[Federal Register Volume 66, Number 44 (Tuesday, March 6, 2001)]
[Rules and Regulations]
[Pages 13427-13429]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-5428]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8944]
RIN 1545-AX41


Grouping Rules for Foreign Sales Corporation Transfer Pricing

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations and amendments to 
temporary regulations that provide guidance to taxpayers that have made 
an election to be treated as a foreign sales corporation (FSC). These 
regulations permit the grouping of transactions for purposes of 
applying the administrative pricing (including marginal costing) rules 
to determine FSC transfer prices and provide a time for filing for the 
election to group transactions.

DATES: Effective date: These regulations are effective March 2, 2001.
    Applicability: For dates of applicability, see Sec. 1.925(a)-
1(c)(8)(i).

FOR FURTHER INFORMATION CONTACT: Christopher J. Bello (202) 874-1490 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    On March 3, 1987, the IRS and Treasury published temporary 
regulations (TD 8126, 1978-1 C.B. 184) in the Federal Register (52 FR 
6428) to provide (among other things) rules for grouping transactions 
for purposes of applying the FSC transfer pricing rules. A notice of 
proposed rulemaking (INTL-153-86, 1987-1 C.B. 799) cross-referencing 
the temporary regulations and inviting comments and requests for a 
public hearing was published on the same day in the Federal Register 
(52 FR 6467). Written comments concerning the proposed regulations were 
received and a public hearing was held.
    On March 3, 1998, the IRS and Treasury amended the above temporary 
regulations by publishing temporary regulations (TD 8764, 1998-1 C.B. 
844) in the Federal Register (63 FR 10305) that (among other things) 
modified the time for filing the election to group transactions for 
purposes of applying the administrative pricing (including marginal 
costing) rules to determine FSC transfer prices. A notice of proposed 
rulemaking (REG-102144-98, 1998-1 C.B. 860) cross-referencing the 
temporary regulations and notice of public hearing was published on the 
same day in the Federal Register (63 FR 10351). Written comments 
concerning the proposed regulations were received and, on June 24, 
1998, a public hearing was held.
    After consideration of all the comments, certain proposed 
regulations relating to grouping of transactions for FSC transfer 
pricing are adopted as revised by this Treasury decision.

Explanation of Provisions

    Section 927(d)(2)(B) of the Internal Revenue Code provides 
generally that FSCs and their related suppliers may, to the extent 
provided in regulations, elect to apply the FSC transfer pricing 
provisions under section 925 on the basis of groups of transactions 
based on product lines or recognized industry or trade usage, rather 
than on a transaction-by-transaction basis. Sections 1.925(a)-
1T(c)(8)(i) and 1.925(b)-1T(b)(3)(i) of the temporary regulations 
permit taxpayers, at their annual choice, to group transactions in 
applying the administrative pricing (including marginal costing) rules 
to determine FSC transfer prices. Such grouping elections must be 
evidenced on a Schedule P of the FSC's timely filed (including 
extensions) U.S. income tax return for the taxable year. No untimely or 
amended returns are allowed to make a grouping election, change a 
grouping basis, or change from a grouping basis to a transaction-by-
transaction basis (collectively ``grouping redeterminations'').
    Section 1.925(a)-1T(c)(8)(i) of the temporary regulations also 
contains a transition rule that requires grouping redeterminations for 
any taxable year beginning before January 1, 1998, to be made no later 
than the due date of the FSC's timely filed (including extensions) U.S. 
income tax return for the FSC's first taxable year beginning after 
December 31, 1997 (transition rule).
    Conforming changes are reflected in Secs. 1.925(a)-1T(e)(4) and 
1.925(b)-1T(b)(3)(i) of the temporary regulations.
    Commentators requested that the rule limiting grouping elections to 
timely filed returns be removed to allow taxpayers to maximize FSC 
benefits and correct grouping errors. Other commentators requested that 
the time limit for grouping elections be replaced by a case-by-case 
analysis that would disallow only those grouping redeterminations that 
are abusive. Commentators also suggested alternative time limits that 
would allow taxpayers to file amended returns to reflect grouping 
redeterminations within a

[[Page 13428]]

