DFJ, a Missouri corporation, owns 55% of Duvall, a foreign corporation formed under Krunian law. Krunia is a central European country with a 22% corporate income tax and no income tax treaty with the United States. Last year, DFJ leased equipment to Duvall for a $415,000 annual rent payment. DFJ reported the rent as taxable income, while Duvall deducted it in the computation of taxable income. This year, the IRS determined that an arm's length rent for the equipment should be $600,000. The IRS can use its Section 482 authority to:

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The IRS's Section 482 authority allows it to adjust the income and deductions between related parties to ensure that transactions are conducted at arm's length. This means the IRS can increase DFJ's taxable income by the difference between the arm's length rent ($600,000) and the reported rent ($415,000), which is $185,000, to reflect what the income would have been if the parties had been dealing at arm's length. The IRS does not have the authority to directly adjust the income or deductions of a foreign corporation like Duvall that is not subject to U.S. tax laws, nor can it mandate additional payments or treat the adjustment as a constructive dividend.

DFJ, a Missouri Corporation, Owns 55% of Duvall, a Foreign