Allocation of Income, Deductions, Credits, and Allowances among Related Taxpayers
Allocation of Income, Deductions, Credits, and Allowances among Related Taxpayers
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1 Harlan Pomeroy, Allocation of Income , Deductions, Credits, and Allowances among Related Taxpayers, 15 Cas. W. Res. L. Rev. 250 (1964) Available at:
Harlan Pomeroy
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will find it advantageous to forego the election and allocate a single
surtax exemption among the members of its group.
A Corporation
--------------B Corporation
----------------C Corporation
--------------D Corporation
---------------E Corporation
----------------$25,000
50,000
10,000
25,000
25,000
A Corporation
--------------B Corporation
--------------$12,500
12,500
$11,100
23,600
3,600
11,100
11,100
$60,500
$ 2,750
2,750
$ 5,500
III
ALLOCATION OF INCOME, DEDUCTIONS, CREDITS,
AND ALLOWANCES AMONG RELATED TAXPAYERS
Harlan Pomeroy
Section 482 of the Internal Revenue Code is one of many weapons
in the arsenal of the Commissioner of Internal Revenue for defending
the public fisc against raids by resourceful taxpayers. It is, in many
respects, his most effective as well as his most lethal weapon.
Broad in its literal terms and scope, section 482 provides, in effect,
that the Commissioner may, for certain specified purposes, shift among
related entities the various items going into the equation determining
taxable income. The ends or purposes for which the allocation may be
made also are broadly stated. The alternative purposes are the
prevention of tax evasion and the clear reflection of income.
The language of section 482 is thus deceptively simple and
nontechnical. Its terms are brief. The effect of section 482, however, may
have very wide range. Moreover, inasmuch as the application of the
section has been held to be largely within the Commissioner's discretion,
its application is not easily upset.
There are scores of cases which have been decided under section 482
and under its predecessors in the 1939 Code and earlier revenue acts.
It is the purpose of this article to indicate some of the problems which
may arise under section 482 and to highlight certain of the more
important cases.
OUTLINE OF STATUTORY PROVISION AND ITS BACKGROUND
There are certain statutory requirements which must be met before
section 482 can be applied. There must be two or more organizations,
trades, or businesses. The organizations, trades, or businesses must be
owned or controlled "by the same interests." The ownership or
control may be direct or indirect. And there must be either an evasion of
taxes or a failure dearly to reflect income. Once the conditions
required for the application of section 482 are present, the Commissioner
has authority under section 482 to "distribute, apportion, or allocate
gross income, deductions, credits, or allowances" between or among the
related organizations, trades, or businesses.
Legislative History
Section 482 originated in 1921 in conjunction with consolidated
returns. At that time, the Commissioner could "consolidate the
accounts" of "related trades or businesses," owned or controlled directly or
indirectly by the same interests, in order to make an "accurate
distribution or apportionment of gains, profits, income, deductions, or capital."1
In 1924 this was changed so as to permit the consolidation either at
the direction of the Commissioner or at the request of the taxpayer.2
Then, in 1928, the Commissioner's sanctions were broadened, from
consolidating the accounts to distributing, apportioning, or allocating
gross income and deductions. The taxpayer could no longer insist upon
application of the provision. At the same time, the requisite conditions
for invoking the Commissioner's authority were changed to eliminate the
requirement that the trades or businesses be "related." Moreover, the
1. Revenue Act of 1921, ch. 136, ยง 240(d), 42 Stat. 260. This provision was directed
particularly at foreign subsidiaries which were "sometimes employed to 'milk' the parent
corporation, or otherwise improperly manipulate the financial accounts of the parent company."
It was not enacted to permit computing the tax "on the basis of the consolidated return."
H.R. RPp. No. 350, 67th Cong., 1st Sess. 14 (1921).
2. Revenue Act of 1924, ch. 234, S 240(d), 43 Stat. 288.
Commissioner could act where there was evasion of taxes, and whether or
not the trades or businesses were affiliated.?
In 1934, the Commissioner's authority was extended to include
"organizations" in addition to trades or businesses.4
And finally, in 1943,
the Commissioner could allocate "credits" and "allowances" in addition
to gross income and deductions.
The reason for this change was to
broaden the Commissioner's authority under what is now section 482
to equal h (...truncated)