Daily Tax Update - December 20, 2006

THE DAILY TAX UPDATE WILL BE PUBLISHED ON A PERIODIC BASIS UNTIL THE 110TH CONGRESS CONVENES ON JANUARY 4TH.

IRS MODIFIES TRANSFER PRICING SERVICES REGS EFFECTIVE DATE AND EXPANDS LIST OF SPECIFIED COVERED SERVICES
Today, the IRS issued Notice 2007-05 which makes certain clarifications and modifications with respect to the temporary section 482 regulations applicable to controlled services transactions and allocation of income from intangibles. A key element of the new guidance is that it defers by a year the effective date of the services regulations, published in the Federal Register on August 4, 2006, to the extent that they relate to the identification of services eligible to be priced at cost. The notice provides limited relief from certain provisions of the temporary regulations applicable to controlled services transactions, which have an effective date of January 1, 2007 (i.e., taxable years beginning on or after January 1, 2007).  The notice also provides clarification concerning other aspects of the temporary regulations, stating principles upon which taxpayers may rely, pending the issuance of final regulations.

  • The IRS also issued guidance (Rev. Proc. 2007-13) that significantly broadens the list of specified covered services eligible for the services cost method (SCM) under the transfer pricing rules and seeks comments on the continually "evolving" list.
  • Effective for tax years beginning after December 31, 2007, the revenue procedure identifies specified covered services described as support services that are common across industry sectors and generally don’t involve a significant arm’s length markup on total services costs. The guidance does not address a second category of services—low margin covered services—which have a median comparable arm’s length markup on total services costs of 7 percent or less. Simultaneously released guidance (Notice 2007-5) clarifies provisions related to the SCM and modifies the effective date of temporary regulations (T.D. 9278) that established the SCM under the transfer pricing rules.
  • The notice can be accessed here.
  • The revenue procedure can be accessed here.
  • For additional information, contact Philip R. West - pwest@steptoe.com, Stanley Smilack - ssmilack@steptoe.com or Michael C. Durstmdurst@steptoe.com.

PRESIDENT SIGNS TAX EXTENDERS, TRADE, HEALTH PACKAGE: Today, President Bush signed the $45.1 billion "Tax Relief and Health Care Act of 2006" into law. The bill renews numerous tax cuts such as the research and development tax credit, the college tuition deduction, and the state and local sales tax deduction. The President said, "’The Tax Relief and Health Care Act of 2006’ will maintain key tax reforms, expand our commitment to renewable energy resources, make it easier for Americans to afford health insurance and open markets overseas for our farmers and small business owners. This is a good piece of pro-growth legislation."

  • Additional information on the bill can be accessed here.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

STEPTOE & JOHNSON LLP - TAX PRACTICE
Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country. The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court. The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving. Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them. Read more information on Steptoe's tax practice.