As long as there is nothing expressly prohibiting the adjustment, taxpayers may generally file amended returns reporting an amount of tax owed that is less than what they had previously reported on their originally filed return. Although we disagree, some have read Reg. § 1.482-1(a)(3) as presenting an absolute bar to reducing taxable income in an amended or untimely return through any type of correction to the prices of controlled transactions. The Court of Federal Claims seemingly upheld that interpretation in Intersport Fashions West Inc. v. United States. 2 In this article, we pay particular attention to each of the different parts of Reg. § 1.482-1(a)(3), ensuring that each sentence is interpreted in the context of the remainder of the regulation. This reading of the provision facilitates the correct definition of its scope which, in turn, informs the determination of what type of transfer pricing corrections a taxpayer should be allowed to make in an amended return, notwithstanding Reg. § 1.482-1(a)(3). We then summarize the Intersport case and identify what we consider to be crucial mistakes in the court's opinion. Finally, we consider certain circumstances where we believe the taxpayer should be allowed to make corrections to its transfer prices even under Intersport. These include: (i) a taxpayer-initiated mutual agreement procedure (“MAP”) under a US income tax treaty; (ii) an amendment to an Advance Pricing Agreement (“APA”) annual report; (iii) an adjustment to an NOL carryforward schedule (as opposed to an amended return); (iv) a court-ordered downward adjustment; and (v) an explicit contractual provision in an intercompany agreement that calls for upward and downward transfer pricing adjustments. The views expressed in this article are those of the authors and do not necessarily represent the views of Mayer Brow or its clients.MAYER BROWN | 2 Types Of Transfer Pricing Corrections Article To interpret Reg. § 1.482-1(a)(3), it is important to distinguish among the different types of transfer pricing corrections that a taxpayer may try to undertake in an amended or untimely tax return. Rather than attempting to classify every possible type of correction into perfectly defined categories, we believe the different types of transfer pricing corrections span across a spectrum ranging from the correction of mere clerical or arithmetic errors to retroactive changes to the taxpayer's transfer pricing methodology. On one end of the spectrum, there is the correction of errors. Errors may come in different shapes and sizes, but they share a common basis: an error is something that was not the result of the taxpayer's own volition. A common type of error results from mere scrivener's errors when transcribing the results of intercompany transactions to the tax return. A pure arithmetic mistake is another type of error that may be commonly made when pricing intercompany transactions.3 On the other end of the spectrum, there are corrections or changes to the taxpayer's voluntary decisions involved in the application of the § 482 principles that underlie the results reported on its original tax return. This may occur, for example, through a change in the transfer pricing method, the profit level indicator or the comparables originally selected by the taxpayer. Of course, there is a gray area along this spectrum where it is not clear whether the proposed correction involves the correction of a mistake or, instead, an attempt to retroactively revisit the taxpayer's original transfer pricing positions and analysis. In these cases, the determination may ultimately depend on a detailed inquiry into the facts and circumstances surrounding the purported mistake or error.4 Defining The Scope Of Reg. § 1.482-1(A)(3) For more than 75 years, the Treasury Regulations have provided that a taxpayer cannot require the IRS to apply § 482 in order to reallocate income or expenses, and that the taxpayer cannot itself apply such Code section affirmatively.5 This appears to be fairly consistent with the plain language in § 482, which provides that the “Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses” (emphasis added). The 1993 temporary regulations clarified, however, that “a controlled taxpayer may report the results of its controlled transactions based upon prices different from those actually charged if necessary to reflect an arm's-length result.”6 This language made it clear that a taxpayer can affirmatively adjust the pricing of intercompany transactions in order to meet the arm's-length standard. However, the 1993 temporary regulations did not specify the timing of such adjustments, leaving open the issues of whether such changes had to be made before year end or before the due date for the original return, or if they could be made in an amended return. In 1994, the IRS finalized the 1993 temporary regulations, including Reg. § 1.482-1(a)(3) which addressed the taxpayer's use of § 482 and clarified the timing issue.7 Reg. § 1.482-1(a)(3) reads as follows: Taxpayer's use of section 482. If necessary to reflect an arm's length result, a controlled taxpayer may report on a timely filed US income tax return (including extensions) the results of its controlled transactions based upon prices different from those actually charged. Except as provided in this paragraph, section 482 grants no other right to a controlled taxpayer to apply the provisions of section 482 at will or to compel the district director to apply such provisions. Therefore, no untimely or amended returns will be permitted to decrease taxable income based on allocations or other adjustments with respect to controlled transactions. See § 1.6662-6T(a)(2) or successor regulations. A contextual reading of each of the different parts of Reg. § 1.482-1(a)(3) reveals that the provision lays out: (i) a general rule (contained in the second sentence); (ii) an exception to that general rule (contained in the first sentence); and (iii) anMAYER BROWN | 3 application of that general rule (contained in the third and last sentence). (i) The general rule: The second sentence of Reg. § 1.482-1(a)(3) sets forth the general rule that a taxpayer may not apply § 482 at will. This sentence defines the overall scope of Reg. § 1.482-1(a)(3): the regulation addresses the application of § 482 by the taxpayer and the taxpayer's ability to report the results of its controlled transactions based upon prices different from those “actually charged”8 pursuant to the application of such Code section. (ii) The exception to the general rule: The first sentence of Reg. § 1.482-1(a)(3) introduces an exception to the above-mentioned general rule: the taxpayer may apply § 482 to report the results of its controlled transactions based upon prices different from those actually charged to the extent this is done on a timely filed US income tax return (including extensions). (iii) The application of the general rule: The third sentence of Reg. § 1.482-1(a)(3) describes an application of the general rule stated in the second sentence of the regulation. Specifically, the third sentence concludes, in light of the prior two sentences, that a taxpayer cannot file an amended or untimely return to decrease taxable income based on allocations or other adjustments with respect to controlled transactions.9 This third sentence must be read in the context of the remainder of Reg. § 1.482-1(a)(3). The bar imposed on the filing of amended or untimely returns to decrease taxable income only applies to the extent such a decrease in taxable income is the result of an application by the taxpayer of § 482. As such, the third sentence of Reg. § 1.482-1(a)(3) should have no effect on the filing of any amended or