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Comments on proposed foreign recordkeeping regulations under Section 6038A.

Comments on Proposed Foreign Recordkeeping Regulations under Section 6038A

On December 4, 1990, the Internal Revenue Service issued proposed regulations under section 6038A of the Internal Revenue Code, relating to the information reporting and agency designation requirements for foreign-owned corporations. The regulations were published in the Federal Register on December 10, 1990 (55 Fed. Reg. 50706), and in the December 31, 1990, issue of the Internal Revenue Bulletin (1990-53 I.R.B. 45). The IRS held a public hearing on the regulations on February 22, 1991.

For simplicity's sake, the proposed regulations are referred to as the "proposed regulations"; specific provisions are cited as "Prop. Reg. [section]." References to page numbers are to the proposed regulations (and preamble) as published in the Internal Revenue Bulletin.


The Omnibus Budget Reconciliation Act of 1989 amended section 6038A of the Internal Revenue Code by expanding the class of corporations subject to that information reporting provision to include corporations with at least 25-percent foreign ownership and by imposing additional recordkeeping requirements on those corporations. As enacted, these rules applied only to taxable years beginning after July 10, 1989, but in 1990 Congress extended the section 6038A amendments to cover all open years. With respect to summonses for records, however, the 1990 amendments are effective only if the records were in existence on March 20, 1990. See Omnibus Budget Reconciliation Act of 1990, Public Law No. 101-508, [subsection] 11314, 11315.

TEI filed pre-regulation comments on the 1989 Act amendments with the IRS on May 24, 1990. Although the Institute commends the IRS for incorporating several of our recommendations,(1) TEI believes that refinements are necessary to ensure that the recordkeeping and agency designation requirements do not become unworkable and overly burdensome. For example, while we welcome the inclusion of a safe harbor and de minimis exceptions, these mechanisms should be expanded to encompass more related party transactions.

The proposed regulations correctly recognize that section 6038A is a powerful new tool to obtain access to foreign-based books and records and, accordingly, that its application must be measured and consistent. On its face, the statute could be invoked to impose enormous administrative burdens for businesses of all sizes. Fortunately, the proposed regulations contain several provisions to ameliorate those potentially harsh burdens, including authorizing the negotiation of taxpayer-specific record maintenance agreements, the use of reasonable estimates on Form 5472, and the filing of one consolidated Form 5472 for all members of a consolidated group. The proposed regulations represent a good first step. More is needed, however, to ensure that the statute is applied judiciously and that its enforcement mechanisms are used only as a last resort. To achieve these objectives, we recommend that the proposed regulations provide that the imposition of penalties under section 6038A(e) (3) must be approved by the Assistant Commissioner (International). The prudent exercise of such authority is essential given Congress's decision to limit judicial review of the penalty determination.

With respect to the record maintenance requirements, we agree that the general recordkeeping requirements of section 6001 constitute the foundation on which the requirements of section 6038A are built. We strongly disagree, however, that section 6001 necessarily extends to records of any foreign related party that may be "relevant" to transactions between the reporting corporation and foreign related parties, including "indirectly related records." In our view, the regulations stretch section 6001's recordkeeping requirements and the Code's admittedly broad definition of "relevance" practically to their breaking point and should be circumscribed.

With respect to the agency designation, we agree that such designation does not, on its own, constitute a U.S. trade or business or a permanent establishment. The regulations should be clarified to state unequivocally that the agency designation is not evidence that may be considered in determining whether the related party is engaged in a U.S. trade or business under the Code, or has created a permanent establishment or fixed base for purposes of an income tax treaty.


1. Prop. Reg. [section] 1.6038A-1(h): De Minimis Rule

Prop. Reg. [section] 1.6038A-1 provides the general rule that certain foreign-owned corporations engaged in a trade or business in the United States (a "reporting corporation") must furnish certain information annually on an information return (Form 5472) and maintain records relating to transactions between the reporting corporation and a foreign related party. Prop. Reg. [section] 1.6038A-1(h) provides an exemption from section 6038A's recordkeeping and agency requirements for certain de minimis transactions. The exemption applies to a reporting corporation (i) that has an aggregate value of not more than $2 million of gross payments made to (or received from) foreign related parties, and (ii) for which the aggregate value of the gross payments made to (or received from) foreign related parties is less than 10 percent of its U.S. gross income. In the preamble to the proposed regulations, the IRS requests comments on this de minimis rule. 1990-53 I.R.B. at 46.

