Xilinx Inc. and Subsidiaries - Page 26

         III. Respondent’s Allocations Are Inconsistent With the Arm’s-               
              Length Standard Mandated by Section 1.482-1, Income Tax                 
              A.   Respondent’s Authority To Make Allocations                         
              Section 482 provides respondent with wide latitude in                   
         allocating income and deductions between controlled parties to               
         ensure such parties report their true taxable income.  This broad            
         grant of authority, however, is constrained by section 1.482-1,              
         Income Tax Regs., which sets forth the “general principles and               
         guidelines to be followed under section 482.”  Sec. 1.482-                   
         1(a)(1), Income Tax Regs.  The sections to which these general               
         principles and guidelines apply include, but are not limited to,             
         section 1.482-7, Income Tax Regs.  Id.                                       
              Section 1.482-1(a)(2), Income Tax Regs., authorizes                     
         respondent to “make allocations between or among the members of a            
         controlled group if a controlled taxpayer has not reported its               
         true taxable income.”  In determining true taxable income, “the              
         standard to be applied in every case is that of a taxpayer                   
         dealing at arm’s length with an uncontrolled taxpayer” (i.e.,                
         arm’s-length standard).  Sec. 1.482-1(b)(1), Income Tax Regs.                
         (emphasis added).  The arm’s-length standard is employed to                  
         ensure that related party transactions clearly reflect the income            
         of each party and to prevent tax evasion.                                    

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Last modified: May 25, 2011