Do You Have to Check Everything? IRS Adjustments to Intercompany Lending Transactions

The IRS Office of Chief Counsel recently considered consolidated group membership in determining the arm’s length rate of interest chargeable for intragroup loans and making a section 482 adjustment. Under the section 482 regulations, the arm’s length rate of interest on an intragroup loan to a controlled borrower is generally the rate at which that borrower could realistically obtain alternative financing from an unrelated party. Thus, if an unrelated lender would consider group membership in establishing financing terms available to the borrower, and such third-party financing is realistically available, then the IRS may adjust the interest rate in a controlled lending transaction to reflect group membership.

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Related Content

• Corporate Interest Deduction Limitations
  See how one of the easiest ways for a taxpayer to attempt to avoid taxes is by entering into transactions with related parties. Absent rules governing these kinds of transactions, a taxpayer who wholly owns two corporations could cause the corporations to enter into transactions at off-market values to reduce taxable income and increase deductions. Section 267 is one of the primary provisions enacted to curb the potential for tax avoidance through the use of related parties. Similarly, Section 482 is designed to police amounts payable between certain related persons (i.e., controlled taxpayers) using an arm's length transaction standard.

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