Treatment of Services Under Section 482; Allocation of Income and Deductions From Intangible Property; Stewardship Expense, 38830-38876 [E9-18326]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 74, Number 148 (Tuesday, August 4, 2009)]
[Rules and Regulations]
[Pages 38830-38876]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-18326]



[[Page 38829]]

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Part IV





Department of the Treasury





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Internal Revenue Service



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26 CFR Parts 1 and 31, and 602



Treatment of Services Under Section 482; Allocation of Income and 
Deductions From Intangible Property; Stewardship Expense; Final Rule

Federal Register / Vol. 74, No. 148 / Tuesday, August 4, 2009 / Rules 
and Regulations

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 31, and 602

[TD 9456]
RIN 1545-BI78, 1545-BI79, 1545-BI80


Treatment of Services Under Section 482; Allocation of Income and 
Deductions From Intangible Property; Stewardship Expense

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations that provide guidance 
regarding the treatment of controlled services transactions under 
section 482 and the allocation of income from intangible property, in 
particular with respect to contributions by a controlled party to the 
value of intangible property owned by another controlled party. This 
document also contains final regulations that modify the regulations 
under section 861 concerning stewardship expenses to be consistent with 
the changes made to the regulations under section 482. These final 
regulations potentially affect controlled taxpayers within the meaning 
of section 482. They provide updated guidance necessary to reflect 
economic and legal developments since the issuance of the current 
guidance.

DATES: Effective Date: These regulations are effective on July 31, 
2009.
    Applicability Dates: These regulations apply to taxable years 
beginning after July 31, 2009.

FOR FURTHER INFORMATION CONTACT: Carol B. Tan or Gregory A. Spring, 
(202) 435-5265 for matters relating to section 482, or Richard L. 
Chewning (202) 622-3850 for matters relating to stewardship expenses 
(not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-2149. The collection of information 
in these final regulations is in Sec.  1.482-9. This information is 
required to enable the IRS to verify that a taxpayer is reporting the 
correct amount of taxable income. An agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of information 
unless it displays a valid control number.
    Books and records relating to a collection of information must be 
retained as long as their contents might become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    Section 482 of the Internal Revenue Code generally provides that 
the Secretary may allocate gross income, deductions, and credits 
between or among two or more organizations, trades or businesses owned 
or controlled by the same interests in order to prevent evasion of 
taxes or clearly to reflect income of a controlled taxpayer.
    Regulations under section 482 published in the Federal Register (33 
FR 5849) on April 16, 1968, provided guidance with respect to a wide 
range of controlled transactions, including transfers of tangible and 
intangible property and the provision of services. Revised and updated 
transfer pricing regulations were published in the Federal Register (59 
FR 34971, 60 FR 65553, 61 FR 21955, and 68 FR 51171) on July 8, 1994, 
December 20, 1995, May 13, 1996, and August 26, 2003. While 
comprehensive in other respects, these regulations did not modify 
substantively the rules dealing with controlled services transactions. 
On September 10, 2003, proposed regulations relating to the treatment 
of controlled services transactions and the allocation of income from 
intangible property, in particular with respect to contributions by a 
controlled party to the value of intangible property owned by another 
controlled party (the 2003 proposed regulations), were published in the 
Federal Register (68 FR 53448, REG-146893-02 and REG-115037-00).
    On August 4, 2006, temporary regulations relating to the treatment 
of controlled services transactions, the allocation of income from 
intangible property, and stewardship expenses (the 2006 temporary 
regulations) were published in the Federal Register (71 FR 44466, TD 
9278, REG-146893-02, REG-115037-00, and REG-138603-03). A notice of 
proposed rulemaking cross-referencing the temporary regulations was 
published in the Federal Register on the same day (71 FR 44247, REG-
146893-02, REG-115037-00, and REG-138603-03). Written comments 
responding to the notice of proposed rulemaking were received, and a 
public hearing was held on October 27, 2006.
    The 2006 temporary regulations are generally effective with respect 
to taxable years beginning after December 31, 2006, and Notice 2007-5, 
2007-1 C.B. 269, published on January 16, 2007, partially modified the 
effective date of the 2006 temporary regulations as it pertained to the 
identification of controlled services transactions eligible to be 
priced at cost. Accordingly, the 2006 temporary regulations related to 
the new services cost method in Sec.  1.482-9T(b) (described in Section 
A.1 in this preamble) apply to taxable years after December 31, 2007, 
with the exception of the business judgment rule described in Sec.  
1.482-9T(b)(2), which had the same effective date (taxable years after 
December 31, 2006) as the other provisions of the temporary 
regulations.
    By issuing the 2006 temporary regulations in temporary and proposed 
form, the Treasury Department and the IRS provided taxpayers an 
opportunity to submit additional comments prior to the time these 
regulations became effective. See Sec.  601.601(d)(2)(ii)(b). After 
consideration of all the comments, the proposed regulations under 
section 482 are adopted as revised by this Treasury decision, and the 
corresponding temporary regulations are removed.

Explanation of Revisions and Summary of Comments

Introduction

    The Treasury Department and the IRS received a number of comments 
on the 2006 temporary regulations from taxpayers, their 
representatives, as well as industry and professional groups. 
Commentators generally approved of the 2006 temporary regulations and 
found the changes from the 2003 proposed regulations to be useful. 
Specifically, commentators approved of the replacement of the 
simplified cost-based method with the services cost method (SCM) and 
the inclusion of the shared services arrangement provision in the SCM 
rules. Commentators also generally approved of changes made to the 
profit split method. However, commentators did express concerns with 
some aspects of the 2006 temporary regulations.
    While these final regulations reflect some modifications in 
response to comments received on the 2006 temporary regulations, both 
the format and the substance of the final regulations are generally 
consistent with the 2006 temporary regulations. The changes adopted are 
intended to make certain clarifications and improvements without 
fundamentally altering the policies reflected in the 2006 temporary 
regulations.