TEI strongly endorses the concept of a safe harbor for reporting corporations whose foreign related party transactions are insubstantial in relation to their aggregate business operations. We suggest, however, that the two-part test in the proposed regulations can operate to require the reporting of relatively insubstantial transactions. Consistent with the de minimis reporting exception set forth in Prop. Reg. [section] 1.6038A-2(b)(7), the regulations should provide that insubstantial transactions (measured by a dollar amount) not be taken into account in detemining whether the reporting corporation meets the two-part test. (2)

Moreover, we recommend the final regulations adopt a straight percentage test. At a minimum, the regulations should provide that the exemption applies to a reporting corporation (i) that has an aggregate value of not more than $2 million of gross payments made to (or received from) foreign related parties, or (ii) for which the aggregate value of the gross payments made to (or received from) foreign related parties is less than 10 percent of its U.S. gross income. Alternatively, should the two-part test be retained, the de minimis ceiling on gross payments should be increased to $5 million and adjusted periodically for inflation.

We also recommend that the IRS expand this exemption to encompass the Form 5472 information-reporting requirements, as well as section 6038A's record maintenance and agency-designation rules. We believe that such changes will ease the administrative burdens for both taxpayers and the government without doing violence to the policies underlying section 6038A.

2. Prop. Reg. [section] 1.6038A-1(i): Consolidated Filings

In the preamble, the IRS requests comments on ways in which foreign corporations may file a single agency designation similar to the consolidated Form 5472 that may be filed under Prop. Reg. [section] 1.6038A-1(i). 1990-53 I.R.B. at 46.

We recommend that the controlling foreign entity be permitted to file one agency designation on behalf of itself and its affiliates (as listed in the authorization document) without obtaining powers of attorney or similar authorization from each affiliate. The designation could be based on the Form 851 (Affiliations Schedule) which is filed with the consolidated return. Proof of such designation should not be required in advance of the time the underlying books and records are requested by the IRS during the audit.

In addition, since the purpose of the agency designation is to facilitate IRS access to foreign-based data, the foreign related party should be deemed to satisfy the agency authorization requirement (without proffering proof of an agency relationship) if the reporting corporation actually provides the requested information during the audit. (3) Consistent with the thrust of section 6038A(e)(3),(4) the regulations should also specify that a failure to obtain the required agency authority will not subject the U.S. reporting corporation to penalties if the IRS secures the requested information directly from the reporting corporation or otherwise.

3. Prop. Reg. [section] 1.6038A-2(b): Contents of the Return

a. Related Party Tax Information. Prop. Reg. [section] 1.6038A-2(b) lists the information a reporting corporation must include on Form 5472. Included in this list is the requirement that the reporting corporation report the country in which each related party covered by section 6038A files an income tax return as a resident.

Section 6038A was amended in 1989 and 1990 to facilitate the IRS's access to records of foreign-owned companies, not to expand the type of records required to be maintained. See H.R. Rep. No. 101-247, 101st Cong., 1st Sess. 1296-98 (1989) (House Report). Moreover, Congress expressed the view that the provision should not interfere with tax treaties that prohibit discrimination against foreign-owned corporations. S. Print, 101st Cong., 1st Sess. 162 (Oct. 12, 1989) (Senate Report). Countries in which related parties file tax returns, however, need not be reported by domestic corporations. The legislative history fails to support this requirement. We therefore recommend that the requirement be dropped as beyond the pale of the statute.

B. Interaction with Section 1059A. Section 1059A(a) of the Code provides that

where goods are imported into the United States in a transaction involving related parties, the amount of any costs taken into account by the importing U.S taxpayer in computing the basis or inventory cost generally may not exceed the amount used in computing the goods' customs value. Adjustments to the customs value are permitted under section 1059A(b) for items such as freight, insurance, and subsequent manufacturing costs.