untimely return that does not constitute an application or reapplication of § 482 principles. In other words, the regulation read in totum allows taxpayers to correct the results of their controlled transactions in amended or untimely returns provided those corrections do not require the taxpayer to revisit its application of § 482. This provision prevents taxpayers from re-applying the decision-making analysis and rules set forth in § 482 and its corresponding regulations. Several arguments support this conclusion. Specifically, the use of the adverb “therefore” at the beginning of the third sentence means that sentence is simply setting forth the consequence of the rule and exception from the prior two sentences. In addition, the third sentence refers to “allocations” made by the taxpayer with respect to controlled transactions, a term used in § 482, indicating that only reapplications of § 482 principles are precluded.10 Finally, this interpretation of the third sentence is consistent with the fact that the heading of Reg. § 1.482-1(a)(3) reads “Taxpayer's use of section 482” (emphasis added).11 Based on this reading of Reg. § 1.482-1(a)(3), not all corrections made in an amended return to the results of the taxpayer's controlled transactions would be prohibited. First, a taxpayer should be allowed to make corrections in its amended return for anything that is clearly an error, such as a mere scrivener's errors or an arithmetic mistake (even if such a correction results in a decrease to its US taxable income). Both the language and the purpose of Reg. § 1.482-1(a)(3) support this conclusion. As explained above, the reasonable interpretation of the regulation indicates that the taxpayer is barred from decreasing its taxable income through corrections made in an amended or untimely return if (and only if) such corrections involve an application of § 482. Corrections that represent anything other than an application of § 482 should be permitted. Further support for this position is found in the preamble to the 1994 final regulations which states that “the limited exception provided by this rule [referring to the first sentence of Reg. § 1.482-1(a)(3)] does not permit taxpayers to apply section 482 at will; thus, for example, a taxpayer may not rely on section 482 to reduce its taxable income on an amended return.” (emphasis added). In correcting a scrivener's error or an arithmetic mistake, a taxpayer is not relying on § 482. Also, correcting an error does not compromise the policy behind Reg. § 1.482-1(a)(3). It has been noted that Reg. § 1.482-1(a)(3) is mainly intended to prevent taxpayers from using transfer pricing adjustments to engage in retroactive tax planning.12MAYER BROWN | 4 The correction of a scrivener's error or an arithmetic mistake does not give rise to the taxpayer attempting to undertake retroactive tax planning or to otherwise revisit the decision-making process of its transfer pricing. That said, as the transfer pricing corrections move along the spectrum toward the realm of the multiple, and often complex, computational issues involved in the application of § 482, one can conceive of certain gray areas where it may be difficult to determine whether Reg. § 1.482-1(a)(3) prohibits the intended correction or not. An analysis of the facts and circumstances surrounding the purported mistake should help in this determination. To this effect, if the taxpayer can provide evidence of a bona fide pre-existing intercompany agreement setting forth the transfer pricing method, any correction aimed at bringing the results reported on the tax return in line with such agreement should be allowed because it would not involve a re-application of § 482. Likewise, to the extent the taxpayer can prove through other contemporaneous documentation (e.g., internal communications) or through its course of conduct (e.g., practice in prior and subsequent years) that the correction is merely aimed at amending an involuntary error, the taxpayer should be allowed to include such a correction in an amended return. Those corrections would not involve an allocation of income through an application of § 482 at will, but would simply be a means of guaranteeing that the tax return reflects what the controlled parties had originally determined ought to be the arm's-length pricing for the controlled transaction. Lastly, those corrections made in amended returns that involve changes to the different aspects of the transfer pricing methodology originally and voluntarily selected by the taxpayer would fall more squarely within the purview of the prohibition of Reg. § 1.482-1(a)(3) (to the extent they result in a decrease to the taxpayer's taxable income). In fact, it is precisely this type of correction that generally presents an opportunity for the retroactive tax planning that Reg. § 1.482-1(a)(3) was clearly intended to prevent. Intersport THE FACTS AND THE COURT'S DECISION Intersport is the only publicly available court opinion specifically addressing the bar contained in Reg. § 1.482-1(a)(3) for the correction of transfer prices on amended or untimely tax returns. In Intersport, the taxpayer, Intersport Fashions West Inc., a US corporation (“Intersport”), designed and distributed motorcycle apparel. In 1999, Eurobike Aktlengesellschaft, a German corporation (“Eurobike”) acquired Intersport and two other companies. The acquisitions were not successful. In response to Eurobike's creditors requesting that the company restructure its operations and improve liquidity due to the company's substantial acquisition-related debt, Eurobike retained consultants for the years 2001 through 2003 and spent €18 million on fees and other expenses. Intersport claimed deductions for an “insurance charge” and a “management fee” that it had paid to Eurobike in 2001 and 2002, respectively. After Eurobike filed for bankruptcy in Germany in July 2003, Intersport was acquired by Fairchild Corporation in November 2003. On June 22, 2004, Intersport filed its 2003 tax return, on which it claimed deductions for “management fees” and “legal and consulting fees” that were based on its purported allocable share of the restructuring expenses incurred by Eurobike in 2003. Later, in early 2005, the IRS initiated an audit of Intersport's 2001 through 2003 income tax returns. At that time, Intersport informed the IRS that it intended to file amended returns claiming refunds for its 2001 and 2002 tax years, but agreed, at the IRS's request, not to file these claims until after the audit was completed. The audit ended with the IRS making additional assessments for the 2001 and 2002 tax years. Intersport paid these assessments and subsequently filed amended returns for those years, claiming deductions for allocations of “restructuring expenses” (instead of an “insurance charge” or “management fee”), significantly reducing its tax liabilities for those years.MAYER BROWN | 5 The IRS disallowed these deductions on the amended returns on the grounds that Reg. § 1.482-1(a)(3) prohibited Intersport's claim. Intersport filed suit in the Court of Federal Claims seeking a refund. In the fall of 2008, the court dismissed Intersport's 2001 refund claim on the grounds that it lacked subject matter jurisdiction — Intersport, among other things, had failed to satisfy the full-payment rule related to refund suits with respect to that year.13 The government later moved for summary judgment on Intersport's remaining refund claim related to the 2002 tax year. Intersport countered that the modified deduction claimed on the amended return merely corrected a mistake in its calculation of the allocation to it of Eurobike's restructuring expenses; that its treatment of the