Appendix — South Texas Rice Warehouse Co. v. Commissioner

APPEN DIX

Internal Revenue Code of 1954:

Src. 482. ALLOCATION oF INCOME AND ‘Depuc-

TIONS AMONG TAXPAYERS.

.In any case of two or. more organizations,

trades, or businesses (whether or not incorpo- ——

rated, whether or not organized in e-United *

States, and whether or not-affiliated) owned or

eontrolled directly-or indirectly by the same in-

_terests, the Secretary or his delegate may dis- ~

t ibute, apportion, or allocate gross income, ~

deductions, credits, or allowances between or

“among such organizations, trades, or businesses,

if he determines that such distribution, appor-

tionment, or allocation is necessary in order to

_ prevent evasion of taxes or clearly to reflect the

income of any of such organizations, trades, or

businesses.

(26 U.S.C. 1964 ed., Sec. 482.) —

Treasury Regulation on Income Tax (1954 Cede):

[as added by T.D. 6595, 1962-1 Cum. Bull. 43].

Sec. 1.482-1. _ DETERMINATION OF THE TAXABLE

INCOME OF A CONTROLLED TAXPAYER.

(a) Definttions. When used in this sec-

tion—

(1) The term “organization” includes any

organization of any kind, whether it he a sole

proprietorship, ‘a partnership, a trust, an eés-

tate, an association, or a corporation (as each

is defined or understood in the Internal Reve-

nue Code or the regulations thereunder), ir-

respective of the place where organized, where

operated, or where its trade or business is con-

ducted, and ‘regardless of whether domestic or

foreign, whether exempt, whether affiliated, or

whether a party to a Sere return.

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(2) The term “trade’’ or “business’’ iricludes

‘ any trade or business activity of any kind, re-

-‘gardless ‘of whether or where organized,

whether owned individually or otherwise, and .

regardless of the place where carried on. |

(3) The term “controlled’’ includes any kind

_ of control, direct or indirect, whether legally

enforceable, and however exercisable or exer-

cised. It is the reality of the control which is

decisive; not its form or the mode of its exer-

cise. -A presumption of control arises if income

or deductions have been arbitrarily shifted.

_ (4) The term “controlled taxpayer’? means

any one of two or more organizations, trades,

or businesses owned or controlled directly or

indirectly by the same interests.

(5) The terms “group” and “sroup of con-—

‘trolled taxpayers’? mean the organizations,

trades, or businesses owned or controlled by the

’ game interests. /

(6) The term “true taxable income’? means,

in the case of a controlled-taxpayer, the taxable

income (or, ‘as the case may be, any-item or ele-

ment affecting taxable income) which would . .

have resulted to the controlled taxpayer, had —

it in the conduct of its affairs. (or, as the case

may be, in the particular contract, transaction,

arrangement, or other act) dealt with the other

- member or members of the group at arm’s

length. It does not mean the incomé, the de-

- ductions, the credits, the allowances, or the item

or element of income, deductions, credits, or

allowances, resulting to the controlled ‘tax-.

‘payer by. réason of the- particular contract,

transaction, or arrangement, the controlled tax-

payer, or the interests controlling it, chose to

make (even though such contract, transaction,

-or arrangement be legally binding upon the

parties thereto). |

(b) ‘Scope and purpose. (1) The purpose.

of section 482 is to place a controlled taxpayer

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ll

on a tax parity with an uncontrolled taxpayer,

by determining, according to the standard of .

an uncontrolled ¢axpayer, the true taxable in-

come from the property and business of a con-

trolled taxpayer. The interests controlling. a

group of controlled taxpayers are assumed to

have complete power to- cause. each controlled...

taxpayer so to conduct its affairs that its trans-

actions and accounting records truly reflect the

taxable income from the property and business

of each of the controlled taxpayers. If how-

ever, this has not been done and the taxable in-

- comes are thereby understated, the district

director shall intervene, and, by making such

distributions, apportionments, or allocations as

‘he may deem necessary of gross income, deduc-

tions, credits, or allowances, or of any. item or

element affecting taxable income, between or.

‘ among the controlled taxpayers constituting

the group, shall determine the true taxable in- ~

come of each controlled taxpayer. The stand- ”

ard to be applied in every case is that of an un-

controlled taxpayer dealing at arm’s length

with another uncontrolled taxpayer.

(2) Section 482 and this section apply to the

case of -any controlled taxpayer, whether. such

_ taxpayer makes a separate or a consolidated re-

turn, - If a controlled taxpayer makes a sepa- |

rate return, the determination is of its true

separate taxable income. If a controlled. tax-

.. payer is a party to a consolidated return, -the

true consolidated taxable income of the affili-

ated group and the true separate taxable. in-

come of the controlled taxpayer are determined —

consistently with the principles of a consoli-

dated return. Be ;

(3) Section 482 grants no right to a con- |

trolled taxpayer to apply its provisions at will, .

nor does it grant any right to\compel the dis-

trict director to apply such provisions. It is

not intended (except in the case of the com-

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putation of consolidated taxable income under’

a consolidated return) to effect in any case °

such a distribution, apportionment, or alloca-

tion of gross income, deductions, credits, or

allowances, or any item of gross: income, deduc-

tions, credits, or allowances, as would produce,

a result equivalent to a computation of con- —

solidated taxable income under subchapter A,

' chapter 6 of the Code. .

\ + (e) Application. Transactions between one

controlled taxpayer and: another will be sub-

jected to special scrutiny to ascertain whether

the common control is being used to reduce,

avoid, or escape taxes. In determining the true

taxable income of a controlled taxpayer, the

district director is not restricted to the case of.

improper accounting, to the case of a fraudu- »

lent, colorable, or sham transaction, or to the

ease of a device designed to reduce or avoid

tax by shifting or distorting incorhe, deduc-

tions, credits, or allowances. The authority to

determine true taxable income extends to any

ease in which either by inadvertence or design

the. taxable income, in whole or in part, of a

controlled taxpayer, is other than it would have

‘been had the taxpayer in the conduct of his.

affairs been an uncontrolled taxpayer dealing -

at arm’s length with another uncontrolled tax-

payer. - :

(26 C.F.R., Sec. 1.482+1.)

U.S. GOVERNMENT PRINTING OFFICE: 1967

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