[[Page 38831]]

Explanation of Provisions

A. Controlled Services

1. Services Cost Method--Treas. Reg. Sec.  1.482-9(b)
a. Applicability of the Services Cost Method
    Most comments focused on the SCM. Several commentators requested 
confirmation that application of the SCM is a matter within the control 
of the taxpayer, provided that the underlying services otherwise 
qualify for the SCM. Some commentators stated that the 2006 temporary 
regulations could be interpreted as requiring a taxpayer to apply the 
SCM if all the conditions for that method were satisfied.
    Notice 2007-5 confirmed that taxpayers control whether the SCM 
applies. The final regulations make this clear. Section 1.482-9(b)(1) 
provides that, if a taxpayer applies the SCM in accordance with the 
rules of Sec.  1.482-9(b), which requires that a statement evidencing 
the taxpayer's intent to apply the SCM be contained in the taxpayer's 
books and records, then the SCM will be considered the best method for 
purposes of Sec.  1.482-1(c).
b. Specified Covered Services
    Several commentators contended that the proposed list of specified 
covered services in Announcement 2006-50, 2006-2 C.B. 321, is too 
narrow. One commentator listed tax planning and public relations 
activities as examples of activities not on the list that illustrated 
the narrowness of the list. Some commentators suggested that the list 
should refer to departments, cost centers, or accounting 
classifications, rather than to specific activities or groups of 
activities. One commentator suggested that all activities in particular 
departments should be identified as eligible for the SCM. Commentators 
also stated that a comprehensive analysis would be required and that it 
would be too burdensome to track employee time for activities that are 
specified covered services vs. non-specified covered services. See 
Sec.  601.601(d)(2)(ii)(b). The Treasury Department and the IRS also 
received suggestions to broaden the general administrative provision 
and add additional specific activities to the list of specified covered 
services, including warehousing and distribution, quality control and 
quality assurance relating to manufacturing and construction, and 
environmental remediation.
    The SCM is intended to provide a practical and administrable means 
of identifying low-margin services that may be evaluated by reference 
to total services cost without a markup. The list of services eligible 
to be priced at cost in the specified covered services portion of the 
SCM was added specifically in response to requests from commentators 
that the former simplified cost-based method be eliminated and replaced 
with just such a list of eligible services. In response to public 
comments, the Treasury Department and the IRS published Rev. Proc. 
2007-13, 2007-1 C.B. 295, which added several categories as well as 
activities within existing categories. In particular, public relations 
and tax planning services were added to the list, and the individual 
categories of specified covered services were expanded to include 
``other similar activities.''
    After careful consideration, the Treasury Department and the IRS 
believe that Rev. Proc. 2007-13 strikes the appropriate balance between 
broadening the list to include services similar to the specific 
services described and expanding the categories of services. The 
Treasury Department and the IRS do not believe that other additional 
services suggested by commentators were appropriate, but will continue 
to consider other recommendations for additional services to be added 
to the list in the future.
    One commentator expressed concern that a review of services to 
determine if they qualify as specified covered services may require a 
more extensive analysis than under previous regulations, including 
interviews of individual employees or of small groups of employees. 
Although the covered services list is not applied on a departmental 
basis, a reasonable aggregation of similar services may be appropriate 
for performing the specified covered services analysis in some cases. 
To determine if the services cost method should apply to a particular 
service (or group of services) performed by a group of employees, the 
aggregation principle of Treas. Reg. Sec.  1.482-1(f)(2)(i)(A) should 
be followed as appropriate. In certain cases, aggregation may assure a 
more accurate result, especially if it recognizes synergies that an 
individual employee analysis might ignore. An aggregation of employee 
services may, thus, efficiently evaluate the work of employees engaged 
in a common function, as well as recognize the added value that their 
collaborative effort might produce. Conversely, analysis on an 
aggregate basis does not permit characterization of an individual 
service as a specified covered service if it, in fact, is not a 
specified covered service.
c. Low Margin Covered Services
    Commentators provided comments on low margin covered services 
described in Sec.  1.482-9T(b)(4)(ii) of the 2006 temporary 
regulations. One commentator believed that the 7 percent limit is too 
high for the SCM. In the commentator's view, the limit should be lower 
because the 7 percent figure will cover activities that are risky. Most 
of the commentators, however, believed that the 7 percent limit is an 
appropriate measure. The Treasury Department and the IRS continue to 
believe that the 7 percent limit is appropriate in light of its 
purpose. That is, it minimizes the compliance burden on taxpayers and 
the IRS for relatively low-margin services.
    Several commentators requested more guidance on low margin covered 
services. One commentator suggested that the Treasury Department and 
the IRS develop an analysis to determine if certain services have a 
markup of 7 percent or less and publish the results. For example, the 
IRS could develop a set of comparables for various groups of low margin 
services, such as human resources, accounting and finance, information 
services, and training. Some commentators requested guidance on when 
and how often a transfer pricing study is needed to support a 
determination that services are low margin covered services. In this 
regard, some commentators requested that the regulations specify a 
period of years (such as three years) for which a transfer pricing 
study may be valid for purposes of determining if a service is a low 
margin covered service. In support of this request, one commentator 
stated that the regulations could provide, for example, that the 
reliance period could apply to taxpayers whose facts and circumstances 
have not changed materially from the time the service was most recently 
established as a covered service.
    The Treasury Department and IRS did not adopt this proposal. 
Because there may be significant differences among services across 
different businesses, a standardized, IRS-developed comparables set 
would not be feasible and would conflict with the fact intensive nature 
of an appropriately robust transfer pricing analysis. For similar 
reasons, the Treasury Department and the IRS did not adopt the proposal 
to specify the frequency or timing of transfer pricing analyses to 
support taxpayer positions. To do so would be inconsistent with a 
proper comparability analysis, including consideration of the time at 
which