restructuring expenses substantially complied with Reg. § 1.482-1(a)(3), which it characterized as a procedural regulation; and that disallowing the same deduction for 2002 that the IRS tacitly agreed represented an arm's-length charge for the taxpayer's 2003 year, would violate the principle set forth in the § 482 regulations that the statute is intended to make sure that controlled taxpayers are treated in parity with uncontrolled taxpayers. The court granted the government's motion. In granting the government's motion for summary judgment, the court first noted that the language of Reg. § 1.482-1(a)(3) is “clear and unambiguous” and, as such, its plain meaning should be controlling. The court interpreted the regulation's plain language as precluding downward adjustments to US taxable income that relate to intercompany transactions. The court also cited two Supreme Court cases (Scaife14 and Lerner Stores) 15 in which the Court had found that an amended return filed after the due date for the original return (including extensions, if any) was “untimely” and, thus, could not be considered a “first return” for purposes of certain excise tax provisions that required the taxpayer to declare a certain stock value in a “first return.”16 In what could be read as a categorical statement that taxpayers may never file amended tax returns that would increase a deduction or reduce taxable income in connection with a controlled transaction, the court stated: “Because plaintiff attempts to use an untimely return [i.e., a return filed after the due date for filing the original return] to seek additional deductions that would decrease its taxable income, its claims are barred by Treasury Regulation 1.482-1(a)(3).”17 In addition, the court disregarded the taxpayer's “substantial compliance” argument. Intersport had not shown that it had a good excuse for failing to comply, and had not proved that Reg. § 1.482-1(a)(3) was unimportant, unclear or confusing. Lastly, the court held that the IRS had not abused its discretion in rejecting Intersport's amended return because such decision was supported by the plain language of the regulations.18 Intersport eventually moved to voluntarily dismiss its appeal against the Court of Federal Claims decision and the Federal Circuit granted its motion.19 CRITICAL ANALYSIS OF THE DECISION After Intersport, on the surface it would appear to be easy for the IRS to argue that no downward adjustments relating to transfer pricing are allowed in amended returns. Not so fast. The opinion — at least some of the categorical language in it — is flawed and has limited precedential value providing taxpayers with strong arguments against its application. If the analysis in Intersport is correct, which we do not believe is the case, taxpayers appear to be precluded from making any type of corrections (including corrections of errors) to the prices of their controlled transactions that result in a downward adjustment to their taxable income. That said, the court's conclusion that Reg. § 1.482-1(a)(3) prevents taxpayers from correcting errors was unnecessary as the taxpayer failed to meet its burden. Further, the reasoning behind such conclusion is fundamentally flawed. Finally, it should be noted that, fortunately, Intersport is a Court of Federal Claims opinion which, not only is it not binding on any appellate court or any other trial court (including the Tax Court), but does not even set binding precedent for separate and distinct cases in that same court. The conclusion in Intersport that Reg. § 1.482-1(a)(3) prevents a taxpayer from correcting even a “mistake in its calculation” was unnecessary. In connection with a motion for summary judgment “all justifiable inferences are to be drawn in” the non-moving party's — there, Intersport's — favor. In order for anMAYER BROWN | 6 inference to be justifiable in favor of Intersport's implied assertion that its 2002 amended return position represented merely the correction of a mistake, however, Intersport had to “point to an evidentiary conflict created on the record” that the initially reported amount of its share of Eurobike's restructuring expenses was a mistake.20 Intersport failed to do so. It did not present any agreement showing that the allocation of the expenses at issue had been previously contemplated by the controlled entities in accordance with the deductions claimed in the amended return.21 That by itself appears to have been sufficient for the court to find in favor of the IRS. A holding that Intersport failed to meet its burden would have been consistent with the government's litigating position. Interestingly, in moving for summary judgment, the government appears to have been willing to concede that corrections of an error in an amended return may not be precluded by Reg. § 1.482-1(a)(3). In fact, its opening brief suggests that the Secretary designed the regulation to prevent taxpayers from reapplying § 482 principles after having filed a timely original return. To this effect, it stated: As discussed further below, § 482 does not authorize the allocations claimed by plaintiff. Such allocations are expressly prohibited by § 1.482-1(a)(3) because plaintiff failed to report them on a timely tax return, and plaintiff is now attempting to make a substantial change in position which the regulation does not allow. Plaintiff's assertion that the allocations it claims are the result of a mere “correction” of expenses allocated from its parent, see Compl. ¶ 7, is not supported by the facts. (Gov. MFSJ at 7) Plaintiff's purported “correction,” however, in fact represents a change of position with respect to allocations, which is not allowed under the plain language of § 1.482-1(a)(3).... The facts demonstrate that plaintiff's purported correction represents a substantial change of position with respect to allocations. Plaintiff admits there was no allocation agreement between plaintiff and Eurobike. In the absence of some prior arrangement with respect to allocation of the restructuring expenses, plaintiff can hardly contend that its claim is based on a mere correction. Therefore, plaintiff's argument fails on the facts because no allocation agreement ever existed between plaintiff and Eurobike that could have served as the basis for the alleged correction... During discovery, plaintiff was asked to describe in detail the circumstances giving rise to the need for the alleged correction, including a description of the purported error and the basis for the correction. Plaintiff's response reveals that its present claims arises, not from a correction, but from a decision by plaintiff's new owner to seek additional deductions that it believed should have been allocated by Eurobike in the first instance, but were not. (Id. at 14–15) Thus, Fairchild was not merely correcting an erroneous application of a previously established method for making allocation... This is not merely a correction, but instead a substantial change of position. Treasury Regulation § 1.482-1(a)(3) does not allow such a change of position with respect to allocations to be made on an amended return. (Id. at 16). (emphasis added). The referenced “change of position” was indeed a change in the application of § 482 principles. Prior to this change, it appears Intersport had not been allocated any portion of the subject expenses under § 482 principles. So invoking § 482 after having filed a timely original return seems to fall squarely within the scope of the prohibition of the third sentence of Reg. § 1.482-1(a)(3). In other words, it was after-the-fact tax planning, not simply a correction of an error or mistake in calculation. Despite that it was unnecessary for the court to reach its