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Daniel I. Halperin, The Unrelated Business Income Tax and Payments from Controlled Entities, Tax Notes, Dec. 12, 2005, at 1443.


Abstract: The unrelated business income tax now applies to deductible payments of interest, rent, or royalties received from controlled entities. The Tax Relief Act of 2005, as just passed by the Senate, would modify that rule to tax only those amounts that exceed the sum that would be paid if the transaction were at arm's length. Although, that is meant to achieve consistency with third-party arrangements, it creates an advantage for the use of subsidiaries as opposed to direct ownership. Thus, he says, fully consistent treatment of all alternatives is impossible. Moreover, he adds, the difficulty of enforcing an arm's-length standard is obvious and unquestionably the IRS will not be fully able to preclude the exclusion of payments in excess of arm's-length prices. Since it has not been shown that self-dealing between the parent and the subsidiary, as opposed to actually contracting with unrelated parties, is substantially more efficient, the report concludes that the proposed change would make the law considerably more complex and difficult to administer without any clear gain in efficiency.