Opinion ID: 561780
Heading Depth: 2
Heading Rank: 3

Heading: Transfer Price for Lenses.

Text: 38 The Commissioner contends that the Tax Court erred in finding that the standards for the comparable uncontrolled price method were met. 4 That method must be applied if, but only if, comparable uncontrolled sales are available. Treas.Reg. Sec. 1.482-2(e)(1)(ii). The Commissioner focuses on the meaning of the term comparable, on which the regulations elaborate as follows: 39 Uncontrolled sales are considered comparable to controlled sales if the physical property and circumstances involved in the uncontrolled sales are identical to the physical property and circumstances involved in the controlled sales, or if such properties and circumstances are so nearly identical that any differences either have no effect on price, or such differences can be reflected by a reasonable number of adjustments to the price of uncontrolled sales. For this purpose, differences can be reflected by adjusting prices only where such differences have a definite and reasonably ascertainable effect on price. 40 Id. Sec. 1.482-2(e)(2)(ii). 41 The Tax Court premised its ruling upon numerous sales by four different lens manufacturers to unrelated lens distributors. All comparable sales prices were reduced by $0.62, an adjustment that compensated for B & L's unique practice of paying the duty and freight charges on its lens purchases. After this adjustment, all these sales were at a price that exceeded the $7.50 transfer price paid by B & L, with one exception. One manufacturer, the Amsco/Lombart division of the American Sterilization Company, transacted some sales (less than half) that, when adjusted, indicated a transfer price less than $7.50, but the Tax Court gave these sales little weight because, unlike the uniform price charged by B & L Ireland, they set different prices for standard and thin lenses. All other adjusted comparable sales, including Amsco/Lombart single price sales, indicated a transfer price above $7.50, with many exceeding $10.00. 42 The Tax Court's conclusion that these sales were comparable was premised on findings of fact that B & L functioned as a distributor with respect to the lenses it purchased from B & L Ireland, and that the soft contact lenses at issue were generally considered a fungible commodity. The Commissioner disputes the former finding. He contends that in addition to its distribution functions, B & L supplied the know-how necessary to manufacture the lenses, the Bausch & Lomb and Soflens trademarks, the FDA approval required for sales on the United States market, the fruits of its ongoing research and development, and ready-made foreign and domestic markets. 43 We find this argument unconvincing. As was implicit in our prior determination that the transfer price for lenses and royalty rate for intangibles should be accorded independent consideration, the provision of know-how, trademarks, FDA approval, and ongoing research and development is properly taken into account hereinafter with respect to the royalty to be imputed to B & L Ireland on an arm's-length basis for the transfer of these intangibles. Further, the provision of ready made markets is entirely consistent with the role of a distributor. 44 The position urged by the Commissioner would preclude comparability precisely because the relationship between B & L and B & L Ireland was different from that between independent buyers and sellers operating at arm's-length. This, however, will always be the case when transactions between commonly controlled entities are compared to transactions between independent entities. 45 We addressed a similar contention by the Commissioner in United States Steel Corp. v. Commissioner, 617 F.2d 942 (2d Cir.1980). The Commissioner there argued that identically priced shipping services supplied to competitors of United States Steel by its subsidiary were not comparable to the services supplied by the subsidiary to United States Steel because of the special parent/subsidiary relationship that existed between them. We responded that the Commissioner's approach might recognize economic reality; but [would] also ... engraft a crippling degree of economic sophistication onto a broadly drawn statute, which--if 'comparable' is taken to mean 'identical', ...--would allow the taxpayer no safe harbor from the Commissioner's virtually unrestricted discretion to reallocate. Id. at 951. 46 Similarly, the position urged by the Commissioner herein amounts to reading so broadly the requirement in Treas.Reg. Sec. 1.482-2(e)(ii) that the circumstances involved in comparable uncontrolled sales and controlled sales under section 482 review be identical, or nearly identical, as to threaten effective nullification of the comparable uncontrolled price method. That method is postulated in the Commissioner's regulations, however, as the method of choice for testing transfers of tangible property between commonly controlled entities. We therefore decline to adopt the suggested interpretation of section 1.482-2(e)(ii). 47