Now what? Collateral consequences of transfer pricing adjustments.

I. Overview

If it is determined under section 482 of the Internal Revenue Code that a U.S. taxpayer underpaid its U.S. income tax by reason of a transfer pricing error, the immediate consequence is that the U.S. company owes additional U.S. income tax. Beyond that, three crucial tax inquiries come into play:

* Double Taxation: Can the foreign tax previously paid by its foreign affiliate with respect to the amount now reallocated be credited or refunded to avoid double taxation?

* Adverse Collateral Tax Consequences: Can any adverse collateral U.S. tax consequences of the reallocation be avoided or mitigated?

* Ability to Repatriate Funds: What are the U.S. and foreign tax consequences of a reimbursement of the U.S. company by its foreign affiliate to compensate for the original transfer pricing error? Although repatriation is not required as a tax matter, funds may be needed from the foreign affiliate to pay the additional U.S. tax or for financial or business reasons.

Similar issues may be presented if a taxpayer avoids section 482 adjustments by reporting transaction results on a timely filed tax return based on prices different from those actually charged(1)(*) (so-called compensating adjustments), or makes similar corrections pursuant to an advance pricing agreement (APA).

Two basic dynamics are operative here. First, the IRS must make appropriate correlative allocations to the income of the related party.(2) Second, the IRS will generally permit an "as-if" approach, thereby allowing the parties to end up in the same position they would have been in had the original transaction been conducted at arm's-length.

The taxpayer's focus, of course, cannot be exclusively on U.S. tax consequences. A continual, and complex, interface is created by the rules and policies of the taxing authority having jurisdiction over the foreign related party(ies). These vary significantly and are often difficult to determine. Of note is the March 1995 draft of the second part of the Organisation for Economic Co-Operation and Development's transfer pricing guidelines,(3) which encourages tax administrations to avoid "secondary adjustments" in most cases, because of complexity, coordination, and other problems.

In analyzing the collateral consequences of transfer pricing adjustments, the relationship and identities of the U.S. and foreign parties can be critical. Pertinent categories for present purposes are (1) U.S. parent/foreign subsidiary, (2) U.S. subsidiary/foreign parent, and (3) siblings of a foreign parent. This article sets forth separate examples for each category, though there are many common substantive and procedural issues. Also, the examples involve inbound purchases of tangible goods, but essentially the same net result and issues obtain in outbound transactions or cases involving intercompany services, intangibles, or loans (with some additional withholding tax issues possible in the latter cases). A matrix at the end of the article summarizes the key concerns and consequences in the three situations.

II. Case A: U.S. Parent/Foreign Subsidiary

Example: A U.S. multinational corporation (USPAR) buys products manufactured abroad by its foreign subsidiary (FOSUB), a controlled foreign corporation (CFC) for Subpart F purposes.(4) The IRS determines under section 482 that USPAR overpaid for the products, and reduces USPAR's cost of goods sold, increasing its taxable income accordingly. The IRS position is that:

* The amount of the overpayment represents a capital contribution by USPAR to FOSUB.(5)

* FOSUB'S earnings and profits (E&P) are reduced by the amount of the overpayment.(6)

* The foreign tax paid by FOSUB in excess of the amount payable had the sales price been an arm's-length price is deemed a voluntary overpayment of tax to the foreign government and thus is ineligible for foreign tax credit or deduction to USPAR. FOSUB's E&P, however, will generally reflect its actual foreign tax expense, regardless of creditability.(7)

The IRS approach potentially gives rise to double taxation of the reallocated amount to the extent of foreign taxes paid by FOSUB. Moreover, the "overpaid" funds are held by FOSUB even though it is considered not to have earned them. The following analysis focuses on how to eliminate the double taxation and, if desired, how to move the funds back to USPAR. Adverse collateral consequences of the allocation are not particularly problematic, since the overpayment is treated as a nontaxable capital contribution.

A. Elimination of Double Taxation

1. FOSUB should first attempt to secure a foreign tax refund unilaterally, based on the "corrected" amount of its income.(8) This will generally be difficult, however, unless some sort of simultaneous examination process is available, the amount involved is small, or the foreign tax system is relatively informal.