Prop. Reg. [section] 1.6038A-2(b)(5) requires the reporting corporation to disclose the underlying reasons for any discrepancies between the customs value and the basis or inventory cost of the goods. Such a reconciliation, however, is not required for domestic corporations and therefore seemingly violates the anti-discrimination clause of most tax treaties. Thus, we question whether the requirement can properly be imposed under section 6038A.

In addition, since section 1059A requires only that the inventory value not exceed the customs value with authorized adjustments, no disclosure should be required where a U.S. taxpayer's basis or inventory value is equal to or less than the customs value for such goods. Indeed, the reporting corporations should not be required to show the adjustments to value permitted under section 1059A on the Form 5472. Rather, such corporations should be permitted to make a blanket statement (under penalties of perjury) that any adjustments to the customs value of the goods have been made in compliance with section 1059A.

c. Reporting of De Minimis Amounts. Prop. Reg. [section] 1.6038A-2(b)(7) provides a de minimis reporting exception for any actual amount that is $50,000 or less. Although we commend the IRS for concluding that a de minimis rule is proper, we believe that the $50,000 threshold fails to take into account the vast number and size of transactions by large corporations. We therefore suggest a three-tier de minimis rule:

* $50,000 for companies with

gross sales of $10 million or


* $100,000 for companies with

gross sales between $10 and

$100 million; and

* $250,000 for companies with

gross sales of more than $100


These amounts should be adjusted periodically to take into account inflationary factors. The adoption of such a rule would permit both the IRS and reporting corporations to concentrate on the more material transactions.

4. Prop. Reg. [section] 1.6038A-2(f): Reportable Transactions

The record maintenance, agency designation, and noncompliance penalty provisions of the proposed regulations seemingly apply not only to transactions reportable on Form 5472, but to other transactions as well. See Prop. Reg. [section] 1.6038A-2(f)(1). Although the vast majority of transactions are, in fact, covered by the Form 5472 reporting requirements, we believe that the regulations should specify that the section 6038A requirements apply only to transactions otherwise required to be disclosed on Form 5472.

Such a limitation is justified by the legislative history of the 1989 Act. Hence, the conference report on the 1989 Act states:

The conference agreement also

provides further statutory

clarification that the scope . . .

is limited to requests by the

Secretary to examine records or

produce testimony related to

reportable transactions. . . .

H.R. Rep. No. 101-386, 101st Cong., 1st Sess. 593 (1989) (Conference Report). We believe that the reference to "reportable" transactions is properly directed at transactions reportable on Form 5472. Thus, we recommend that the recordkeeping requirements encompass only those records necessary to document and support reportable transactions shown or required to be shown on Form 5472. This approach would be similar to the "transactional" approach embodied in Treas. Reg. [subsection] 1.964-3 and -4, relating to the records to be kept by U.S. shareholders in respect of amounts includible in income for controlled foreign corporations under section 951 of the Code.

5. Prop. Reg. [section] 1.6038A-3(b): Indirectly Related Records

Prop. Reg. [section] 1.6038A-3(b)(2) requires the maintenance of records directly or indirectly related to transactions between the reporting corporation and any foreign related parties. An example of an "indirectly related" record is one possessed by a foreign subsidiary of a foreign related party documenting the raw material or component costs of a product manufactured by that subsidiary and sold as a finished product by the foreign related party to the reporting corporation. Prop. Reg. [section] 1.6038A-3(c)(1) applies the "indirectly related records" requirement to records subject to reporting under the safe harbor.

Under section 482, the inquiry is whether the transfer price between the related parties would have been agreed to by unrelated third parties. In many cases, the indirectly related records described in Prop. Reg. [section] 1.6038A-3(b)(2) will have precious little or no bearing on establishing such an arm's-length price. Consequently, the imposition of a mandatory, universal requirement is difficult to justify. At a minimum, the requirement should be restricted to U.S-connected transactions, rather than transactions between foreign related parties that have no connection with the United States.

