Tax News

CCH (cch.taxgroup.com) reports:

A marketing corporation could not be required to file a combined New York corporate franchise tax report with its parent company, even though substantial intercorporate transactions created a presumption of distortion, because the corporation demonstrated with a thorough transfer pricing report that its intercompany pricing with the parent was at arm's length.
In challenging the transfer pricing report, the Division of Taxation argued that the companies presented as comparable to the taxpayer were not truly comparable for several reasons (e.g., they were significantly smaller and had significantly different business functions). The Division also asserted that the taxpayer was not compensated for significant services performed for the parent and that the taxpayer's experts failed in numerous ways to follow the technical rules of the IRC Sec. 482 regulations.
However, the Tax Appeals Tribunal rejected the Division's arguments, finding that the taxpayer diligently sought to comply with the law as developed in prior decisions. The taxpayer engaged recognized experts to apply the methods required in the regulations, and the contemporaneous transfer pricing report applied those methods diligently and supported its conclusions persuasively. The principal author of the report testified in its defense at the hearing, and the taxpayer presented expert testimony that endorsed the report's conclusions and methods. Accordingly, the Tribunal found that the taxpayer carried its burden of rebutting the presumption of distortion.
In the absence of the presumption, it was the Division's burden to demonstrate the existence of distortion. However, much of the material presented by the Division consisted of a recitation of factual discrepancies appearing to have very limited significance or demonstrating only that the comparable companies used in the report were not identical to the taxpayer. The Division failed to find major defects in the methodology of the report. In addition, although it objected to the profit level indicator used in the report, the Division did not show what other profit level indicator should have been used. The Division also did not persuasively attack the functional analysis that was the beginning point for selecting the appropriate class of comparable companies, and it did not show that the statistical screens applied in the report were manipulated to produce a particular result.
The Tribunal noted that the IRC Sec. 482 regulations rely upon statistical methods that purport to find only ranges of acceptable answers, not mathematical precision. If the methods are applied in a random way that is faithful to the procedures set out in the regulations, then lack of precision does not invalidate the results.
Hallmark Marketing Corp. , New York Division of Tax Appeals, Tax Appeals Tribunal, DTA No. 819956, July 19, 2007, ¶405-793
Other References:
Explanations at ¶11-550