R3 Multi-Jurisdictional Tax Issues in Federal Taxation

Question 1

What is a controlled Taxpayer?

Answer 1

Any one of two or more taxpayers owned or controlled directly or indirectly by the same interest, and includes the taxpayer that owns or controls the other taxpayers.

Question 2

What is an uncontrolled Taxpayer?

Answer 2

Any one of two or more taxpayers not owned or controlled directly or indirectly by the same interest.

Question 3

What is the definition of controlled?

Answer 3

“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.

Question 4

What is a “controlled transaction” or a a “controlled transfer”

Answer 4

Any transaction or transfer between two or more members of the same group of controlled TP.

Question 5

What is an “uncontrolled transaction”

Answer 5

Any transaction between 2 or more taxpayers that are not members of the same group of controlled taxpayers.

Question 6

What is an “uncontrolled comparable”?

Answer 6

“uncontrolled comparable” means the uncontrolled transaction or uncontrolled taxpayer that is compared, under any applicable pricing methodology, with a controlled transaction or with a controlled taxpayer.

Question 7

What is the purpose for the IRS making transfers pricing adjustments?

Answer 7

To assure that reported prices (as adjusted by the IRS) that one affiliate charged to another affiliate yield results that are consistent with the results that would have been realized if uncontrolled taxpayer had engaged in the same transaction under the same circumstances (the arm’s length standard)

Question 8

Under what circumstances will the courts not support the IRS making transfer pricing adjustments?

Answer 8

The courts will reverse the IRS’ adjustments if the controlled taxpayer shows that the results of its transactions are within an arm’s length range established by 2 ore more uncontrolled comparable transaction based on a single pricing method.

Question 9

What is the “arm’s length” standard?

Answer 9

A controlled transaction or controlled transfer meets the arms length standard if the result of the transaction or the transfer are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction or transfer under the same circumstances.

Question 10

Describe the circumstances that will allow the taxpayer to avoid penalties with respect to IRS-imposed transfer pricing adjustment?

Answer 10

By the date the TP files the return, the TP has completed a “482 study” which establishes that the prices charged to affiliates (controlled TP) were reasonable and complied with the US treasury regulations, if applicable.

Question 11

What is the advance pricing agreement program?

Answer 11

A program to resolve actual or potential transfer pricing disputes prior to examination (audit)

The agreement is a binding contract between the IRS and the TP by which the IRS agrees not to seek a transfer pricing adjustment for a covered transaction if the taxpayer files its return consistent with the agreed transfer pricing method set forth in the contract.

Question 12

What elements usually make up an apportionment factor used to apportion income to a state?

Answer 12

The percentage of the corporation’s property, payroll, and sales in the state

Question 13

How are after-tax cash flows computed?

Answer 13

The tax savings or expense related to a particular cash flow = the amount of the expense or income X the marginal income tax rate of the firm. This amount is deducted from cash flows to determine the after-tax amount of the cash flow.

Note: Multiply pretax cash flow by (1-tax rate) as a shortcut to compute after tax cash flows.

Question 14

Which types of assets transactions potentially affect income taxes and cash flows?

Answer 14

1. Asset abandonment
2. Asset Sale
3. Asset trade-in

Question 15

What is the tax treatment for an abandoned asset?

Answer 15

The remaining book value (for tax purposes) is deductible as a tax loss. The tax loss will reduce tax liabilities in the year of abandonment.

Question 16

How are income taxes and cash flows affected by an asset trade-in?

Answer 16

Generally, no gain or loss is recognized on the trade-in of an old asset for tax purposes, so there is no immediate tax effect. The traded-in asset’s book value becomes a portion of the depreciable basis of the new asset, resulting in additional depreciation for tax purposes in later years and the reduction of taxes payable in those later years.