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that the FARS contracts are not comparable to the circumstances
in this case.
The parties’ disagreement raises several questions about the
regulations. Firstly, we must consider whether the Commissioner
must be aware of an actual arm’s-length transaction before
allocating costs between controlled entities that have a bona
fide cost-sharing arrangement. Secondly, if an actual arm’s-
length example is not required, then we must decide whether the
Commissioner must possess facts and/or admissible evidence before
making such an allocation.5
We do not agree with petitioner’s perception that respondent
would have to be aware of an actual arm’s-length transaction as a
prerequisite to making any allocations. Section 1.482-2(d)(4),
Income Tax Regs., limits the Commissioner’s ability to make an
allocation, in the case of a bona fide cost-sharing arrangement,
to the appropriate reflection of each participant’s arm’s-length
share of the costs and risks of developing the property. The
regulation goes on to direct that cost-sharing arrangements will
be considered “arm’s length” where the “terms and conditions
[are] comparable to those which would have been adopted by
unrelated parties similarly situated had they entered into such
5 The parties have raised several other factual and/or legal
questions that need not be addressed in the setting of this
summary judgment motion because of our conclusion that there is a
genuine issue as to a material fact.
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