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3. Discussion
Petitioners contend that an arm’s-length fee was charged by
INC for its investment management services rendered to LTD.
Petitioners contend that the fee was arm's length because
petitioners used a "cost-plus [profit]" calculation in the early
years. During 1986, INC began charging a fee based on "an assets
under management percentage." As support for the contention that
the fee was arm's length, petitioners emphasize that
representatives from both INC and LTD negotiated the fee in
consultation with outside counsel and that the fee was reviewed
and accepted each year by the companies' outside auditor.
Petitioners contend that INC's fees were comparable to the
fees that United States Trust charged LTD before the creation of
INC. Petitioners contend that United States Trust is "an
independent service provider" which charged an arm’s-length fee
for its services.
Finally, petitioners contend that respondent's section 482
allocations are arbitrary, capricious, and unreasonable on the
following additional grounds. Petitioners assert that
respondent's expert report is flawed. Petitioners contend that
conclusions of respondent's experts about INC's operations had no
relation to the facts. Furthermore, petitioners complain that
respondent has allocated all of LTD's remaining net income to
INC. Petitioners contend that, for respondent's allocations to
prevail, all of the income LTD earned in the taxable years ended
1985 through 1989 must have "originated exclusively through INC
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