Academic journal article Journal of Accountancy

IRS Loses Sundstrand - Again

Academic journal article Journal of Accountancy

IRS Loses Sundstrand - Again

Article excerpt

Showing once again its never say die" attitude when it comes to pursuing transfer pricing cases, the IRS attempted to make a section 482 adjustment 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." 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 is the legal doctrine that, in a new proceeding, sustains the conclusiveness of a judgment rendered in an earlier action).

Judge Hamblen granted the motion in part. …

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