6. Prop. Reg. [section] 1.6038A-3(c): Record Maintenance - Safe Harbor

a. In General. Prop. Reg. [section] 1.6038A-3(a)(1) provides the general rule that a reporting corporation must keep the permanent books of account or records as required by section 6001 that are sufficient to establish the correctness of the federal income tax return of the reporting corporation. Prop. Reg. [section] 1.6038A-3(a)(2) provides that a reporting corporation will be deemed to satisfy section 6038A's record maintenance requirements if it maintains six categories of records specified in Prop. Reg. [section] 1.6038A-3(c)'s designated safe harbor.

With respect to four of the six categories of records listed in the safe harbor,(5) there is no requirement to create records ordinarily not kept by the reporting corporation or its related parties. With respect to the other two categories, however, the safe harbor rules go substantially beyond records "maintenance" to records "creation" - requiring basic accounting records and records to produce material profit and loss statements to be created if they do not otherwise exist.

TEI is concerned that the safe harbor under Prop. Reg. [section] 1.6038A-3(c) could be interpreted by examining agents as setting forth the mandatory recordkeeping requirements for all reporting corporations. Thus, while Prop. Reg. [section] 1.6038A-3(a)(1) states that "section 6038A and this section provide detailed guidance regarding maintenance of records. . . "(emphasis added), the only detailed guidance relates to the safe harbor provisions. In addition, the preamble to the regulations states (at page 47):

The regulations generally are

based upon the view that the

requirement to "maintain"

records does not require their

creation. However, basic accounting

records and material

profit and loss statements must

be created if they are not otherwise


1990-53 I.R.B. at 47 (emphasis added). The implication of the above statement is that these two categories must be created and maintained to satisfy the general recordkeeping requirements under Prop. Reg. [section] 1.6038A-3(a).

Several IRS and Treasury representatives have attempted to assuage taxpayer concerns by stating that the maintenance or creation of the records listed in Prop. Reg. [section] 1.6038A-3(c)'s safe harbor provision is voluntary and that a reporting corporation can successfully aver that its current recordkeeping practices satisfy sections 6001 and 6038A. Assuming these statements are correct, the IRS should clarify the regulations by striking the above-quoted statement from the preamble. Moreover, the proposed regulations should explicitly confirm that the safe harbor is intended only as a guide to the records that will satisfy the statutory requirements under the safe harbor and that there are other ways in which to comply with section 6038A.

b. Production of Material Profit and Loss Statements. Although TEI agrees that a safe harbor is appropriate with respect to the records to be maintained under section 6038A, the requirements of Prop. Reg. [section] 1.6038A-3(c) are so onerous that many reporting corporations may opt not to avail themselves of the provision. As a result, the safe harbor's value to reporting corporations and to the IRS will be greatly diminished.

Specifically, the requirement for compilation and maintenance of material product line profit and loss (P&L) statements (and the apparent degree of specificity of such statements) may be the most burdensome aspect of the proposed regulations. Reporting corporations will undoubtedly find it difficult, if not impossible, to compile the "significant industry" and "high profit" segments required to produce the P&L statements.

In addition, the required production of P&L statements by industry segments implies an emphasis on the profit-split method of pricing transactions under section 482. The profit-split method was accorded a low priority in the Treasury Department and IRS's Section 482 White Paper. We therefore see no compelling need for such statements.

Most important, such records are not required to be maintained by domestic corporations under section 6001 of the Code. (6) The requirement thus represents a significant expansion of section 6001's general recordkeeping requirements and, therefore, seems at odds with the Treasury Department's statement during consideration of the 1989 Act that section 6038A was intended to ensure that the recordkeeping requirements of foreign-owned corporations are "no different, in general effect, from those imposed on U.S.-owned companies, . . ." Letter by Nicholas F. Brady to Senator Steven Symms of the Senate Finance Comittee (October 13, 1989). In these circumstances, the requirement may well violate the anti-discrimination clauses of U.S. tax treaties.

