulations.

The disciplinary sanctions to be im-posed for violation of the regulations are:

Disbarred from practice before theIRS—An individual who is disbarred isnot eligible to represent taxpayers beforethe IRS.

Suspended from practice before theIRS—An individual who is suspended isnot eligible to represent taxpayers beforethe IRS during the term of the suspension.

Censured in practice before theIRS—Censure is a public reprimand. Un-like disbarment or suspension, censuredoes not affect an individual’s eligibilityto represent taxpayers before the IRS, butOPR may subject the individual’s futurerepresentations to conditions designed topromote high standards of conduct.

Monetary penalty—A monetarypenalty may be imposed on an individualwho engages in conduct subject to sanc-tion or on an employer, firm, or entityif the individual was acting on its behalfand if it knew, or reasonably should haveknown, of the individual’s conduct.

Disqualification of appraiser—Anappraiser who is disqualified is barredfrom presenting evidence or testimony inany administrative proceeding before theDepartment of the Treasury or the IRS.

Under the regulations, attorneys, cer-tified public accountants, enrolled agents,enrolled actuaries, and enrolled retirement

plan agents may not assist, or accept assis-tance from, individuals who are suspendedor disbarred with respect to matters consti-tuting practice (i.e., representation) beforethe IRS, and they may not aid or abet sus-pended or disbarred individuals to practicebefore the IRS.

Disciplinary sanctions are described inthese terms:

Disbarred by decision after hearing,Suspended by decision after hearing,Censured by decision after hearing,Monetary penalty imposed after hear-ing, and Disqualified after hearing—Anadministrative law judge (ALJ) conductedan evidentiary hearing upon OPR’s com-plaint alleging violation of the regulationsand issued a decision imposing one ofthese sanctions. After 30 days from theissuance of the decision, in the absence ofan appeal, the ALJ’s decision became thefinal agency decision.

Disbarred by default decision, Sus-pended by default decision, Censured bydefault decision, Monetary penalty im-posed by default decision, and Disqual-ified by default decision—An ALJ, afterfinding that no answer to OPR’s complainthad been filed, granted OPR’s motion for adefault judgment and issued a decision im-posing one of these sanctions.

Disbarment by decision on appeal,Suspended by decision on appeal, Cen-sured by decision on appeal, Monetarypenalty imposed by decision on ap-peal, and Disqualified by decision onappeal—The decision of the ALJ wasappealed to the agency appeal authority,acting as the delegate of the Secretaryof the Treasury, and the appeal authorityissued a decision imposing one of thesesanctions.

Disbarred by consent, Suspended byconsent, Censured by consent, Mone-tary penalty imposed by consent, andDisqualified by consent—In lieu of adisciplinary proceeding being institutedor continued, an individual offered a con-sent to one of these sanctions and OPR

accepted the offer. Typically, an offerof consent will provide for: suspensionfor an indefinite term; conditions that theindividual must observe during the sus-pension; and the individual’s opportunity,after a stated number of months, to filewith OPR a petition for reinstatement af-firming compliance with the terms of theconsent and affirming current eligibilityto practice (i.e., an active professionallicense or active enrollment status). Anenrolled agent or an enrolled retirementplan agent may also offer to resign in orderto avoid a disciplinary proceeding.

Suspended by decision in expeditedproceeding, Suspended by default de-cision in expedited proceeding, Sus-pended by consent in expedited pro-ceeding—OPR instituted an expeditedproceeding for suspension (based on cer-tain limited grounds, including loss of aprofessional license and criminal convic-tions).

OPR has authority to disclose thegrounds for disciplinary sanctions in thesesituations: (1) an ALJ or the Secretary’sdelegate on appeal has issued a decisionon or after September 26, 2007, which wasthe effective date of amendments to theregulations that permit making such deci-sions publicly available; (2) the individualhas settled a disciplinary case by signingOPR’s “consent to sanction” form, whichrequires consenting individuals to admit toone or more violations of the regulationsand to consent to the disclosure of the in-dividual’s own return information relatedto the admitted violations (for example,failure to file Federal income tax returns);or (3) OPR has issued a decision in anexpedited proceeding for suspension.

Announcements of disciplinary sanc-tions appear in the Internal Revenue Bul-letin at the earliest practicable date. Thesanctions announced below are alphabet-ized first by the names of states and sec-ond by the last names of individuals. Un-less otherwise indicated, section numbers(e.g., §10.51) refer to the regulations.