2. If FOSUB is unable, after "exhausting all effective and practical remedies,"(9) to obtain a refund, USPAR should seek competent authority assistance to mitigate the resulting double taxation accordance with treaty provisions, if applicable, under Rev. Proc. 91-23.(10) Competent authority proceedings in transfer pricing cases can be quite lengthy, difficult, costly, and unpredictable, although the IRS is seriously attempting to streamline and improve the process, with some success. Taxpayers may be required to file amended returns or protective claims for refund with the foreign tax authority to keep the foreign statute of limitations open, satisfy treaty requirements, and meet similar requirements. Timing and "alerting" concerns can be tricky and delicate.

3. If refund remedies and competent authority rights are exhausted but unavailing, the actual foreign taxes originally paid by FOSUB should be creditable (subject to applicable limitations under section 904).(11) This result, however, is not automatic.(12)

4. Taxpayers should consider the effect of currency changes. If foreign tax rules compute refunds based on exchange rates in effect for the transaction year and there have been significant intervening changes, FOSUB may experience a real economic benefit or detriment.

B. Potential Adverse Collateral Tax Consequences

1. No direct adverse collateral U.S. tax consequenees will result with respect to FOSUB because the overpayment is treated as a nontaxable capital contribution.

2. The reduction of FOSUB's gross income could affect certain Subpart F calculations, e.g., the 5-percent and 70-percent gross income thresholds in sections 954(b)(3)(A) and 954(b)(3)(B), respectively, and, perhaps, the section 954(b)(4) exclusion for high-foreign-taxed foreign base company income. Other tax regimes involving gross income tests might also be affected, including personal holding company or foreign personal holding company determinations.(13) Expense allocations based on relative gross income amounts could be altered. See Treas. Reg. [sections] 1.861-8(f)(4).

C. Repatriation of Funds

1. Absent special relief, a current repatriation payment by FOSUB to USPAR will be treated as a taxable distribution. The payment will be taxed as a dividend under sections 301 and 316 to the extent of FOSUB's current or accumulated E&P for the payment year (and as a capital gain to the extent the amount exceeds E&P and stock basis), as modified by the section 959 prioritization and exclusion rules regarding previously taxed E&P for CFCs. Because FOSUB's transaction year E&P is reduced by the section 482 correlative allocation, however, intervening Subpart F inclusions under section 951 and actual taxable dividends in prior or current years may be favorably adjusted. Related indirect foreign tax credits will also be reduced if the allocable foreign tax is not creditable.

2. Taxpayer attempts to characterize the excessive purchase price as creating an account payable to USPAR, so that repatriation is considered a nontaxable loan repayment, have not fared well in court.(14) The IRS has, however, administratively constructed such a pattern, as described below.

3. To avoid or mitigate adverse consequences, consider invoking Rev. Proe. 65-17.(15) This Revenue Procedure is designed to allow a transfer of funds to place the parties in the same position they would have been in had the overpayment not occurred, without adverse tax consequences. Specific procedures must be followed, including execution of a closing agreement. Relief is not available if tax avoidance was a principal purpose of the underlying transaction or if there was an underpayment of tax due to fraud on any matter. Generally, these conditions have not been an issue, but there has recently been more attention paid to this standard.

Rev. Proc. 65-17 permits establishment of an interest-bearing account receivable by USPAR from FOSUB, as of the end of the transaction year, up to the amount of the allocation (together with accrued interest). This procedure allows return of the funds to USPAR as nontaxable loan repayments, without dividend tax, but USPAR is deemed to receive taxable interest income annually (with interest calculated on the resultant tax deficiency) under the section 482 imputed arm's-length interest rules, for each year the account receivable is deemed outstanding. The account receivable must be paid off within 90 days after the Rev. Proc. 65-17 closing agreement is entered into; payment may be made by cash, interest-bearing fixed-maturity note, or an offset against existing debt.(16)

The desirability of invoking Rev. Proc. 65-17 depends on a comparison of the after-tax "yield" with that on a taxable distribution. Currently, repatriation under Rev. Proc. 65-17 is especially attractive because U.S. competent authority policy allows repayment of Rev. Proc. 65-17 accounts receivable without imputation of interest. This informal policy derives from a desire to avoid a second double taxation issue with respect to imputed interest.

