On 29 December 2023, the Office of Chief Counsel Memorandum announced that the IRS is considering group membership to determine the arm’s length interest rate chargeable for intragroup loans and make a section 482 adjustment. The memorandum provides non-taxpayer specific legal advice regarding the application of section 482 of the Internal Revenue Code.

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 Service may adjust the interest rate in a controlled lending transaction to reflect group membership.

This is true notwithstanding that group membership may improve the debt terms available to a controlled borrower based on financial support expected from another group member (even if that group member is the lender in the controlled lending transaction). Taxpayers may argue that while group membership may reduce the arm’s length interest rates available to the borrower from credit markets, it should be ignored where it does so based on an expectation of financial support from the lender because the lender does not benefit from its own support.

However, such an argument relies on the ownership relationship with the borrower. It must be rejected as it assumes, contrary to the arm’s length standard, that the controlled lender would provide financial support to the controlled borrower, whereas no unrelated lender would. Under the regulations, the ownership relationship between the controlled lender and controlled borrower is disregarded for this purpose. Rather, the controlled lender is expected to enforce repayment of the debt according to its terms as in an arm’s length bona fide lending.