specific holding about Reg. § 1.482-1(a)(3)’s preclusive effect, taxpayers can further argue that Intersport is not binding on any other court and that the court's analysis is fundamentally flawed. The precedential effect of Intersport is limited. First taxpayers can argue that Court of Federal Claims cases are not binding on the Tax Court. That is, the Tax Court need not adhere to the Court of Federal Claims' interpretation of Reg. § 1.482-1(a)(3).22 Second, given the flawed analysis on which the court's holding rests in Intersport, taxpayers can argue that it is not even binding precedent in the Court of Federal Claims.23 Most importantly, the court's holding that a taxpayer may not correct an error in an amended returnMAYER BROWN | 7 appears to rest on a flawed reading of two Supreme Court cases, Scaife and Lerner Stores. According to the Intersport court, those cases resolved the issue of “whether an amended return filed after the close of the filing period could cure a mistake such as a computation error.”24 But instead of answering that broad question, Scaife actually held the taxpayer to the plain language of the statute at issue, which provided that: the adjusted declared value of the taxpayer's capital stock shall be the value as declared in the “first return.” The value so declared “cannot be amended.” § 105(f). The return must be made within one month after the close of the year with respect to which the tax is imposed. § 105(d). In that statute, Congress specifically mandated that the value of the capital stock could not be amended. Based on this, the Supreme Court stated “[t]he statute is not ambiguous. Once the period for filing the ‘first return’ has expired, the value declared ‘cannot be amended....’ We are dealing here with an Act of Congress which not only prescribes the formula for determining the time within which a return may be filed but which also explicitly states that a declaration of value contained in the original return may not be amended.” The Court's holding in Lerner Stores relied on the same reasoning.25 Reg. § 1.482-1(a)(3), however, does not use similarly restrictive language. Read carefully, unlike the statute at issue in Scaife, Reg. § 1.482-1(a)(3) does not state an absolute rule that prices of controlled transactions reported in the original return “cannot be amended” — or at least cannot be amended so as to reduce the taxpayer's taxable income. The regulation adds the important qualifier to the bar on downward adjustments on amended returns to prohibit such adjustments only if “based on allocations ... with respect to controlled transactions.” As stated above, although the regulation precludes amendments that entail an application or re-application of § 482 principles, it does not prevent the correction of errors. If the Treasury intended for Reg. § 1.482-1(a)(3) to be read more broadly, it could have modeled the regulation after the statute at issue in Scaife and Lerner Stores by simply stating that the results of controlled transactions reported in an original return “cannot be amended” or “cannot be amended to decrease taxable income.” But it did not do this. This failure suggests the Secretary intended Reg. § 1.482-1(a)(3) to be interpreted differently than the statute in those cases. This interpretation is further supported by the cross-reference to “Temp. Treas. Reg. 1.6662-6T(a)(2) or successor regulations” in Reg. § 1.482-1(a)(3). Section 6662(e) imposes a substantial valuation misstatement penalty on transfer prices that are understated by a defined amount. Under Reg. § 1.6662-6(a)(2), a taxpayer may amend the “results of controlled transactions [increasing its US taxable income] if the amended return is filed before the Internal Revenue Service has contacted the taxpayer regarding the corresponding original return” to avoid the imposition of penalties. The use of the term “results” in this provision allows a taxpayer to correct errors and its application (or misapplication) of § 482 to avoid the penalty. On the other hand, if the Secretary intended Reg. § 1.482-1(a)(3) to prevent all downward adjustments to US taxable income related to controlled transactions, it could have used the same terminology: “A taxpayer may not change the results of controlled transactions after filing an original return to decrease taxable income.” Again, the Treasury did not adopt a regulation containing such a restriction. Instead, the express language of Reg. § 1.482-1(a)(3) is predicated on a taxpayer applying § 482 principles; corrections of errors — including scrivener's, arithmetic, data or computational errors — generally do not involve an application of the provisions of § 482. Therefore, taxpayers have supportable arguments to present to the IRS that corrections of errors are permitted under the regulations. At a minimum, IRS Appeals officers should take into account Intersport's significant limitations when assessing the IRS's litigating hazards. Possible Ways To Sidestep Intersport's Reading Of Reg. § 1.482-1(A)(3) As noted above, we believe Intersport's reading of § 482 is wrong. Contrary to the court's opinion in the case, Reg. § 1.482-1(a)(3) does not prevent taxpayers from filing amended returns to correct errors relatedMAYER BROWN | 8 to the results of their controlled transactions, even if that leads to a reduction in the US taxable income. That said, one can easily — but incorrectly — accord greater significance than is warranted to the Court of Federal Claims' Intersport opinion. In this regard, it is worth exploring situations where taxpayers should be able to side-step Intersport's seemingly absolute bar. Indeed, even taking Intersport's conclusions into account, there are various circumstances where the taxpayer should be allowed to correct errors relating to its transfer prices (and in some limited instances, even the application of § 482). These include: (i) a taxpayer-initiated MAP under a US income tax treaty; (ii) an amendment to an APA annual report; (iii) an adjustment to an NOL carryforward schedule (as opposed to the claiming of additional losses on an amended return); (iv) a court-ordered downward adjustment; and (v) an explicit contractual provision in an intercompany agreement that calls for upward and downward transfer pricing adjustments. These alternatives are presented in this section. TAXPAYER-INITIATED MAPS If a taxpayer discovers that one of its US entities overcharged one of its foreign affiliates (located in a treaty jurisdiction and eligible for the benefits of such treaty) for certain products or services, may the taxpayer amend the foreign affiliate's returns in the foreign jurisdiction and request a MAP under the treaty with the ultimate goal of reducing US taxable income? Before the issuance of Notice 2013-78,26 many practitioners believed a taxpayer could request a mutual agreement procedure only where the IRS or the treaty partner initiated an adjustment.27 More specifically, the language of Article 9, paragraph 2, of the 2006 US Model Treaty (the “Associated Enterprises” article) suggests that correlative adjustments only apply upon an adjustment to taxable income made by the treaty partner and not as a result of taxpayer-initiated adjustments: “Where a Contracting State includes in the profits of an enterprise of that State, and taxes accordingly, profits on which an enterprise of the other Contracting State has been charged to tax in that other State, and the other Contracting State agrees that the profits so included are profits that would have accrued to the enterprise of the first-mentioned State if the conditions made between the two enterprises had been those that would have been made between independent enterprises, then