- 159 -
and cases cited therein. The separate existence of DHL and
DHLI/MNV was not, in this context, used to facilitate the
artificial shifting of the net incomes in the form of the network
fees or in the context of respondent’s supposition of a
partnership or joint venture. Accordingly, we hold that
respondent’s so-called Network Fee section 482 determination is
not sustained because petitioners have shown an abuse of
respondent’s discretion. See Paccar, Inc. v. Commissioner, 85
T.C. at 787.
VI. Are Petitioners Entitled to Setoffs to Any of the Section
482 Allocations That Have Been Sustained?
Petitioners contend that they are entitled to setoffs for
two types of items. One concerns a 1984 sale of LaserNet from
DHL to DHLI, and the other concerns the total cost theory
developed by petitioners’ expert concerning the imbalance
adjustment. Petitioners rely on section 1.482-1(d)(3), Income
Tax Regs., which provides that if the district director makes a
section 482 allocation,
The district director shall also consider the effect of
any other nonarm’s length transaction between * * *
[the controlled parties] in the taxable year which, if
taken into account, would result in a setoff against
any allocation which would otherwise be made, provided
the taxpayer is able to establish with reasonable
specificity that the transaction was not at arm’s
length and the amount of the appropriate arm’s length
charge. * * *
As to petitioners’ and their expert’s theory on imbalance
based on total costs for services as opposed to costing only the
excess in a reciprocal service arrangement, we have already held
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