APA Disclosure: Can The Process Survive?

Published: October 15, 1999
Source: Canadian Tax Journal

Taxpayer enthusiasm for the APA process may abate following a recent decision by the Internal Revenue Service to release redacted APAs to the public, despite a history of assurances of nondisclosure.

In a reversal of the position that it had taken since the inception of its advance pricing agreement ("APA") program, the Internal Revenue Service (the "Service") recently conceded, during litigation brought by a legal publisher under the US Freedom of Information Act ("FOIA")(1) and Section 6110 of the Internal Revenue Code,(2) that APAs (and supporting documentation) must be disclosed to the public. Speculation abounds as to the real reasons for the Service's concession.

Even though the Service's position concerning the confidentiality of APAs and supporting documentation had been questioned by practitioners from the outset of the program, taxpayers who participated in the APA program probably felt betrayed by the Service's recent concession. The Service apparently made the concession without consulting any of the taxpayers or other governments who had been involved in the APA program and without attempting to negotiate a settlement that would secure the confidentiality of the many APAs (and supporting documentation) that either have been concluded or are in the process of being concluded. At this point, unless Congress steps in to reverse the Service's position through legislation, taxpayers who negotiated APAs on the assumption that their competitors would not be privy to any of the information furnished to the Service during the APA process will see their APAs (and, at some later time, the supporting documentation) released to the general public, albeit in redacted form.(3)

Whether the APA program, which has been touted by the Service as a major success,(4) will be able to withstand the potential fallout from the release of redacted APAs to the public, however, remains to be seen.

The APA Program

In 1991, the Service issued guidance on applying for an APA.(5) In 1996, the Service revised and expanded this guidance in light of its experience with the APA program.(6)

An APA is a binding agreement between a taxpayer and the Service concerning the appropriate transfer-pricing methodology to be applied to the transactions covered by the APA.(7) If the taxpayer complies with the terms and conditions of the APA, then the Service will regard the results of the application of the agreed-upon transfer- pricing methodology as satisfying the arm's-length standard of Section 482 of the Code, and will not contest the application of the agreed-upon transfer-pricing methodology to the subject matter of the APA.(8) An APA may be unilateral (that is, the only parties to the APA are the taxpayer and the Service), bilateral, or multilateral (that is, the parties to the APA are not only the taxpayer and the Service but also one or more treaty partners of the United States).(9)

Although the APA process involves a great deal of cost and effort on the part of taxpayers, both in terms of the amount of information that must be disclosed and in terms of the out-of-pocket costs related to obtaining, implementing, and complying with the APA, the success of the APA program is indicative of taxpayers' overall judgment that the benefit of certainty provided by an APA far outweighs its costs. Thus, by September 30, 1997, the Service had concluded a total of 113 APAs, and had pending an additional 159 APA requests.(10) By September 30, 1998, the Service had concluded 164 APAs, and had pending an additional 186 APA requests.(11)

Not content with past successes, the Service constantly refined and expanded the scope of the APA program. When the Service issued its revised guidance on requesting APAs in 1996, for example, the Service formally began to permit taxpayers to "roll back" an APA to open taxable years (APAs had previously applied on a prospective basis only), actively encouraged taxpayers to seek a bilateral or multilateral APA rather than a unilateral APA, and extended bilateral and multilateral APAs to cover agreements with the taxing authorities of US possessions.(12) In 1997, the Service indicated that its goal was to streamline the APA process, reducing the time necessary to complete the APA process from an average of 20 months from the filing of the APA request to an average of 12 months.(13) The Service also implemented an "early referral" program under which taxpayers involved in transfer-pricing audits could opt at the beginning of the audit process to seek an APA rather than undergo examination by the Service.(14) In late 1998, the Service issued final procedures for small business taxpayers (that is, taxpayers with gross income of $200 million or less) wishing to take advantage of the APA process; these procedures were designed "to address the [small business taxpayer's] need to achieve the compliance certainty an APA provides at a cost that is reasonable relative to the size and complexity of the transactions involved."(15)