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transactions were undertaken, as well as other relevant economic 
circumstances.
    One other commentator requested that the midpoint should be used in 
measuring a comparable markup on total services costs for purposes of 
low margin covered services. While it may be true that, in some cases, 
the midpoint could be used depending on the statistical method used, 
the interquartile range ordinarily provides an acceptable measure of an 
arm's length range. See Sec.  1.482-1(e)(2)(iii)(B). Therefore, the 
Treasury Department and the IRS believe that the interquartile range of 
the comparable median markup is an appropriate measure.
d. Excluded Activities
    One commentator requested that engineering be removed from the list 
of services that are ineligible for the SCM in Sec.  1.482-9T(b)(3) of 
the 2006 temporary regulations. This comment was not adopted, since, in 
the view of the Treasury Department and the IRS, intragroup engineering 
services generally should be subject to a robust transfer pricing 
analysis.
e. Business Judgment Rule
    Several commentators expressed concern over how the business 
judgment rule would be administered. Some commentators requested that 
statements in the preamble about the business judgment rule in the 2006 
temporary regulations be incorporated in final regulations. Other 
commentators suggested that the business judgment rule should be 
applied by reference to one or more trades or business of the 
controlled group rather than of the renderer, recipient, or both. These 
commentators claimed that the business judgment rule may yield 
incorrect results in some cases, for example, where a headquarters 
services company or other legal entity is established solely to provide 
centralized support services. The activities performed by such an 
entity would potentially be ineligible for the SCM under the business 
judgment rule because they would constitute the entity's core 
capability.
    The Treasury Department and the IRS agree that the business 
judgment rule should be determined on a controlled group basis and 
expressed this view in Notice 2007-5. The final regulations clarify 
that the business judgment rule is determined by reference to a trade 
or business of the controlled group.
    Section 3.04 of Notice 2007-5 clarified that the business judgment 
rule ``is satisfied by a reasonable exercise of the taxpayer's business 
judgment, not a reasonable exercise of the IRS's judgment in examining 
the taxpayer.'' The Treasury Department and the IRS reiterate that the 
final regulations incorporate a high threshold for application of the 
business judgment rule to exclude services otherwise eligible for the 
SCM. Section 1.482-9(b)(5) provides that the rule is based on a 
taxpayer's reasonable conclusion in its business judgment that the rule 
is satisfied. It has come to the attention of the Treasury Department 
and the IRS that the clarification in the notice of the business 
judgment rule has been misconstrued as creating a non-rebuttable 
presumption that a taxpayer's determination under the business judgment 
rule is always correct. This construction of the clarification was not 
intended and is not supported by the plain language of the business 
judgment rule. The business judgment rule requires a reasonable 
conclusion by the taxpayer. Thus, the taxpayer's business judgment is 
only the starting point of the analysis, and the taxpayer must make a 
reasonable conclusion in that regard. Whether the taxpayer's conclusion 
is reasonable may be subject to examination by the IRS in the course of 
an audit.
    One commentator suggested that the regulations adopt a ``principal 
activity'' test similar to the test described in the Organisation for 
Economic Cooperation and Development Transfer Pricing Guidelines for 
Multinational Enterprises and Tax Administrations (OECD Guidelines) in 
place of the business judgment rule. The Treasury Department and the 
IRS decline to adopt this suggestion. Another commentator pointed out 
that the examples illustrating the business judgment rule more 
accurately describe a high value service or intangible property, rather 
than a covered service. The Treasury Department and the IRS agree that 
some of the examples in the temporary regulations could be read as 
describing transfers of intangible property rather than provisions of 
services involving the intangible property. Some examples have been 
edited to improve clarity, including to ensure that they cannot be read 
as describing transfers of intangible property.
    Commentators also raised questions concerning how to evidence the 
necessary business judgment; for example, whether an executive's 
representation must be preferred to the tax director's. The business 
judgment rule is applied on a case-by-case basis and takes into account 
the taxpayer's facts and circumstances.
    One other commentator requested that the business judgment rule 
take into account whether a particular activity, such as that of a 
corporate tax department, contributes to the operating profit (as 
defined in Sec.  1.482-5(d)(3)) of one or more controlled parties. 
Notice 2007-5 provided several clarifications to the business judgment 
rule, including a clarification that the business judgment rule should 
take into account whether a particular activity contributes to the 
operating profit of one or more controlled parties. After further 
consideration, the Treasury Department and the IRS decided not to add 
an operating profit consideration to the business judgment rule because 
the operating profit concept is broader than the intended rule and 
because it would implicitly require taxpayers to do the type of 
economic analysis (and create the attendant administrative burden for 
taxpayers) that the business judgment rule is intended to eliminate.
    The Treasury Department and the IRS continue to believe, however, 
that the conclusion in Notice 2007-5 is correct--that activities such 
as back office tax services should not fail the business judgment rule 
because they may affect net income by reducing domestic or foreign 
income taxes. Depending on the facts and circumstances, tax services 
may or may not satisfy the business judgment rule.
f. Reorganization of the SCM
    Section 1.482-9T(b) of the 2006 temporary regulations contains 
several requirements, all of which have to be satisfied in order for 
the SCM to be applicable. In other words, the requirements under Sec.  
1.482-9T(b) are conjunctive; failure to satisfy one of the requirements 
renders a service ineligible for SCM treatment regardless of whether 
any of the other requirements is satisfied. The Treasury Department and 
the IRS are aware that the rules under Sec.  1.482-9T(b) have been 
misinterpreted as disjunctive such that satisfaction of only one of the 
requirements renders a service eligible for the SCM. This view is 
unsupported by the plain language of Sec.  1.482-9T(b). To improve 
clarity, the requirements for the SCM are reorganized in the final 
regulations. Section Sec.  1.482-9(b)(2) lists the conditions necessary 
for a service to be eligible for the SCM and provides a cross-reference 
to the paragraph in Sec.  1.482-9(b) that corresponds to each 
condition. In summary, to be eligible for the SCM, a service must be a 
covered service, the service cannot be an excluded activity, the 
service cannot be precluded from constituting a covered service by 
reason of the business judgment rule, and adequate books and records 
must be maintained with respect to the service. The

