As tariffs on goods imported into the United States keep changing, the interplay between customs values and transfer pricing has become more significant. Taxpayers with established transfer prices may be incentivized to seek lower customs values. Congress enacted section 1059A to prevent taxpayers from inappropriately benefiting from variance between transfer prices and customs values. Section 1059A generally limits the basis or inventory cost that a taxpayer can claim for federal income tax purposes for property imported from related persons. Where the same cost is used in computing both the customs value and tax basis or inventory cost, the basis or inventory cost cannot exceed the amount of the cost taken into account in computing the customs value.1
Differences in valuation methodologies for customs and tax purposes can make section 1059A difficult to navigate. For example, transfer pricing rules under section 482 generally require the arm's length result of a controlled transaction be determined under the method that, under the facts and circumstances, provides the most reliable measure of an arm's length result – this is often referred to as the “best method rule.” There is no strict priority of methods, and no method will invariably be considered to be more reliable than others. For transfer pricing purposes, taxpayers often use profits-based methods that focus on the relative profitability of the parties to a controlled transaction, rather than the price paid for each good. However, the customs rules include a hierarchy of methods that favors transactional value methods, which seek to value each good as it crosses the border.
Until recently, the Internal Revenue Service’s (IRS) “International No-Rule List,” which provides a list of matters under the jurisdiction of the Associate Chief Counsel (International) on which the IRS ordinarily will not issue letter rulings or determination letters, included section 1059A. More specifically, the list provided that the IRS ordinarily would not issue letter rulings or determination letters with respect to whether a taxpayer's cost or inventory basis in property imported from a foreign affiliate will not be limited by section 1059A due to differences between customs valuation and income tax valuation.
On January 5, 2026, the IRS released Rev. Proc. 2026-7, 2026-2 I.R.B. 316, which removes section 1059A from the International No-Rule List,2 and the IRS has already begun to issue rulings with respect to section 1059A.
On January 6, 2026, the IRS published PLR 202552012, which demonstrates complexities that can arise in applying section 1059A when valuation methodologies for customs and tax purposes differ. The ruling finds that the overall customs value does not necessarily limit a taxpayer’s tax basis in imported goods from related persons in all circumstances. The taxpayer in PLR 202552012, a US corporation, purchased finished goods manufactured by its non-US parent for importation, distribution, and resale to unrelated US parties. For federal income tax purposes, the transfer prices of the imported products were determined under the residual profit split method (a profit-based methodology). However, for customs purposes, the taxpayer used a different valuation method based on US customs laws – the deductive value method (a transaction value methodology).3 Under the deductive value method, the starting point is a constructed resale price paid to the importer by third parties based on the most common unit price at the first commercial level after importation. From this constructed resale price, various adjustments are made to arrive at the final customs value. These adjustments include subtracting post-importation expenses such as advertising and other selling, general, and administrative expenses.
The taxpayer requested a ruling as to whether section 1059A limits its basis or inventory cost of the imported products that the taxpayer can claim for federal income tax purposes to the customs value that results from its use of the deductive value method for US customs purposes. The ruling highlights the need for taxpayers to navigate the differences between, on the one hand, profits-based methods used in transfer pricing, and on the other hand, transaction value methods used in customs valuations.
In its ruling, the IRS distinguished between the final customs value determined using the deductive value method and the costs that are taken into account in ultimately determining the customs value, noting that “[s]ection 1059A(a) imposes a limit on any costs that are both ‘taken into account in computing the basis or inventory cost’ and ‘also taken into account in computing the customs value’ of property that a taxpayer imports from a related party.” The ruling concludes that section 1059A does not impose a ceiling by reference to the customs value itself and does not apply to treat the bottom-line customs value reached using the deductive value method as a ceiling on inventory or cost basis. However, the IRS noted that to the extent adjustments used in deriving the final customs value reflect related-party costs that are included in basis or inventory costs, these costs are indeed taken into account for purposes of section 1059A and could provide a limitation for income tax purposes.
In sum, the IRS ruled that section 1059A applies only to specific costs considered in both customs valuation and tax basis or inventory cost calculations, not to the final customs value itself when determined via the deductive value method.
1 Section 1059A does not limit the IRS’s power under section 482 to adjust claimed basis or inventory costs or enable taxpayers to increase basis or inventory costs for section 482 purposes.
2 Rev. Proc. 2026-7 updated and supersedes the prior International No-Rule List provided in Rev. Proc. 2025-7, 2025-1 I.R.B. 301.
3 The deductive value method determines the customs value of certain imported products by starting with the resale price at the first commercial level after importation (with that price determined based on the unit price at which the Imported Products are sold in the greatest aggregate quantity) and making various adjustments.
[View source.]