2009–33 I.R.B. 248 August 17, 2009

City & State Name Professional Disciplinary Sanction Effective Date(s)Designation

Arizona

Phoenix Hamilton, Douglas A. CPA Consent Suspension Indefinite fromNovember 23,2007

California

Studio City Kenney, Elizabeth K. Enrolled Agent Suspended by consentfor admitted violationof § 10.51 (failed tofile several Federal taxreturns)

Indefinite fromJuly 30, 2009

Hayward Neal, Thomas R. CPA Suspended by decisionin expedited proceedingunder § 10.82 (revocationof CPA license)

Indefinite fromJuly 10, 2009

Connecticut

Corso, Stephen P.,See Nevada

Florida

Miami Beach Murphree, Gary M. Attorney Suspended by defaultdecision in expeditedproceeding under §10.82(suspension of attorneylicense)

Indefinite fromJuly 23, 2009

Boca Raton Schmidt, Peter H. Attorney Suspended by defaultdecision in expeditedproceeding under §10.82(attorney disbarment)

Indefinite fromJuly 23, 2009

Miami Todd, Mayumi O. CPA Suspended by decisionin expedited proceedingunder § 10.82 (suspensionof CPA license inWashington)

Indefinite fromJuly 17, 2009

Illinois

Albion Nead, Morris J. Attorney Suspended by decisionin expedited proceedingunder § 10.82 (attorneydisbarment)

Indefinite fromJuly 2, 2009

Iowa

Muscatine Barry, James P. Attorney Suspended by decisionin expedited proceedingunder § 10.82 (suspensionof CPA license inMissouri)

Indefinite fromJuly 2, 2009

August 17, 2009 249 2009–33 I.R.B.

City & State Name Professional Disciplinary Sanction Effective Date(s)Designation

Kentucky

Fort Wright Robison, Jean P. CPA Suspended by decisionin expedited proceedingunder § 10.82 (suspensionof attorney license)

Indefinite fromJuly 7, 2009

Maryland

Rockville Hall, Jr., Ralph E. Attorney Suspended by defaultdecision in expeditedproceeding under §10.82(suspension of attorneylicense)

Indefinite fromJuly 21, 2009

Massachusetts

Manchester Goldstein, Frederick Attorney Suspended by defaultdecision in expeditedproceeding under §10.82(suspension of attorneylicense)

Indefinite fromJuly 21, 2009

South Dartmouth Quinn, Mary M. Attorney Suspended by defaultdecision in expeditedproceeding under §10.82(suspension of attorneylicense)

Indefinite fromJuly 7, 2009

Minnesota

St. Paul Brost, Linda A. Attorney Suspended by defaultdecision in expeditedproceeding under §10.82(suspension of attorneylicense)

Indefinite fromJuly 7, 2009

Stillwater Houge, Benjamin S. Attorney Suspended by defaultdecision in expeditedproceeding under §10.82(suspension of attorneylicense)

Indefinite fromJuly 21, 2009

Missouri

Barry, James P.,See Iowa

Nevada

Las Vegas Corso, Stephen P. CPA Suspended by defaultdecision in expeditedproceeding under §10.82(conviction under 18U.S.C. § 1343, wire fraud,and 26 U.S.C. § 7201,attempted income taxevasion) in Connecticut

Indefinite fromJuly 21, 2009

2009–33 I.R.B. 250 August 17, 2009

City & State Name Professional Disciplinary Sanction Effective Date(s)Designation

New Jersey

Cedar Knolls Kimmel, Andrew M. Attorney Suspended by defaultdecision in expeditedproceeding under §10.82(suspension of attorneylicense)

Indefinite fromJuly 7, 2009

New York

Bronx Burke, Thomas P. Attorney Suspended by defaultdecision in expeditedproceeding under §10.82(attorney disbarment)

Indefinite fromJuly 7, 2009

North Carolina

Kar, James,See Oregon

Oregon

Milwaukie Kar, James CPA Suspended by defaultdecision in expeditedproceeding under § 10.82(revocation of CPAlicense in North Carolina)

Indefinite fromJuly 7, 2009

Texas

Dallas Brooks, Jeffrey K. Enrolled Agent Suspended by decisionin expedited proceedingunder §10.82 (convictionunder state law for theftover $200,000)

Indefinite fromJuly 28, 2009

Washington

Todd, Mayumi O.,See Florida

August 17, 2009 251 2009–33 I.R.B.

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe the ef-fect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position is be-ing extended to apply to a variation of thefact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds that thesame principle also applies to B, the earlierruling is amplified. (Compare with modi-fied, below).

