Differences in Customs and Income Tax Valuations are not a Violation of Section 1059A

On October 29, 2010, the Internal Revenue Service released an advice memorandum regarding the “first sale rule” and the potential for a transfer pricing adjustment. In a chief counsel advice memorandum, the IRS explained that differences in valuations for customs law and income tax law purposes upon the correct application of the “first sale rule” do not violate Section 1059A of the Internal Revenue Code. Section 1059A places a limit on a taxpayer’s basis or inventory costs in property that is imported from related persons. The “first sale” rule is a custom valuation rule that permits importers to refer to the price paid by an intermediary to a foreign manufacturer as the taxpayer’s basis for determining the value of the imported merchandise. The general income valuation rules most often yield a higher value because the amount is based on a later, more valuable sale. Naturally, the custom valuation rule is preferred by importers because it generally has a lower value than that of the income tax valuation and minimizes customs duties. The memorandum explains that this difference in valuations does not violate Section 1059A because the difference falls under the exception in Regulation 1.1059A-1(c)(2)(iv). Please note that chief counsel advice memoranda cannot be cited or used as precedent. Click here for a copy of the memorandum. –Elaina L. Blanks