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Luxembourg and to include a monthly statement of the client's
allocated share of the fund value".
We first examine petitioners' argument that the section 482
allocations lead to the "creation" of income. We have previously
held that Smith-Bridgman & Co. v. Commissioner, 16 T.C. 287
(1951), and its progeny, which enunciated the doctrine that
section 482 and its predecessor may not be used to "create"
income, were vitiated by subsequent regulations issued in 1968.
Latham Park Manor, Inc. v. Commissioner, 69 T.C. 199, 215-216
(1977)(allocating interest income to two subsidiary corporations
that made interest-free loans to their parent corporation, even
though the parent corporation produced no income from the loan
proceeds during the taxable years), affd. without published
opinion 618 F.2d 100 (4th Cir. 1980). Accordingly, petitioners'
reliance on Smith-Bridgman and similar cases is misplaced.
Moreover, we conclude that petitioners' argument that the
inquiry should be limited to the actual amounts of fees or
commissions that LTD itself earned is without merit. In addition
to overcoming respondent's presumption of correctness, under the
law applicable to this case, petitioners have the burden of
proving satisfaction of the arm's-length standard. See Eli Lilly
& Co. v. Commissioner, 856 F.2d 855, 860 (7th Cir. 1988), affg.
in part and revg. in part 84 T.C. 996 (1985); Sundstrand Corp. &
Subs. v. Commissioner, 96 T.C. 226, 354 (1991), affd. 17 F.3d 965
(7th Cir. 1994). If petitioners fail to carry that burden, the
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