Clarified is used in those instanceswhere the language in a prior ruling is be-ing made clear because the language hascaused, or may cause, some confusion.It is not used where a position in a priorruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe new ruling does nothing more than re-state the substance and situation of a previ-ously published ruling (or rulings). Thus,the term is used to republish under the1986 Code and regulations the same po-sition published under the 1939 Code andregulations. The term is also used whenit is desired to republish in a single rul-ing a series of situations, names, etc., thatwere previously published over a period oftime in separate rulings. If the new rul-ing does more than restate the substance

of a prior ruling, a combination of termsis used. For example, modified and su-perseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that is selfcontained. In this case, the previously pub-lished ruling is first modified and then, asmodified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further names insubsequent rulings. After the original rul-ing has been supplemented several times, anew ruling may be published that includesthe list in the original ruling and the ad-ditions, and supersedes all prior rulings inthe series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome of casesin litigation, or the outcome of a Servicestudy.

AbbreviationsThe following abbreviations in current useand formerly used will appear in materialpublished in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.E.O.—Executive Order.

ER—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.

PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statement of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D. —Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z —Corporation.

2009–33 I.R.B. i August 17, 2009

Numerical Finding List1

Bulletins 2009–27 through 2009–33

Announcements:

2009-56, 2009-28 I.R.B. 145

2009-57, 2009-29 I.R.B. 158

2009-58, 2009-29 I.R.B. 158

2009-59, 2009-29 I.R.B. 158

2009-60, 2009-30 I.R.B. 166

2009-61, 2009-33 I.R.B. 246

2009-62, 2009-33 I.R.B. 247

2009-63, 2009-33 I.R.B. 248

Notices:

2009-51, 2009-28 I.R.B. 128

2009-55, 2009-31 I.R.B. 170

2009-57, 2009-29 I.R.B. 147

2009-58, 2009-30 I.R.B. 163

2009-59, 2009-31 I.R.B. 170

2009-60, 2009-32 I.R.B. 181

2009-61, 2009-32 I.R.B. 181

Proposed Regulations:

REG-152166-05, 2009-32 I.R.B. 183

REG-112994-06, 2009-28 I.R.B. 144

REG-130200-08, 2009-31 I.R.B. 174

REG-113289-08, 2009-33 I.R.B. 244

Revenue Procedures:

2009-30, 2009-27 I.R.B. 27

2009-31, 2009-27 I.R.B. 107

2009-32, 2009-28 I.R.B. 142

2009-33, 2009-29 I.R.B. 150

Revenue Rulings:

2009-18, 2009-27 I.R.B. 1

2009-19, 2009-28 I.R.B. 111

2009-20, 2009-28 I.R.B. 112

2009-21, 2009-30 I.R.B. 162

2009-22, 2009-31 I.R.B. 167

2009-23, 2009-32 I.R.B. 177

Treasury Decisions:

9452, 2009-27 I.R.B. 1

9453, 2009-28 I.R.B. 114

9454, 2009-32 I.R.B. 178

9455, 2009-33 I.R.B. 239

9456, 2009-33 I.R.B. 188

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2009–1 through 2009–26 is in Internal Revenue Bulletin2009–26, dated June 29, 2009.

August 17, 2009 ii 2009–33 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletins 2009–27 through 2009–33

Announcements:

2006-93

Superseded by

Ann. 2009-62, 2009-33 I.R.B. 247

Notices:

2004-67

Supplemented and superseded by

Notice 2009-59, 2009-31 I.R.B. 170

2006-70

Obsoleted by

T.D. 9453, 2009-28 I.R.B. 114

2006-109

Superseded in part by

Rev. Proc. 2009-32, 2009-28 I.R.B. 142

2008-43

Obsoleted by

REG-113289-08, 2009-33 I.R.B. 244

Revenue Procedures:

97-49

Modified and superseded by

Rev. Proc. 2009-31, 2009-27 I.R.B. 107

2008-38

Superseded by

Rev. Proc. 2009-30, 2009-27 I.R.B. 27

2008-65

Modified by

Rev. Proc. 2009-33, 2009-29 I.R.B. 150

2009-16

Modified by

Rev. Proc. 2009-33, 2009-29 I.R.B. 150

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2009–1 through 2009–26 is in Internal Revenue Bulletin 2009–26, dated June 29, 2009.

2009–33 I.R.B. iii August 17, 2009

August 17, 2009 2009–33 I.R.B.

2009–33 I.R.B. August 17, 2009

August 17, 2009 2009–33 I.R.B.

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