Rev. Proc. 64-54

SECTION 1. SCOPE.

This Revenue Procedure prescribes the policy and procedure of the Internal Revenue Service for the treatment of United States controlling taxpayers subject to `economic double taxation' or other undue hardship for their taxable years beginning prior to January 1, 1963, arising from the application of section 482 of the Internal Revenue Code of 1954 (section 45 of the Internal Revenue Code of 1939) to the United States controlling taxpayers and one or more of their controlled foreign entities.

SEC. 2. BACKGROUND AND PURPOSE.

Beginning in 1960 the Internal Revenue Service initiated an accelerated International Enforcement Program to review the tax consequences of various arrangements between United States business entities and the foreign entities controlled by them. As a result of this program, adjustments were proposed by the Service under section 482 of the Code which in some cases have produced `economic double taxation' and, in certain cases described in section 4 below, have produced undue hardship. Furthermore, in many instances valid refund claims for foreign taxes paid with respect to the years under audit can no longer be filed. The purpose of this Revenue Procedure is to set forth the standards and procedures to be applied by the Service for mitigating the resulting hardships in certain of these cases for taxable years beginning prior to January 1, 1963.

SEC. 3. MITIGATION OF ECONOMIC DOUBLE TAXATION.

.01 For its taxable years beginning prior to January 1, 1963 (subject to the other provisions of this Revenue Procedure), a United States controlling taxpayer will be granted relief from economic double taxation resulting from allocations under section 482 of the Code. Such a taxpayer will be allowed by the Service to offset against the United States tax attributable to the section 482 allocation an amount equal to the amount by which the controlled foreign entity's foreign income tax liability as actually determined exceeded the amount which would have been determined to be such liability if the controlled foreign entity had originally treated the transactions giving rise to the section 482 allocation in a manner consistent with the section 482 allocations. The amount of the relief shall be limited to that portion of the United States controlling taxpayer's tax liability which is attributable to the section 482 allocation.

.02 In order for a United States controlling taxpayer to obtain relief, the following conditions must be met for each taxable year:

1 The amount of the section 482 allocation has either been tentatively established by informal agreement or has been established by formal agreement or other determination;

2 A written request for relief shall be furnished in duplicate. Such request shall be signed by the person or persons having the authority to sign the United States controlling taxpayer's Federal income tax returns. The request shall contain the following:

(a) A statement that the section 482 allocation will result in economic double taxation as defined in section 3.04 below.

(b) A copy of the foreign tax return(s) and a translation in English of each such return. (Schedules and attachments not relevant to the section 482 allocation adjustment may be omitted.)

(c) A statement of any adjustments (including any refunds) of the foreign tax liability shown on the foreign tax return which were made after the date of the filing of such return, indicating the changes made in each item shown on such return which gave rise to such adjustment, and, a description of any claim for refund of the foreign tax which has been filed, stating the amount thereof and its status.

(d) Evidence establishing that the tax shown on such return(s) was paid in full. If any adjustments were made in the return increasing the amount of tax due, payment of the amount of such additional tax must also be established.

(e) A schedule showing the changes which would be made in each item reported in the foreign tax return (taking into account adjustments described in paragraph (c) above) if such return were amended to reflect the section 482 allocations.

(f) A schedule showing the amount of relief requested and setting forth the computation of

(1) the foreign tax shown on the original return (or if there has been an adjustment of such tax, the foreign tax as so adjusted) and

(2) the foreign tax which would have been payable had the controlled foreign entity reported its income so as to reflect the section 482 allocation.

3 The United States controlling taxpayer (and any other United States person, controlling the foreign entity or controlled by such taxpayer, which is directly or indirectly affected by the section 482 allocation) must enter into a closing agreement under section 7121 of the Code in which:

(a) The taxpayer (and such other affected United States person) agrees that it and any person controlled by it will forego a foreign tax credit with respect to distributions of the accumulated profits (as defined in section 902(c) of the Code) of the controlled foreign entity for the year of the allocation to the extent that the foreign tax is being allowed as an offset to United States tax under this Revenue Procedure; and

(b) The taxpayer (and such other affected United States person) agrees to pay over to the United States Government an amount (not to exceed the relief allowed) equal to any recovery of foreign tax previously paid by the foreign entity to the extent that such recovery is attributable to the substance of the section 482 allocation.

For purposes of this paragraph, a United States person shall be deemed affected by the section 482 allocation if, absent the offset provided for in this section, it was, or in the future might be, able to claim as a credit against its United States tax all or a portion of the foreign tax allowed as such offset.