that other State shall make an appropriate adjustment to the amount of the tax charged therein on those profits. In determining such adjustment, due regard shall be had to the other provisions of this Convention and the competent authorities of the Contracting States shall if necessary consult each other” (emphasis added). Further, Article 25, paragraph 1, of the 2006 US Model Treaty seems to indicate that a predicate to requesting MAP relief is an adjustment or other “action” initiated by at least one of the Contracting States: “Where a person considers that the actions of one or both of the Contracting States result or will result for such person in taxation not in accordance with the provisions of this Convention, it may ... present its case to the competent authority of either Contracting State”28 (emphasis added). Similarly, Rev. Proc. 2006-5429 states that “[t]here is no authority for the US competent authority to provide relief from US tax...unless such authority is granted by a treaty,” and that “[a] tax treaty generally permits taxpayers to request competent authority assistance when they consider that the actions of the United States, the treaty country, or both, result or will result in taxation that is contrary to the provisions of the treaty” (emphasis added). In Notice 2013-78, however, the IRS proposed to issue a new MAP revenue procedure that, inter alia, would update and supersede Rev. Proc. 2006-54. Importantly, the notice specifically allows, and provides a framework for, MAPs resulting from taxpayer-initiated adjustments. In this regard, among the proposed changes to Rev. Proc. 2006-54, the notice would clarify that, in addition to US or foreign-initiated adjustments, “MAP issues can also arise as a consequence of taxpayer-initiated positions.”30 Various detailed procedural requirements can be found in the Notice, indicating a thoughtful, regularized expansion of the role of the US competent authority in assisting, through theMAYER BROWN | 9 mutual agreement procedure, with taxpayer-initiated adjustments.31 All that said, there is still a fair amount of uncertainty as to whether a taxpayer-initiated MAP may allow for a reduction of US taxable income through an amended or untimely return. In this regard, it has been noted that it is unclear if the Notice 2013-78 framework for taxpayer-initiated adjustments is limited to adjustments otherwise allowable under US law or if, instead, adjustments resulting from a MAP would not be subject to limitations imposed by domestic law, including Reg. § 1.482-1(a)(3).32 Notwithstanding that uncertainty, the amendments to the MAP revenue procedure proposed in Notice 2013-78 seem to provide an avenue for taxpayers to make transfer pricing corrections in an amended US tax return with the effect of reducing their taxable income and overcoming the prohibition imposed under domestic law in Reg. § 1.482-1(a)(3).33 APA ANNUAL REPORT AMENDMENT An APA may also offer a taxpayer the opportunity to sidestep the bar imposed under Intersport's reading of Reg. § 1.482-1(a)(3). Specifically, § 11.01(5) of Rev. Proc. 2006-934 (which governs the procedures for obtaining and administering APAs) provides that: “[i]f a filed annual report contains incomplete or incorrect information, or reports an incorrect application of the TPM, the taxpayer must amend it within 45 days after becoming aware of the need to amend the report. This time may be extended for good cause.” Given the amendment requirement of Rev. Proc. 2006-9, an argument can be made that, since the amendment of the APA annual report is required, the taxpayer should be allowed to make corresponding revisions to its tax return to the extent such return was affected by such errors, even if the revisions would lead to a decrease in its US taxable income. To that point, an APA is a “binding contract” between a taxpayer and the IRS, and the parties are bound to the terms of that agreement.35 It therefore seems reasonable to conclude that the taxpayer should be allowed (or required) to make any corrections to its tax returns to ensure compliance with such “contractual” obligations. As such, Reg. § 1.482-1(a)(3) should not present a bar to the extent the corrections are made to ensure compliance with the terms of the APA which, again, are binding on the taxpayer and the IRS. NOL CARRYFORWARD Another case where, notwithstanding Intersport, a US taxpayer should be able to retroactively correct errors that overstated its taxable income relating to its controlled transactions is when it is in a tax loss position in the tax year of the controlled transaction and remains in a tax loss position in all subsequent tax years until the error is discovered and corrected. For example, assume that in Year 1 a US taxpayer (“US Co”) pays $2 to its foreign affiliate (“FA”) for certain services. US Co was in a tax loss position in Year 1 and remains in a tax loss position in Years 2 and 3, with a $2 NOL carryforward at the end of each of those years. In Year 4, the taxpayer discovers an arithmetic error in the original pricing of the transaction and determines that FA should have charged $5 for the services provided to US Co in Year 1. US Co has taxable income of $5 in Year 4. Under these particular circumstances, nothing should prevent US Co from adjusting the beginning balance of its NOL carryforward schedule in its original Year 4 tax return to show a $5 initial NOL balance as a result of the correction made to the price paid to FA in Year 1. US Co may then use such NOL carry forward (in full) to offset its Year 4 taxable income. Authorities are consistent that, upon discovery of the required prior year adjustment, the taxpayer is allowed to make the adjustment with no need to amend the return for the year in which the NOL originated (indeed, the originating year may well be a closed year by the time the required adjustment is discovered).36 In addition, there is no need to amend the intervening years' returns if the taxpayer was still in a loss position for those years. As such, the taxpayer may directly reflect such adjustment — for the first time — in the NOL carryforward schedule of the tax return for the first open tax year in which the taxpayer had taxable income.37 In the above example, the correction to the price of the controlled transaction should not be barred by the third sentence of Reg. § 1.482-1(a)(3) because theMAYER BROWN | 10 taxpayer would not be filing an “untimely or amended return.” In fact, it seems that such an adjustment would be expressly permitted under the first sentence of the regulation inasmuch as the taxpayer would be reporting “on a timely filed US income tax return” the results of its controlled transaction based upon a price different from the one actually charged. COURT-ORDERED DOWNWARD ADJUSTMENT Even though taxpayers cannot apply the provisions of § 482 at will or compel the District Director to apply such provisions, when the IRS makes an adjustment to the taxpayer's transfer pricing, it may be opening the door for the taxpayer to bring the case to court and try to present evidence that, in fact, a downward adjustment is justified. For example, in Year 1, FA charged $4 to US Co for certain services. In a later year, the IRS audits the Year 1 transaction and determines that FA should have charged $3 for the services provided. After the IRS has proposed an upward adjustment to taxable income, the taxpayer may bring the case to court and seek to prove, not only that the $3 price proposed by the IRS is too low, but that FA should have charged $5 (instead of $4) for the services. If the court is persuaded, such adjustment would result in a decrease in US Co's taxable income notwithstanding the