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reorganization does not substantively change the SCM rules.
    Modifications have also been made to the list of excluded 
activities to harmonize it with Rev. Proc. 2007-13. In particular, 
instead of referring to ``excluded transactions,'' the regulations now 
refer to ``excluded activities.''
g. Shared Services Arrangements
    In general, commentators supported the shared services arrangement 
(SSA) provision in the 2006 temporary regulations as a useful mechanism 
for allocation of costs from shared or centralized services. 
Commentators called into question, however, the restriction of SSAs to 
covered services priced under the SCM. In response, Notice 2007-5 
provided that a SSA may be used for controlled services transactions 
outside of the SCM context. Specifically, Notice 2007-5 states: ``This 
Notice confirms that taxpayers may also make allocations of arm's 
length charges for services ineligible for the SCM that yield a benefit 
to multiple members of a controlled group. In such a case, however, the 
flexible rules under the SCM for establishing the joint benefits and 
selecting the allocation key are inapplicable. Instead, the more robust 
analysis under the general transfer pricing rules applies for purposes 
of determining the appropriate arm's length charges, benefits, 
allocation keys, etc.'' The Treasury Department and the IRS considered 
providing additional SSA rules to services priced under methods other 
than the SCM, but concluded that such rules would be unnecessary. In 
any event, as stated in Notice 2007-5, the flexible SSA rules for 
establishing the joint benefits and selecting the allocation key are 
inapplicable in the non-SCM context.
    Other commentators requested that a SSA should be respected even if 
a party that reasonably anticipates a benefit makes a payment 
equivalent to its share under an SSA to the service provider pursuant 
to a different arrangement. For example, assume that a controlled 
service provider performs services to ten taxpayers that are members of 
its controlled group. Assume further that nine of the service 
recipients agree in a single written contract to allocate the arm's 
length charge based on a reasonable allocation basis, but the tenth 
service recipient pays for its share of the services pursuant to a 
separate agreement. These comments were not adopted because whether an 
agreement constitutes a SSA requires a case-by-case determination based 
on the facts and circumstances.
    Some commentators observed that the SSA rules require the 
allocation of costs on the basis that ``most reliably reflects'' the 
participants' respective shares of reasonably anticipated benefits, but 
some of the examples use the phrase ``precisely known.'' This led the 
commentators to question whether the SSA rules create an unattainable 
standard or, at least, a higher standard than the reasonable standard 
for allocation of costs described in Treas. Reg. Sec.  1.482-9T(k) and 
to suggest a change to the examples. The examples do not create a 
standard based on precisely known shares of reasonably anticipated 
benefits. Rather, the examples use hypothetical, precisely known 
reasonably anticipated benefits as a measuring stick to provide an 
easily understood comparative analysis of potential allocation keys for 
illustrative purposes. The suggested changes are not adopted.
2. Comparable Uncontrolled Services Price Method--Treas. Reg. Sec.  
1.482-9(c)
    The comparable uncontrolled services price (CUSP) method evaluates 
whether the consideration in a controlled services transaction is arm's 
length by comparison to the price charged in a comparable uncontrolled 
services transaction. This method is closely analogous to the 
comparable uncontrolled price (CUP) method in Sec.  1.482-3(b).
    One commentator objected to the statement in the second sentence of 
Sec.  1.482-9T(c)(1) of the 2006 temporary regulations that, to be 
evaluated under the CUSP method, a controlled service ordinarily must 
be ``identical to or have a high degree of similarity'' to the 
uncontrolled comparable transactions. The commentator claimed that such 
language creates a higher standard for determining the best method than 
in the rest of the section 482 regulations. For example, both Sec.  
1.482-1(c)(1) and Sec.  1.482-9T(c)(2)(i) refer to the ``most reliable 
measure of an arm's length result'' standard. The sentence in question 
was intended merely as a guide to when the CUSP method is applicable. 
It was not intended to change the standard under the best method rule. 
To avoid further confusion, the sentence is removed, but without 
effecting a substantive change.
    The CUSP method in these final regulations is substantially similar 
to the corresponding method in the 2006 temporary regulations.
3. Cost of Services Plus Method--Treas. Reg. Sec.  1.482-9(e)
    The cost of services plus method is generally analogous to the cost 
plus method for transfers of tangible property in existing Sec.  1.482-
3(d). The cost of services plus method evaluates whether the amount 
charged in a controlled services transaction is arm's length by 
reference to the gross services profit markup realized in comparable 
uncontrolled transactions. Section 1.482-9T(e)(3)(ii)(A) provides that, 
if the appropriate gross services profit markup is derived from 
comparable uncontrolled services transactions of other service 
providers, then, in evaluating comparability, the controlled taxpayer 
must consider the results under this method expressed as a markup on 
total services costs of the controlled taxpayer because functional 
differences may be reflected in differences in service costs other than 
those included in comparable transactional costs.
    One commentator objected to the required consideration of the 
results of the cost of services plus method expressed as a markup on 
total services costs of the controlled taxpayer when external 
comparables are utilized. In the commentator's view, this rule requires 
a confirming analysis under a comparable profits method (CPM) and, 
therefore, places an undue burden on the taxpayer. The same commentator 
also expressed the concern that the rule would create an even greater 
burden by requiring two sets of external comparables for application of 
the two methods.
    These comments are not adopted for several reasons. First, the 
restatement of the price does not require researching two sets of 
external comparables under two different methods. The sole purpose of 
the calculation is to determine whether it is necessary to perform 
additional evaluation of functional comparability under the cost of 
services plus method. That is, if the price indicates a markup on the 
renderer's total services cost that is either low or negative when 
restated, this may indicate differences in functions that have not been 
accounted for under the traditional comparability factors under the 
cost of services plus method. Thus, a low or negative markup merely 
suggests the need for additional inquiry, which may lead to a 
determination that the cost of services plus method is not the most 
reliable measure of an arm's length result under the best method rule.
    The cost of services plus method is adopted in the final 
regulations without change.
4. Profit Split Method--Treas. Reg. Sec. Sec.  1.482-9(g) and 1.482-
6(c)(3)(i)(B)
    The final regulations provide additional guidance concerning 
application of the comparable profit

[[Page 38834]]

split and the residual profit split methods to controlled services 
transactions in Sec.  1.482-9(g) and Sec.  1.482-6(c)(3)(i)(B). 
Generally, the comparable profit split and the residual profit split 
methods evaluate whether the allocation of the combined operating 
profit or loss attributable to one or more controlled transactions is 
arm's length by reference to the relative value of each controlled 
taxpayer's contributions to the combined operating profit or loss.
    The Treasury Department and the IRS received several comments on 
the profit split method. One commentator requested that Sec.  1.482-
8T(b), Example 12 of the 2006 temporary regulations explain why the 
profit split method is preferable to using the financial results of a 
set of publicly-traded companies engaged in selling merchandise and 
related promotion and marketing activities. Example 12 is revised in 
the final regulations to address this comment.
    Another commentator argued that the profit split method should not 
apply to a party that does not own valuable intangible property or does 
not use any such property in the related party transaction being 
evaluated. The commentator noted that other parts of the regulations, 
such as the CPM, CUSP method, and costs of services plus method 
reference valuable intangible property in the examples. The same 
commentator asserted that the profit split method should be limited to 
parties that bear substantial risk in their intercompany transactions. 
The Treasury Department and the IRS believe that limiting application 
of the profit split method to contributions of valuable intangible 
property or the bearing of risks would be inappropriate. The changes in 
the 2006 temporary regulations to routine and non-routine contributions 
is an appropriate standard and conformed to the changes to Sec.  1.482-
6T(c)(3)(i)(B)(1), which defines a nonroutine contribution as ``a 
contribution that is not accounted for as a routine contribution.'' In 
other words, a nonroutine contribution is one for which the return 
cannot be determined by reference to market benchmarks.
    The 2006 temporary regulations provide that the residual profit 
split method ordinarily is used where multiple controlled taxpayers 
make significant nonroutine contributions. A commentator requested that 
this provision be removed because it suggests that the method always 
applies where there are no market benchmarks. The provision regarding 
the residual profit split method that the commentator requested be 
removed has been changed to conform to language in the cost sharing 
regulations. Accordingly, Sec.  1.482-9(g)(1) provides that the 
residual profit split method may not be used where only one controlled 
taxpayer makes significant nonroutine contributions. The commentator 
also claimed that the residual profit split method contains an 
inconsistency because, although the method applies when there are no 
market benchmarks, the method includes a market benchmark analysis for 
comparability purposes. Compare Sec. Sec.  1.482-9(g)(1) and 1.482-
6(c)(3)(i)(B)(2). The Treasury Department and the IRS do not consider 
that there is an inconsistency. The method contemplates the use of 
market benchmarks, if available, to determine the profit split that 
will be applied to the return to nonroutine contributions already 
determined under the method. The same commentator requested that the 
sentence in Sec.  1.482-6T(c)(2)(ii)(B) of the 2006 temporary 
regulations relating to the comparable profit split method that states 
that ``the comparable profit split method may not be used if the 
combined operating profit (as a percentage of the combined assets) of 
the uncontrolled comparables varies significantly from that earned by 
the controlled taxpayers'' should be deleted. These comments are not 
adopted, since the stated condition is fundamental to comparability 
under the method.
5. Contingent Payments--Treas. Reg. Sec.  1.482-9(i)
    The 2006 temporary regulations provide detailed guidance concerning 
contingent-payment contractual terms. The rules built on the principle 
that, in structuring controlled transactions, taxpayers are free to 
choose from among a wide range of risk allocations. The provision 
acknowledged that contingent-payment terms--terms requiring 
compensation to be paid only if specified results are obtained--may be 
particularly relevant in the context of controlled services 
transactions.
    Commentators raised several concerns about the substance and scope 
of this provision. One commentator said that the regulations do not 
address whether a taxpayer may, in the absence of a written agreement, 
present facts to demonstrate that a contingent payment arrangement best 
reflects the economic substance of the underlying transactions. The 
Treasury Department and the IRS do not agree that an arrangement may be 
treated as a contingent payment arrangement under Sec.  1.482-9(i)(2) 
if the arrangement does not satisfy the requirements of the contingent 
payment arrangement provision, including the written contract 
requirement. However, where the Commissioner exercises its authority 
pursuant to Sec.  1.482-1(d)(3)(ii)(B) to impute contractual terms, the 
taxpayer may present additional facts to indicate if an alternative 
agreement best reflects the economic substance of the underlying 
transaction, consistent with the parties' course of conduct in a 
particular case. See Sec.  1.482-1(d)(3)(ii)(C), Examples 4 and 6.
    The same commentator also pointed out that the requirement to 
evaluate whether a specified contingency bears a direct relationship to 
the controlled services transaction based on all of the facts and 
circumstances should be combined with the specified contingency 
requirement. The Treasury Department and the IRS agree that the 
language in Sec.  1.482-9(i)(2) should be clarified. Accordingly, the 
regulations remove the last sentence in Sec.  1.482-9T(i)(2)(i)(C) of 
the 2006 temporary regulations relating to a specified contingency and 
combine it with the requirement under Sec.  1.482-9T(i)(2)(i)(B). Thus, 
Sec.  1.482-9(i)(2)(i)(B) now requires that the contract state that 
payment for a controlled services transaction is contingent (in whole 
or in part) upon the happening of a future benefit (within the meaning 
of Sec.  1.482-9(l)(3)) for the recipient directly related to the 
activity or group of activities. For this purpose, whether the future 
benefit is directly related to the activity or group of activities is 
evaluated based on all the facts and circumstances.
6. Total Services Costs--Treas. Reg. Sec.  1.482-9(j)
    In the 2006 temporary regulations, total services costs include all 
costs directly identified with provision of the controlled services, as 
well as all other costs reasonably allocable to such services under 
Sec.  1.482-9(k). ``Costs'' must reflect all resources expended, used, 
or made available to render the service. Generally accepted accounting 
principles (GAAP) or Federal income tax accounting rules may provide an 
appropriate starting point, but neither would necessarily be conclusive 
in evaluating whether an item must be included in total services costs.
    Another commentator requested that value added costs (that is, 
labor costs and depreciation) should be distinguished from total 
services costs. The commentator stated that a markup on value added 
costs may be more reliable than a markup on total costs in certain 
instances and that this could be a useful measure for any of the 
transfer pricing methods, including the cost of services plus method. 
The regulations already provide flexibility in the context of the cost 
of services plus method,

