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Section 482 gives respondent broad authority to allocate
gross income, deductions, credits, or allowances between two
related corporations if the allocations are necessary either to
prevent evasion of taxes or to reflect clearly the income of the
corporations. See Seagate Tech., Inc. and Consol. Subs. v.
Commissioner, 102 T.C. 149, 163 (1994). The applicable standard
is arm's-length dealing between taxpayers unrelated by ownership
or control. See sec. 1.482-1A(b)(1), Income Tax Regs. As stated
in Sundstrand Corp. & Subs. v. Commissioner, 96 T.C. 226, 353
(1991):
The purpose of section 482 is to prevent the artificial
shifting of the net incomes of controlled taxpayers by
placing controlled taxpayers on a parity with
uncontrolled, unrelated taxpayers. * * *
* * * the regulations attempt to identify the
"true taxable income" of each entity based on the
taxable income which would have resulted had the
entities been uncontrolled parties dealing at arm's
length. * * *
When respondent has determined deficiencies based on section 482,
the taxpayer bears the burden of showing that the allocations are
arbitrary, capricious, or unreasonable. See id.; Eli Lilly & Co.
v. Commissioner, 84 T.C. 996, 1131 (1985), affd. on this issue,
revd. in part, and remanded 856 F.2d 855, 860 (7th Cir. 1988).
Respondent's section 482 determination must be sustained
absent a showing of abuse of discretion. See Bausch & Lomb, Inc.
v. Commissioner, 92 T.C. 525, 582 (1989), affd. 933 F.2d 1084 (2d
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