At the outset of the APA program, the Service took the view that

[t]he information received or generated by the Service during the APA process relates directly to the potential tax liability of the taxpayer under the Internal Revenue Code. Therefore, the APA and such information are subject to the confidentiality requirements of section 6103 of the Code. The information may also be commercially sensitive and may be proprietary or otherwise privileged. Finally, the APA and such information may be confidential pursuant to the terms and conditions of income tax conventions between the United States and involved foreign governments.(16)

This position was reaffirmed in similar language when the Service updated its procedures on seeking an APA in 1996.(17) The Service took the position that an APA and the supporting documentation were confidential and not subject to public disclosure for three reasons: (1) to encourage taxpayers to participate in the APA process, which was an "unknown and untried device"; (2) APAs were said to be more similar to negotiated resolutions reached in examinations of taxpayers (which are not publicly disclosed) than to private letter rulings (which are publicly disclosed); and (3) redacted APAs would not be a useful source of guidance to taxpayers, given the extent of redaction that would be required before their release to the public.(18) Despite these Service positions, practitioners have questioned the Service's stance on the confidentiality of APAs and supporting documentation from the beginning of the APA program.(19)

The Suit

In February 1996, a legal publisher filed the first of three lawsuits seeking the release of APAs for public inspection under FOIA and Section 6110 of the Code.(20) These three suits, which are identical except with respect to the time periods covered, were consolidated by the US District Court for the District of Columbia.


Under FOIA, the Service is required to make its records available promptly to any person, without regard to the reason for the request,(21) provided only that (1) the person reasonably describes the records requested and (2) the person makes the request for disclosure in accordance with the published rules prescribing the procedures to be followed in making such a request.(22) There are a number of exceptions to the application of FOIA. For example, matters that are specifically exempted from disclosure by statute (such as tax return information) and trade secrets and commercial or financial information that is privileged or confidential are not required to be disclosed under FOIA.(23) Taxpayers have only a limited right to be notified of, and therefore a limited right to object to, the disclosure of information pertaining to them under FOIA.(24)

Section 6110

Under Section 6110 of the Code, the Service is required to open to public inspection the text of any written determination and any background file document relating to that determination.(25) A "written determination" is defined as a ruling, determination letter, technical advice memorandum, or chief counsel advice.(26) A "background file document" includes the request for the written determination, any written material submitted in support of the request, and any communication between the Service and persons outside the Service in connection with the written determination received before issuance of the determination.(27)

Before any written determination or background file document is opened to public inspection, the Service is required to delete, among other things (1) the names, addresses, and other identifying details of the person to whom the written determination pertains and of any other person identified in the written determination or background file document; (2) trade secrets and commercial or financial information that was obtained from a person and that is privileged or confidential; and (3) information the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.(28)

The Service is also required, upon issuance of any written determination or upon receipt of a request for a background file document, to mail a notice of intention to disclose to any person to whom the written determination pertains.(29) In this notice of intention to disclose, the Service is required to inform the taxpayer of his right to seek administrative remedies (and, once administrative remedies have been exhausted, judicial remedies) in order to restrain disclosure of information.(30) Under Section 6110, a taxpayer's judicial remedy consists of the ability to file suit in the "Tax Court (anonymously, if appropriate) for a determination with respect to that portion of such written determination or background file document which is to be open to public inspection."(31) In the context of a proceeding under Section 6110, the Tax Court is empowered to close portions of hearings, testimony, evidence, and reports to the public in order to preserve confidentiality.(32)

Service Concession of Section 6110 Issue

In response to the legal publisher's motion for summary judgment in the consolidated actions, on January 11, 1999 the Service filed its memorandum in opposition, conceding that redacted APAs are "written determinations" subject to disclosure under Section 6110 of the Code.(33) Although the Service's concession concerned only the APAs themselves, the concession will effectively cause all supporting documentation furnished by a taxpayer to the Service during the APA process also to be subject to disclosure under Section 6110 as "background file documents."(34)

