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operating losses carried from the 1970’s and 1980’s that
petitioners have claimed in the years before the Court.
Accordingly, respondent seeks the allocation of imbalance and
transfer costs and 4-percent markups25 for the years 1979 through
1986 and increases in the markup rates for imbalance and transfer
computations from 2 to 4 percent for 1987 through 1992. It
should be noted that the imbalance for 1991 and 1992 resulted in
a payment from DHL to DHLI. In that regard, respondent contends
that the 4-percent rate should apply to that payment and an
allocation made favoring petitioners. Respondent’s pre-1987
proposed adjustments are larger because they include the cost and
the markup, whereas the 1988 through 1992 adjustments cover only
an increase in the markup percentage.26
Respondent’s expert, an economist, by using information
reported by DHL, including financial statements and annual
25 Respondent used a 15-percent markup in the statutory
notice determination.
26 The adjustment for the years 1987 and forward where DHL
and DHLI used a cost plus 2 percent markup are relatively small
in that they usually represent the difference between the 2 and
4-percent markups. For example, the adjustment computed by
respondent’s expert (which represents respondent’s trial position
and represents a reduced markup percentage from 15 down to 4) for
the 1988 tax year is $277,000 for the imbalance and transfers.
That is so because respondent does not question the parties’
approach and computation of the base (costs) to which the markup
percentage is applied. In contrast, for years prior to 1987, DHL
and DHLI did not address the imbalance, and the cost factor was
not paid on the imbalance. This difference accounts for
relatively larger combined adjustments for the imbalance and
transfers ranging from $1.075 million for 1979 up to $12.480
million for 1986.
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