Moreover, we submit that the enormous administrative burden placed on an affiliated group to generate this type of documentation is unwarranted. The primary purpose in enacting section 6038A was to give the IRS greater access to transfer pricing data under section 482 in order to establish an arm's-length price. House Report at 1296. In many cases, however, actual product line profitability may not be a key, or even a modestly relevant, determinant of a reasonable transfer price under section 482. We submit that product line P&L statements should be required only when such statements are created in the ordinary course of the taxpayer's business (i.e., when the documents satisfy the "existing records test" under Prop. Reg. [section] 1.6038A-3(c)(4). (7)

7. Prop. Reg. [section] 1.6038A-3(e): Specific Agreements

Prop. Reg. [section] 1.6038A-3(e) permits the IRS District Director or the Assistant Commissioner (International) to enter into agreements with specific reporting corporations that establish what records must be maintained. We recommend that this provision be clarified to specifically allow IRS personnel to enter into an agreement providing that records, or a specific type of record need to be maintained.(8) For example, the regulations should authorize a specific agreement whereby the reporting corporation would be accorded safe harbor protection notwithstanding its not creating and maintaining the material profit and loss statements specified in Prop. Reg. [section] 1.6038A-3(c)(2)(ii). In addition, the agreement could provide that records need not be maintained when the fair market price can be established independently (e.g., as with commodities transactions). Such a provision could minimize the administrative burden and cost of compliance in circumstances where no meaningful purpose will be served by requiring the creation and maintenance of all the records specified in the safe harbor.

We also recommend that the regulations expressly state that the reporting corporation and the IRS District Director (or the Assistant Commissioner (International)) may negotiate different time periods for production or translation under Prop. Reg. [section] 1.6038A-3(f) (providing for production or translation of documents within 60 and 30 days, respectively, of a request by the IRS).

Finally, Prop. Reg. [section] 1.6038A-3(e) should be revised to specify that the IRS may enter into agreements that apply retroactively with respect to all open taxable years. This would be consistent with the 1990 Act amendments applying the section 6038A requirements to such years.

8. Prop. Reg. [section] 1.6038A-3(f): Exception to U.S. Maintenance

a. Time Period for Production. Prop. Reg. [section] 1.6038A-3(f)(1) provides that the reporting corporation may elect to maintain certain records outside the United States. To make the election, a reporting corporation must agree to the production of records by either:

(i) delivering duplicates to the

IRS within 60 days of a request

for such records and

providing translations within

30 days of a request for such

translations; or

(ii) moving duplicates of the requested

documents to the

United States within 60 days

of the request for such

records; providing the IRS

with an index of the records

and the name and address of

the custodian; and continuing

to maintain such records during

the required retention

period. (9)

Under Prop. Reg. [section] 1.6038A-3(f)(3), the District Director or the Assistant Commissioner (International) may grant extensions of time or permit production of the record to be scheduled over a period of time.

In our pre-regulation comments, we recommended that reporting corporations be permitted to produce or translate documents within 90 days of a request by the IRS. We still believe that a 90-day time frame more realistically recognizes the problems associated with obtaining and translating foreign documents than the 30- and 60-day periods set forth in the regulations. In addition, a 90-day time period would reduce the number of extension requests required to be filed by the reporting corporation and processed by the IRS.

b. Country-Based Exceptions. The legislative history of the 1989 Act specifically provides that "the Treasury may grant country-based exceptions to the general U.S. record maintenance rules." Senate Report at 156. We are disappointed that such exceptions are not included in the proposed regulations.

TEI recommends that an independent requirement to maintain specified records in the United States not be imposed where adequate exchange-of-information provisions already exist and function well. This very point was recognized by the Senate Finance Committee during consideration of the 1989 legislation. See Senate Report at 156. Given the Treasury Department's general sensitivity to treaty-override issues, we believe that the Secretary should not ignore a grant of authority from Congress that pays deference to the delicate nature of treaty provisions. Thus, we recommend that the regulations exempt reporting corporations with records in those countries - such as Canada, Germany, France, and the United Kingdom - where exchange-of-information agreements have operated exceptionally well or where experience has made it clear that the IRS will be provided with the necessary information in a timely and efficient manner. Quite candidly, taxpayers operating in those countries are aware of the efficiency of these exchange provisions and will generally comply without requiring the IRS to resort to section 6038A. In addition, these country-based exceptions should be available to reporting corporations without the need to make a formal election.

