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income; i.e., the taxable income (or item or element affecting
taxable income) that would have resulted to such taxpayer in an
arm’s-length transaction. See Altama Delta Corp. v.
Commissioner, 104 T.C. 424, 456 (1995); Seagate Tech., Inc. &
Consol. Subs. v. Commissioner, supra at 164; Sundstrand Corp. v.
Commissioner, 96 T.C. 226, 353 (1991), affd. 17 F.3d 965 (7th
Cir. 1994). Once the true taxable income of each controlled
taxpayer is determined, the Commissioner may distribute,
apportion, or allocate gross income, deductions, credits, or
allowances, or any item or element affecting taxable income, so
that each controlled taxpayer, after such an allocation, reports
its own true taxable income.
The Commissioner's determination as set forth in a notice of
deficiency is presumptively correct. The taxpayer has the burden
of proof. Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933).
Moreover, absent a showing of abuse of discretion by the
Commissioner, the Commissioner's section 482 determination must
be sustained. Bausch & Lomb, Inc. v. Commissioner, 92 T.C. 525,
582 (1989), affd. 933 F.2d 1084 (2d Cir. 1991). To succeed,
therefore, a taxpayer first must show that the Commissioner's
section 482 reallocations are arbitrary, capricious, or
unreasonable. Sundstrand Corp. v. Commissioner, supra; Eli Lilly
& Co. v. Commissioner, 84 T.C. 996, 1131 (1985), affd. in part,
revd. in part and remanded 856 F.2d 855 (7th Cir. 1988). In
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