Inverworld, Inc., et al. - Page 34

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          adjustment "shall actually be made" and the district director               
          "shall decrease the income of the other member".  We believe that           
          petitioners' argument fails to appreciate the procedure regarding           
          correlative adjustments set forth in the regulations.                       
          Accordingly, we believe that it would be helpful to expand upon             
          what we stated in our prior opinion.                                        
               Section 1.482-1(d)(2), Income Tax Regs., provides that, in             
          the event that an appropriate correlative adjustment is made by             
          the district director, it shall be treated in one of two                    
          alternative ways:  The correlative adjustment either (1) shall              
          actually be made or (2) shall be deemed to have been made.  The             
          proper treatment of a correlative adjustment, if one is made by             
          the district director, depends on whether or not the U.S. income            
          tax liability of the "other member" of the group of controlled              
          taxpayers involved in the allocation (i.e., the taxpayer entitled           
          to receive an appropriate correlative adjustment) would be                  
          affected for any pending taxable year.                                      
               The regulations provide that, in the event that an                     
          appropriate correlative adjustment is made by the district                  
          director, if the U.S. income tax liability of the other member              
          would be affected for any pending taxable year, "The correlative            
          adjustment shall actually be made."  Sec. 1.482-1(d)(2), Income             
          Tax Regs.  Alternatively, the regulations provide that, in the              
          event that an appropriate correlative adjustment is made by the             
          district director, if the U.S. income tax liability of the other            




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