The IRS would most likely apply the arm's length transaction test to determine which of the following?
A)Whether an expenditure is related to a business activity.
B)Whether an expenditure will be likely to produce income.
C)Timeliness of an expenditure.
D)Reasonableness of an expenditure.
E)All of the choices are correct.

Question

Quizplus · Accepted Answer

The arm's length transaction test is used to evaluate whether an expenditure is reasonable, meaning whether it is consistent with what would be expected in a normal transaction between two unrelated parties. This test is typically applied in transfer pricing situations in which an entity is making payments to related parties, but it can also be used more broadly to determine the reasonableness of any expenditure. Therefore, the correct choice is D, reasonableness of an expenditure.

The IRS Would Most Likely Apply the Arm's Length Transaction