9. Prop. Reg. [section] 1.6038A-3(g): Period of Retention

Prop. Reg. [section] 1.6038A-3(g) requires that records be maintained "as long as they may be relevant to determining the correct tax treatment of any transaction...."

Record maintenance and storage is a very costly operation, especially for large multinational corporations. Certain transactions, especially those relating to inventory costs, may affect the reporting corporation's tax liability for many years, particularly where the reporting corporation utilizes the LIFO method of accounting for inventories. Once the cost of a particular transaction is built into an inventory layer, it will affect the corporation's tax liability until there is an inventory draw-down reaching that layer.

To avoid the enormous costs associated with perpetual maintenance of records relevant to inventory costs, the regulations should provide that records need only be retained until the expiration of the statute of limitations for the initial tax year to which the records relate. Such a retention period would permit the IRS sufficient time to determine the proper tax treatment of the transaction without unduly burdening corporations. This rule would balance the IRS's need for access to records against the reporting corporation's interest in efficient, cost-effective record maintenance. In addition, a similar rule should apply to records related to the acquisition of assets that are subject to the allowance for depreciation, depletion, or amortization.

10. Prop. Reg. [section] 1.6038A-4: Monetary Penalties

Prop. Reg. [section] 1.6038A-4 provides guidance concerning the circumstances under which the monetary penalties of section 6038A(d) of the Code may be applied. Subparagraph (b) of that regulation discusses the reasonable cause exception. Prop. Reg. [section] 1.6038A-4(b)(2)(i) acknowledges that an omission or error with respect to the information required to be shown on Form 5472 will not constitute a failure for purposes of section 6038A(d) if the reporting corporation establishes that it has "substantially complied with the filing of Form 5472 or the requirement to maintain or produce records."

TEI believes the regulations should explicitly provide that the reporting corporation's filing of an amended Form 5472 containing correct and complete information within the time period specified in Rev. Proc. 85-26, 1985-1 C.B. 580 (permitting CEP taxpayers to satisfy the adequate disclosure requirements of section 6662 by providing certain information within 10 days of the commencement of an audit), will constitute a showing of "substantial compliance" under section 6038A. Section 6038A should not be administered in such a way that the filing of an amended Form 5472 automatically triggers an inquiry into whether the penalty should be applied with respect to the original Form 5472 filed by the reporting corporation.

11. Prop. Reg. [section] 1.6038A-5: Annual Authorization of Agency

The proposed regulations provide that the agency designation required under section 6038A(e) of the Code must be made on an annual basis. We submit that the requirement for annual filings is unnecessary and, instead, that agency designations should remain effective until revoked by the parties.(10) Consequently, we recommend that the annual designation requirement be replaced by a requirement that the reporting corporation represent that the required agency designation has been obtained and has not been revoked. At the very least, the regulations should permit agency designations to remain in effect for some specified period of time (say, 10 years) to minimize the administrative burden of obtaining such authorizations.

12. Other Data-Gathering Tools

The proposed regulations provide little insight into how and under what circumstances the IRS may invoke its summons authority under section 6038A(e). During the legislative debate on the 1989 Act amendments, Congress expressed its belief that the revisions did not violate any existing tax treaty provisions. H.R. Rep. No. 101-386, 101st Cong., 1st Sess. 595 (1989) (Conference Report). By failing to address the scope of its summons authority, however, the proposed regulations do not sufficiently allay concerns whether the rules violate such treaties.

The legislative history of the 1989 Act amendments provides in pertinent part:

It is expected that where records

of a related party are obtainable

on a timely and efficient basis

under information-exchange

procedures under a tax treaty,

the Internal Revenue Service

generally would make use of

such procedures before issuing

a summons to the designated

agent of the related party.

Senate Report at 157. Treasury and IRS representatives have stated publicly that the treaty process will be used before the summons authority is invoked. To ensure that this requirement is consistently applied, the regulations should expressly provide that information-exchange provisions must information-exchange provisions must be used before invoking section 6038A's summons authority. The regulations should also require the exhaustion of the normal individual document request (IDR) process and the section 982 formal document request before resorting to the summons authority under section 6038A(e). We believe the majority of taxpayers will comply with reasonable information requests without forcing the IRS to use the section 6038A summons authority. Consequently, we believe that, given its extraordinary nature, the authority to issue a summons should reside at a high level within the IRS.

