Blocked Income

Generally, IRC § 482 allows the IRS to distribute, apportion, or allocate gross income, deductions, credits, or allowances among commonly controlled entities when needed to prevent tax evasion or clearly reflect income, including by requiring that returns from intangibles be commensurate with the income attributable to the intangible. The regulations describe the goal as determining the taxpayer’s true taxable income under an arm’s-length standard.

Treasury’s blocked-income regulation under § 482 requires that a foreign restriction be publicly promulgated and generally applicable to similarly situated controlled and uncontrolled parties and that it expressly prevents payment or receipt, in any form, of the arm’s-length amount. The guidance also distinguishes legal prohibitions on payment from rules that merely limit local deductibility.

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