Alternatively, Rev. Proc. 65-17 permits a taxpayer election to recharacterize actual distributions -- but not section 951 deemed distributions -- made in the transaction year as nontaxable payments (which thus do not pull through foreign tax credits), rather than as taxable distributions (with foreign tax credits). This may prove desirable if foreign tax credits are low in the transaction year, if there are excess foreign tax credits, or if interest effects or tax rate differentials are significant.

Rev. Proc. 65-17 treatment must be requested before closing action is taken on the underlying section 482 adjustment.(17) This rule was modified in 1991 so that, if a treaty country is involved, Rev. Proc. 65-17 relief is available only in conjunction with a competent authority request.(18) Some relaxation was recently proposed in Ann. 95-9: A taxpayer is required to use competent authority procedures only if it otherwise intends to request such assistance on the underlying transaction or if a competent authority proceeding is already pending. Otherwise, if the Assistant Commissioner (International) concurs, the relief procedure can be handled by the pertinent District Director.

4. The foreign tax treatment of repatriation transactions must be considered in all cases. Foreign treatment may well not be consistent, leading to adverse foreign tax consequences. See, e.g., Schering Corp. v. Commissioner,(19) where the 5 percent Swiss dividend withholding tax was imposed on repayment of a Rev. Proc. 65-17 receivable by a Swiss subsidiary. The adverse consequences were mitigated, however, because the Tax Court allowed a direct section 901 foreign tax credit to the U.S. parent corporation.

If the foreign country respects the loan characterization,(20) taxable currency gain/loss may result from the repayment.

III. Case B: Foreign Parent/U.S. Subsidiary

Example: A U.S. subsidiary (USSUB) of a foreign parent company (FOPAR) buys products manufactured abroad by FOPAR. The IRS determines under section 482 that USSUB overpaid for the products and reduces USSUB's cost of goods sold, increasing its taxable income accordingly.

In this situation, the IRS treats the overpayment as a distribution to FOPAR, with dividend treatment to the extent of USSUB's E&P. In such a case, the 30 percent U.S. withholding tax under sections 881 and 1442 (subject to reduction by treaty) will typically be imposed.(21) Reimbursement by the overpaid party would be a payment by a foreign parent to its U.S. subsidiary -- ordinarily a nontaxable capital contribution.

The same double taxation concern is present here as in Case A, but the other inquiries reflect the mirror image of that case: Adverse dividend consequences result from inaction, whereas repatriation is nontaxable. In many respects, Case B is considerably simpler than Case A:

* Correlative allocation to FOPAR is usually irrelevant, since FOPAR does not pay U.S. tax nor are its E&P relevant to another entity's U.S. tax.

* The foreign tax credit rules are not pertinent (assuming FOPAR is not a U.S. taxpayer).

* Subpart F and related rules are irrelevant.

A. Elimination of Double Taxation

1. FOPAR should first attempt to secure a foreign tax refund unilaterally with respect to the section 482 adjustment amount.

2. If FOPAR's unilateral attempts are unavailing, USSUB should seek competent authority assistance.

3. Currency changes can have real economic effect, depending on the foreign country rules for computing tax refunds.

B. Potential Adverse Collateral Tax Consequences

Inaction may trigger a U.S. withholding tax on the deemed distribution from overpayment for products by USSUB. Case law does not support loan treatment,(22) but a taxpayer might argue that imposition of withholding tax amounts to double taxation.(23)

1. The taxpayer should determine whether USSUB has sufficient current and accumulated E&P in the transaction year to support dividend treatment. USSUB's E&P will be increased by the underlying section 482 adjustments, net of attributable increased U.S. tax, and adjustments to USSUB's E&P may also affect withholding obligations on intervening distributions.