Intersport decision. Case law supports the proposition that courts are wholly unimpaired in determining correct transfer pricing when the taxpayer makes a threshold showing that the IRS's transfer pricing adjustments are arbitrary, capricious, or unreasonable.38 In Pikeville Coal, 39 a US company, Pikeville Coal Co. (“Pikeville”), sold coal to its Canadian parent, Stelco, Inc (“Stelco”). Stelco and Pikeville agreed that Pikeville would charge Stelco the quoted market price for coal. During an IRS audit, Pikeville requested a tax refund on the basis that it had overcharged Stelco. The IRS agreed with Pikeville that it had overcharged Stelco for the coal and estimated a fair market value price for the coal lower than the price that Pikeville had actually been charging. Pikeville filed a protest claiming that the reduction in the sales prices should have been even greater and, eventually, filed a refund action against the government in the Court of Federal Claims. In denying the government's motion to dismiss and motion for reconsideration, the court confirmed that the taxpayer should be allowed at trial to present evidence of the fair market value of the coal and that the court had the power to reallocate income based on its own determination of the fair market value of the goods. Similarly, in Ciba-Geigy, 40 a US taxpayer paid a 10% royalty to its foreign affiliate. The IRS proposed an adjustment to reduce the royalty to 6%. The taxpayer brought the case to court and introduced evidence that a third party would have been willing to pay up to 15% royalties for the intangibles in question. Although the Tax Court was not persuaded by the taxpayer's evidence and concluded that a royalty in excess of 10% could not be justified, the court accepted the initial proposition that it would be possible for a taxpayer to obtain a court-ordered downward adjustment when challenging an adverse transfer pricing reallocation made by the IRS.41 Accordingly, where the IRS makes a § 482 re-allocation, taxpayers should be able to argue in court that a more favorable adjustment is actually warranted.42 Should the court be persuaded, the taxpayer would obtain a retroactive transfer pricing adjustment that would reduce its US taxable income. Nothing in the Intersport decision should prevent this result. Finally, it should be noted that court-ordered corrections to the results of controlled transactions may involve both the correction of errors or the application or reapplication of the § 482 principles. EXPLICIT CONTRACTUAL PROVISION The Preamble to the final cost sharing regulations43 supports the proposition that an upward or downward adjustment is possible if the cost sharing agreement between or among the cost sharing participants requires such adjustments. More specifically, the Preamble provides: The IRS has encountered a number of contracts that contain price terms for transactions that are subject to section 482, including buy-ins and PCTs, that provide for contingent terms based on subsequent actual income experience. Some such terms specify a charge for the transaction and then further provideMAYER BROWN | 11 for adjustments to that charge based generally on the actual income results... Controlled participants have flexibility in agreeing to contingent payment terms and, thus, in allocating upside or downside risk among the parties. In so doing, the parties can tie their prices to the income actually earned with respect to the subject of the buy-in or PCT. The recognition that contractual terms may permit both upward and downward adjustments in transfer pricing results is not limited to cost sharing arrangements. The regulations governing intercompany service transactions explicitly recognize contingent payment arrangements whereby — assuming that the relevant contingencies that may trigger a price adjustment are spelled out in writing, are based on the actual benefits that accrue to the service recipient and the risks borne by the service provider and the arrangement comports with the economic substance of the controlled transaction and the parties' actual conduct — such post-transaction adjustments will be given effect.44 Admittedly, the adjustment is effective in the year that the contingency occurs and not the year of the transaction, but recognition of this method by which taxpayers can revisit the terms of controlled transactions following the filing of the initial tax return for the year of the transaction is a way to avoid the inflexibility implied by the Intersport opinion. Importantly, the contractual provisions contemplated by the cost sharing and intercompany services regulations should allow both for upward and downward adjustments after the filing of the tax return for the year of the intercompany transaction, and should be very definitive in terms of when an adjustment is triggered and exactly how the adjustment is calculated. The parties may try to bolster their position by using some form of “catch-all” language stating that the prices set forth in the agreement “are intended to meet the arm's-length pricing standard of § 482 and will be reviewed from time to time to ensure consistency with such standard.” Even if it were decided that a taxpayer cannot make a transfer pricing adjustment in an amended return based on an explicit contractual provision, the taxpayer should still be allowed to report any compensatory payments (which may include an interest component) made pursuant to the adjustment clause in the agreement in the original return for the year in which the compensatory payments are actually made.45 Several arguments support this conclusion. First and foremost, the taxpayer would not be filing an amended or untimely return so it would be outside the scope of Reg. § 1.482-1(a)(3). Second, such compensating payment would be required by the contract, just like a contract between unrelated parties that agree to make correcting payments to rectify errors or mistakes made in prior years. Finally, this treatment is consistent with the last sentence of Reg. § 1.461-1(a)(3), which in its relevant part reads as follows: ....if a liability is properly taken into account in an amount based on a computation made with reasonable accuracy and the exact amount of the liability is subsequently determined in a later taxable year, the difference, if any, between such amounts shall be taken into account for the later taxable year. Conclusion Reg. § 1.482-1(a)(3) and Intersport present a seemingly absolute bar to reduce taxable income through transfer pricing adjustments reflected on an amended or untimely return. But a careful reading of Reg. § 1.482-1(a)(3) uncovers mistakes in the Intersport decision and confirms that taxpayers should be allowed to make certain transfer pricing corrections in an amended return notwithstanding Reg. § 1.482-1(a)(3). Further, even taking the Intersport decision into account, there are certain circumstances where a taxpayer should be allowed to make corrections to transfer prices, including: (i) a taxpayer-initiated MAP under a US income tax treaty; (ii) an amendment to an APA annual report; (iii) an adjustment to an NOL carryforward schedule (as opposed to an amended return); (iv) a court-ordered downward adjustment; and (v) an explicit contractual provision in an intercompany agreement that calls for upward and downward transfer pricing adjustments.MAYER BROWN | 12 Endnotes Article 1 Lewis J. Greenwald is a Partner in the Tax Transactions & Consulting Practice, Brian W. Kittle is a Partner in the Tax Controversy & Transfer Pricing Practice and Lucas Giardelli is an Associate in the Tax Transactions & Consulting Practice, each of the New York office of Mayer Brown. The authors wish to thank their Mayer Brown colleagues Brendan Sponheimer (Associate in the Tax Controversy & Transfer Pricing Practice) and Christopher K. Mayer (Associate in the Tax Transactions & Consulting Practice) for their assistance with this article. 