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Part 4. Examining Process

Chapter 49. Economist Program

Section 1. Overview - Economist Program

4.49.1  Overview - Economist Program

4.49.1.1  (11-03-2006)
Overview

  1. This chapter defines the responsibilities of the Economist Program within the Large and Mid Sized Business's (LMSB's) Field Specialists.

  2. Background - Economists are assigned to teams located in key cities nationwide. Their purpose is to supplement the legal and accounting skills of Service personnel and assist them in addressing the economics underlying many of the tax issues they encounter, particularly those in international cases. In addition to LMSB, economists assist SBSE, W&I, TEGE, Appeals, Chief Counsel, Competent Authority, the Treasury Department and the Department of Justice.

  3. Scope of Activity - Economic issues are found in many types of tax examinations, e.g., fair market value of stock and closely held businesses; international issues under IRC section 482; valuation of acquired intangible assets; economic feasibility studies; etc. It is therefore essential that the economic principles, concepts, and data needed to resolve these issues are recognized and that examinations encompass these areas. Furthermore, the application of economic principles must give consideration to tax laws and regulations appropriate to the tax issues.

  4. Areas of Expertise - Economists should be used to assist in the analysis and evaluation of substantive economic factors. This assistance may cover, but is not necessarily limited to, items such as:

    • Arm's-length pricing of goods and services;

    • Value of intangibles;

    • Royalty and commission rates;

    • Industry and trade practices;

    • Profits and profit ratios;

    • Value of functions performed;

    • Distribution patterns;

    • Advanced Pricing Agreements (APAs);

    • Financial products;

    • Pricing of Natural Resources;

    • Cost sharing/buy ins;

    • Tax shelters/Tax shifting;

    • Value of share interest in partnerships;

    • Reasonable compensation;

    • Foreign currency exchange; and

    • Value and economic validity of specific types of legal and financial arrangements, e.g., covenant not to complete.

  5. In addition, Economists provide research skills in a number of areas including supporting the Office of Pre-filing and Technical Guidance (e.g., the Industry Specialization Program and the International Field Assistance Specialist Program), conducting industry studies, and obtaining and analyzing information needed to develop issues.

  6. Voluntary Compliance - The Economist Program improves voluntary compliance by:

    • Ensuring uniformity of approach to economic problems;

    • Promoting the establishment of sound precedents; and

    • Assisting in prompt and thorough development and documentation of economic approaches.

4.49.1.2  (11-03-2006)
Requests for An Economist

  1. Requests for an economist are mandatory in all Coordinated Industry Cases (CIC).

  2. Requests for an economist are mandatory in all IRC section 482 (including APAs) cases, except cases in which the examiner is utilizing the "safe haven" provisions of the regulations.

  3. Requests for an assistance in all other cases should be made when an economist may assist in the :

    • Identification of potential issues;

    • Determination of the issue areas to be pursued;

    • Recognition of the economic data needed to support the issues;

    • Analysis, evaluation, and interpretation of economic and statistical information; and

    • Determination of whether an adjustment is based upon sound economic concepts, is reasonable in amount, and is consistent with recommendations made in similar situations.

  4. To make the most efficient use of the limited number of economists, requests should be restricted to cases in which:

    • The potential deficiency is substantial in amount; or

    • The resolution of the issue will have significant precedent value.

4.49.1.3  (11-03-2006)
Procedures for Requesting Economist Assistance

  1. All requests for an economist should be made on the Specialist Referral System (SRS).

  2. Examiners are encouraged to discuss potential issues on cases with an Economist Team Manager prior to submitting requests for an Economist.

  3. Requests should be submitted as soon as it is determined that Economist is needed or that a mandatory request is required.

  4. The request for an Economist will be acknowledged, accepted or rejected, within 10 workdays after receipt by the Economist Team Manager via SRS.

  5. When the services of both an economist and another specialist are requested, the decision on whether the economist or other specialist should be used rests entirely with the office seeking assistance. In CIC cases the decision rests with the CIC team manager. It is recommended that discussions be held between the specialist managers and the CIC team manager so that differences can be worked out and an informed decision made.

4.49.1.4  (11-03-2006)
Economist Assistance

  1. Economists are available to provide assistance to team managers, revenue agents, international examiners, engineers, appeals officers, competent authority analysts, APA personnel, Chief Counsel, and estate and gift tax examiners.

  2. The contribution an economist brings to the development of an issue may include:

    • Evaluation, analyses and interpretation of data from an economic perspective;

    • Locating and identifying sources of pertinent economic data;

    • Preparing or reviewing proposed adjustments from an economic perspective; and

    • Preparation for and participation in discussions or conferences between the Service and taxpayers or their representatives.

  3. The economist will work closely with the requesting examiner, team members, and other specialists assigned to the examination. In particular, international issues regarding IRC section 482require close cooperation and coordination between the economist and the international examiner.

  4. In those cases where formal assistance is provided, the economist's findings will be submitted in report form. When limited assistance is provided, a memorandum will be prepared.

  5. Economists may serve as expert witnesses in litigated cases. At other times, they may identify and locate independent outside experts to provide expert testimony on economic matters.

4.49.1.5  (11-03-2006)
Economist Reports

  1. Upon completion of an assignment, the economist will prepare a report or memorandum for submission to the Economist Team Manager for review, approval, and forwarding to the requesting party.

  2. The economist's report will show information which is necessary to support the basis for any recommended adjustment. Emphasis will be placed on accurate factual development, rebuttal to the taxpayer's positions, and a discussion of the application of the tax law cited. The report should emphasize the economics of the issue and explain the economic reasoning to support the recommendations.

  3. A memorandum will be prepared at the completion of limited Economist Assistance, for submission to the requesting examiner. The memorandum should not be provided to the taxpayer. This memorandum may provide guidance to the referring examiner as to how to pursue an issue and/or an overview of the economic factors of the case. It should not be cited as the support for an adjustment.

  4. Reasonable effort should be made to write in a language which non-economists can understand.

  5. The Economist Team Manager is responsible for reviewing and approving all reports and memoranda prepared by economists. The review will address the form, content, and the overall quality of the report. For all reports a report cover will be prepared and signed by the Economist Team Manager.

4.49.1.6  (11-03-2006)
Program Responsibilities

  1. The Economist Program Manager will:

    1. Provide oversight of the Economist Teams;

    2. Issue guidelines and procedures related to the Economist Program operations;

    3. Evaluate the needs and provide effective direction in the management and maintenance of the program by: assessing the effectiveness of the Economist Teams regarding the development of substantive international and domestic issues; conducting Economist Team evaluations through visits and analysis of statistical data; assessing the adequacy of staffing levels and requirements for economists by conducting workload studies; and analyzing the adequacy of location and staffing levels of PODs.

    4. Ensure that the economists are trained in accordance with established training standards;

    5. Provide liaison between the Economist Program and Industry segments; and

    6. Provide liaison between the Economist Program and other Business units.


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