3.The populace and the financial community’s increasing distrust of the data and
the financial statements being presented, in part because of document destruc-
tion.As a result of these events external to the transfer pricing process, the taxpayer or
the IRS that relies on comparables is on dangerous ground. It has now become much
easier for the transfer pricing litigator to challenge the comparables presented by the
opposition. The transfer pricing regulations make reference to the reliability of data,
and this issue itself may be the issue in transfer pricing litigation.
It is our view that events external to the transfer pricing process will impact forum
selection and will impact taxpayer challenges to the IRS’s comparables. More taxpay-
ers may find refuge with the District Court and avoid both the Tax Court and the Claims
Court to secure their right to trial by jury, to better challenge the comparables being pre-
sented by the IRS as part of the comparable profits method.^14 These events are part of
the fallout to the recent accounting and financial failures to be sure, but we suggest the
IRS return to the traditional transfer pricing methodologies or develop new methodolo-
gies such as the “comparison of functions employed” discussed later in this analysis.
29.15 DEPENDENCE ON SIC CODE ANALYSIS. All too often, the selection of an SIC
for a business is often made by the lowest functionary of that business, the person who
knows least about the current business or the future plans of the business. Nonetheless,
the international examiner may seize upon the SIC code and force the business into the
mold of that SIC code so as to secure a ready transfer pricing comparable.^15
(a) SIC Issues. The following SIC code issues are likely to arise:
- The SIC code being selected by the taxpayer may not be correct.
- The SIC code may change over time, making the original SIC code no longer
relevant. - The business could be better reflected by having a number of SIC codes.
We believe that the IRS should undertake an initial review of the SIC code being
selected by the taxpayer. Further, we find that both taxpayers and the IRS would ben-
efit from establishing parameters for having more than one SIC code. We suggest that
such parameter be analogous to the segmental analysis under Section 1.6038-3(c)^16
or to high-profit segments under Section 1.6038-3(c)(6),^17 addressing return on assets.
(b) Difficulties Caused By the Comparable Profits Method. The CPM forces each
taxpayer to be categorized into a narrow category such as an SIC code. The examiner
29.15 DEPENDENCE ON SIC CODE ANALYSIS 29 • 21(^14) Robert J. Cunningham, “Litigating Transfer Pricing Cases,” Transfer Pricing Handbook#2, 3rd ed.,
edited by R. Feinschreiber (New York: John Wiley & Sons, 2001): Section 69.1.
(^15) Barbara N. McLennan, “Finding and Applying Arm’s-Length Comparables under the Comparative
Profits Method,” Transfer Pricing Handbook#1, 3rd ed., edited by R. Feinschreiber (New York: John
Wiley & Sons, 2001): Section 11.1.
(^16) Robert Feinschreiber, “Significant Industry Segments,” Transfer Pricing Handbook#2, 3rd ed., ed-
ited by R. Feinschreiber (New York: John Wiley & Sons, 2001): Section 60.1.
(^17) Robert Feinschreiber, “High Profit Test,” Transfer Pricing Handbook#2, 3rd ed., edited by R. Fein-
schreiber (New York: John Wiley & Sons, 2001): Section 61.1.