2 103 Fed. Cl. 396 (Fed. Cl. 2012). See also Morton-Norwich Prods., Inc. v. United States, 602 F.2d 270, 275 (Cl. Ct. 1979) (describing a prior version of the regulation as providing that “section 482 is not available to a taxpayer nor may a taxpayer force the Service to exercise its discretion [under section 482]”). 3 For example, an error of this type may occur when an intercompany cost-plus services agreement provides that certain costs should be included in the “cost pool,” but such charges were inadvertently excluded from the prices actually charged by the service provider. This type of error would also occur where a licensor accidentally charges a 6% royalty even though an intercompany license agreement required the licensee to pay an 8% royalty. 4 Assume, for example, that a taxpayer intends to change the comparables it had originally selected for purposes of its transfer pricing analysis under the argument that there has been a clerical error when setting up the metrics or criteria to filter and select the comparables (e.g., the taxpayer argues it intended to exclude any companies with turnover over $10 billion, but accidentally set up the filter to exclude companies with turnover over $15 billion). In such a case, contemporaneous documentation, as well as the practice in prior and subsequent years, may help determine whether the taxpayer actually made an involuntary mistake when selecting its pool of comparables or if, instead, it is trying to revisit and modify a prior determination regarding its comparability criteria. 5 Reg. § 1.482-1(b)(3). T.D. 6952, 33 Fed. Reg. 5848 (Apr. 15, 1968). 6 Reg. § 1.1482-1T(a)(3). T.D. 8470, 58 Fed. Reg. 5263 (Jan. 21, 1993). 7 T.D. 8552, 59 Fed. Reg. 34971 (July 8, 1994). 8 For purposes of this article, the prices “actually charged” are understood to be the prices recorded in the taxpayer's internal accounting (prior to any consolidation/elimination of intercompany transactions). 9 Although the regulations are silent on the point, the IRS's position is that an untimely or amended return may be used, however, to increase US taxable income. Rev. Proc. 99-32, 1999-2 C.B. 296 (“If the adjustment results in an increase in taxable income, the increased income may be reported by the taxpayer at any time.”). It should also be noted that Reg. § 1.482-1(a)(3) ends with a cross-reference to Reg. § 1.6662-6T(a)(2). Reg. § 1.6662-6(a)(2), which mirrors Reg. § 1.6662-6T(a)(2), suggests that a taxpayer may correct the results of its controlled transactions in an amended return for penalty protection purposes (of course, this provision involves a correction that results in an increase to the taxpayer's US taxable income). See also FSA 200031025. 10 The third sentence also mentions “other adjustments,” but this should not be interpreted as encompassing any possible type of correction to the reported transfer prices. Read in context with the overall scope of Reg. § 1.482-1(a)(3), it is reasonable to conclude that the term also refers to adjustments to the taxpayer's original application of § 482. 11 Courts have long recognized that the heading of a section cannot limit the plain meaning of the text and that, for interpretative purposes, it is only of use when it sheds light on some ambiguous word or phrase; “they are but tools available for resolution of a doubt. But they cannot undo or limit that which the text makes plain.” Brotherhood of Railroad Trainmen v. Baltimore & O.R. Co., 331 US 519, 528–529 (1947). See also § 7806(b); Grapevine Imports, Ltd. v. United States, 71 Fed. Cl. 324, 331 and n. 6 (2006). However, in this case, nothing in the plain language used in the third sentence of Reg. § 1.482-1(a)(3) indicates that it is intended to apply to any type of correction to the results of controlled transactions, regardless of whether such correction constitutes an application of § 482 or not. Rather, the language suggests that the scope of the prohibition is limited to amendments to an application of § 482 and the heading does nothing but confirm this understanding. 12 See, e.g., Erin Collins, David Chamberlain and George Hirsch, U.S. Transfer Pricing: Ups and Downs on Amended Returns, 68 Tax Notes Int'l 307, 308 (2012). 13 Intersport Fashions West, Inc. v. United States, 84 Fed. Cl. 454, 463 (2008). 14 Scaife Co. v. Commissioner, 314 U.S. 459 (1941). 15 Helvering v. Lerner Stores Corp., 314 U.S. 463, 466 (1941). 16 It is interesting to note that, under the “first return” line of authorities cited by the court in Intersport, a “first return” includes an amended return when filed before the statutory due date of the original return for that tax year (Haggar Co. v. Helvering, 308 U.S. 389, 395 (1940)). Yet, the third sentence of Reg. § 1.482-1(a)(3) refers both to “untimely” or “amended” tax returns, so arguably the prohibition would also encompass adjustments made in an amended return filed before the due date (including extensions) of the original return. That said, in a situation where a taxpayer reverts to the transfer pricing reported on its originally filed return, neither Reg. § 1.482-1(a)(3) nor Intersport would be applicable to preclude such a claim. This could indeed arise where a taxpayer agrees with the IRS to certain adjustments to close an audit but reserves the right to later challenge those adjustments. Even if the taxpayer agrees to any transfer pricing adjustment that is asserted on a Form 5701 notice of proposed adjustment, signs a Form 870 waiving any restriction on assessment of the associated tax deficiency, and pays that tax, nothing in the process should be considered as superseding the original tax return position. Moreover, taking such a course of action should not preclude the taxpayer from being able to file a refund claim within two years of payment to recover such taxes. See § 6213(d). In fact, even if the taxpayer signs a Form 870-AD, which on its face seems to prohibit theMAYER BROWN | 13 taxpayer from filing a claim for refund on covered issues, the taxpayer may not be barred from doing so. Several courts have held that a formal closing agreement entered into pursuant to § 7121 is the exclusive means to legally bind the taxpayer in connection with audit settlements. See Botany Worsted Mills v. United States, 278 U.S. 282 (1929). Courts are divided on whether a taxpayer's execution of a Form 870-AD precludes the taxpayer from later seeking a refund claim for the same years. It is, however, clear that a taxpayer can expressly reserve the right to file a refund claim for certain issues on this form. 17 103 Fed. Cl. 396, 405 (2012). 18 In relation to this point, in its reply brief in support of its motion for summary judgment, the government cites to Badaracco v. Commissioner as standing for the idea that the Code does not expressly permit amended returns, which are creatures of administrative origin. 