The North West Life Assurance Company of Canada - Page 68

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            attribution of profits based on a hypothetical situation                                   
            different from the facts that actually occurred.                                           
                  Paragraph 13 of the above-quoted Commentaries does not                               
            contradict paragraph 10.  It simply states that profits                                    
            "attributed" should be based on the establishment's accounts to                            
            the extent they represent real facts.  The profits "allocated"                             
            and "attributed" pursuant to section 842(b) are based on the real                          
            facts regarding the amount of insurance coverage sold by                                   
            petitioner's U.S. insurance business.  The volume of petitioner's                          
            U.S. business is reflected by its actual liabilities on policies                           
            issued by the U.S. branch.  The amount of assets that would have                           
            been expected to be held by a separate U.S. entity with those                              
            actual liabilities and the expected profits on the assets of such                          
            a separate entity are hypothetical.  However, to require total                             
            acceptance of all figures reported in petitioner's records                                 
            reflecting its profits on U.S. operations carried out as a branch                          
            of a foreign corporation would not only nullify section 842(b)                             
            but also nullify the allocation procedure specifically permitted                           
            in article VII, paragraph (2).1                                                            




            1Sec. 842(b) does not contravene the admonition in par. 11                                 
            of the Model Commentary that tax administrators should not                                 
            "construct hypothetical profit figures in vacuo."  Sec. 842(b)                             
            starts with the taxpayer's real facts regarding the amount of                              
            insurance liabilities it incurred selling insurance in the United                          
            States and then makes adjustments based on comparable domestic                             
            companies.                                                                                 



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Last modified: May 25, 2011