The term does not include investments in subsidiaries, excess cash, and portfolio investments. Operating assets may be measured by their net book value or by their fair market value, provided that the same method is consistently applied to the tested party and the comparable parties, and consistently applied from year to year. In addition, it may be necessary to take into account recent acquisitions, leased assets, intangibles, currency fluctuations, and other items that may not be explicitly recorded in the financial statements of the tested party or uncontrolled comparable. Finally, operating assets must be measured by the average of the values for the beginning of the year and the end of the year, unless substantial fluctuations in the value of operating assets during the year make this an inaccurate measure of the average value over the year. In such a case, a more accurate measure of the average value of operating assets must be applied.
There is data from a number of independent operators of wholesale distribution businesses. These potential comparables are further narrowed to select companies in the same industry segment that perform similar functions and bear similar risks to USSub. An analysis of the information available on these taxpayers shows that the ratio of operating profit to sales is the most appropriate profit level indicator, and this ratio is relatively stable where at least three years are included in the average. For the taxable years 1994 through 1996, USSub shows the following results:
1994 | 1995 | 1996 | Average | |
Sales | $500,000 | $560,000 | $500,000 | $520,000 |
Cost of Goods Sold | 393,000 | 412,400 | 400,000 | 401,800 |
Operating Expenses | 80,000 | 110,000 | 104,600 | 98,200 |
Operating Profit | 27,000 | 37,600 | (4,600) | 20,000 |
Uncontrolled distributor | OP/S (percent) | USSub COP |
A | 1.7 | $8,840 |
B | 3.1 | 16,120 |
C | 3.8 | 19,760 |
D | 4.5 | 23,400 |
E | 4.7 | 24,440 |
F | 4.8 | 24,960 |
G | 4.9 | 25,480 |
H | 6.7 | 34,840 |
I | 9.9 | 51,480 |
J | 10.5 | 54,600 |
1994 | 1995 | 1996 | Average | |
Sales | $500,000 | $560,000 | $500,000 | $520,000 |
Cost of Good Sold | 370,000 | 460,000 | 400,000 | 410,000 |
Operating Expenses | 110,000 | 110,000 | 110,000 | 110,000 |
Operating Profit | 20,000 | (10,000) | (10,000) | 0 |
Uncontrolled distributor | OP/S (percent) | USSub COP |
C | 0.5 | $2,500 |
D | 1.5 | 7,500 |
E | 2.0 | 10,000 |
A | 1.6 | 13,000 |
F | 2.8 | 14,000 |
B | 2.9 | 14,500 |
J | 3.0 | 15,000 |
I | 4.4 | 22,000 |
H | 6.9 | 34,500 |
G | 7.4 | 37,000 |
1995 | 1996 | 1997 | Average | |
Sales | $560,000 | $500,000 | $530,000 | $530,000 |
Cost of Good Sold | 460,000 | 400,000 | 430,000 | 430,000 |
Operating Expenses | 110,000 | 110,000 | 110,000 | 110,000 |
Operating Profit | (10,000) | (10,000) | (10,000) | (10,000) |
1994 | 1995 | 1996 | Average | |
Assets | $24,000 | $25,000 | $26,000 | $25,000 |
Sales to MarkCo | 25,000 | 30,000 | 35,000 | 30,000 |
Cost of Goods Sold | 6,250 | 7,500 | 8,750 | 7,500 |
Royalty to DevCo (5%) | 1,250 | 1,500 | 1,750 | 1,500 |
Other | 5,000 | 6,000 | 7,000 | 6,000 |
Operating Expenses | 1,000 | 1,000 | 1,000 | 1,000 |
Operating Profit | 17,750 | 21,500 | 25,250 | 21,500 |
26 C.F.R. §1.482-5