4 If, and to the extent, requested by the Internal Revenue Service, the United States controlling taxpayer shall furnish a statement setting forth a list of all distributions which were made by the controlled foreign entity to United States corporations owning at least 10 percent of the voting stock of such controlled foreign entity and which were considered to have been made in whole or in part out of the accumulated profits (as defined in section 902(c) of the Code) of the year to which the section 482 allocation relates, or would be so considered after giving effect to section 482 allocations in subsequent years. The list shall show the name of each United States corporation receiving such a distribution. If the United States controlling taxpayer, or any United States person controlled by or controlling it, shall have received such a distribution, the list shall indicate the taxable, year in which the distribution was received, the amount of the distribution, the year of the accumulated profits to which the distribution was attributed in computing the tax liability shown on the tax return, the year of the accumulated profits to which the distribution should be attributed after giving effect to the section 482 allocations, and the amount, if any, by which the foreign tax credit claimed under section 902 of the Code with respect to such distribution exceeds the credit which would have been claimed had the section 482 allocations and the tax offset allowed by this section been taken into account.

.03 Since the relief provided for in section 3.01 above is being allowed as a matter of administrative policy, the decision of the Commissioner or his delegate as to the amount to be allowed shall be final and shall not be subject to any appeal or review. See section 6.016 below for procedures to be followed if a United States controlling taxpayer is not in accord with the determination of the amount of the relief from economic double taxation proposed by the Commissioner or his delegate.

.04 For the purpose of this Revenue Procedure, economic double taxation shall be deemed to exist if, as a consequence of a section 482 allocation, the total income tax payable to the United States and another nation by the United States controlling taxpayer and its controlled foreign entity is greater than that which would have resulted if the United States controlling taxpayer and its controlled foreign entity had originally treated the transactions giving rise to the section 482 allocation in a manner consistent with the section 482 allocation. For purposes of this section, any reference to the United States tax or to the additional tax attributable to the section 482 allocations means the United States income tax payable prior to allowance of the credit for foreign taxes.

SEC. 4. ELIMINATION OF UNDUE HARDSHIP.

.01 For taxable years beginning prior to January 1, 1963, the Service does not intend to pursue section 482 allocations with respect to certain types of transactions enumerated below.

1 Allocations to reflect a charge for the use of funds loaned or otherwise advanced by the United States controlling taxpayer to its controlled foreign entity will not be made

(a) unless the United States controlling taxpayer borrowed money at interest for the specific purpose of relending or advancing all or part of such money to its controlled foreign entity, or

(b) unless, and to the extent that, the controlled foreign entity used funds borrowed from or advanced by the United States controlling taxpayer to relend at interest (other than interest of the type described in section 954(c)(3)(B) of the Code), to invest in income producing securities (unless such income would be of a type described in section 954(c)(3)(B) of the Code), or to carry accounts at interest or a carrying charge for a period of time in excess of that ordinary and necessary to carrying on its trade or business.

2 Allocations to reflect charges or royalties for the use of intangible assets belonging to the United States controlling taxpayer will not be made to the extent that the intangibles are used by a controlled foreign entity in the manufacture of products or the sale of products manufactured by the foreign entity or other foreign person. However, such allocations will be made if, and to the extent that, the products manufactured by the foreign entity are sold or purchased by the United States controlling taxpayer or any other United States person controlling or controlled by it. For purposes of the preceding sentence, a sale will be deemed made by the United States controlling taxpayer or other United States person controlling or controlled by it if the sale is made to any other United States person and the United States controlling taxpayer or United States person controlling or controlled by it renders substantial assistance to the controlled foreign entity in making the sale.

3 Allocations of overhead type expenses, including research and development expenses, will not be made except to the extent that

(a) it can be shown that certain expenses (not including expenses incurred in the supervision of the affairs of the controlled foreign entity similar to that exercised by directors of a company) were incurred for the direct benefit of a foreign entity, or

(b) the overhead is incurred in connection with the manufacture of products purchased by the United States controlling taxpayer from the controlled foreign entity or sold to the controlled foreign entity by such taxpayer. For purposes of the preceding sentence transactions with United States persons controlling or controlled by the United States controlling taxpayer shall be considered to be with such taxpayer.

.02 The Service generally will not make any section 482 allocation with respect to any year of a controlled foreign entity beginning before January 1, 1963, if such entity has paid to its stockholders not later than 60 days after the end of such year 90 percent or more of its earnings for such year (determined without regard to section 482 allocations) and the amount of such distribution allocable to the direct or indirect interest of the United States controlling shareholder was included in his income as a dividend (as defined in section 316 of the Code). However, the Service will not refrain from making section 482 allocations under this paragraph if such allocations are necessary to determine the proper source of the United States controlling taxpayer's income for the purpose of section 904 of the Code.

SEC. 5. DEFINITION OF TERMS.

.01 The terms `control,' `controlled,' and `controlling' have the same meaning here as in section 1.482-1(a)(3) of the Income Tax Regulations, which states as follows: `The term `controlled' includes any kind of control, direct or indirect, whether legally enforceable, and however exercisable or exercised. It is the reality of the control which is decisive, not its form or the mode of its exercise. A presumption of control arises if income or deductions have been arbitrarily shifted.' A corporation will be deemed to control another corporation if both entities are controlled by the same United States person or persons.

