CHANROBLES VIRTUAL LAW LIBRARY

ChanRobles™ Virtual Law Library | chanrobles.com™  
Main Index ChanRobles LawTube - Social Network Chan Robles Virtual Law Library Latest Legal Updates Philippine Legal Resources Significant Philippine Legal Resources Worldwide Legal Resources Philippine Supreme Court Decisions United States Supreme Court Jurisprudence United States Laws, Statutes & Codes

US LAWS, STATUTES & CODES ON-LINE

ChanRobles On-Line Bar Review

supreme.chanrobles.com


google search for chanrobles.comSearch for www.chanrobles.com


   (1) Combined taxable income:  (a) K's sales price.................................  .......   $1,000  (b) Less deductions:    J's cost of goods sold............................     $650    J's direct selling expenses.......................      100    K's export promotion expenses.....................      230                                                       ---------        Total deductions..............................  .......      980                                                                --------  (c) Combined taxable income.........................  .......       20                                                                ========(2) K's profit under combined taxable income method (before application of loss limitation):  (a) 50 percent of combined taxable income...........       10  (b) Plus: 10 percent of K's export promotion               23   expenses (10% of $230).............................                                                       ----------  (c) K's profit......................................       33                                                       ==========(3) K's profit under gross receipts method (before application of loss limitation):  (a) 4 percent of K's sales price (4% of $1,000).....       40  (b) Plus: 10 percent of K's export promotion               23   expenses (10% of $230).............................                                                       ----------  (c) K's profit......................................       63                                                                ======== 
  Since combined taxable income ($20) is lower than both K's profit under the combined taxable income method ($33) and under the gross receipts method ($63), the maximum income K may earn is $20. Accordingly, the commissions K may receive from J are $250, i.e., K's expenses ($230) plus K's profit ($20).

Example 2.  M and N are calendar year taxpayers. M, a domestic manufacturing company, owns all the stock of N, a DISC for the taxable year. During 1972, M produces and sells a particular product line of export property to N for $75, a price which can be justified as satisfying the standard of arm's length price of section 482. N performs substantial functions with respect to the transaction and resells the export property for $100. M's cost of goods sold attributable to the export property is $60. M's direct selling expenses so attributable (relating to advertising of the product line in foreign markets) are $12. Although M has other deductible expenses, for purposes of this example, assume that M has no other deductible expenses. N's expenses attributable to resale of the export property are $22 of which $20 are export promotion expenses. The maximum profit which N may earn with respect to the product line is $6, computed as follows:

   (1) Combined taxable income:  (a) N's sales price.................................  .......     $100  (b) Less deductions:    M's cost of goods sold............................      $60    M's direct selling expenses.......................       12    N's expenses......................................       22                                                                --------      Total deductions................................  .......       94                                                                --------  (c) Combined taxable income.........................  .......        6                                                                ========(2) N's profit under combined taxable income method (before application of loss limitation):  (a) 50 percent of combined taxable income...........        3  (b) Plus: 10 percent of N's export promotion                2   expenses (10% of $20)..............................                                                       ----------  (c) N's profit......................................        5                                                       ==========(3) N's profit under gross receipts method (before application of loss limitation):  (a) 4 percent of N's sales price (4% of $100).......        4  (b) Plus: 10 percent of N's export promotion                2   expenses (10% of $20)..............................                                                       ----------  (c) N's profit......................................        6                                                       ==========(4) N's profit under section 482 method:  (a) N's sales price.................................      100  (b) Less deductions:    N's cost of goods sold (price paid by N to M).....       75    N's expenses......................................       22                                                                --------      Total deductions................................  .......       97                                                                --------  (c) N's profit......................................  .......        3                                                                ======== 
  Since the gross receipts method results in greater profit to N ($6) than does the combined taxable income method ($5) or section 482 method ($3), and does not exceed combined taxable income ($6), N may earn a maximum profit of $6. Accordingly, the transfer price from M to N may be readjusted as long as the transfer price is not readjusted below $72, computed as follows:
   (5) Transfer price from M to N:  (a) N's sales price...................................  ......    $100  (b) Less:    N's expenses........................................     $22    N's profit..........................................       6                                                         --------      Total subtractions................................  ......      28                                                                 -------  (c) Transfer price....................................  ......      72 

Example 3.  Q and R are calendar year taxpayers. Q, a domestic manufacturing company, owns all the stock of R, a DISC for the taxable year. During 1972, Q produces and sells a product line of export property to R for $170, a price which can be justified as satisfying the standards of arm's length price of section 482, and R resells the export property for $200. Q's cost of goods sold attributable to the export property is $115 so that the combined gross income from the sale of the export property is $85 (i.e., $200 minus $115). Q's expenses incurred in connection with the property sold are $35. Q's deductible overhead and other supportive expenses allocable to all gross income are $6. Apportionment of these supportive expenses on the basis of gross income does not result in a material distortion of income and is a reasonable method of apportionment. Q's gross income from sources other than the transaction is $170 making total gross income of Q and R (excluding the transfer price paid by R) $255 (i.e., $85 plus $170). R's expenses attributable to resale of the export property are $20, all of which are export promotion expenses. The maximum profit which R may earn with respect to the product line is $16, computed as follows:

