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B. The Corresponding Item of Income and Intercompany
Transactions
Respondent agrees that the rate support payments were not
income to GMAC.30 Respondent contends, however, that the
corresponding item of income does not have to be from the very
same payment that creates the deduction. Respondent asserts that
"income or deduction that flows directly or indirectly from an
intercompany transaction constitutes a corresponding item" under
section 1.1502-13(b)(2), Income Tax Regs.
We must determine what the regulations meant by "the
corresponding item of income". Three examples contained in
section 1.1502-13(h), Income Tax Regs., illustrated what this
term meant:
Example (3). Corporations P and S file
consolidated returns on a calendar year basis and
report income on the cash basis. On July 1, 1966, S
pays P $1,000 interest on a loan made in 1961. The
payment of interest is an intercompany transaction
30 The rate support payments were not income to GMAC; they
reduced GMAC's basis in the rate-supported RISC's/fleet loans.
This was because the rate support payments induced GMAC to
purchase RISC's/fleet loans from independent GM dealers at face
value (i.e., GMAC paid independent GM dealers more than fair
market value for a below-market RISC/fleet loan only because GM
made rate support payments to GMAC for the excess amount paid).
See Brown v. Commissioner, 10 B.T.A. 1036, 1054-1055 (1928)
(amount received by buyer to induce him to purchase property is a
reduction in his cost of the property rather than income to the
buyer); Rev. Rul. 73-559, 1973-2 C.B. 299 (basis in acquired
mortgage is reduced by the amount of the inducement payment); see
also Freedom Newspapers, Inc. v. Commissioner, T.C. Memo. 1977-
429; Rev. Rul. 76-96, 1976-1 C.B. 23 (new car purchaser must
reduce his basis by amount of manufacturer rebate).
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