[[Page 38835]]

which is determined by reference to comparable transactional costs, the 
comparable profits method, and unspecified methods. Consequently, the 
comment is not adopted. The definition of total services costs in these 
regulations is, thus, similar to the provisions in the 2006 temporary 
regulations.
    Section 1.482-9T(j) of the 2006 temporary regulations explicitly 
states that total services costs include stock-based compensation, and 
Examples 3 through 6 of Sec.  1.482-9T(f)(3) illustrate when stock-
based compensation constitutes a material difference requiring 
adjustments for comparability and reliability purposes. Commentators 
requested further guidance regarding the valuation, comparability, and 
reliability considerations for stock-based compensation. Other 
commentators objected to the explicit statement that stock-based 
compensation can be a total services cost. These final regulations do 
not provide further guidance regarding stock-based compensation. The 
Treasury Department and the IRS continue to consider technical issues 
involving stock-based compensation in the services and other contexts 
and intend to address those issues in a subsequent guidance project.
7. Controlled Services Transactions and Shareholder Activities--Treas. 
Reg. Sec.  1.482-9(l)
    Section 1.482-9(l) sets forth a threshold test for determining 
whether an activity constitutes a controlled services transaction 
subject to the general framework of Sec.  1.482-9. Section 1.482-
9(l)(3) provides rules for determining whether an activity provides a 
benefit. Paragraphs (l)(3)(ii) through (v) provide guidelines that 
indicate the presence or absence of a benefit. Section 1.482-
9T(l)(3)(iv) of the 2006 temporary regulations provides that an 
activity is a shareholder activity if the sole effect of that activity 
is either to protect the renderer's capital investment in the recipient 
or in other members of the controlled group, or to facilitate 
compliance by the renderer with reporting, legal, or regulatory 
requirements applicable specifically to the renderer, or both.
    The Treasury Department and the IRS received comments on 
shareholder activities. Some commentators asserted that the ``sole 
effect'' language is too restrictive and that the language should be 
replaced by a ``primary effect'' standard. Other commentators argued 
that the language appropriately encompasses shareholder activities. 
Another commentator requested a change to the regulations such that a 
shareholder activity should be considered to have a sole effect only if 
the benefits provided to the other controlled group members are either 
(i) indirect or remote or (ii) duplicative.
    The Treasury Department and the IRS believe that the ``sole 
effect'' language is appropriate. The ``primary effect'' language in 
the 2003 proposed regulations could inappropriately include activities 
that are not true shareholder activities and may even consist of 
substantial activities that are non-shareholder activities. An activity 
that is described in Sec.  1.482-9(l)(3)(ii) through (iv) does not 
produce a benefit, but the mere fact that an activity is not described 
in Sec.  1.482-9(l)(3)(ii) through (iv) does not mean that the activity 
necessarily provides a benefit. An activity not described in Sec.  
1.482-9(l)(3)(ii) through (iv) provides a benefit only if it satisfies 
the incremental value standard of Sec.  1.482-9(l)(3)(i). Furthermore, 
for that purpose, it may be more reliable, depending on the facts and 
circumstances, to measure incremental value on a functional aggregate 
activity, rather than a component activity-by-activity basis.
8. Third Party Costs--Treas. Reg. Sec.  1.482-9(l)(4)
    Under Sec.  1.482-9T(l)(4) of the 2006 temporary regulations, a 
controlled services transaction may be analyzed as a single transaction 
or as two separate transactions depending on which approach provides 
the most reliable measure of the arm's length result under the best 
method rule in existing Sec.  1.482-1(c). Two examples are provided 
illustrating different alternatives when a controlled services 
transaction included expenses related to a third-party contract (third 
party costs) with a controlled taxpayer. In both examples, third party 
costs that could be reliably disaggregated could be charged at cost. 
Commentators requested that all third party costs be treated as ``pass 
through'' items that are not subject to a markup applicable to costs 
incurred by the renderer in its capacity as service provider.
    The Treasury Department and the IRS continue to maintain the view 
that whether to consider ``pass through'' items as disaggregated from, 
or aggregated with, other functions and costs, depends on which 
analysis most reliably reflects an arm's length result. Therefore, the 
rules of Sec.  1.482-9(l)(4) are adopted without change.
9. Coordination With Other Transfer Pricing Rules--Treas. Reg. Sec.  
1.482-9(m) and Guarantees
    Section 1.482-9(m) provides coordination rules applicable to a 
controlled services transaction that is combined with, or includes 
elements of, a non-services transaction. These coordination rules rely 
on the best method rule in existing Sec.  1.482-1(c)(1) to determine 
which method or methods would provide the most reliable measure of an 
arm's length result for a particular controlled transaction.
a. Services Subject to a Qualified Cost Sharing Arrangement--Treas. 
Reg. Sec.  1.482-9(m)(3)
    Section 1.482-9T(m)(3) of the 2006 temporary regulations states 
that services provided by a controlled participant under a qualified 
cost sharing arrangement are subject to existing Sec.  1.482-7. As part 
of the temporary cost sharing regulations (TD 9441, 2009-7 I.R.B. 460, 
74 FR 340) published on January 5, 2009, the Treasury Department and 
the IRS replaced the coordination rules with new Sec.  1.482-9T(m)(3). 
Section 1.482-9(m)(3) is reserved pending finalization of the cost 
sharing regulations.
b. Global Dealing Operations
    The Treasury Department and the IRS are working on new global 
dealing regulations. The intent of the Treasury Department and the IRS 
is that, when final global dealing regulations are issued, those 
regulations will govern the evaluation of the activities performed by a 
global dealing operation. Pending the issuance of new global dealing 
regulations, taxpayers may rely on the proposed global dealing 
regulations to govern financial transactions entered into in connection 
with a global dealing operation as defined in proposed Sec.  1.482-8. 
Thus, the cross-reference under proposed Sec.  1.482-9(m)(6) (71 FR 
44247), which provides that a controlled services transaction does not 
include a financial transaction entered into in connection with a 
global dealing operation as defined in proposed Sec.  1.482-8, remains 
in proposed form. Section 1.482-9(m)(6) in these final regulations is 
reserved pending issuance of global dealing regulations.
c. Guarantees, Including Financial Guarantees
    Financial transactions, including guarantees, are explicitly 
excluded from eligibility for the SCM by Sec.  1.482-9(b)(4)(viii). 
However, no inference is intended that financial transactions 
(including guarantees) would otherwise be considered the provision of 
services