   (1) Combined taxable income:  (a) R's sales price...................................  ......    $200  (b) Less deductions:    (i) Q's cost of goods sold................       115    (ii) Q's expenses incurred in connection          35     with the property sold...................    (iii) Apportionment of Q's supportive     expenses:      Q's supportive expenses.................        $6      Combined gross income from sale of              85       export property........................      Total gross income of Q and R...........       255      Apportionment...........................   (6x85)/       2                                                     255    (iv) R's expenses.........................  ........      20                                                         --------      Total deductions........................  ........  ......     172                                                                 -------  (c) Combined taxable income...................................      28                                               ===========(2) R's profit under combined taxable income method (before application of loss limitation):  (a) 50 percent of combined taxable income...        14  (b) Plus: 10 percent of R's export promotion         2   expenses (10% of $20)......................                                               -----------  (c) R's profit..............................        16                                               ===========(3) R's profit under gross receipts method (before application of loss limitation):  (a) 4 percent of R's sales price (4% of              8   $200)......................................  (b) Plus: 10 percent of R's export promotion         2   expenses (10% of $20)......................                                               -----------  (c) R's profit..............................        10                                               ===========(4) R's profit under section 482 method:  (a) R's sales price.........................       200  (b) Less deductions:    R's cost of goods sold (price paid by R to Q).......     170    R's expenses..............................        20                                               ----------      Total deductions........................  ........     190                                                         ---------  (c) R's profit..............................  ........      10                                                                 ======= 
  Since the combined taxable income method results in greater profit to R ($16) than does the gross receipts method ($10) or section 482 method ($10), and does not exceed combined taxable income ($28), R may earn a maximum profit of $16. Accordingly, the transfer price from Q to R may be readjusted as long as the transfer price is not readjusted below $164 computed as follows:
   (5) Transfer price from Q to R:  (a) R's sales price...................................  ......    $200  (b) Less:    R's expenses........................................     $20    R's profit..........................................      16                                                         --------      Total.............................................  ......      36                                                                 -------  (c) Transfer price....................................  ......     164                                                                 ======= 

Example 4.  S and T are calendar year taxpayers. S, a domestic manufacturing company, owns all the stock of T, a DISC for the taxable year. During 1972, S produces and sells 100 units of a particular product to T under a written agreement which provides that the transfer price between S and T shall be that price which allocates to T the maximum permitted to be received under the intercompany pricing rules of section 994. Thereafter, the 100 units are sold by T for $950. S's cost of goods sold attributable to the 100 units is $650. S's other deductible expenses so attributable are $300. Although S has other deductible expenses, for purposes of this example, assume that S has no deductible expenses not definitely allocable to any item of gross income. T's expenses attributable to the resale of the 100 units are $50. S chooses not to apply the section 482 method. T may not earn any income under the gross receipts or combined taxable income method with respect to resale of the 100 units because combined taxable income is a negative figure, computed as follows:

   (1) Combined taxable income:  (a) T's sales price...................................  ......    $950  (b) Less deductions:    S's cost of goods sold..............................    $650    S's expenses........................................     300    T's expenses........................................      50                                                         --------      Total deductions..................................  ......   1,000                                                                 -------  (c) Combined taxable income (loss)....................  ......   ($50)                                                                 ======= 
  Under paragraph (e)(1)(i) of this section, T is permitted to recover its expenses attributable to the 100 units ($50) even though such recovery results in a loss or increased loss to the related supplier. Accordingly, the transfer price from S to T may be readjusted as long as the transfer price is not readjusted below $900, computed as follows:
   (2) Transfer price from S to T:  (a) T's sales price...........................................    $950  (b) Less: T's expenses........................................      50                                                                 -------  (c) Transfer price............................................     900                                                                 ======= 

Example 5.  Assume the same facts as in example 4 except that S chooses to apply the section 482 method and that under arm's length dealings T would have derived $10 of income. Accordingly, the transfer price from S to T may be set at an amount not less than $890, computed as follows:

   (1) Transfer price from S to T:  (a) T's sales price...................................  ......    $950  (b) Less:    T's expenses........................................     $50    T's profit..........................................      10                                                         --------      Total deductions..................................  ......      60                                                                 -------  (c) Transfer price....................................  ......     890                                                                 ======= 

Example 6.  X and Y are calendar year taxpayers. X, a domestic manufacturing company, owns all the stock of Y, a DISC for the taxable year. During March 1972, X manufactures a particular product of export property which it leases on April 1, 1972, to Y for a term of 1 year at a monthly rental of $1,000, a rent which satisfies the standard of arm's length rental under section 482. Y subleases the product on April 1, 1972, for a term of 1 year at a monthly rental of $1,200. X's cost for the product leased is $40,000. X's other deductible expenses attributable to the product are $900, all of which are incurred in 1972. Although X has other deductible expenses, for purposes of this example, assume that X has no other deductible expenses. Y's expenses attributable to sublease of the export property are $450, all of which are incurred in 1972 and are export promotion expenses. X depreciates the property on a straight line basis without the use of an averaging convention, assuming a useful life of 8 years and no salvage value. The profit which Y may earn with respect to the transaction is $2,895 for 1972 and $1,175 for 1973, computed as follows:

