Rev. Proc. 65-17

SECTION 1. SCOPE.

This Revenue Procedure prescribes the position of the Internal Revenue Service and the procedures to be followed in cases in which a United States taxpayer, whose taxable income has been increased for a taxable year by reason of an allocation under section 482 of the Internal Revenue Code of 1954 (section 45 of the Internal Revenue Code of 1939), requests permission to receive payment from the entity from, or to, which the allocation of income or deductions, was made of an amount equal to a part or all of the amount allocated, without further Federal income tax consequences.

SEC. 2. BACKGROUND AND PURPOSE.

Section 482 of the Code gives the Internal Revenue Service authority to `distribute, apportion or allocate gross income, deductions, credits, or allowances' among certain related organizations, trades or businesses if it `determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income' of any such entity. In applying section 482 of the Code, the Service will, in appropriate cases and pursuant to a closing agreement, permit taxpayers whose income has been increased by the Service under section 482 of the Code to make certain adjustments to conform their accounts to reflect the section 482 allocations. The cases in which such adjustments will be permitted are outlined in section 3, below. The types of adjustment permitted are described in section 4 and the prescribed procedures are set forth in section 5. Any reference in this Revenue Procedure to an increase in taxable income shall also be deemed a reference, in an appropriate case, to a reduction in a taxpayer's loss.

SEC. 3. CASES IN WHICH ADJUSTMENT OF ACCOUNTS WILL BE PERMITTED.

A United States taxpayer shall qualify for the treatment provided in this Revenue Procedure:

.01 If for a taxable year beginning prior to January 1, 1963, the taxable income of such taxpayer is increased by the Internal Revenue Service under section 482 of the Code, or

.02 If for a taxable year beginning after December 31, 1962, the taxable income of such taxpayer is increased by the Internal Revenue Service under section 482 of the Code and it is determined by the Service that the arrangements or transactions, or the terms thereof, giving rise to the section 482 allocation did not have as one of their principal purposes the avoidance of Federal income tax. The datermination as to whether one of the principal purposes was avoidance of Federal income tax will be based upon all the facts and circumstances of the case. Among the factors which will be considered are are dividends received from the corporation with which the transaction or arrangement giving rise to the section 482 allocation was consummated, whether the taxpayer attempted in good faith to comply with the regulations theretofore promulgated contravened such 482 of the Code, the extent to which the arrangement contravened such regulations, and the amount of income tax, including any income tax levied by a foreign country, which resulted from the transaction. The relative weight to be given any one factor will depend on the facts of each case. The fact that the other party to the transaction or arrangement giving rise to the section 482 allocation is a foreign corporation or a Western Hemisphere trade corporation shall not in and of itself be a basis for a finding that one of the principal purposes of the transaction or arrangement was avoidance of Federal income tax.

.03 A taxpayer shall not qualify under section 3.01 or 3.02, above, for the treatment provided in this Revenue Procedure if any part of any underpayment of tax by such taxpayer for the taxable year involved in the allocation is due to fraud.

SEC. 4. ADJUSTMENTS TO BE MADE OR ALLOWED.

.01 If a taxpayer qualifying under section 3 above complies with the requirements of section 5 below, such taxpayer shall be permitted to exclude from his gross income all or part of any dividend which

1 was received from the corporation (as defined in section 7701(a)(3) of the Code) with which it engaged in the transaction or arrangement giving rise to the section 482 allocation (the `other corporation') and

2 was included in the gross income of the taxpayer as a dividend (within the meaning of section 316 of the Code) for the year for which the allocation is made,

provided that the amount so excluded shall not exceed the amount of the increase in the taxable income of such taxpayer resulting from the section 482 allocation from the other corporation less the amount of any offset which is allowed to that taxpayer under section 3 of Revenue Procedure 64-54, C.B. 1964-2, 1008, with respect to such section 482 allocation. To the extent that a dividend is excluded from income pursuant to this paragraph, it shall cease to qualify as a dividend under section 316 of the Code or a distribution under section 963 of the Code or as a dividend for any Federal income tax purpose; for instance, no foreign tax shall be deemed to have been paid with respect thereto under section 902 of the Code for the purpose of the credit allowed under section 901 of the Code and no dividend received deduction shall be allowed with respect thereto under sections 241 through 247 of the Code. An amount includible in income under sections 551 or 951 of the Code shall not be considered a dividend for purposes of this paragraph. .02 If a taxpayer qualifying under section 3, above, complies with the requirement of section 5, below, such taxpayer shall be entitled to establish an account receivable from the entity with which it engaged in the transaction or arrangement giving rise to the section 482 allocation (the `other entity'). Such account receivable shall not exceed

1 The amount of the increase in the taxable income of such taxpayer resulting from the section 482 allocation from the other entity, less

2 The amount of any offset which is allowed to the taxpayer under section 3 of Revenue Procedure 64-54 with respect to such section 482 allocation, and less

3 Any amount excluded by the taxpayer pursuant to section 4.01, above, and plus

4 The interest accrued on such account receivable and included in taxable income pursuant to section 4.03, below.

Except as provided in section 4.03, below, the account receivable may be established and paid without tax consequences, provided that such account receivable is paid within 90 days after the date of the closing agreement required by section 5.013, below. Payment must be in the form of money, a written debt obligation payable at a fixed date and bearing interest at an arm's length rate determined in the manner provided in section 1.482-2(a)(2) of the Income Tax Regulations (or the proposed regulations if such regulations are not yet in force), or an accounting entry offsetting such account receivable against an existing debt owed by the taxpayer to the other entity.

