Document Type

Article

Publication Date

6-2026

Abstract

In his May article, Michael McDonald, a former managing director at Ernst & Young and current adjunct professor at the University of Virginia School of Law, criticized the IRS’s recently announced method for applying the commensurate with income (CWI) requirement that addresses the widespread underpricing of intangibles.1 His analysis questioned the IRS’s interpretation of section 482. McDonald argues that, until 2025, Treasury and the IRS applied CWI in a manner consistent with the arm’s-length principle despite congressional misgivings about the arm’s-length principle that were not only expressed in the legislative history of the Tax Reform Act of 1986 but were also inserted into the statute itself.

The section 482 regulations are based on the text of the statute. Arguably, that text embodies a valid delegation to Treasury and the IRS to draft such regulations, including their choice of adopting the arm’s-length principle (established in 1935) and cost sharing (since the 1960s).5 But these regulations must follow the intelligible principle of clear reflection of income. In 1986 Congress, upon adding CWI to the statute, determined that periodic adjustments are necessary regardless of whether they are consistent with the arm’s-length principle.

Comments

Reprinted with the permission of Tax Analysts.

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