slides - NABE

Burden of Proof – Transfer Pricing Cases (cont’d) Perkin-Elmer Corp. v. Comm’r, T.C. Memo 1993-414 In the Notice of Deficiency, the IRS based its Section 482 allocations on acharacterization of the taxpayer’s Puerto Rican affiliate as a consignmentcontract assembler Prior to trial, the IRS abandoned this theory and adopted a position thatrespected the affiliate’s status as a licensed manufacturer The taxpayer argued that the IRS’s abandonment of both the factual and legalbases underlying the Section 482 allocations in the Notice caused the IRS’sallocations to be arbitrary, capricious and unreasonable The Tax Court held that the taxpayer met its burden of showing the IRS abusedits discretion, where the IRS’s initial theory had been rejected in other cases The Tax Court held, however, that the taxpayer still must meet its burden ofproving that its transfer pricing was arm’s length “The task thus thrust upon us is, to put it mildly, frustrating. In this case, as inother significant section 482 cases before the Court in recent years, each partyhas spent most of the time attacking the other party’s allocation formula ratherthan establishing the soundness of its or her own formula.”5