- 220 -
not include LTD’s payment of service fees to INC. Consequently,
we held, supra pp. 206-207, that respondent’s allocation of the
remaining amount of LTD’s net income to INC (thereby effecting an
allocation, when added to the amount of service fees already paid
by LTD to INC, of all of LTD’s net income to INC) is arbitrary.
Because we use the fees that LTD charged its unrelated
clients as the arm’s length charge for INC’s services, we
calculate INC’s arm’s length charge in the same manner as LTD
calculated its service charges to its clients; to wit: we
multiply the net value of assets placed with LTD by a percentage
factor, depending upon the category of investment. As to the
total amounts of client assets placed with LTD, we use the
figures in respondent's expert report, which are rounded from
figures in the audited annual reports of LTD and its subsidiaries
for 1985 through 1989. As to the percentage factors, which for
some products include an initial placement cost and an asset
management fee, we use the figures in the discretionary
authorizations or the Deloitte workpapers.
LTD paid INC to handle LTD’s certificates of deposit and
pooled investments operation, cash and investment funds, and
Treasury bill transactions. LTD charged its clients 0.50 percent
of the net assets placed with LTD in the certificate of deposit
operation, cash and investment funds, or Treasury bill
transactions. Accordingly, the arm’s length charge for INC’s
services for such operations is the amount of net assets received
from clients times 0.50 percent.
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