Inverworld, Inc., et al. - Page 152

                                                - 229 -                                                   
                  Following the second path, if LTD files a U.S. income tax                               
            return by the time the primary adjustment is made, LTD will be                                
            precluded from taking its correlative adjustment, which would be                              
            in the form of a section 882(c)(1)(A) deduction.  The form of a                               
            section 482 allocation, including the character and source of                                 
            amounts allocated, follows the substance of the particular                                    
            transaction that results in the avoidance of taxes or the failure                             
            to reflect income clearly.  Sec. 1.482-1(d)(1), Income Tax Regs.                              
            Appropriate adjustments may include, inter alia, an increase or                               
            decrease in gross income, or an increase or decrease in                                       
            deductions.  Id.                                                                              
                  In the instant case, the substance of the particular                                    
            transaction that results in the avoidance of taxes was an                                     
            underpayment by LTD to INC of fees for the performance of                                     
            personal services.  The form of the section 482 allocations to                                
            INC and LTD follows the substance of such transaction and                                     
            therefore consists of additional compensation for services for                                
            INC and additional compensation expenses for LTD.  Accordingly,                               
            the character and source of the amounts allocated are:  For INC,                              
            personal services income from sources within the United States                                
            includable in INC's gross income pursuant to section 61(a)(2),                                
            and, for LTD, additional compensation expenses includable in                                  
            LTD's trade or business deductions pursuant to section                                        
            882(c)(1)(A).  The form of the correlative adjustment to LTD’s                                
            income is, therefore, an increase in the amount LTD is entitled                               





Page:  Previous  219  220  221  222  223  224  225  226  227  228  229  230  231  232  233  234  235  236  237  238  Next

Last modified: May 25, 2011