[[Page 38836]]

for transfer pricing purposes. The Treasury Department and the IRS 
intend to issue future guidance regarding financial guarantees.

B. Income Attributable to Intangible Property--Treas. Reg. Sec.  1.482-
4(f)(3) and (4)

    Paragraphs (3) and (4) of Sec.  1.482-4(f) provide rules for 
determining the owner of intangible property for purposes of section 
482 and also provide rules for determining the arm's length 
compensation in situations where a controlled party other than the 
owner makes contributions to the value of intangible property. Section 
1.482-4(f)(3)(i)(A) provides that the legal owner of intangible 
property pursuant to the intellectual property law of the relevant 
jurisdiction, or the holder of rights constituting intangible property 
pursuant to contractual terms (such as the terms of a license) or other 
legal provision, will be considered the sole owner of intangible 
property for purposes of this section unless such ownership is 
inconsistent with the economic substance of the underlying 
transactions. Some commentators believe that the rules should specify 
that a holder of bare legal title to intangible property should not be 
presumed to be the owner when other parties have all of the other 
benefits and burdens of ownership. After considering the public 
comments, the Treasury Department and the IRS continue to believe that 
the legal ownership standard as set forth in Sec.  1.482-4(f)(3)(i)(A) 
is the appropriate framework for determining ownership of intangible 
property under section 482.
    The provisions of Sec.  1.482-4(f)(3) and (4) are adopted without 
change.

C. Economic Substance

    A number of commentators expressed similar and sometimes 
interrelated concerns regarding economic substance considerations, 
imputation of contractual terms, the realistic alternatives principle, 
and the rules for income attributable to intangible property. The 
common thread running through these comments is a concern that the IRS 
will inappropriately treat taxpayers as having engaged in transactions 
different from those in which they actually engaged.
    Section 1.482-4(f)(3)(i)(A) provides that, if no owner of 
intangible property is identified under the intellectual property law 
of the relevant jurisdiction, or pursuant to contractual terms 
(including terms imputed pursuant to Sec.  1.482-1(d)(3)(ii)(B)) or 
other legal provision, then the controlled taxpayer that has control of 
intangible property, based on all the facts and circumstances, will be 
considered the sole owner of intangible property for purposes of this 
section. One commentator believes that the control rule for determining 
ownership of non-legally protected intangibles allows the IRS to 
attribute ownership of intangible property in a manner that is 
inconsistent with economic substance. Accordingly, the comment suggests 
that such control determinations must be consistent with economic 
substance in all cases. In the context of the control rule in Sec.  
1.482-4(f)(3)(i)(A), this is already reflected in the language 
``including terms imputed pursuant to Sec.  1.482-1(d)(3)(ii)(B).''
    Section 1.482-9T(h) of the 2006 temporary regulations provides 
that, consistent with the specified methods, an unspecified method 
should take into account the general principle that uncontrolled 
taxpayers compare the terms of a particular transaction to the 
realistic alternatives to that transaction, including economically 
similar transactions structured as other than services transactions, 
and only enter into a transaction if none of the alternatives is 
preferable to it. The realistic alternatives concept was imported from 
Sec.  1.482-1(f)(2)(ii) to be consistent with the general aim to 
coordinate the analyses under the various sections of the regulations 
under section 482. This provision allows flexibility to consider non-
services alternatives to a services transaction, for example, a 
transfer or license of intangible property, if such an approach 
provides the most reliable measure of an arm's length result.
    Commentators suggested that the realistic alternative principle be 
clarified so that only transactions actually engaged in by the 
controlled taxpayer can constitute realistic alternatives or that the 
principle be removed altogether on the grounds that it inappropriately 
treats taxpayers as engaging in transactions other than those they 
chose. The Treasury Department and the IRS do not agree with the 
assertion that consideration of realistic alternatives improperly 
disregards a taxpayer's chosen arrangement and that the realistic 
alternative principle is limited to internal comparables. It is a 
longstanding principle under Sec.  1.482-1(f)(2)(ii)(A) and in the 
valuation field, generally, that, although the Commissioner will 
evaluate the results of a transaction as actually structured by the 
taxpayer unless it lacks economic substance, the Commissioner may 
consider alternatives available in determining the arm's length 
valuation of the controlled transaction. The realistic alternatives 
principle does not recast the transaction. Rather, it assumes that 
taxpayers are rational and will not choose to price an arrangement in a 
manner that makes them worse off economically than another available 
alternative. Thus, if the price associated with a realistic alternative 
appears preferable in comparison with the price associated with the 
chosen arrangement, the logical implication is that the actual 
arrangement has been priced incorrectly through a flawed application of 
the best method rule. This is further reflected in the example in Sec.  
1.482-9T(h), which illustrates when realistic alternatives may be 
considered to evaluate the arm's length consideration, and explicitly 
states that the best method rule of Sec.  1.482-1(c) governs the 
analysis.
    The unspecified method provisions in these final regulations are 
adopted without change.
    Section 1.482-9(i)(3) provides that, consistent with the authority 
in Sec.  1.482-1(d)(3)(ii)(B), the Commissioner may impute contingent-
payment contractual terms in a controlled services transaction if the 
economic substance of the transaction is consistent with the existence 
of such terms. When the 2003 proposed regulations were issued, 
commentators expressed concerns with the rule for imputing contingent 
payment terms to the extent that it permits the IRS to recast 
arrangements if there is a disagreement about the pricing of a service. 
The temporary regulations responded to this concern by providing a new 
Example 5 in Sec.  1.482-1T(d)(3)(ii)(C) to illustrate that if a 
taxpayer's pricing is outside of the arm's length range, that fact 
alone would not support imputation of additional contractual terms 
based on economic substance grounds. Commentators responded, however, 
that the last sentence of Example 5 perpetuated the same problem of 
allowing the IRS to recast arrangements if there were pricing disputes 
between a taxpayer and the IRS.
    The Treasury Department and the IRS agree that the last sentence of 
Example 5 in Sec.  1.482-1T(d)(3)(ii)(C) did not clearly convey its 
intended meaning, which is that a transfer pricing method and the price 
derived from the application of that method do not inform the terms of 
the transaction or the risks borne by the entities. Rather, the 
selection and application of a transfer pricing method should be based 
on a comparability analysis of the transaction, which must consider the 
risks borne by each entity in the transaction. Thus, the last sentence 
in Sec.  1.482-1T(d)(3)(ii)(C) Example 5,