.02 The term `foreign entity' as used in this Revenue Procedure shall include domestic corporations satisfying the conditions of section 931 of the Code (relating to income from sources within possessions of the United States).

SEC. 6. PROCEDURES TO BE FOLLOWED RESPECTING CASES WITHIN THE JURISDICTION OF THE INTERNAL REVENUE SERVICE (INCLUDING CASES DOCKETED IN THE TAX COURT OF THE UNITED STATES).

.01 Relief from economic double taxation .

1 The request for relief referred to in section 3.022 above shall be filed with the District Director for the district in which the taxpayer's income tax return for the year(s) affected was filed. The District Director will forward the request to the appropriate Internal Revenue Service office having jurisdiction in the matter. The request may be filed at any point in the administrative processing of the case or during litigation in the Tax Court of the United States. A request with respect to a year for which the Service has completed action will be considered if the request is submitted within the statutory period for filing claims for refund and the taxpayer's liability for such year has not been finally determined by offer in compromise, closing agreement or court action. The request for relief shall have the effect of keeping the period of limitations open only for the allowance of the requested relief.

2 At any time during which a case is pending, the office having jurisdiction of the case may, in its discretion, request advice from the Director of International Operations with respect to the proper method of computing the offset to be allowed pursuant to section 3 above.

3 After the amount of the allocation under section 482 of the Code has been tentatively established or determined, the file will be referred to the Director of International Operations, Washington, D.C., for review of the taxpayer's computations and for preparation of the closing agreement required by section 3.023 above.

4 If the Director of International Operations finds it necessary to obtain additional information or to modify the amount of relief requested, he will communicate with the United States controlling taxpayer. If the matter cannot be resolved by correspondence, he will confer with such taxpayer. The jurisdiction of the Director of International Operations under this procedure shall be limited to the determination of the amount of tax offset to be allowed and preparation of the closing agreement. He shall not modify the amount of the section 482 allocation.

5 If the Director of International Operations finds the taxpayer's computations to be acceptable or otherwise reaches an agreement with the taxpayer, he will prepare a closing agreement in accordance with section 3.023 above and send it to the taxpayer for signature. The taxpayer will return the signed copies of the closing agreement to the Director of International Operations for processing in accordance with established procedure.

6 If an agreement as to the amount of the offset is not reached, the file will be returned to the field office having jurisdiction, and the case will be processed without giving effect to any relief under section 3 above. The taxpayer may appeal the basic section 482 allocation. If any case involving a proposed section 482 allocation reaches trial status in the Tax Court of the United States (including a case in which no request for relief has yet been made by the taxpayer) the parties may stipulate or otherwise arrange with the court that there will be allowed to the taxpayer such relief from double taxation as is determined by the Commissioner under this Revenue Procedure, based on the court's decision as to the amount of the section 482 allocation. Such stipulation or arrangement will provide that the taxpayer will only be entitled to such relief upon compliance with the requirements of section 3 above.

.02 Elimination of Undue Hardship .

1 All cases pending with the Internal Revenue Service involving proposed section 482 allocations will be reviewed by the offices having jurisdiction and appropriate modifications required by section 4 above will be made. Cases pending with the Department of Justice will be reviewed by the Chief Counsel's office. See section 7 below.

2 A closed case will be reconsidered by the Service if the taxpayer files a request for reconsideration within the statutory period for filing claims for refund and the taxpayer's liability for such year has not been finally determined by offer in compromise, closing agreement or court action. Such request shall be filed with the District Director for the district in which the taxpayer's income tax return for the year(s) affected was filed.

3 The relief provided in section 4 above is being allowed as a matter of administrative policy only. Therefore, any Service decision with respect to the application of section 4 shall only be subject to the administrative reviews and appeals within the Internal Revenue Service which are available to taxpayers in any other income tax cases.

SEC. 7. CASES WITHIN THE JURISDICTION OF THE DEPARTMENT OF JUSTICE.

If a case within the jurisdiction of the Department of Justice warrants consideration for relief under this Revenue Procedure and a request for relief is filed with the appropriate District Director, the Service will, through its Chief Counsel, recommend to the Department of Justice that arrangements be made to afford the relief contemplated by this Revenue Procedure.

SEC. 8. EFFECT OF ALLOCATION AGREEMENT ON OTHER TAXABLE YEARS.

An agreement entered into by a taxpayer and the Service as to the amount of the section 482 allocations for a taxable year with respect to which the taxpayer receives relief under this Revenue Procedure shall not be considered to be evidence of the proper amount to be allocated in any other taxable year.

¹ Also released as Technical Information Release 663, dated Dec. 10, 1964.