specified time limit (for example, one year from the extended due date 
of the original return). In response to these comments, the Treasury 
and the IRS have revised the time limits for filing grouping elections 
under Sec. 1.925(a)-1T(c)(8)(i). Accordingly, these regulations permit 
grouping redeterminations no later than one year after the due date of 
the FSC's timely filed (including extensions) U.S. income tax return 
for taxable years beginning after December 31, 1999. For any taxable 
year beginning before January 1, 2000, a grouping redetermination may 
be made no later than the due date of the FSC's timely filed (including 
extensions) U.S. income tax return for the FSC's first taxable year 
beginning on or after January 1, 2000.
    Commentators also suggested that the transition rule be extended by 
two or more years to enable taxpayers to assemble data and determine 
the most advantageous groupings for taxable years beginning before 
January 1, 1998. In response, the IRS on May 17, 1999, published Notice 
99-24 (1999-1 C.B. 1069). Notice 99-24 notified taxpayers that the IRS 
and Treasury intended to extend by one year the transition rule for 
such years. These regulations provide a further extension of the 
transition rule time limit.
    These regulations also provide an additional time period for 
certain taxpayers to make grouping redeterminations notwithstanding the 
time limits for filing grouping redeterminations otherwise specified in 
these regulations. In particular, a grouping redetermination may be 
made at any time during the one-year period commencing upon 
notification of the related supplier by the Internal Revenue Service of 
an examination, provided that both the FSC and the related supplier 
agree to extend their respective statutes of limitations for assessment 
by one year. The IRS and Treasury anticipate the IRS and taxpayers to 
plan and conduct examinations in a manner consistent with the foregoing 
provision so as to facilitate efficient and fair administration of the 
FSC grouping rules for transfer pricing.
    Finally, these regulations provide that the requirements under 
Sec. 1.925(a)-1T(e)(4) with respect to redeterminations other than 
grouping also apply to grouping redeterminations.

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 has also been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations, and because the 
regulation does not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, the 
temporary regulations and notice of proposed rule-making preceding 
these regulations were submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comment on their impact on small 
business.

Drafting Information

    The principal author of these regulations is Christopher J. Bello 
of the Office of the Associate Chief Counsel (International). Other 
personnel from the IRS and Treasury Department also participated in the 
development of these regulations.

List of Subjects 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirement.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
an entry in numerical order for section 1.925(a)-1 to read as follows:


    Authority: 26 U.S.C. 7805 * * *.

    Section 1.925(a)-1 also issued under 26 U.S.C. 925(b)(1) and (2) 
and 927(d)(2)(B). * * *
    Par. 2. Section 1.925(a)-1 is added to read as follows:


Sec. 1.925(a)-1  Transfer pricing rules for FSCs.

    (a) through (c)(7) [Reserved] For further guidance, see 
Sec. 1.925(a)-1T(a) through (c)(7).
    (c)(8) Grouping transactions. (i) The determinations under this 
section are to be made on a transaction-by-transaction basis. However, 
at the annual choice made by the related supplier if the administrative 
pricing methods are used, some or all of these determinations may be 
made on the basis of groups consisting of products or product lines. 
The election to group transactions shall be evidenced on Schedule P of 
the FSC's U.S. income tax return for the taxable year. No untimely or 
amended returns filed later than one year after the due date of the 
FSC's timely filed (including extensions) U.S. income tax return will 
be allowed to elect to group, to change a grouping basis, or to change 
from a grouping basis to a transaction-by-transaction basis 
(collectively ``grouping redeterminations''). The rule of the previous 
sentence is applicable to taxable years beginning after December 31, 
1999. For any taxable year beginning before January 1, 2000, a grouping 
redetermination may be made no later than the due date of the FSC's 
timely filed (including extensions) U.S. income tax return for the 
FSC's first taxable year beginning on or after January 1, 2000. 
Notwithstanding the time limits for filing grouping redeterminations 
otherwise specified in the previous three sentences, a grouping 
redetermination may be made at any time during the one-year period 
commencing upon notification of the related supplier by the Internal 
Revenue Service of an examination, provided that both the FSC and the 
related supplier agree to extend their respective statutes of 
limitations for assessment by one year. In addition, any grouping 
redeterminations made under this paragraph must meet the requirements 
under Sec. 1.925(a)-1T(e)(4) with respect to redeterminations other 
than grouping. The language ``or grouping of transactions'' is removed 
from the fourth sentence of Sec. 1.925(a)-1T(e)(4), applicable to 
taxable years beginning after December 31, 1997. See also 
Sec. 1.925(b)-1T(b)(3)(i).
    (c)(8)(ii) through (f) [Reserved] For further guidance, see 
Sec. 1.925(a)-1T(c)(8)(ii) through (f).
    (g) Effective date. The provisions of this section apply on or 
after March 2, 2001.

    Par. 3. Section 1.925(a)-1T is amended as follows:
    1. Paragraph (c)(8)(i) is revised.
    2. The last sentence of paragraph (e)(4) is removed.
    The revision reads as follows:


Sec. 1.925(a)-1T  Temporary regulations; transfer pricing rules for 
FSCs.

* * * * *
    (c) * * *
    (8) * * * (i) * * * [Reserved] For further guidance, see 
Sec. 1.925(a)-1(c)(8)(i).

[[Page 13429]]

Sec. 1.925(b)-1T  [Amended]

    Par. 4. Section 1.925(b)-1T is amended by removing the last 
sentence of paragraph (b)(3)(i).

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Dated: February 28, 2001.
 Pamela F. Olson,
Acting Assistant Secretary of the Treasury.
[FR Doc. 01-5428 Filed 3-2-01; 8:45 am]
BILLING CODE 4830-01-P