IRS Chief Counsel’s Office Advises Setoff for Retroactive Controlled Services Cost Method Change

The Chief Counsel’s Office advised on whether a taxpayer may retroactively change its cost allocation method for controlled services transactions and claim the adjustment as a setoff under Treas. Reg. §1.482-1(g)(4)(i). The taxpayer originally allocated costs to regional operating companies based on worldwide gross revenue shares, but sought to change to a two-step method that first allocates costs among business divisions, then apportions to regional companies based on divisional revenue. The Chief Counsel’s Office concluded that the new method is more reliable under Treas. Reg. §1.482-9(k)(2) because it more specifically connects costs to benefits, and the setoff claim should be ...