Chap 3 - Multi-jurisdictional tax issues in federal taxation Flashcards
The IRS often makes adjustments when there are transfer pricing issues. Transfer pricing issues exist under which of the following circumstances?
a. A U.S.-based taxpayer leases intangible property from an affiliate that is subject to U.S. income tax.
b. A U.S.-based taxpayer sells tangible property to an affiliate that is subject to U.S. income tax.
c. A U.S.-based taxpayer shares costs with an affiliate that is not subject to U.S. income tax and does not file a consolidated income tax return with the U.S.-based taxpayer.
d. A U.S.-based taxpayer enters into a service contract with an affiliate that is subject to U.S. income tax and files a consolidated income tax return with the U.S.-based taxpayer.
A U.S.-based taxpayer shares costs with an affiliate that is not subject to U.S. income tax and does not file a consolidated income tax return with the U.S.-based taxpayer.
Choice “c” is correct. Transfer pricing issues exist when a U.S.-based taxpayer shares costs with an affiliate that either (i) is not subject to the U.S. income tax or (ii) does not file a consolidated income tax return with the U.S.-based taxpayer.
Choice “b” is incorrect. Transfer pricing issues arise when a U.S.-based taxpayer transfers, sells, purchases, or leases tangible property or intangible property to or from an affiliate that either (i) is not subject to U.S. income tax; or (ii) does not file a consolidated income tax return with the U.S.-based taxpayer.
Choice “d” is incorrect. Transfer pricing issues arise when a U.S.-based taxpayer enters into loan agreements or service contracts with an affiliate that either (i) is not subject to U.S. income tax; or (ii) does not file a consolidated income tax return with the U.S.-based taxpayer.
Choice “a” is incorrect. Transfer pricing issues arise when a U.S.-based taxpayer transfers, sells, purchases, or leases tangible property or intangible property to or from an affiliate that either (i) is not subject to U.S. income tax; or (ii) does not file a consolidated income tax return with the U.S.-based taxpayer.
The IRS has the authority to adjust upward or downward the gross income and deductions between or among certain organizations to prevent the evasion of taxes or to clearly reflect the income of two or more organizations. Which one of the following is a characteristic of these organizations?
a. The organizations must be directly owned by the same interests.
b. The organizations must be organized in the United States.
c. The organizations must be incorporated.
d. The organizations may be members of an affiliated group that file a consolidated U.S. tax return.
The organizations may be members of an affiliated group that file a consolidated U.S. tax return.
Choice “d” is correct. The organizations that are subject to these provisions of the IRC extend to members of an affiliated group that file a consolidated U.S. income tax return.
Choice “c” is incorrect. The organizations are not required to be incorporated in order to be subject to the provisions of the IRC that allow the IRS to adjust gross income, deductions, credits, and allowances to prevent the evasion of taxes.
Choice “a” is incorrect. The organizations can be either directly or indirectly owned by the same interests. Direct ownership is not required.
Choice “b” is incorrect. The IRC does not require that the organizations be organized in the U.S.
A binding contract between the IRS and the taxpayer by which the IRS agrees not to seek a transfer pricing adjustment for a covered transaction if the taxpayer files its return for a covered year consistent with the agreed transfer pricing method is called a(n):
a. Controlled transaction analysis agreement. b. Advance Pricing Agreement Program. c. Request for competent authority. d. Section 482 study.
Advance Pricing Agreement Program.
Choice “b” is correct. The APA is a binding contract between the IRS and the taxpayer by which the IRS agrees not to seek a transfer pricing adjustment for a covered transaction if the taxpayer files its return for a covered year consistent with the agreed transfer pricing method.
Choice “d” is incorrect. A section 482 study is prepared by the taxpayer based upon allowable pricing methods set forth by the IRS and is completed by the time the taxpayer files the federal income tax return. The taxpayer must determine that the prices for controlled transactions and controlled transfers are in accordance with the allowable pricing methods and that the use of such method was reasonable.
Choice “c” is incorrect. A “request for competent authority” is a request by the taxpayer that the IRS and taxing officials in the other jurisdiction together determine the appropriate transfer price so that the taxpayer group is not taxed twice on the same income.
Choice “a” is incorrect. A controlled transaction analysis agreement is not an official document in the transfer pricing area.
What is a controlled taxpayer?
Any one of two or more taxpayers owned and controlled directly or indirectly by the same interests, and includes the taxpayer that owns or controls the other taxpayers.
What does “controlled” mean?
Controlled includes any kind of control, direct or indirect, including control resulting from the actions of two or more taxpayers acting together.
A presumption of control arises if income or deductions have been arbitrarily shifted.
What is a controlled transaction/transfer?
A transaction/transfer between two or more members of the same group of controlled taxpayers.
What is an “arms length standard?
A controlled transaction/transfer meets the arm’s length standard if the results of the transactions/transfer are consistent with the results that would have been realized if the uncontrolled taxpayers had engaged in the same transaction/transfer.
What elements usually make up an apportionment factor used to apportion income to the state?
The % of the corporations property, payroll and sales in the state.
