Purpose: This IRM section provides guidance for examiners working cases involving the allocation of income and deductions among taxpayers as provided for in IRC 482 and the regulations.

Audience: LB&I and SB/SE personnel

Policy Owner: Director, Treaty and Transfer Pricing Operations (TTPO), LB&I

Program Owner: TTPO

Primary Stakeholders: LB&I and SB/SE personnel

Program Goals: The goal of this program is to provide guidance to examiners making IRC 482 primary and correlative adjustments.

The purpose of IRC 482 is to ensure taxpayers clearly reflect income attributable to controlled transactions and to prevent avoidance of taxes regarding such transactions. IRC 482 places a controlled taxpayer on a tax parity with an uncontrolled taxpayer in determining true taxable income. Transactions between controlled taxpayers will be subject to special scrutiny to ascertain whether common control is being used to reduce, avoid or escape taxes. In determining the true taxable income of a controlled taxpayer, the Service is not restricted to the case of improper accounting, to the case of a fraudulent or sham transaction or to the case of a device designed to reduce or avoid tax by shifting or distorting income, deductions, credits, or allowances. The authority to determine true taxable income extends to any case in which, either by inadvertence or design, the taxable income of a controlled taxpayer does not reflect an arm's length result as with an uncontrolled taxpayer.

Transactions between controlled taxpayers which may involve an IRC 482 issue include (but are not limited to) the following:

The initial allocation, which ordinarily increases the income of one or more members of the controlled group, is referred to as the "primary allocation" or the "primary adjustment" and the corresponding decrease of the other member(s) is the "correlative allocation" or "correlative adjustment."

Issue teams should review the advance notification procedures under IRM 4.60.2, Mutual Agreement Procedures and Report Guidelines, regarding primary and correlative adjustments, whenever an IRC 482 adjustment is anticipated.

A statement will be made in the examination report prepared for the primary adjustment taxpayer to the effect that:

Rules regarding the unauthorized disclosure of information apply to IRC 482 adjustments, despite the relationship between primary adjustment and correlative adjustment taxpayers. The primary adjustment and correlative adjustment taxpayers' report should not disclose tax return information of the other taxpayer except to the extent necessary to explain the primary and correlative adjustments.

The correlative adjustment should not be made until the primary adjustment has been made. Per Treas. Reg. 1.482-1(g)(2)(iii), the primary adjustment will not be considered to have been made and, accordingly, a correlative adjustment is not required to be made until the date of a final determination on the primary adjustment under IRC 482. For this purpose, a final determination includes:

To provide uniform treatment of all IRC 482 cases, agreed or unagreed, reports on the primary adjustment taxpayer and the correlative adjustment taxpayer should be prepared concurrently, kept together and transmitted to the next function, (e.g., Case Processing, Technical Services, or Office of Appeals).

In cases with no current tax effect as a result of a correlative adjustment (e.g., foreign entity, loss entity, etc.), place a statement in the correlative adjustment taxpayer’s audit report to the effect that the correlative adjustments are deemed to have been made when and if:

It is important that this statement be included in all reports prepared for the taxpayer(s) to which the correlative adjustments apply so the subsequent issue team does not miss the effect of these adjustments in the event of a subsequent examination or carryback of losses or credits or other events which do have a tax effect. The historical case file of the taxpayer should include the examination report(s) with the primary and correlative tax effects.

The examiner will attach Form 3198, Special Handling Notice, to the case jacket of the correlative adjustment taxpayer to ensure that overpayments resulting from the correlative adjustments are not scheduled and refunded to the taxpayer. The Form 3198 will note the need to delay making a refund to the correlative adjustment taxpayer until the primary adjustment taxpayer has paid the deficiency resulting from the IRC 482 adjustment.

Correlative adjustment taxpayers whose tax liability is reduced will be advised of the nature of the adjustment(s), the reason the overpayment cannot be refunded at this time and the possible need to protect statute(s) of limitations from expiring. See IRM 4.10.13.5.2.3, Protested Primary Adjustments Involving Only U.S. Taxpayers for Primary Adjustment and Correlative Allocation.

The correlative adjustment taxpayer(s) will be invited to file a claim for refund (protective claim) if the period for filing a claim for refund expires in less than 180 days. Letter 897(DO) will be sent to solicit a claim for each taxable year needing protection. Once a protective claim is received, Form 895, Notice of Statute Expiration, will be attached and the statute will be updated according to IRM 25.6.22, Statute of Limitations, Extension of Assessment Statute of Limitations by Consent. See also IRM 4.10.13.5.2.3, Protested Primary Adjustments Involving Only U.S. Taxpayers for Primary Adjustment and Correlative Allocation.

An agreed IRC 482 issue is where all affected (primary and correlative) taxpayers are in full agreement with the IRS’s IRC 482 issue.

The examiner must obtain a signed agreement, using the appropriate Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment, or payment of the deficiency from the primary adjustment taxpayer.

The examiner must make the correlative adjustment(s) and obtain agreement for the adjustment(s) using the appropriate Form 870.

The taxpayer should be advised that their cases can be more expeditiously adjusted and closed if the taxpayer(s) scheduled to receive refunds, if any, will voluntarily consent in writing to have the refunds applied against the proposed deficiencies.

The examiner will attach Form 3198 to the return(s) involving an overassessment, as prescribed in IRM 4.11.5.4(6), above.

An unagreed IRC 482 cases is where any affected (primary or correlative) taxpayer does not agree to the IRS’s adjustment under IRC 482. See IRM 4.46.5.7.1, Types of Examination Reports Based on Agreement, and IRM 4.46.6.8, Unagreed Report.

In unagreed IRC 482 cases when the correlative-adjustment taxpayer takes any inconsistent positions, do not make the correlative IRC 482 adjustments. Instead, explain the reason for not making the correlative adjustments. This explanation should be made in the revenue agent's report (RAR).

In all unagreed IRC 482 cases, the correlative adjustment taxpayer should be advised of the period of limitations under IRC 6511 for filing a claim for refund. If the period for filing a claim for refund expires in less than 180 days, the examiner should inform the taxpayer of the opportunity to file an amended return claiming a refund. Such claims should be picked up and submitted with the case, if possible.

In all unagreed IRC 482 cases, to ensure that overpayments resulting from the correlative adjustments are not scheduled and refunded to the taxpayer, the examiner will complete and affix Form 3198 to the return of the correlative adjustment taxpayer. See IRM 4.11.5.4, Examination Reports.

If the taxpayer or a related entity is involved in bankruptcy litigation see IRM 4.27.2.7, Closing Procedures - Unagreed Cases with Automatic Stay. Automatic stays due to bankruptcy may require a recalculation of the assessment statute expiration date and refund statute expiration date.

There may be instances when an IRC 482 allocation is examined in one area office and the issue will affect an allocation to a controlled taxpayer in another area office. The office making the initial examination will immediately advise the other area office of the issue and amount involved so appropriate steps may be taken to secure the return and protect the statute of limitations.

Immediately upon conclusion of the primary adjustment taxpayer’s examination, a notice should be issued each other area office that will contain sufficient information to enable the receiving office to make the correlative adjustment to the related return. The initiating office examiner's case files will include copies of the notification.

Upon receipt of notification, the receiving office will take prompt action to make adjustments for the IRC 482 allocations resulting from the initial taxpayer examination. Reopening procedures will be considered in the event that the return has been examined and closed.