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IRS wins procedural issue in Yamaha.

The IRS won an important procedural issue recently in Yamaha Motor Corp. U.S. v. Commissioner (T.C.M. 1992-110), a case brought under section 482 of the tax code. The Tax Court denied the taxpayer's motion to shift the burden of proof to the IRS, finding the IRS's amended answer to the taxpayer's petition did not raise a "new matter" proscribed under Tax Court Rule 142(a).

In its deficiency notice (totaling about $135 million), the IRS had allocated income to Yamaha-U.S. based on "tangible property purchased for resale" from the Japanese parent company.

After the case went to court, the IRS amended its answer, alleging that a part of the deficiency was attributable to advertising and sales promotion expenses or, alternatively, for the maintenance of excessive inventory, on behalf of the Japanese parent. In either case, the IRS was empowered to allocate to Yamaha-U.S. an arm's length consideration for these services.

Yamaha-U.S. filed a motion claiming the "services" theory raised a "new matter" requiring the presentation of different evidence and therefore shifted the burden of proof to the IRS under rule 142(a).

The Tax Court rejected the taxpayer's position, finding the IRS used the resale method (contained in its regulations) to compute the deficiency.

The resale method typically is used in setting a transfer price in a distributorship context. Under this method, the price paid by a distributor to its supplier is computed by taking the price the distributor charges to third parties and reducing it by an appropriate markup percentage, with adjustments for services performed by the distributor (such as delivery, inventory maintenance, minor assembly, advertising, billing and servicing).

Yamaha-U.S. would have to take into account such items anyway in proving the deficiency was erroneous. Therefore, evidence required to be presented for the services theory did not warrant the assignment of the burden of proof to the IRS.

Observation: The deficiency notice was vague, merely saying an adjustment was being made for "tangible property purchased for resale." This decision will encourage the IRS to issue vague deficiency notices in the future.
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Article Details
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Title Annotation:Yamaha Motor Corp. U.S. v. Commissioner
Author:Burge, Marianne
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Jun 1, 1992
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