2. The taxpayer should investigate the foreign tax credit rules applicable to FOPAR to determine whether the foreign jurisdiction will allow a foreign tax credit to offset the U.S. tax cost. The absence of an actual distribution will exacerbate the situation.(24)

3. If the results under 1 and 2 are unfavorable, the taxpayer should consider invoking Rev. Proc. 65-17 and Rev. Rul. 82-80, the latter of which permits elimination of the deemed dividend and attendant withholding tax for the transaction year "if Rev. Proc. 65-17 treatment is granted." Hence, the parties must apparently establish, and satisfy in accordance with Rev. Proc. 65-17, an account receivable from FOPAR to USSUB.(25) The required taxable imputed interest may prove to be too high a price just to eliminate withholding tax on the deemed dividend, particularly at common treaty-reduced rates such as 5 percent. As previously discussed, current U.S. competent authority policy allows withholding tax relief under Rev. Proc. 65-17 by use of a non-interest-bearing account receivable to avoid cascading competent authority double taxation issues. Accordingly, the adverse U.S. dividend withholding tax consequence can be eliminated without further cost if competent authority proceedings are involved and the funds are repatriated. The funds, however, will then be in the United States and would bear U.S. withholding tax if later distributed to FOPAR.

4. Finally, the taxpayer should consider the foreign treatment of the deemed distribution. Foreign taxation of deemed amounts is relatively unlikely.

C. Repatriation of Funds

As with Case A, the desirability of repatriation depends on the taxpayer's need for funds in various jurisdictions and other factors. Repatriation may also be required to eliminate U.S. dividend withholding tax under Rev. Proc. 65-17. Repayment in Case B is generally nonproblematic:

1. A current repatriation payment by FOPAR to USSUB should be treated as a nontaxable capital contribution. Thus, if USSUB has insufficient E&P to cause dividend withholding tax concerns, repatriation can be effected quite simply, without involving Rev. Proc. 65-17.

2. The taxpayer should consider the foreign tax treatment of a repayment, e.g., whether a withholding tax will be imposed on imputed interest if loan characterization is respected.

IV. Case C: Siblings

Example: This case posits a non-arm's-length transaction between a U.S. subsidiary (USSIB) and a foreign subsidiary (FOSIB) of a common parent, either U.S. or foreign.(26) The section 482 allocation increases USSIB's income and generates a correlative reduction to FOSIB's income.

Under the IRS view, this reallocation creates a constructive distribution to the common parent.(27) To the extent USSIB has E&P, this triggers U.S. dividend withholding tax if the parent is foreign or U.S. income tax if the parent is a U.S. taxpayer. The consolidated return rules or dividends received deduction eliminate the second level of taxation in most cases involving a U.S. parent, but issues remain where a foreign parent (FOPAR) is involved. Like Case B, correlative allocations to FOSIB are irrelevant in most such cases, as are U.S. foreign tax credit and Subpart F rules.

A. Elimination of Double Taxation

1. FOSIB should first attempt to secure a foreign tax refund unilaterally with respect to the section 482 adjustment amount.

2. If the unilateral attempt is unsuccessful, the taxpayer can seek competent authority relief. An additional (and potentially disabling) complexity -- involvement of a third country -- is presented if FOPAR is in a different foreign tax jurisdiction from FOSIB.

3. As in each other case, the economic effect of currency changes with respect to foreign tax refunds must be considered.

B. Potential Adverse Collateral Tax Consequence's

The IRS takes the position that the section 482 adjustment generates a second level of U.S. tax -- specifically, a withholding tax on a constructive dividend to FOPAR by reason of USSIB's overpayment to FOSIB for products, "whether or not the motive was an attempt improperly to allocate income or deductions between the corporations." See Rev. Rul. 78-83.

Substantial case law, however, supports the position that a constructive dividend to the common parent is appropriate only if there is a "direct benefit" to the parent, and that there is no such benefit fiere.(28) The IRS articulated its disagreement with the direct benefit requirement, as a legal matter, in G.C.M. 38676. Instead, the IRS approach is to allow relief from the second level of tax via Rev. Proc. 65-17 in nonavoidance situations, but to otherwise assert constructive dividend treatment.

