Rev. Proc. 70-8

Section 1. Purpose

This Revenue Procedure prescribes the procedure to be followed with respect to the claiming of any set-offs to adjustments proposed by the district director pursuant to section 482 of the Internal Revenue Code of 1954.

Sec. 2. Background

.01 Section 1.482-1(d)(3) of the Income Tax Regulations provides:

In making distributions, apportionments, or allocations between two members of a group of controlled entities with respect to particular transactions, the district director shall consider the effect upon such members of an arrangement between them for reimbursement within a reasonable period before or after the taxable year if the taxpayer can establish that such an arrangement in fact existed during the taxable year under consideration. The district director shall also consider the effect of any other nonarm's length transaction between them in the taxable year which, if taken into account, would result in a set-off against any allocation which would otherwise be made, provided the taxpayer is able to establish with reasonable specificity that the transaction was not at arm's length and the amount of the appropriate arm's length charge.

.02 Such section of the regulations further provides:

In order to establish that a set-off to the adjustments proposed by the district director is appropriate, the taxpayer must notify the district director of the basis of any claimed set-off at any time before the expiration of the period ending 30 days after the date of a letter by which the district director transmits an examination report notifying the taxpayer of proposed adjustments or before July 16, 1968, whichever is later.

.03 The requirement that the taxpayer notify the district director of the basis of any claimed set-off is separate and distinct from the requirements that the taxpayer "establish that such an arrangement in fact existed" or that he "establish with reasonable specificity that the transaction was not at arm's length and the amount of the appropriate arm's length charge". The former requires that the non-arm's length transactions upon which the claimed set-off is based be sufficiently identified in the notification to the district director so as to constitute a reasonable foundation for the claimed set-off and to permit verification by the Service. The latter requirements involve the proving of the claimed set-off.

.04 The requirement that the taxpayer notify the district director "of the basis of any claimed set-off at any time before the expiration of the period ending 30 days after the date of a letter by which the district director transmits an examination report notifying the taxpayer of proposed adjustments" applies whether the claimed set-off is based on an "arrangement. . . . for reimbursement" or based on "other non-arm's length" transactions. Ordinarily, the taxpayer will be able to notify the district director of the basis of any claimed set-off during the course of an examination, prior to the time a "30-day" letter is issued. In unusual circumstances, this may not be so. However, orderly administration of the Internal Revenue Code necessitates a reasonable cut-off point as to the raising of any set-offs. The timing provision concerning the notification accommodates both considerations. Accordingly, where a taxpayer does not file a protest to the 30-day letter, the notification must be filed within 30 days after receipt of that letter unless an extension has been granted by the district director. The request for an extension must be filed before the 30 day period has expired. Where the taxpayer files a timely protest, a notification accompanying the protest will be considered timely. The provisions of section 7502 of the Code apply as to timeliness of any mailed notification.

.05 To meet the burden of proof concerning any claimed set-off it will be necessary for the taxpayer to furnish certain detailed information as specified in section 1.482-1(d)(3) of the regulations. Early submission of such information, when possible, will be to the advantage of both the taxpayer and the Service. Normally, the information should be submitted concurrently with the "notification", or shortly thereafter; however, it is recognized that in certain cases, this may not be possible. The procedural situation, in such instances, is not greatly different than exists when a taxpayer takes exception to any other proposed adjustment. Therefore, the question concerning the appropriateness of granting additional time in this regard lies entirely within the administrative discretion of the district director.

Sec. 3. Procedures To Be Followed

.01 The notification to the district director required under section 1.482-1(d)(3) of the regulations must be a separate written statement and is to be submitted in duplicate.

.02 The notification must sufficiently identify the arrangement for reimbursement or any other non-arm's length transactions upon which the claimed set-off is based so as to constitute a reasonable foundation for the claimed set-off and permit verification by the Service.

.03 It should also contain:

1 The taxapayer's name, address and employer or social security identification number;

2 The date and symbols on the letter which transmitted the proposed adjustments, if such letter has been received; and

3 The taxable year(s) involved.

.04 The statement made in the notification, and all evidence submitted, must be declared by the taxpayer to be true under penalties of perjury.

.05 If a representative prepares or files the notification, instead of the declaration required by section 3.04 above, he may substitute a declaration stating that:

1 He prepared the notification and accompanying documents, and

2 He knows personally that the statements it contains are true.

.06 An incomplete or improper notification will not extend the period within which the district director is to be notified. Therefore, the taxpayer must be careful to include sufficient information in his notification and, if possible, to submit it in sufficient time to permit correction of any deficiencies within the prescribed limitation period. Thus, when possible, the notification should be submitted during the examination prior to issuance of the 30-day letter which transmits the examination report of proposed adjustments.

.07 When appropriate, a previously submitted notification may be incorporated by reference into a protest filed by the taxpayer.

.08 To expedite the examination, information necessary to establish the claimed set-off should accompany the notification or be submitted as soon thereafter as possible. Such information must establish that an arrangement for reimbursement did in fact exist during the taxable year under consideration; or establish with reasonable specificity that the transaction was not at arm's length, as well as the amount of the appropriate arm's length charge.

.09 The taxpayer will be required to make available to the district director such information as he may require to examine the transactions relied upon by the taxpayer. In this connection, the taxpayer must execute such consents extending the statute of limitations as the district director, in his discretion, determines to be necessary to enable him to examine the transactions raised by the taxpayer as set-offs.

Sec. 4. Inquiries

Inquiries regarding this Revenue Procedure should be addressed to the Director, Audit Division (CP:A:T), Internal Revenue Service, Washington, D.C. 20224.