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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
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