The ability of the IRS to impose withholding tax on a constructive dividend in this setting is also debatable. This issue was viewed as a "tantalizing question" in R.T French Co., supra, and was recently sidestepped by the Tax Court in Central de Gas de Chihuahua.(29)

To determine the extent of concern with the collateral consequences:

1. The taxpayer should determine whether USSIB has sufficient current or accumulated E&P in the transaction year to support dividend treatment. USSIB's E&P will be increased by the underlying 482 adjustments, net of attributable U.S. tax.

2. The taxpayer should review the foreign (non-U.S.) tax credit rules applicable to FOPAR. Difficulty in obtaining credit abroad will be exacerbated by the constructive and indirect nature of the alleged dividend.

3. If the collateral implications are unfavorable, Rev. Proc. 65-17 relief should be available. Recharacterization of any transaction-year distributions as nontaxable is clearly allowable (including various multi-tier situations The ability to avoid a dividend by establishing an account receivable is not explicitly discussed in the revenue procedure, but there is no apparent theoretical or policy bar to relief.(31) The tax costs of imputed interest on such a receivable must be considered, absent waiver in a competent authority proceeding.

4. The taxpayer should evaluate the foreign tax treatment of a repayment. The possible involvement of a third country will obviously complicate the situation.

C. Repatriation of Funds

Absent a need or desire to establish a Rev. Proc. 65-17 receivable, repatriation is nontaxable from the U.S. perspective.

1. A current repatriation payment by FOSIB to USSB could be treated as a capital contribution by a non-shareholder (FOSIB) or, under a two-step analysis, by the parent shareholder (FOPAR).(32) A nonshareholder capital contribution, however, may require basis reduction under section 362(c), occasioning a later tax.

2. If a two-step view is indicated, pertinent foreign tax rules should be checked, particularly if FOPAR and FOSIB are in different tax jurisdictions. The first constructive step -- a deemed distribution by FOSIB to FOPAR -- might trigger undesirable foreign tax consequences if similarly characterized abroad.

In the USPAR case, a two-step view (i.e., a constructive distribution to USPAR plus a capital contribution to the purchasing subsidiary) could be problematic if the selling subsidiary is foreign, since the distribution could be taxable and lack adequate foreign tax credit. There is no specific IRS authority requiring a two-step view of the repatriation transaction.

V. Special Cases: Taxpayer-Initiated Adjustments under the Section 482 Regulations or Advance Pricing Agreements

The final section 482 regulations allow taxpayers to report transaction results on timely filed returns based on prices different from those actually charged(33) (commonly referred to as "compensating adjustments"). Similar adjustment mechanisms are used in many APAs.

Effective adjustment of prices after the tax year in which the transaction occurred raises the same three concerns discussed above: double taxation, repatriation, and adverse collateral tax consequences. Theoretically, the full spectrum of earlier analyses applies. Practically, the focus is considerably narrower, since the elapsed time is short, and an APA may already involve competent authority proceedings and enable establishment of correlative mechanisms.

A. Double Taxation Issues

If the foreign affiliate's foreign tax return can be similarly adjusted before filing, there will be no need to seek a refund later. Preliminary reactions from major treaty partners are not, however, favorable in this regard; time, experience, and a desire for consistency will optimally lead to more compatible results. One solution may be to include a formal price adjustment clause in the pertinent intercompany agreement, to create a contractual repayment obligation ab initio. Other creative ideas depend on the receptivity of competent authorities to the acceptance of cases in various procedural postures.

A bilateral APA provides an opportunity to sort out double taxation issues by negotiation and agreement. This is also true with respect to collateral foreign tax consequences, below.

