The 1059A Limitation on Imported Property Basis

The U.S. Internal Revenue Code’s Section 1059A creates consistency between the value of goods declared for customs and the value claimed for income tax. This rule applies when businesses import property from related foreign entities. Its function is to prevent an importer from declaring a low value to U.S. Customs and Border Protection to minimize duties, while claiming a higher value on its tax return to increase deductions. This provision establishes a ceiling for the tax basis of imported property, limiting it to the value declared for customs.

Identifying a Transaction Subject to the Rule

The Section 1059A limitation is triggered when property is imported in a transaction between related persons. Importation occurs when entry documentation is filed with U.S. Customs and Border Protection to release the merchandise. The transaction can be direct between the buyer and seller or indirect through an agent.

The definition of a “related person” is broad, established under Internal Revenue Code Sections 267, 707, and 482. Under these rules, related parties include immediate family members such as siblings, spouses, ancestors, and direct descendants. The definition also covers an individual and a corporation if the individual owns more than 50% of the stock, or two corporations within the same controlled group. For partnerships, a person is related if they own more than 50% of the capital or profits interest, and two partnerships are related if the same people own over 50% of both.

Calculating the Tax Basis Limitation

A taxpayer’s basis in imported property for calculating inventory cost or depreciation cannot be greater than its “customs value.” The customs value is the amount declared on entry documents submitted to U.S. Customs and Border Protection. This rule creates a valuation ceiling, not a floor; the IRS can still argue for a lower tax basis, but the taxpayer cannot claim a higher one.

For example, if a U.S. company imports components from its foreign parent and declares a customs value of $150 per unit, its tax basis for those components cannot exceed $150. The company is prevented from claiming a higher cost, such as $175 per unit, to reduce its taxable income.

Permitted Adjustments to Valuation

While the customs value sets a ceiling, certain costs can be added to determine the final tax basis. Treasury Regulations allow for adjustments for amounts that are business expenses for tax purposes but are not included in the dutiable value of the goods.

Commonly permitted adjustments include:

• International freight charges
• Insurance costs during transit to the U.S.
• U.S. inland freight costs from the port of entry to a warehouse or factory
• Costs for post-importation activities like assembly, modification, or further processing

These additions are only allowed if they are actual costs not already included in the customs value. For example, if the customs value was based on a “delivered” price that included freight and insurance, those costs cannot be added again.

Documentation and Reporting on Tax Returns

Compliance with Section 1059A does not require a specific form. Adherence is shown through the accurate calculation of cost of goods sold (COGS) or the basis of depreciable assets on the business’s income tax return, such as Form 1120 for corporations or Form 1065 for partnerships.

To support the reported figures, a business must retain documents including:

• Customs entry summary forms, such as CBP Form 7501, detailing the declared value and duties paid
• Commercial invoices from the foreign seller
• Bills of lading
• Proof of payment for freight and insurance costs

Businesses should also maintain internal worksheets that reconcile the final tax basis with the initial customs value. These worksheets should itemize each adjustment, such as post-importation freight or assembly costs, and connect the total to the figures on the tax return.