Kaps Warehouse, Inc. - Page 11

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            understated by $176,548 and $155,000, respectively, on the basis of                       
            the rebates petitioner gave to its related entities. Respondent                           
            determined that the reduction of petitioner's income on account of                        
            the rebates was improper because the rebates were not at arm's                            
            length.  Respondent also determined that petitioner was liable for                        
            the section 6662(b)(2) accuracy-related penalties for both years at                       
            Issue 1.  Reallocation of Income                                                          
                  We first consider respondent's reallocation of income to                            
            petitioner from three of its related entities pursuant to section                         
            482 for fiscal years 1991 and 1992.                                                       
                  A.  Relevant Section 482 Law                                                        
                  Section 482 grants the Commissioner broad discretion to                             
            scrutinize transactions between commonly controlled taxpayers and                         
            to allocate items of income, deductions, and credits between them                         
            where necessary to prevent the evasion of taxes or to ensure the                          
            clear reflection of each taxpayer's income.2  See, e.g., Paccar,                          

                  2     Sec. 482 provides, in pertinent part, as follows:                             
                              In any case of two or more                                              
                        organizations, trades, or businesses * * *                                    
                        owned or controlled directly or indirectly by                                 
                        the same interests,  the Secretary may                                        
                        distribute, apportion, or allocate gross                                      
                        income, deductions, credits, or allowances                                    
                        between or among such organizations, trades,                                  
                        or businesses, if he determines that such                                     

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