B. Adverse Collateral Tax Consequences and Repatriation Issues

The collateral or repayment-triggered constructive dividends are generally of the type subject to amelioration or elimination under Rev. Proc. 65-17. The IRS is currently revisiting the interplay between Rev. Proc. 65-17 and taxpayer-initiated adjustments under the final section 482 regulations. Treas. Reg. [sections] 1.482-1(g)(3) ("Adjustments to Conform Accounts to Reflect Section 482 Allocations") requires "appropriate adjustments" and allows application for Rev. Proc. 65-17 relief.

It is hoped that the IRS will consider allowing the establishment of a non-interest-bearing account receivable tied to filing the return on which the taxpayer-initiated adjustment is reflected. Relief could be automatic, or elective, rather than by formal application, subject to denial upon audit. A decision will be needed on whether eligibility should be based on the section 6662(e) penalty standards or the current Rev. Proc. 65-17 "non-avoidance" standard.

APA procedures(34) specifically authorize this type of approach, as follows:

1. Compensating adjustments are deemed to accrue at the end of the transaction year. This retroactive "as-if" adjustment should eliminate most adverse collateral consequences from the reallocation itself.

2. Compensating adjustments must be paid within 90 days of filing the tax return for the pertinent transaction year.

3. Companies may employ any method that accords with Rev. Proc. 65-17 for payment of compensating adjustments, e.g., check or wire transfer, offsets through intercompany accounts, or recharacterized dividends.

4. No interest accrues if the receivable or payable is timely paid.

5. No withholding taxes or penalties are imposed on the payment of compensating adjustments.

Consistent foreign treatment will be sought through the competent authority process in a bilateral APA.

VI. Conclusion

The myriad collateral consequences of transfer pricing adjustments will receive increased visibility as transfer pricing audits and concerns proliferate. Careful attention must be paid to the specifics of the taxing rules on all sides of the transaction and the need to anticipate and coordinate them. This is not an easy task; additional IRS guidance and international consistency would be most welcome.

For additional information, please see the Appendix on page 282.