.03. The account receivable established in accordance with section 4.02, above (except for the accrued interest) shall be deemed to have been created as of the last day of the taxpayer's taxable year for which the allocation under section 482 of the Code is made. Such account receivable shall bear interest at an arm's length rate, computed in the manner provided in section 1.482-2(a)(2) of the regulations (or the proposed regulations if such regulations are not yet in force), from the day after the date the account is deemed to have been created or from the first day of the taxpayer's first taxable year beginning after December 31, 1962, whichever is later, to the date of payment. The interest so computed shall be accrued and included in the taxpayer's taxable income for each taxable year during which the account receivable is deemed outstanding.

.04 A taxpayer's election to avail itself of the provisions of this Revenue Procedure shall in no way affect the allocation made by the Service under section 482 of the Code. Such election shall, however, affect the taxpayer's taxable income and credits to the extent indicated by sections 4.02 and 4.03, above.

SEC. 5. PROCEDURES TO BE FOLLOWED.

.01 Cases pending with the Internal Revenue Service .

1 If a United States taxpayer desires to avail itself of the treatment provided in section 4, above, it must file a request in writing with the District Director of Internal Revenue before closing action is taken on the section 482 issue. The request shall be signed by a person having the authority to sign the taxpayer's Federan income tax returns, and shall contain the following:

(a) A request that the taxpayer desires the treatment provided by section 4 of this Revenue Procedure for the years indicated:

(b) If the taxable year of the taxpayer to which the allocation relates began after December 31, 1962, a statement that the arrangements or transactions, or the terms thereof, which gave rise to the section 482 allocation were not consummated in a manner which had as one of its principal purposes the avoidance of Federal income tax, and that the taxpayer will cooperate fully with the Service in providing evidence supporting such statement;

(c) An offer to enter into a closing agreement under section 7121 of the Code as provided for in section 5.013, below.

2 The Service will determine whether the taxpayer qualifies for the requested treatment and inform the taxpayer of its decision. If the request is rejected, the taxpayers may pursue the matter through established channels of appeal.

3 If the Service concludes that section 4, above, properly applies and if the amount of the section 482 allocation has been agreed upon, the taxpayer will be requested to enter into a closing agreement under section 7121 of the Code establishing for each year involved:

(a) The amount of the section 482 allocation;

(b) The amount of any tax offset allowed under section 3 of Revenue Procedure 64-54 with respect to such allocation;

(c) The amount of any dividends received which the taxpayer elects to exclude from income under section 4.01, above;

(d) The amount of interest on the account receivable includible in income pursuant to section 4.03, above, and the years of such inclusion;

(e) The net amount of the account receivable which the taxpayer elects to establish under section 4.02, above;

(f) The manner of payment of the account receivable referred to in (e) above, and the taxpayer's right to receive such payment free of further Federal income tax consequences, provided such payment is made within 90 days after execution of the closing agreement on behalf of the Commissioner;

(g) The amount of any foreign tax credits claimed in the taxable year of the section 482 allocation which have ceased to be allowable in that year by reason of the election by the taxpayer to exclude amounts received as dividends from gross income pursuant to section 4.01, above. Where a foreign tax credit, attributable to a dividend being excluded from gross income under this revenue procedure, has been carried back to a year for which the statute of limitations for assessment of tax has run, appropriate adjustment will be required.

.02 Cases pending before the Tax Court of the United States .-If a case reaches trial status in the Tax Court and it is determined that the taxpayer is entitled to the benefits of the provisions of section 4, above, the parties may stipulate or otherwise arrange with the Court so that any adjustment in tax for the years before the Court will reflect the application of section 4, above, provided the taxpayer executes the required closing agreement.

.03 Closed Cases .-In any case involving a section 482 allocation which has been closed, that taxpayer may file a request for the treatment provided by section 4, above, if such treatment will not change the taxpayer's tax liability for a year which is barred by the statute of limitations, or a year for which the tax liability has been finally determined by offer in compromise, closing agreement, or court action. Such request must be filed within 180 days after May 24, 1965 (the date this Revenue Procedure is published in the Internal Revenue Bulletin) with the District Director for the district in which the taxpayer's tax return for the year covered by the section 482 allocation was filed and shall contain the information required by section 5.011, above. The request will then be processed in the same manner as in a pending case, described in sections 5.012 and 5.013, above.

.04 Cases within the jurisdiction of the Department of Justice .-If a taxpayer files with the appropriate District Director a request for treatment under section 4, above, with respect to a case within the jurisdiction of the Department of Justice, the Service, through its Chief Counsel, will recommend to the Department of Justice the action to be taken with respect to the taxpayer's request.

¹ Also released as Technical Information Release 723, dated Apr. 23, 1965.