Rev. Proc. 72-46

Section 1. Purpose.

The purpose of this Revenue Procedure is to extend the application of section 4.04(2) of Revenue Procedure 65-31, C.B. 1965-2, 1024, to the foreign subsidiary of a first tier foreign subsidiary of a United States controlling taxpayer.

Sec. 2. Background.

.01 Revenue Procedure 64-54, C.B. 1964-2, 1008, sets forth the policy and procedure governing the application of section 482 of the Internal Revenue Code of 1954 with respect to United States controlling taxpayers.

.02 Section 3 of Revenue Procedure 64-54 provides relief from economic double taxation by the allowance of an offset against the United States tax attributable to the adjustment under section 482 of the Code.

.03 Section 4.02 of Revenue Procedure 65-17, C.B. 1965-1, 833, provides that a taxpayer to which income has been allocated may, as part of a closing agreement, elect to establish an account receivable from the other entity involved in the transaction for the amount of income allocated, and that no further tax liability will arise from payment of the receivable.

.04 Section 4.04(2) of Revenue Procedure 65-31, amplifying Revenue Procedure 64-54, is applicable where a United States taxpayer requests offset relief under section 3 of Revenue Procedure 64-54, but does not desire the account receivable treatment provided by Revenue Procedure 65-17 or fails to make timely request for such treatment. In such circumstances, the amount of the allocation, reduced by the offset granted, will be considered as being a contribution by such taxpayer to the capital of its first tier subsidiary as of the last day of the taxpayer's taxable year for which the allocation is made in the case where the foreign entity (a second or lower tier subsidiary) which was a party to the allocation is directly controlled by another entity, and such other entity (a first tier subsidiary) is directly controlled by the taxpayer.

Sec. 3. Application.

The amount considered to be a contribution by the United States taxpayer to the capital of its first tier subsidiary under section 4.04(2) of Revenue Procedure 65-31, in turn is considered a contribution by such first tier subsidiary to the capital of its subsidiary (a second tier subsidiary), the latter being a party to the allocation.

Sec. 4. Effect on Other Documents.

.01 Section 4.04(2) of Revenue Procedure 65-31 is modified.

.02 Revenue Procedure 65-17 was previously discussed in Revenue Procedure 65-31, C.B. 1965-2, 1024; amended by Revenue Procedure 65-17, Amendment I, C.B. 1966-2, 1211; amplified and clarified by Revenue Procedure 70-23, C.B. 1970-2, 505; and amplified by Revenue Procedure 71-35, C.B. 1971-2, 573.