Rev. Proc. 84-3

Rev. Proc. 84-3

SECTION 1. SCOPE

This revenue procedure, in accordance with section 1.994-1(e)(5)(v) of the Income Tax Regulations, prescribes the conditions and the procedures to be followed in cases in which intercompany prices paid by a DISC to its related supplier or commissions paid by a related supplier to a DISC, as originally determined by the parties under section 994 of the Internal Revenue Code, are redetermined by the Internal Revenue Service in a manner that results in an increase of the intercompany prices or reduction of the commissions. Procedures are prescribed below by which the DISC's related supplier and/or shareholder may request an adjustment of accounts and a reclassification of actual distributions previously made with respect to all or a part of the amount of the pricing or commission redetermination.

SEC. 2. BACKGROUND AND PURPOSE

Section 995(b) of the Code treats a portion of a DISC's taxable income for each taxable year as a deemed distribution to its shareholder, which is taxable to the shareholder as a dividend. Under section 996(a)(3) of the Code, actual distributions by a DISC out of previously taxed income (PTI), which consists of amounts taxed to a DISC's shareholder under section 995(b) are excluded from the shareholder's gross income. Actual distributions by a DISC out of its accumulated DISC income (ADI) or other earnings and profits (not constituting either PTI or ADI) are taxable to the DISC's shareholder as ordinary dividends.

Redeterminations by the Service of intercompany prices or commissions determined under the section 994(a) pricing rules generally have the effect of reducing a DISC's PTI and ADI for the taxable year of the redetermination. As a result of such a reduction in PTI, a portion of any nontaxable distribution previously made by a DISC out of PTI as originally computed by the parties is reclassified as a taxable distribution out of ADI or other earnings and profits.

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

3.01 The treatment provided in this revenue procedure will be available with respect to all transactions for any taxable year of a DISC to which intercompany prices paid by the DISC to its related supplier, or commissions paid by the related supplier to the DISC, as originally determined by the parties under section 994 of the Code, are subsequently redetermined by the Service in a manner that results in an increase of the intercompany prices or reduction of the commissions provided it is determined by the Service that the arrangements or transactions, or the terms thereof, giving rise to the redetermined intercompany prices or commissions did not have as one of their principal purposes the avoidance of Federal income tax. The determination 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.

3.02 The treatment provided in all revenue procedure will not be available if any part of any underpayment of tax by the related supplier and/or shareholder for any taxable year affected by the Service's redetermination is due to fraud.

SEC. 4. ADJUSTMENTS TO BE MADE OR ALLOWED

4.01 In a case qualifying under section 3 above in which the DISC's shareholder complies with the requirements of section 5 below, the shareholder shall be permitted to exclude from its gross income all or part of any actual distribution received from the DISC that was originally a nontaxable distribution out of the DISC's PTI, but would (but for the application of this section 4.01) be converted into a taxable distribution out of the DISC's ADI or other earnings and profits by reason of a redetermination of DISC taxable income made by the Service for the taxable year of the DISC in which such distribution occurred. To the extent that a distribution is excluded from gross income pursuant to this paragraph, it shall not qualify as a distribution out of any of the DISC's earnings and profits accounts, or as a dividend under section 316 of the Code or for any other Federal income tax purpose; for example, no foreign tax shall be deemed to have been paid with respect thereto for purposes of the foreign tax credit under section 901(d) of the Code.

4.02 In a case to which section 4.01 above applies, the account receivable established under section 1.994-1(e)(5) of the regulations by the DISC's related supplier in respect of the transactions which gave rise to the redetermination of the intercompany prices or commissions shall be deemed to have been paid by the DISC to the related supplier within 90 days after the date on which such account receivable was established to the extent of any amount excluded from the gross income of the DISC's shareholder pursuant to section 4.01 above. Thus, any distribution excluded from gross income under section 4.01 shall be reclassified and treated as a timely payment of any equivalent portion of the amount owed by the DISC to the related supplier by reason of the redetermination. The time, manner, and payment of any excess of an account receivable over an amount reclassified under the preceding sentence and also the interest attributable to an account receivable shall be governed by the rules set forth in section 1.994-1(e)(5) of the regulations.

4.03 If the shareholder referred to in section 4.01 above and the related supplier referred to in section 4.02 above are different parties, the related supplier shall establish an account receivable from the shareholder for any amount which is excluded from the gross income of the shareholder under section 4.01 and deemed paid to the related supplier under section 4.02. The time and manner of payment of such account receivable and interest attributable thereto shall be governed by the rules applicable to accounts receivable established under section 1.994-1(e)(5) of the regulations.

4.04 The election of a DISC's shareholder to invoke this revenue procedure in no way affects the redetermination by the Service of the intercompany prices payable by the DISC or the commissions payable to the DISC. Such election shall, however, affect the taxable income of the shareholder, the DISC, and the DISC's related supplier to the extent indicated by sections 4.01, 4.02, and 4.03 above.

SEC. 5. PROCEDURES TO BE FOLLOWED

5.01 Cases pending with the Internal Revenue Service

1. If a DISC's shareholder desires to invoke this revenue procedure, it must file a request in writing with the District Director of Internal Revenue or the Appeals Office having jurisdiction of the case before closing action is taken on the redetermination of DISC taxable income. The request shall be signed by a person having the authority to sign the shareholder's Federal income tax returns, and shall contain the following:

(a) a request that the shareholder be granted the treatment provided by section 4 of this revenue procedure for the years indicated; and

(b) an offer to enter into a closing agreement under section 7121 of the Code as provided in section 5.013 below.

2. The Service will determine whether the affected parties qualify under section 3 above for the requested treatment and inform the shareholder of its decision. If the request is rejected, the shareholder may pursue the matter through established channels of administrative appeal.

3. If the Service concludes that section 4 above properly applies and if the amount of the redetermination of DISC taxable income has been agreed upon, the shareholder will be requested to enter into a closing agreement, binding itself, the DISC, and any affected related supplier, establishing for each year involved:

(a) the amount of the redetermination of DISC taxable income;

(b) the amount of any actual distributions received by the shareholder which it elects to exclude from income under section 4.01 above;

(c) the amount of the account receivable from the DISC established by the DISC's related supplier under section 1.994-1(e)(5) of the regulations, net of the deemed payment under section 4.02 above;

(d) the amount of the account receivable from the DISC's shareholder established by the related supplier under section 4.03 above; and

(e) the parties' rights to receive payment of the accounts receivable referred to in (c) and (d) above free of further Federal income tax consequences, provided such payments are made within the time and in the manner prescribed by sec. 1.994-1(e)(5) of the regulations.

5.02 Cases pending before the United States Tax Court.-- If a case has reached 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 DISC's shareholder executes the required closing agreement.

5.03 Closed cases.--In any closed case involving a redetermination of DISC income, the DISC's shareholder may file a request for the treatment provided by section 4 above, if such treatment will not change any taxpayer's 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 January 9, 1984, with the District Director for the District in which the shareholder filed its tax return for the year to which such redetermination relates, 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.

5.04 Cases with the jurisdiction of the Department of Justice--If a taxpayer files a request for treatment under section 4 above with the appropriate District Director, with respect to a case within the jurisdiction of 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.

SEC. 6. EFFECTIVE DATE

This revenue procedure will not be effective until section 1.994-1(e)(5)(v) of the proposed Income Tax Regulations published in the Federal Register on January 9, 1984, is adopted in final form.