The Service actually announced its decision, that APAs are subject to disclosure under Section 6110, in a letter to taxpayers and their representatives dated January 8, 1999.(35) In February 1999, the Service proposed a schedule for redacting and releasing the 132 APAs that are the subject of the legal publisher's lawsuit.(36) Pursuant to this schedule, which has not been approved by the U.S. District Court for the District of Columbia and to which the legal publisher has raised certain objections, taxpayers began to receive proposed redactions to their APAs from the Service during the week of April 7, 1999.(37) The deadline for taxpayers to submit comments to the Service regarding the proposed redactions was June 8, 1999.(38) The Service planned to send out all bilateral and multilateral APAs to treaty partners by June 23, 1999, and these treaty partners were to have until August 23, 1999 to submit their comments regarding the proposed redactions to the Service.(39) After reviewing the comments from treaty partners, the Service announced its intention to send fully redacted APAs to taxpayers and treaty partners, along with a notice of intent to disclose (as required by Section 6110(f), discussed above) no later than September 7, 1999.(40) Unless a taxpayer pursued administrative and judicial remedies under Section 6110, the Service planned to release the redacted APAs to the public on October 18, 1999.(41)

Service Motives Unclear

Some have speculated that the Service unilaterally conceded that APAs are "written determinations" that must be released to the public under Section 6110 as a strategic move to control "the basis under which it would lose."(42) In particular, by choosing to release redacted APAs under Section 6110 rather than under FOIA, the Service could at least ensure "that taxpayer concerns could be better safeguarded," because, "[u]nder section 6110, taxpayers have the right to review proposed disclosures and to propose additional withholding of information allowed under the law; taxpayers have very limited rights in a FOIA case."(43) This theory is supported by the letter that the Service sent to taxpayers and their representatives in January concerning its intention to concede the Section 6110 issue in the lawsuit. This letter states, in part, that "[t]he Service believes that disclosure of APAs under section 6110 would increase the public's confidence that the tax system operates, with respect to all taxpayers,(44) while at the same time protecting taxpayers' privacy interests."(45)

A cynic might suggest, however, that the Service, aware of the dilemma posed by disclosure to APA program participants, felt that a congressional solution would be necessary and that only program participants could bring sufficient pressure to bear on Congress to amend the Code appropriately.

Public Reaction

Notwithstanding speculation concerning the Service's motives in conceding the Section 6110 issue, many taxpayers who sought APAs appear to feel betrayed by the Service's unilateral decision to release redacted APAs to the public. These taxpayers seem disturbed less by the fact that redacted versions of their APAs will be disclosed to the public, a risk that they were aware of when they negotiated the APAs, than by the fact that the Service did not "resist ... disclosure to the maximum extent possible."(46) In fact, several taxpayers have stepped into the fray in an attempt to take up the fight against the legal publisher where the Service left off.(47) These taxpayers have also warned that diverting the resources of the APA staff from negotiating new and renewal APAs to redacting the 132 APAs that are the subject of the legal publisher's lawsuit will have a detrimental effect on the ability of the APA staff "to comply with the mandated timing for processing APA requests. Lengthening the time it takes to obtain an APA is likely to further discourage participation in the APA program. The combination of unwanted disclosure and delays in processing APAs could seriously damage, if not largely destroy, the APA program."(48)

Legislative Remedy?

On June 29, 1999, Representative Amo Houghton of New York and three other members of the U.S. House Ways and Means Committee introduced a bill that would shield APAs and supporting documentation from release to the public by (1) classifying them as confidential return information under Section 6103 of the Code and (2) specifically excepting them from the definition of "written determination" in Section 6110 of the Code.(49) These amendments to the Code to shield APAs from release to the public would be effective retroactively to January 1, 1991.(50) As of this writing, Representative Houghton's bill was still pending before the House Ways and Means Committee, and it appeared that other bills might be introduced as well.


