There is an Internal Revenue code Section IRC 482 which allows the IRS to make allocations to ensure that taxpayers clearly reflect income attributable to controlled transactions and to prevent the evasion of taxes.
Found in the statutory language of IRC 482 , there are three basic prerequisites before this code section can be
- There must be two or more organizations, trades or businesses; AND
- There must be common ownership or control, either directly or indirectly of such entities; AND
- The IRS must determine that an allocation is necessary either to prevent evasion of taxes, or to clearly reflect the income of any of those entities
Per Treas. Reg. 1.482-1(i)(2) a “trade or business” means: A trade or business activity of any kind regardless of: Place of organization; formal organization; type of ownership (individual or otherwise); place of operation.
Thus, the definition of “organization, trade, or business” under IRC 482 is very broad. In addition, at least two such broadly defined parties must be involved for IRC 482 to apply.
Treas. Reg. 1.482-1(i)(4) includes a broad definition of what constitutes control; it can be any kind of control.
Allocations affecting taxable income from one related business to another can be made to: income, deductions, credits & allowances.
The courts have decided on numerous occasions that an IRS allocation will be upheld unless the taxpayer can prove the IRS determination was arbitrary and capricious.
In our next blog, we will discuss the impact of this on management companies and discuss Alternative Health Care Advocates et al v. Commissioner of Internal Revenue Service.