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Tax Research Memo Example


Relevant Facts
Trader Jobs is a related entity to Smartbucks and helps the company to transfer costs and save on taxes. For sometimes, tax-saving strategies for the corporation focus on transfer pricing. It works such that transfer of cost occurs between Smartbucks and Trader Jobs and the tax resulting from the transactions are charged in Turks and Caicos where rates are lower.

The cost-sharing strategy is well in line with the transfer pricing principles Internal Revenue Code (IRC) § 482. The basics worked for the sale of the industrial coffee machine that was transferred to Trader Jobs, leading to reduced tax.

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Specific Issues
The specific issues for analysis are;
1. Does Startbuck’s failure to include the share of employee stock option make it fail to satisfy the arm’s length principle?

2. Does the IRS exceed its authority in claiming that cost-sharing decisions by the sharing entities fail to reflect the economic realities of the cost-sharing strategy?

There is a need to establish that the IRS has exceeded its authority in the arm’s length principle since the cost-sharing method already established parity with uncontrolled taxpayers and thus controls the result of the transaction.

Supporting Analysis
Starbucks is a US-based company with a subsidiary Trader Jobs that operates in the Turks and Caicos Islands. According to the IRC (1986), the authority has no obligation to examine if the pricing used by a taxpayer falls within the arm’s length range (IRC, 1986). In one court case, it was determined that the IRS’ legal authority extends up to the point where employees’ stock compensation is a qualified cost-sharing arrangement (Altera Corporation & Subsidiaries v. Commissioner of Internal Revenue, 2018). In case the lack of information on employees stock compensation relates to a product licensed elsewhere, then IRS has no authority to check the shared costs (The Sales Tax Act of 1990). The relevant provision is that the IRS does not have jurisdiction in this case. In this case, the companies licensed their product outside the United States, and hence IRS oversteps its mandate in dictating the tax default.

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IRC. (1986). Internal Revenue Code of 1986. Taxnotes.com. Retrieved from https://www.taxnotes.com/federal-research-library/internal-revenue-code-of-1986
The Sales Tax Act of 1990 (Act No. III of 1951 as Amended by Act VII of 1990 as amended up to 1st July, 2017). Retrieved from http://download1.fbr.gov.pk/Docs/2017831184658713SALESTAXACT,1990Amededupto01.07.2017.pdf
Altera Corporation & Subsidiaries v. Commissioner of Internal Revenue, Nos. 16-70496, 16-70496 (9th Cir., 2018). Retrieved from https://cases.justia.com/federal/appellate-courts/ca9/16-70496/16-70496-2018-07-24.pdf?ts=1532451828

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