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E. Whether Income Should Be Allocated
Pursuant to Section 482
1. Background
By notices of deficiency, respondent determined that income
should be allocated to INC and Holdings pursuant to section 482.
As to INC’s taxable years ended June 30, 1985 and 1986,
respondent determined by notice of deficiency that INC had
received other income and attached as an exhibit to the notice of
deficiency a list of the balances in three bank accounts.
Respondent treated the sum of the balances from the three
accounts as income to INC for each taxable year. Respondent
never amended the income allocations as to INC’s taxable years
ended June 30, 1985 and 1986.
As to Holdings’ taxable years ended June 30, 1987, 1988, and
1989, respondent determined by notice of deficiency that Holdings
had received other income.29 Respondent allocated to INC all of
LTD’s remaining net income. Respondent calculated LTD’s
remaining net income by deducting LTD’s "direct costs" and LTD’s
payment of service fees to INC from LTD’s gross receipts.
Respondent never amended the income allocations as to INC’s
taxable years ended June 30, 1987, 1988, and 1989.
29
For INC's taxable years ended June 30, 1987, 1988, and 1989,
INC was joined in the consolidated income tax returns filed by
Holdings. Accordingly, respondent's income allocations to INC
pursuant to sec. 482 affect the income tax liability of Holdings.
For convenience and clarity, we make reference to INC only and
include Holdings in such references.
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