§ 1.482-5(e) Example 2.

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Transfer of tangible property resulting in adjustment.

(i) The facts are the same as in Example 1 except that USSub reported the following income and expenses:

1994 1995 1996 Average
Sales $500,000 $560,000 $500,000 $520,000
Cost of Good Sold 370,000 460,000 400,000 410,000
Operating Expenses 110,000 110,000 110,000 110,000
Operating Profit 20,000 (10,000) (10,000) 0

(ii) The interquartile range of comparable operating profits remains the same as derived in Example 1: $19,760 to $34,840. USSub’s average operating profit for the years 1994 through 1996 ($0) falls outside this range. Therefore, the district director determines that an allocation may be appropriate.

(iii) To determine the amount, if any, of the allocation, the district director compares USSub’s reported operating profit for 1996 to comparable operating profits derived from the uncontrolled distributors’ results for 1996. The ratio of operating profit to sales in 1996 is calculated for each of the uncontrolled comparables and applied to USSub’s 1996 sales to derive the following results:

Uncontrolled distributor OP/S (percent) USSub COP
C 0.5 $2,500
D 1.5 7,500
E 2.0 10,000
A 1.6 13,000
F 2.8 14,000
B 2.9 14,500
J 3.0 15,000
I 4.4 22,000
H 6.9 34,500
G 7.4 37,000

(iv) Based on these results, the median of the comparable operating profits for 1996 is $14,250. Therefore, USSub’s income for 1996 is increased by $24,250, the difference between USSub’s reported operating profit for 1996 and the median of the comparable operating profits for 1996.

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