05 February 2025 IRS official affirms approach to periodic adjustments in recent general legal advice memorandum
At a session of the Practicing Law Institute on January 28, 2025, Brad McCormack of the IRS Office of Associate Counsel (International) discussed generic legal advice memorandum AM 2025-001 (GLAM), which addresses the relationship between the general arm's-length standard and the specific periodic adjustment rules. "The new GLAM reaffirms the IRS's long-standing advice in that area," McCormack said, adding that the IRS intends to issue more guidance in this area.1 In the GLAM, the IRS concluded, in two factual scenarios, the following: if the IRS makes a periodic adjustment under Treas. Reg. Section 1.482-4(f)(2) or 1.482-7(i)(6) with respect to high-profit-potential intangible property that is transferred or contributed to a cost sharing arrangement, and none of the Treas. Reg. Sections 1.482-4(f)(2)(ii) or 1.482-7(i)(6)(vi) exceptions apply, then a taxpayer may not overcome the periodic adjustment by invoking the general arm's-length standard under Treas. Reg. Section 1.482-1(b)(1) or the best-method rule of Treas. Reg. Section 1.482-1(c) (see Tax Alert 2025-0326). According to McCormack, the GLAM "refutes incorrect arguments that an arm's-length result is solely and best evidenced by contemporaneous information like data of comparable uncontrolled transactions."2 These arguments do not properly consider the provision of IRC Section 482 that states "income from the transfer (or license) of intangible property shall be commensurate with the income attributable to the intangible," he said.3 The IRS's reading is based on the text and structure of IRC Section 482, as well as its legislative history, McCormack said. Under this reading, the IRS has the discretion to adjust results periodically and taxpayers cannot defend their price using the actual results, he added.4 McCormack said an earlier GLAM (AM 2007-007) contributed to the misinterpretation by stating that "income" in the context of "commensurate-with-income" "should generally be construed as operating profits that would have been reasonably and conscientiously projected at the time of the transaction." Taxpayers should consider reviewing current transfer pricing policies, particularly for high-profit intangibles and cost-sharing arrangements, to ensure alignment with the IRS's reaffirmed interpretation of the interplay between the general arm's-length standard and the specific periodic adjustment rules.
Document ID: 2025-0397 | ||||||||