[[Page 38837]]

paragraph (iv), was intended to explain that the IRS is not required to 
accept the transfer pricing method and form of payment terms of a 
transaction as represented by a taxpayer if they are inconsistent with 
the conduct of the entities and the economic substance of the 
transaction. Because this sentence caused confusion, it has been 
removed. However, the Treasury Department and the IRS affirm that the 
IRS may impute contingent-payment terms where the economic substance of 
the transaction is consistent with the existence of such terms.

D. Stewardship Expenses--Sec.  1.861-8

    The regulations under Sec.  1.861-8(e)(4) conform to, and are 
consistent with, the language relating to controlled services 
transactions as set forth in Sec.  1.482-9(l). The regulations under 
Sec.  1.861-8(e)(4) are applicable for taxable years beginning after 
December 31, 2006.

E. Effective/Applicability Date--Sec.  1.482-9(n)

    These regulations are applicable for taxable years beginning after 
July 31, 2009. Controlled taxpayers may elect to apply retroactively 
all of the provisions of these regulations to any taxable year 
beginning after September 10, 2003. Such election will be effective for 
the year of the election and all subsequent taxable years.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to this regulation. It is hereby 
certified that the collections of information in this regulation will 
not have a significant economic impact on a substantial number of small 
entities. This certification is based on the fact that the collections 
of information are related to elective provisions for determining 
taxable income that simplify and reduce compliance burdens in 
connection with controlled services transactions. When collection of 
information is required, it is expected to take taxpayers approximately 
2 hours to comply, and the administrative and economic costs will be 
nominal in comparison with the resulting simplification and reduction 
of compliance burdens. Thus, the economic impact of the collections of 
information will not be significant. Similarly, while some small 
entities may be subject to the collections of information if they elect 
one of the provisions, the collections of information are not expected 
to affect a substantial number of small entities. Accordingly, a 
regulatory flexibility analysis under the Regulatory Flexibility Act (5 
U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the 
Internal Revenue Code, the notice of proposed rulemaking preceding 
these regulations was submitted to the Small Business Administration 
for comment on its impact on small business.

Drafting Information

    The principal authors of these regulations are Carol B. Tan and 
Gregory A. Spring, Office of Associate Chief Counsel (International) 
for matters relating to section 482, and Richard L. Chewning, Office of 
Associate Chief Counsel (International) for matters relating to 
stewardship expenses.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 31

    Employment taxes, Income taxes, Penalties, Pensions, Railroad 
retirement, Reporting and recordkeeping requirements, Social Security 
and Unemployment compensation.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1, 31, and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *.
    Section 1.482-9 also issued under 26 U.S.C. 482. * * *


0
Par. 2. Section 1.482-0 is amended as follows:
0
1. The introductory text is revised.
0
2. The entries for Sec.  1.482-1(a)(1), (d)(3)(ii)(C), (d)(3)(v), 
(f)(2)(ii)(A), (f)(2)(iii)(B), (g)(4)(iii), (i) and (j) are revised.
0
3. The entries for Sec.  1.482-2(b), (e) and (f) are revised.
0
4. The entries for Sec.  1.482-4(f)(3), (f)(4), (g), and (h) are 
revised.
0
5. The entry for Sec.  1.482-4(f)(7) is removed.
0
6. The entries for Sec.  1.482-6(c)(2)(ii)(B)(1), (c)(2)(ii)(D), 
(c)(3)(i)(A), (c)(3)(i)(B), (c)(3)(ii)(D), and (d) are revised
0
7. The entry for Sec.  1.482-8(c) is added.
0
8. The entries for Sec.  1.482-9 are revised.
    The addition and revisions read as follows:


Sec.  1.482-0  Outline of regulations under section 482.

    This section contains major captions for Sec. Sec.  1.482-1 through 
1.482-9.


Sec.  1.482-1  Allocation of income and deductions among taxpayers.

    (a) * * *
    (1) Purpose and scope.
* * * * *
    (d) * * *
    (3) * * *
    (ii) * * *
    (C) Examples.
* * * * *
    (v) Property or services.
* * * * *
    (f) * * *
    (2) * * *
    (ii) * * *
    (A) In general.
* * * * *
    (iii) * * *
    (A) * * *
    (B) Circumstances warranting consideration of multiple year data.
* * * * *
    (g) * * *
    (4) * * *
    (iii) Examples.
* * * * *
    (i) Definitions.
    (j) Effective/applicability date.