Furthermore, TEI continues to believe that the authority to impose the severe penalties specified under section 6038A(e)(3) (i.e., the disallowance of deductions or cost of goods sold) should be maintained at a senior level within the IRS - i.e., the Assistant Commissioner (International) - in order to ensure that appropriate IRS policies and procedures have been followed, existing data-gathering avenues have been exhausted, and the burdens of producing foreign records can be balanced with the real needs of the IRS and any adverse effect on international precedents. We therefore recommend that the regulations explicitly provide for the exercise of such authority.

13. Effective Dates

The 1989 and 1990 Act amendments apply to all open tax years. The retroactive nature of the provision has been defended on the grounds that the provisions merely require the maintenance of extant records in respect of prior years. We question whether that rationale accords due weight to the "real world" problems associated with corporate record retention schedules. Moreover, proposed regulations under the 1989 Act were not even promulgated until December 1990 and it is unclear how long it will be before final regulations are issued. There are therefore no regulations in effect, but it appears that the reporting and record maintenance regulations will be applied retroactively, i.e., they will be effective as of December 10, 1990. Taxpayers have been essentially left on their own to struggle with section 6038A's amorphous "records" requirements.

Furthermore, the number of varying effective dates provided for in the proposed regulations is potent testimony to the complexity of the requirements. The proposed regulations require seven separate subparagraphs to delineate the effective dates of the regulations. See Prop. Reg. [section] 1.6038A-1(k). We submit that section 6038A is a compelling example of a provision where the Secretary should exercise his discretionary authority under section 7805(b); the provision should generally not become effective until final regulations are issued. Until that time, barring some showing of bad faith (such as the destruction of records specified to be maintained), compliance with section 6001 should be deemed to be compliance with section 6038A.


Tax Executives Institute appreciates this opportunity to present our views on the proposed regulations relating to the record maintenance and agency designation requirements under section 6038A of the Code. If you have any questions, please do not hesitate to call Raymond G. Rossi, chair of TEI's International Tax Committee, at (408) 765-1193 or the Institute's professional staff (Timothy J. McCormally or Mary L. Fahey) at (202) 638-5601.

(1) We commend the IRS for the organization and general format of the proposed regulations. Specifically, the use of a table of contents and a summary at the beginning of the regulations make the proposed rules relatively easy to find. Adoption of this format in future regulations will ameliorate some of the difficulty inherent in reading and understanding the provisions.

(2) Prop. Reg. [Section] 1.6038A-2(b)(7) is discussed further in Comment No. 3.c.

(3) The agency designation requirement is discussed further in Comment No. 11.

(4) The statute provides that the amount of deductions or cost of goods sold "shall be the amount determined by the Secretary in the Secretary's sole discretion from the Secretary's own knowledge or from such information as the Secretary may obtain through testimony or otherwise." (Emphasis added.)

(5) The four categories of documents required to be maintained under the safe harbor are pricing documents, foreign country and third-party filings, ownership and capital structure records, and records of loans, services, and other non-sales transactions.

(6) Concededly, the proposed regulations do not actually require that material P&L statements be maintained; rather, only the underlying records necessary to produce such statements must be kept. Because such statements must be produced within 120 days of a demand by the IRS, however, the regulations effectively require the reporting corporation to establish a system under which P&L statements can be produced.

(7) As an alternative to the creation of P&L statements, the regulations could permit the reporting corporation to provide industry segment financial statements prepared in the normal course of business.

(8) The regulations should authorize the crafting of agreements involving more than one reporting corporation which share the same foreign parent but do not file consolidated returns.

(9) Material P&L statements must be provided within 120 days of the IRS request for such documents.

(10) This same rationale also applies to the annual election to maintain records outside of the United States under Prop. Reg. [Section] 1.6038A-3(f). Such a requirement seems unreasonable and should be revised to permit the election to remain in force until revoked by the taxpayer.
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Author:Rossi, Raymond G.
Publication:Tax Executive
Date:Mar 1, 1991
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