                             computation for 1972(1) Combined taxable income:  (a) Y's sublease rental receipts for year           ........   $10,800   ($1,200x9 months)................................  (b) Less deductions:    X's depreciation ($40,000x1/8x9/12).............    $3,750    X's other expenses..............................       900    Y's expenses....................................       450                                                     ----------      Total deductions..............................  ........     5,100                                                               ---------  (c) Combined taxable income.......................  ........     5,700                                                               =========(2) Y's profit under combined taxable income method (before application of loss limitation):  (a) 50 percent of combined taxable income.........     2,850  (b) Plus: 10 percent of Y's export promotion              45   expenses (10% of $450)...........................                                                     -----------  (c) Y's profit....................................     2,895                                                     ===========(3) Y's profit under gross receipts method (before application of loss limitation):  (a) 4 percent of Y's sublease rental receipts for        432   year (4% of $10,800).............................  (b) Plus: 10 percent of Y's export promotion              45   expenses (10% of $450)...........................                                                     -----------  (c) Y's profit....................................       477                                                     ===========(4) Y's profit under section 482 method:  (a) Y's sublease rental receipts for year.........   $10,800  (b) Less deductions:    Y's lease rental payments for year..............    $9,000    Y's expenses....................................       450                                                     ----------  Total deductions..................................  ........     9,450                                                               ---------  (c) Y's profit....................................  ........     1,350 
  Since the combined taxable income method results in greater profit to Y ($2,895) than does the gross receipts method ($477) or section 482 method ($1,350), Y may earn a profit of $2,895 for 1972. Accordingly, the monthly rental payable by Y to X for 1972 may be readjusted as long as the monthly rental payable is not readjusted below $828.33, computed as follows:
   (5) Monthly rental payable by Y to X for 1972:  (a) Y's sublease rental receipts for year.......  $10,800.                                                          00  (b) Less:    Y's expenses..................................    450.00    Y's profit....................................  2,895.00                                                   ----------      Total.......................................  ........    3,345.00                                                             -----------  (c) Rental payable for 1972...............................    7,455.00                                                   -----------  (d) Rental payable each month ($7,455÷9        828.33   months)........................................                                                   ===========                          computation for 1973(1) Combined taxable income:  (a) Y's sublease rental receipts for year           $3,600   ($1,200x3 months)..............................  (b) Less: X's depreciation ($40,000x1/8x3/12)...     1,250                                                   -----------  (c) Combined taxable income.....................     2,350                                                   ===========(2) Y's profit under combined taxable income method (before application of loss limitation):  (a) 50 percent of combined taxable income.......    $1,175                                                   -----------  (b) Y's profit..................................     1,175                                                   ===========(3) Y's profit under gross receipts method (before application of loss limitation):  (a) 4 percent of Y's sublease rental receipts          144   for year (4% of $3,600)........................                                                   ===========  (b) Y's profit..................................       144                                                   ===========(4) Y's profit under section 482 method:  (a) Y's sublease rental receipts for year.......     3,600  (b) Less: Y's lease rental payments for year....     3,000                                                   -----------  (c) Y's profit..................................       600 
  Since the combined taxable income method results in greater profit to Y ($1,175) than does the gross receipts method ($144) or section 482 method ($600), Y may earn a profit of $1,175 for 1973. Accordingly, the monthly rental payable by Y to X for 1973 may be readjusted as long as the monthly rental payable is not readjusted below $808.33, computed as follows:
   (5) Monthly rental payable by Y to X for 1973:  (a) Y's sublease rental receipts for year.................   $3,600.00  (b) Less: Y's profit......................................    1,175.00                                                             -----------  (c) Rental payable for 1973...............................    2,425.00                                                             ===========  (d) Rental payable for each month ($2,425÷3 months)..      808.33                                                             =========== 

(Secs. 995(e)(7), (8) and (10), 995(g) and 7805 of the Internal Revenue Code of 1954 (90 Stat. 1655, 26 U.S.C. 995 (e)(7), (8) and (10); 90 Stat. 1659, 26 U.S.C. 995(g); and 68A Stat 917, 26 U.S.C. 7805))

[T.D. 7364, 40 FR 29827, July 16, 1975, as amended by T.D. 7435, 41 FR 43142, Sept. 30, 1976; T.D. 7854, 47 FR 51741, Nov. 17, 1982; T.D. 7984, 49 FR 40018, Oct. 12, 1984]

Browse Previous |  Browse Next



Back

Chan Robles Virtual Law Library

google search for chanrobles.com Search for www.chanrobles.com









cralaw

  Copyright©1998- present | chanrobles.com   Disclaimer   E-mail Restrictions
ChanRobles™ Virtual Law Library | chanrobles.com™
 
nad