464 U.S. 386, 393 (1984). The issue there was more narrow — did the filing of an amended return preclude the IRS from relying on the extended statute of limitations where a taxpayer files a fraudulent return? Section 6511(a) and § 6511(b) generally provide that a refund claim, not including statute of limitations extensions, is timely if it is filed within three years from the time the return was filed or two years from when the tax was paid. These sections seem to suggest that a taxpayer may seek a refund through an amended return. Reg. § 1.451-1(a) states that “[i]f a taxpayer ascertains that an item should have been included in gross income in a prior taxable year, he should, if within the period of limitation, file an amended return and pay any additional tax due. Similarly, if a taxpayer ascertains that an item was improperly included in gross income in a prior taxable year, he should, if within the period of limitation, file claim for credit or refund of any overpayment of tax arising therefrom.” Still, courts have said that “[w]hile there is no statute or regulation having the effect of law which vests in a taxpayer the right to file an amended return after expiration of the time for the filing of the original return, it has been the general administrative practice over a long period of time to recognize amended returns filed after the due date for the purpose of correcting clear errors or plain mistakes inhering in original returns.” Klinghamer v. Brodrick, 242 F.2d 563 (10th Cir. 1957). In general, however, the IRS has not been successful in trying to hold a taxpayer to its errors where the taxpayer has filed an amended return correcting them and there is no express prohibition against filing such a return. See, e.g., C.H. Mead Coal Company v. Commissioner, 106 F.2d 388, 390 (4th Cir. 1939) (holding that “[i]f an amendment made to correct a mistake, presented within a reasonable time, is rejected through a narrow and harsh construction of the law, to the detriment of the taxpayer, such rejection is arbitrary and unjust. It certainly is not the duty of the Commissioner to deprive a taxpayer of any rights justly due him.”). Indeed, a prohibition against filing an amended return would seemingly violate the Fifth Amendment of the Constitution as a taxpayer would arguably be deprived of its property without due process of law. 19 Order, Intersport Fashions West, Inc. v. United States, No. 12-5080 (Fed. Cir. Nov. 29, 2012). 20 103 Fed. Cl. 396, 402 (2012), citing Matsushita Electric Corp. of America v. United States, 775 F.2d 1107, 1116 (Fed. Cir. 1985) (en banc). 21 Id. at n. 14. 22 See, e.g., Capital One Fin. Corp. v. Commissioner, 130 T.C. 147, 168 n. 17 (2008) (indicating that Court of Federal Claims cases are “not binding on this [Tax] Court.”); see also Advo, Inc., v. Commissioner, 141 T.C. 298, 313 n. 11 (2013) (“We note that opinions of a U.S. District Court do not constitute binding precedent in this Court”). 23 See W. Coast Gen. Corp. v. Dalton, 39 F.3d 312, 315 (Fed. Cir. 1994) (“Court of Federal Claims decisions, while persuasive, do not set binding precedent for separate and distinct cases in that court. Thus, a Court of Federal Claims decision directed to one claim brought by a party does not create binding precedent for a separate claim — even a separate claim from the same party.”). See also Buser v. United States, 85 Fed. Cl. 248 (2009) (stating the court is not bound by other decisions in the Court of Federal Claims); Reidell v. United States, 47 Fed. Cl. 209, 212 (2000) (recognizing that “[a] decision here is not binding on other judges in this same court”). Cf. Greenberg v. United States, 1 Cl. Ct. 406, 407 (1983) (stating “prudence, comity and the need for consistent application of the laws suggest that a judge should follow the rulings of another judge of the same court absent strong reason to the contrary”) (emphasis added). 24 103 Fed. Cl. 396, 406 (2012). 25 314 U.S. 463, 466 (1941). 26 2013-50 I.R.B. 633. 27 See H. David Rosenbloom, Self-Initiated Transfer Pricing Adjustments, 46 Tax Notes Int'l 1019 (2007); Charles W. Cope and Sean F. Foley, Self-Initiated Transfer Pricing Adjustments, or Virtue Unrewarded, 129 Tax Notes 708 (2010); New York State Bar Association Tax Section, Notice 2013-78 — Mutual Agreement Procedure (Apr. 1, 2014) (“It is often said that, in this context, the corporate taxpayer is merely a stakeholder in an inter- pleader action allowing the two disputing parties to determine whether the taxpayer should pay [one Contracting State or the other], but not both.”). 28 It is worth noting, however, that Article 25, paragraph 3 of the Model Treaty is drafted more broadly — arguably covering taxpayer-initiated adjustments — by providing that competent authorities “may consult together for the elimination of double taxation in cases not provided for in the Convention.” 29 28 2006-45 I.R.B. 1035. 30 Prop. Rev. Proc. § 2.02. However, the US competent authority may deny assistance in MAP cases involving taxpayer-initiated positions if the request “evinces after-the-fact tax planning or fiscal evasion or is otherwise inconsistent with sound tax administration.” Prop. Rev. Proc. § 6.02(12). 31 For instance, a pre-filing memoranda must be submitted if the MAP issues will, or could reasonably be expected to, involve a taxpayer-initiated position. Prop. Rev. Proc. § 3.02(3)(b). 32 New York State Bar Association Tax Section, Notice 2013-78 — Mutual Agreement Procedure (Apr. 1, 2014), 7.MAYER BROWN | 14 33 Arguably, to the extent it is consistent with the outcome of the MAP, the taxpayer should be allowed not only to correct errors in the amended return, but also to apply § 482 by making any necessary changes to its original transfer pricing methodology. 34 2006-2 I.R.B. 278. 35 See Announcement 2011-22, 2011-16 I.R.B. 672. 36 Springfield Street Railway Co. v. United States, 312 F.2d 754 (Ct. Cl. 1963); Rev. Rul. 81-88, 1981-1 C.B. 585. See also J. Walker Johnson and Brigid Kelly, Making Untimely Adjustments to Taxable Income in Closed Years to Determine Taxable Income in Open Years: Applying Unifying Principles, 33 Tax Mgmt. Weekly Rep. 1074 (Aug. 11, 2014); Richard B. Malamud, Amending Closed Tax Years to Increase Carryovers, 1999 Tax Notes Today 166-11. 37 See PLR 9504032 (although statute of limitations for amending loss year had expired, taxpayer could increase NOL carryovers from that year based on its determination that offsetting debt cancellation income realized in that year was less than originally reported.) 38 See Eli Lilly & Co. v. Commissioner, 856 F.2d 855, 860 (7th Cir. 1988) (describing the Tax Court's experience in these situations): “The Tax Court has employed [its] power to reallocate... in several cases in which a taxpayer has rebutted the Commissioner's reallocations without providing alternative allocations that satisfy the arm's length standard, establishing its own allocations to ensure that income, deductions and credits accurately reflect income.” 39 Pikeville Coal Co. v. United States, 37 Fed. Cl. 304 (1997). 40 Ciba-Geigy Corp. v. Commissioner, 85 T.C. 172 (1985). 41 See Steven P. Hannes, Taxpayer's Rights to Benefit from Retroactive Changes Made Under § 482: The Rules, Ciba Geigy, and Pikeville Coal, 5 Transfer Pricing Rpt. 746 (Mar. 26, 1997). 42 Some commentators have suggested that this possibility would exist for the taxpayer only when the IRS voluntarily reduces a taxpayer's income during an audit, as in Pikeville Coal, and presumably not when the IRS has challenged the taxpayer's transfer pricing to increase its taxable income (see Eric Ryan and Chris Kotarba, Intersport and Taxpayer-Initiated Transfer Pricing Adjustments, 21 Transfer Pricing Rpt. 88 (May 17, 2012)). There seems to be no rationale for this distinction and, indeed, the Ciba-Geigy decision suggests otherwise. 43 T.D. 9568, 76 Fed. Reg. 80,082 (Dec. 22, 2011). 44 Reg. § 1.482-9(i). 45 See Collins, Chamberlain and Hirsh, above at n. 11, at 315–316. Naturally, depending on the taxpayer's particular position, an adjustment made in a later year may not always replicate the effects of a retroactive adjustment made in an amended return effective for the tax year of the transaction. In some cases, however, a similar effect may be achieved due to the possibility of carrying back NOLs.