IRS loses Sundstrand - again.Showing once again its never say die" attitude when it comes to pursuing transfer pricing Transfer pricing refers to the pricing of goods and services within a multi-divisional organization, particularly in regard to cross-border transactions. For example, goods from the production division may be sold to the marketing division, or goods from a parent company may be cases, the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. attempted to make a section 482 adjustment to Sundstrand Corporation Sundstrand Corporation was founded in 1926 as a merger of the Rockford Tool Company and Rockford Milling Machine Company in Rockford, Illinois. It was known as Sundstrand Machine Tool Company until 1959 when shareholders voted to change the name to Sundstrand Corporation. for the years 1979 and 1980-even though it had lost the issue for the years 1977 and 1978 in Sundstrand v. Commissioner [96 T.C. 266 (1991)]. This time around, Tax Court Judge Hamblen ruled the IRS was prevented from relitigating the issues decided in the earlier case (Sundstrand v. Commissiner, T.C.M. 1992-86). At that time, Sundstrand had established a Singapore subsidiary, SunPac, to manufacture and distribute a certain air-plane part. SunPac paid Sundstrand a royalty of 2%. Sundstrand purchased all SunPac's output through 1978 at its catalog price less a 15% discount. In a scathing opinion for both sides, Judge Hamblen held SunPac was not a subcontractor and the IRS's adjustment was unreasonable, even though the royalty and transfer price were not "arm's length arm's length adj. the description of an agreement made by two parties freely and independently of each other, and without some special relationship, such as being a relative, having another deal on the side or one party having complete control of the other. ." He determined a proper royalty was 10% and the arm's-length transfer price should be the catalog price less a 20% discount. The IRS then made adjustments for taxable years 1979 and 1980 to both the transfer price and the royalty rate. Sundstrand filed a motion for partial summary judgment, arguing the IRS was collaterally estopped from relitigating the section 482 issues decided earlier (collateral estoppel A doctrine by which an earlier decision rendered by a court in a lawsuit between parties is conclusive as to the issues or controverted points so that they cannot be relitigated in subsequent proceedings involving the same parties. is the legal doctrine Legal doctrine is a framework, set of rules, procedural steps, or test, often established through precedent in the common law, through which judgments can be determined in a given legal case. that, in a new proceeding, sustains the conclusiveness of a judgment rendered in an earlier action). Judge Hamblen granted the motion in part. He rejected the IRS's argument that collateral estoppel was inappropriate because of newly discovered evidence NEWLY DISCOVERED EVIDENCE. That evidence which, after diligent search for it, was not discovered until after the trial of a cause. 2. In general a new trial will be granted on the ground that new, important, and material evidence has been discovered since the , saying the IRS could have employed administrative summonses or other procedures to obtain the new evidence earlier. He held the IRS was barred from asserting a royalty rate for 1979 and 1980 different from the royalty he imposed for 1977 and 1978 in the first Sundstrand case. Although Judge Hamblen applied the law of collateral estoppel to prevent relitigation, he accepted, in part, the IRS's challenge to the transfer price. He ruled the distributor agreement was a "dynamic instrument which was to be changed as the parties' pricing experience dictated." Nonetheless, he held the IRS was prevented from challenging the catalog price as the base price. Observation: The IRS has been relentless in its pursuit of perceived transfer pricing abuses, despite the fact it usually loses large portions of its adjustments. There are at least 26 cases docketed in Tax Court, with aggregate adjustments in the billions. The IRS also has j st issued a set of proposed section 482 regulations. This is the issue to watch in the 1990s. Edited by Robert Willens, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , senior vice-president at Lehman Brothers, New York City New York City: see New York, city. New York City City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. corporate); Marianne Burge, CPA, director of international tax services, Kenneth Kral, CPA, international tax partner, and Marylouise Dionne, Esq., international tax manager, at Price Waterhouse, New York City international). |
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