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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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