Sec.  1.482-2  Determination of taxable income in specific situations.

* * * * *
    (b) Rendering of services.
* * * * *
    (e) [Reserved]. For further guidance, see Sec.  1.482-0T, the entry 
for Sec.  1.482-2T(e).
    (f) Effective/applicability date.
* * * * *


Sec.  1.482-4  Methods to determine taxable income in connection with a 
transfer of intangible property.

* * * * *
    (f) * * *
    (3) Ownership of intangible property.
    (i) Identification of owner.
    (A) In general.
    (B) [Reserved]. For further guidance, see Sec.  1.482-0T, the entry 
for Sec.  1.482-4T(f)(3)(i)(B).
    (ii) Examples.
    (4) Contribution to the value of intangible property owned by 
another.
    (i) In general.

[[Page 38838]]

    (ii) Examples.
* * * * *
    (g) [Reserved]. For further guidance, see Sec.  1.482-0T, the entry 
for Sec.  1.482-4T(g).
    (h) Effective/applicability date.
* * * * *


Sec.  1.482-6   Profit split method.

* * * * *
    (c) * * *
    (2) * * *
    (ii) * * *
    (B) * * *.
    (1) In general.
* * * * *
    (D) Other factors affecting reliability.
* * * * *
    (3) * * *
    (i) * * *
    (A) Allocate income to routine contributions.
    (B) Allocate residual profit.
    (1) Nonroutine contributions generally.
    (2) Nonroutine contributions of intangible property.
    (ii) * * *
    (D) Other factors affecting reliability.
* * * * *
    (d) Effective/applicability date.


Sec.  1.482-8   Examples of the best method rule.

* * * * *
    (c) Effective/applicability date.


Sec.  1.482-9   Methods to determine taxable income in connection with 
a controlled services transaction.

    (a) In general.
    (b) Services cost method.
    (1) In general.
    (2) Eligibility for the services cost method.
    (3) Covered services.
    (i) Specified covered services.
    (ii) Low margin covered services.
    (4) Excluded activities.
    (5) Not services that contribute significantly to fundamental risks 
of business success or failure.
    (6) Adequate books and records.
    (7) Shared services arrangement.
    (i) In general.
    (ii) Requirements for shared services arrangement.
    (A) Eligibility.
    (B) Allocation.
    (C) Documentation.
    (iii) Definitions and special rules.
    (A) Participant.
    (B) Aggregation.
    (C) Coordination with cost sharing arrangements.
    (8) Examples.
    (c) Comparable uncontrolled services price method.
    (1) In general.
    (2) Comparability and reliability considerations.
    (i) In general.
    (ii) Comparability.
    (A) In general.
    (B) Adjustments for differences between controlled and uncontrolled 
transactions.
    (iii) Data and assumptions.
    (3) Arm's length range.
    (4) Examples.
    (5) Indirect evidence of the price of a comparable uncontrolled 
services transaction.
    (i) In general.
    (ii) Example.
    (d) Gross services margin method.
    (1) In general.
    (2) Determination of arm's length price.
    (i) In general.
    (ii) Relevant uncontrolled transaction.
    (iii) Applicable uncontrolled price.
    (iv) Appropriate gross services profit.
    (v) Arm's length range.
    (3) Comparability and reliability considerations.
    (i) In general.
    (ii) Comparability.
    (A) Functional comparability.
    (B) Other comparability factors.
    (C) Adjustments for differences between controlled and uncontrolled 
transactions.
    (D) Buy-sell distributor.
    (iii) Data and assumptions.
    (A) In general.
    (B) Consistency in accounting.
    (4) Examples.
    (e) Cost of services plus method.
    (1) In general.
    (2) Determination of arm's length price.
    (i) In general.
    (ii) Appropriate gross services profit.
    (iii) Comparable transactional costs.
    (iv) Arm's length range.
    (3) Comparability and reliability considerations.
    (i) In general.
    (ii) Comparability.
    (A) Functional comparability.
    (B) Other comparability factors.
    (C) Adjustments for differences between the controlled and 
uncontrolled transactions.
    (iii) Data and assumptions.
    (A) In general.
    (B) Consistency in accounting.
    (4) Examples.
    (f) Comparable profits method.
    (1) In general.
    (2) Determination of arm's length result.
    (i) Tested party.
    (ii) Profit level indicators.
    (iii) Comparability and reliability considerations--Data and 
assumptions--Consistency
    in accounting.
    (3) Examples.
    (g) Profit split method.
    (1) In general.
    (2) Examples.
    (h) Unspecified methods.
    (i) Contingent-payment contractual terms for services.
    (1) Contingent-payment contractual terms recognized in general.
    (2) Contingent-payment arrangement.
    (i) General requirements.
    (A) Written contract.
    (B) Specified contingency.
    (C) Basis for payment.
    (ii) Economic substance and conduct.
    (3) Commissioner's authority to impute contingent-payment terms.
    (4) Evaluation of arm's length charge.
    (5) Examples.
    (j) Total services costs.
    (k) Allocation of costs.
    (1) In general.
    (2) Appropriate method of allocation and apportionment.
    (i) Reasonable method standard.
    (ii) Use of general practices.
    (3) Examples.
    (l) Controlled services transaction.
    (1) In general.
    (2) Activity.
    (3) Benefit.
    (i) In general.
    (ii) Indirect or remote benefit.
    (iii) Duplicative activities.
    (iv) Shareholder activities.
    (v) Passive association.
    (4) Disaggregation of transactions.
    (5) Examples.
    (m) Coordination with transfer pricing rules for other 
transactions.
    (1) Services transactions that include other types of transactions.
    (2) Services transactions that effect a transfer of intangible 
property.
    (3) [Reserved]. For further guidance, see Sec.  1.482-0T, the entry 
for Sec.  1.482-9T(m)(3).
    (4) Other types of transactions that include controlled services 
transactions.
    (5) Examples.
    (n) Effective/applicability date.
    (1) In general.
    (2) Election to apply regulations to earlier taxable years.

0
Par. 3. Section 1.482-0T is amended as follows:
0
1. Revise the section heading and introductory text.
0
2. Revise the section headings for Sec. Sec.  1.482-1T, 1.482-4T and 
1.482.9T and the entries for Sec. Sec.  1.482-1T, 1.482-2T, 1.482-4T 
and 1.482.9T.
0
3. Remove the entries for Sec.  1.482-6T.
    The revisions read as follows:


Sec.  1.482-0T   Outline of regulations under section 482 (temporary).

    This section contains major captions for Sec. Sec.  1.482-1T, 
1.482-2T, 1.482-4T, 1.482-7T, 1.482-8T, and 1.482-9T.

[[Page 38839]]

Sec.  1.482-1T   Allocation of income and deductions among taxpayers 
(temporary).

    (a) through (b)(2) [Reserved]. For further guidance,