Notwithstanding the Service's assertion that the APA program remains "viable and active" despite the legal publisher's lawsuit and the Service's decision to release redacted APAs,(51) several taxpayers have reportedly withdrawn already from the APA program as a result of the Service's concession of the Section 6110 issue.(52) The possibility that Congress may step in and shield APAs from disclosure should stave off a mass exodus from the APA program in the short term. The long-term effects of the release of redacted APAs on taxpayer confidence in the APA program, on taxpayer trust in the Service to keep its word, and on the ability of the APA staff to negotiate APAs on an efficient basis will not be known, however, until some time after Congress either acts to shield APAs from disclosure or, in the absence of congressional action, the Service begins to release the redacted APAs to the public.


1. 5 U.S.C. section 552.

2. Internal Revenue Code of 1986, as amended (herein referred to as "the Code"). Unless otherwise indicated, all statutory references in this article are to the Code, or to the Treasury Regulations promulgated thereunder.

3. Revenue Canada, in particular, has expressed concern about the public release of redacted APAs, because, in various Canadian industries, there are only a few companies and, as a result, "'it is quite easy for someone to figure out who the taxpayer is or for someone to take a pretty good guess as to whom the taxpayer is.'" Mitchell Tropin, APAs: Mexican Official Says BNA APA Lawsuit Caused Taxpayer to Withdraw APA Request, Daily Tax Report, April 13, 1999, G-1.

4. See Ryan J. Donmoyer, Commissioner Richardson Touts IRS Success Stories, (March 25, 1996), 70 Tax Notes 1736; and Susan M. Lyons, U.S. Government Officials Address International Tax Issues, (February 5, 1996), 12 Tax Notes International 389-93.

5. Rev. Proc. 91-22, 1991-1 C.B. 526, superseded by Rev. Proc. 96-53, 1996-2 C.B. 375. A few months prior to the issuance of Revenue Procedure 91-22, the Apple Computer Corporation announced that it had obtained the first APA, to which both the Service and the Australian Tax Office were parties. Michael F. Patton, "Advance Pricing Agreements," in Transfer Pricing: Alternative Practical Strategies, BNA Tax Management Foreign Income Portfolio no. 890 (Washington, DC: Bureau of National Affairs), chapter 8, at A-102.

6. Rev. Proc. 96-53, supra footnote 5. See also Ann. 95-49, 1995-24 IRB 13 (containing the proposed version of Rev. proc. 96-53 and highlighting the changes that were proposed to be made to Rev. proc. 91-22).

7. Rev. proc. 96-53, supra footnote 5, at section 10.01.

8. Ibid. at section 10.02.

9. Ibid. at section 7.

10. Albertina Fernandez, IRS Briefs: APAs to Be Completed in Nine Months, Says Barrett, (November 3, 1997), 77 Tax Notes 547.

11. Jacqueline B. Manasterli, IRS Transfer Pricing Study Short on Recommendations, (June 14, 1999) 83 Tax Notes 1555-57, at 1556.

12. Rev. proc. 96-53, supra footnote 5, at sections 3.06, 7.07 and 7.01.

13. Fernandez, supra footnote 10.

14. Ibid., and Sheryl Stratton, Corporate Taxpayers Object to Disclosure of APAs, (March 8, 1999), 82 Tax Notes 1411-13.

15. Notice 98-65, 1998-52 IRB 10.

16. Rev. proc. 91-22, supra footnote 5, at section 11, superseded by Rev. proc. 96-53, supra footnote 5.

17. Rev. proc. 96-53, supra footnote at section 12.

18. Sheryl Stratton, Competing Interests Snag APA Program Guidance, (January 8, 1996), 70 Tax Notes 138-40, at 139.

19. See, for example, Michael N. Schwartz, Lawrence S. Olson and Richard A. Boykin, Working With the APA Process, (June 6, 1994), 63 Tax Notes 1359-64, at 1362; and James R. Mogle, Advance Pricing Agreements Under Revenue Procedure 91-22, (July/August 1991), 45 Bulletin for International Fiscal Documentation 356-67, at 359-60 (1991) (warning taxpayers to "be prepared for public disclosure of at least a redacted version of the APA and its supporting documentation").

