Rev. Rul. 67-79

The Internal Revenue Service has been asked to explain its acquiescence in the decision of the Tax Court of the United States in the case of Smith-Bridgman & Co. v. Commissioner , 16 T.C. 287 (1951), Acquiescence C.B. 1951-1, 3; and its position on the decision of the U.S. Court of Appeals for the Sixth Circuit in the case of Tennessee-Arkansas Gravel Co. v. Commissioner , 112 Fed.2d 508 (1940). This explanation has been prompted by certain interpretations which have been made of these cases.

The cases involve the application of section 482 of the Internal Revenue Code of 1954, which gives the Revenue Service authority to allocate income and deductions among the members of a group of business entities owned or controlled by the same interests so that the true income of each member of the group is clearly reflected.

In Smith-Bridgman & Co. , the taxpayer made interest-free loans to its parent company. The funds were used to retire outstanding debenture bonds redeemable at a premium plus accrued interest. Under the authority of section 45 of the Internal Revenue Code of 1939 (predecessor of sec. 482 of the 1954 Code) the Revenue Service determined that income representing interest of 4 percent on these loans should be allocated from the parent to the subsidiary in order to clearly reflect income.

In the Tennessee-Arkansas Gravel Co. case, the taxpayer leased equipment to a commonly controlled corporation during 1933 for $1,000 a month. Although the lease agreement covered only the year 1933, the lessee continued to use the equipment during 1934 4without paying rent. Under the authority of section 45 of the 1939 Code the Revenue Service determined that $12,000 should be allocated to Tennessee-Arkansas Gravel Co. from the commonly controlled company as the fair rental value of the equipment for 1934.

In both cases the courts pointed out that no corresponding adjustments were made to the income or deductions of the related corporations from which the allocations were made. The courts concluded that by increasing the taxpayer's income in each case the Revenue Service had not distributed, apportioned, or allocated gross income, but had improperly created or distributed income where none in fact existed.

The Smith-Bridgman & Co. and Tennessee-Arkansas Gravel Co. cases have been cited by some as authority for the proposition that income may not be attributed under section 482 of the 1954 Code to a member of a controlled group involved in a transaction with another member, if the latter had no gross income or if no income was realized outside the group as a result of the particular non-arm's-length transaction.

The acquiescence in Smith-Bridgman & Co. was intended only to concur in the proposition that appropriate adjustments are to be made to the incomes of both members of the group affected to reflect the allocation. The acquiescence does not override the Service's position as to the scope and purpose of section 482 of the 1954 Code as set forth in existing regulations. Similarly, the Service concurs in the result reached in Tennessee-Arkansas Gravel Co. only to the extent the holding is based on its failure to have made an appropriate adjustment to the income or deductions of the member of the group from which the allocation was made.

¹ Also released as Technical Information Release 838, dated Aug. 2, 1966.