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Arm's-Length Prices
In addition to proving that the deficiencies set forth in
the notice are arbitrary, capricious, or unreasonable, petitioner
must also prove that the prices charged by Compaq Asia were
consistent with arm's-length pricing. See Seagate Tech., Inc. &
Consol. Subs. v. Commissioner, 102 T.C. at 163; Eli Lilly & Co.
v. Commissioner, 84 T.C. at 1131. The regulations set forth
three pricing methods to determine whether there is an
appropriate arm's-length price. First, if comparable
uncontrolled sales exist, the regulations mandate that the CUP
method be used. If there are no comparable uncontrolled sales,
the resale price method must be utilized if the standards for its
application are met. If the standards for the resale price
method are not satisfied, either that method or the cost-plus
method may be used, depending upon which method is more feasible
and is more likely to result in an accurate estimate of an arm's-
length price. Where none of the three methods can be reasonably
applied, some other appropriate method may be used. See sec.
1.482-2A(e)(1), Income Tax Regs.
Under the CUP method, the arm's-length price of a controlled
sale is equal to the price paid in comparable uncontrolled sales
including necessary adjustments. "Uncontrolled sales" are sales
in which the seller and the buyer are not members of the same
controlled group. These include sales between a member of the
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