Notes

(1) Treas. Reg. [subsections] 1.482-1(a)(3) and -1(i)(9). (2) Treas. Reg. [sections] 1.482-1(g)(2). (3) Organisation for Economic Co-Operation and Development, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, Draft Text of Part II, [paragraph] 185, reprinted in BNA Daily Tax Report, March 14, 1995, at L-1 (OECD Report). (4) I.R.C. [sections] 957. (5) Rev. Proc. 65-31, 1965-2 C.B. 1024, 1036, [sections] 4.04(1); Treas. Reg. [sections] 1.482-1(g)(3). (6) Treas. Reg. [sections] 1.482-1(g)(2)(ii). (7) Rev. Rul. 92-75, 1992-2 C.B. 197, superseding Rev. Rul. 76-508, 1976-2 C.B. 225, and modifying Rev. Rul. 80-231, 1980-2 C.B. 219; Treas. Reg. [sections] 1.901-2(e)(5)(i). (8) Treas. Reg. [sections] 1.901-2(e)(5)(ii). (9) Under Treas. Reg. [sections] 1.901-2(e)(5)(i), "effective and practical remedies' are determined by weighing reasonableness of the cost (including the risk of additional tax liability) in light of the amount at issue and the likelihood of success. (10) 1991-1 C.B. 534. Revisions to Rev. Proc. 91-23 were recently proposed in Ann. 95-9, 1995-7 I.R.B. 57. (11) Treas. Reg. [sections] 1.901-2(e)(5)(ii), Example 2. (12) Rev. Proc. 91-23, supra. Under Ann. 95-9, U.S. competent authority consultation may be required. (13) See Krueger Co., Inc. v. Commissioner, 79 T.C. 65 (1982); Likins-Foster Honolulu Corp. v. Commissioner, 840 F.2d 642 (9th Cir. 1988). (14) Cappuccilli v. Commissioner, 668 F.2d 138, 140 (2d Cir. 1981), cert. denied, 459 U.S. 822 (1982); Eisenberg v. Commissioner, 78 T.C. 336, 347 (1981). But see Altama Delta Corp. v. Commissioner, 104 T.C. No. 22 (April 11, 1995). (15) 1965-1 C.B. 833. (16) See TAM 9447003 regarding consistent character of account receivable and underlying transaction, to the extent pertinent for other tax purposes, e.g., export trade corporation asset computations. (17) In limited cases, relief may also be available for closed cases. Tax Court or Department of Justice coordination is required in litigation situations. See Rev. Proc. 65-17, [subsections] 5.02-5.04. (18) Rev. Proc. 91-24, 1991-1 C.B. 542. (19) 69 T.C. 579 (1978), acq. 1981-1 C.B. 2. (20) Paragraph 184 of the OECD Report states that loan treatment is not common. (21) Rev. Rul. 82-80, 1982-1 C.B. 89. (22) See Cappuccilli and Eisenberg, supra, But see Altama Delta, supra. (23) See G.C.M. 38676 (Apr. 6, 1981), and Jenks, Constructive Dividends Resulting from Section 482 Adjustments, 24 Tax Lawyer 83, 96 (1970). (24) See OECD Report [paragraph] 181. (25) G.C.M. 38676, supra. (26) Another variant -- two FOSIBs and USPAR -- is more complex and potentially more problematic. Under Rev. Rul. 78-83, 1978-1 C.B. 79, the IRS finds a constructive dividend to USPAR, even though there is no direct U.S. involvement in the transaction. The ability to obtain Rev. Proc. 65-17 relief is not entirely clear (although G.C.M. 38676, supra, assumes applicability), particularly since accessing the competent authority process for a collateral adjustment may be difficult. (27) Rev. Proc. 65-31, 1965-2 C.B. 1024, 1037; Rev. Rul. 69-630, 1969-2 C.B. 112; Rev. Rul. 73-605, 1973-2 C.B. 109; and Rev. Rul. 78-83, 1978-1 C.B. 79. (28) See, e.g., R.T French Co. v. Commissioner, 60 T.C. 836, 855 (1973); White Tool & Machine Co. v. Commissioner, 41 T.C.M. 116 (1980), aff'd, 677 F.2d 528 (6th Cir.), cert. denied, 459 U.S. 907 (1982). See also Sammons v. Commissioner, 472 F.2d 449 (5th Cir. 1972); Rushing v. Commissioner, 52 T.C. 888 (1969), affd, 441 F.2d 593 (5th Cir. 1971); Young & Rubicam v. United States, 410 F.2d 1233, 1238 (Ct. Cl. 1969). But see Gulf Oil Corp. v. Commissioner, 87 T.C. 548, 568 (1986) (suggests that avoiding tax constitutes direct benefit to common parent, but in non-arm's-length, non-section 482 setting). (29) 102 T.C. 515 (1994) (section 881 tax imposed on U.S.-source deemed rental income of foreign sibling). See Stark & Baillif, Do Section 482 Allocations to Foreign Entities Trigger a Withholding Obligation?," J. Taxation (March 1995), at 178. But see Casa de la Jolla Park, Inc. v. Commissioner, 94 T.C. 384 (1990). (30) See Rev. Proc. 70-23, 1970-2 C.B. 505; Rev. Proc. 71-35, 1971-2 C.B. 573. (31) See G.C.M. 38676, supra. (32) Another (less favorable) characterization would be as a nontaxable loan repayment with taxable imputed interest. See Altama Delta, supra. (33) Treas. Reg. [subsections] 1.482-1(a)(3) and -1(i)(9). (34) Rev. Proc. 91-22, 1991-1 C.B. 526, [sections] 10.02; Ann. 95-49, 1995-24 I.R.B. 13, [sections] 10.02.

PATRICIA GIMBEL LEWIS is a member of the law firm of Caplin & Drysdale, Chartered, in Washington, D.C. She received her J.D. degree and M.B.A. degrees (with honors) from Harvard University in 1971. Ms. Lewis is a former Chair of the Taxation Section of the Disctrict of Columbia Bar and is also active in the ABA Section of Taxation's Committee on Foreign Activities of U.S. Taxpayers. She is currently a member of the IRS Commissioner's Advisory Group.