Multiple year analysis. (i) The facts are the same as in Example 2. In addition, the district director examines the taxpayer’s results for the 1997 taxable year. As in Example 2, the district director increases USSub’s income for the 1996 taxable year by $24,250. The results for the 1997 taxable year, together with the 1995 and 1996 taxable years, are as follows: 1995 1996 1997 Average Sales $560,000 $500,000 $530,000 $530,000 Cost of Good Sold 460,000 400,000 430,000 430,000 Operating Expenses 110,000 110,000 110,000 110,000 Operating Profit (10,000) (10,000) (10,000) (10,000) (ii) The interquartile range of comparable operating profits, based on average results from the uncontrolled comparables and average sales for USSub for the years 1995 through 1997, ranges from $15,500 to $30,000. In determining whether an allocation for the 1997 taxable year may be made, the district director compares USSub’s average reported operating profit for the years 1995 through 1997 to the interquartile range of average comparable operating profits over this period. USSub’s ... Read more

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) ... Read more

Transfer of tangible property resulting in no adjustment. (i) FP is a publicly traded foreign corporation with a U.S. subsidiary, USSub, that is under audit for its 1996 taxable year. FP manufactures a consumer product for worldwide distribution. USSub imports the assembled product and distributes it within the United States at the wholesale level under the FP name. (ii) FP does not allow uncontrolled taxpayers to distribute the product. Similar products are produced by other companies but none of them is sold to uncontrolled taxpayers or to uncontrolled distributors. (iii) Based on all the facts and circumstances, the district director determines that the comparable profits method will provide the most reliable measure of an arm’s length result. USSub is selected as the tested party because it engages in activities that are less complex than those undertaken by FP. There is data from a number of independent operators of wholesale distribution businesses. These potential comparables are further narrowed to select companies ... Read more

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