Stout was engaged to assist a private equity fund family, a leading provider of capital to independent energy companies. The matter called for the evaluation of the arm’s-length nature of the interest rate applied to certain intercompany financing transactions between certain feeder and blocker entities of various funds. Stout’s analysis was requested for U.S. income tax purposes related to transfer pricing under Internal Revenue Code (“IRC”) Section 482 and the Treasury Regulations promulgated thereunder related to the pricing of intercompany transactions.
In performing our analysis, Stout considered all applicable methods under IRC Section 482. Based on the intercompany financing transactions and available market data, an unspecified method (based on the principles of the Comparable Uncontrolled Services Price (“CUSP”) Method) was selected as the best method. In determining the appropriate arm’s-length interest rate between the feeder and blocker entities, we determined the borrower’s credit rating. We conducted a market-based analysis of similar debt instruments and credit ratings to determine the appropriate marketable yield for the intercompany financing transactions. We made further adjustments, as applicable, related to the illiquidity or lack of marketability of such intercompany financing transactions.