Are You Being Served? Final U.S. Treasury Regulations governing services are released (Part I)
Treasury published final regulations (T.D. 9456) regarding the treatment of controlled services transactions under §482 of the Internal Revenue Code on August 4, 2009. This post is one in a series discussing key points of interest in the final regulations.
While the preamble to the final regulations is chock-full of helpful information, it does not really address one of the most controversial aspects of the new regulations: Shareholder Activities.
Instead of the kinder, gentler stewardship concept, taxpayers must now contend with Treas. Reg. § 1.482-9(l)(3)(iv) which provides that an activity is a Shareholder Activity if “the sole effect of that activity is either (i) to protect the render’s capital investment in the recipient or in other members of the controlled group, or (ii) to facilitate compliance by the renderer with reporting, legal, or regulatory requirements applicable specifically to the renderer or both.” (Emphasis added.)
Not surprisingly, IRS and Treasury received numerous comments on the “sole effect” language from a variety of commentators, apparently to no avail. In keeping with tradition, the eight examples provided in the final regulations with respect to Shareholder Activities are simple, straightforward and benign – rendering them useless to evaluate the subtleties and nuances of the real world. Taxpayers and practitioners are left to wonder how narrowly the Service will interpret the new language. At least as far as tax law is concerned, examples do not create rules of law.
What may be especially difficult is distinguishing between day-to-day activities related to operations undertaken by the senior management team (not Shareholder Activities) and oversight and regulatory, legal and/or reporting requirements (could be treated as Shareholder Activities). This area merits extra attention particularly since stock based compensation is expressly included in the cost base for purposes of intragroup allocations.
- EAS & RBJ
Tags: IRS