20. Bureau of Nat'l Affairs, Inc. v. Internal Revenue Service, No. 1:96-CV-376 (D.C. Dist. Ct. filed February 27, 1996); Bureau of Nat'l Affairs, Inc. v. Internal Revenue Service, No. 1:96-CV-2820 (D.C. Dist. Ct. filed Dec. 20, 1996); and Bureau of Nat'l Affairs, Inc. v. Internal Revenue Service, No. 1:98-CV-1473 (D.C. Dist. Ct. filed June 11, 1998).

21. See US Dep't of Justice v. Reporters Committee, 489 US 749, at 771 (1989); NLRB v. Sears, Roebuck & Co., 421 US 132, at 143, footnote 10 (1975).

22. 5 USC section 552(a)(3); Treas. reg. section 601.702(c)(1).

23. 5 USC sections 552(b)(3) and (4); Treas. reg. sections 601.701(b)(1)(iii) & (iv).

24. See Treas. reg. section 601.702(h) (concerning the procedures for disclosing business information).

25. Section 6110(a).

26. Section 6110(b)(1).

27. Section 6110(b)(2).

28. Sections 6110(c)(1), (4), and (5).

29. Section 6110(f)(1).

30. Treas. reg. sections 301.6110-5(a)(2)(iii) and (b).

31. Section 6110(f)(3)(A) (flush language).

32. Section 6110(f)(6); Tax Ct. R. 228.

33. "Memorandum in Opposition to Plaintiff's Motion for Summary Judgment," Bureau of Nat'l Affairs, Inc. v. Internal Revenue Service, No. 1:96-CV-376, supra footnote 20, reprinted in Daily Tax Report, January 13, 1999, L-8 to L-9.

34. Sections 6110(a) and (b)(2).

35. Letter from the Internal Revenue Service to Taxpayers and Taxpayer Representatives, reported in Advance Pricing Agreements Subject to Disclosure, IRS Said, (March 1, 1999), 82 Tax Notes 1270.

36. APAs: IRS Officials Say Many Taxpayers Finding No Problems With Proposed APA Redactions, Daily Tax Report, June 11, 1999, G-7.

37. Ibid.

38. Ibid.

39. Ibid.

40. Ibid.

41. Elizabeth Schwinn, APAs: Advance Pricing Program Remains Active Despite BNA Lawsuit, Barrett Says, Daily Tax Report, April 12, 1999, G-1.

42. Steven D. Harris, APA Disclosure: A Critical Analysis, (March 22, 1999), 82 Tax Notes 1821-25, at 1822.

43. Ibid.

44. Some practitioners had expressed concern that different taxpayers might be receiving different treatment under the APA program and that the APA program could, as a result, be used as a means for obtaining an advantage over a competitor. See Stratton, supra footnote 14, and Stratton, supra footnote 18.

45. Supra footnote 35.

46. Letter from Henry J. Birnkrant and Robert T. Cole of Alston & bird LLP, Washington, to the US Department of the Treasury, reported in Corporations Feel Betrayed by Decision to Release APAs, (April 26, 1999), 83 Tax Notes 477.

47. On February 25, 1999, the Tax Executives Institute, which is an association for corporate tax professionals and corporate taxpayers, filed an amicus curiae brief opposing the public release of APAs. On February 26, 1999, three unnamed corporate taxpayers filed their own amicus curiae brief opposing the public release of APAs. See Stratton, supra footnote 14.

48. Supra footnote 46. See also Schwinn, supra footnote 41 (indicating that "closings on APA agreements fell somewhat in the second quarter of fiscal year 1999, as [the APA staff] combined its work on negotiating agreements with the task of redacting its entire completed case inventory").

49. A Bill To Amend the Internal Revenue Code of 1986 To Clarify That Advance Pricing Agreements Between Taxpayers and the Internal Revenue Service Are Confidential Return Information, HR 2378, 106th Cong., 1st Sess. sections 1(a) and (b) (1999).

50. Ibid,. at section 1(c).

51. Schwinn, supra footnote 41.

52. Ibid., and Tropin, supra footnote 3.