Should Taxpayers Embrace MTC s ALAS Or Keep It at Arm s Length? by Jonathan Feldman, Stephen A. Burroughs, and Timothy Gustafson

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1 Should Taxpayers Embrace MTC s ALAS Or Keep It at Arm s Length? by Jonathan Feldman, Stephen A. Burroughs, and Timothy Gustafson Jonathan Feldman Stephen A. Burroughs Timothy Gustafson Jonathan Feldman is a partner and Stephen A. Burroughs is an associate in Sutherland Asbill & Brennan LLP s Atlanta office, and Timothy Gustafson is counsel in Sutherland Asbill & Brennan LLP s Sacramento office. In this edition of A Pinch of SALT, Feldman, Burroughs, and Gustafson analyze the Multistate Tax Commission s Arm s-length Adjustment Service program, arguing that while taxpayer suspicion based on past MTC actions may be justified, the effort has the potential to benefit both sides of transfer pricing disputes by enabling state auditors to perform a substantive analysis under IRC section 482 principles. The views expressed in this article are those of the authors only, are intended to be general in nature, and are not attributable to Sutherland Asbill & Brennan LLP or any of its clients. The information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. A PINCH OF SALT state tax notes Taxpayers, states, and state tax professionals have closely monitored the Multistate Tax Commission s recent foray into transfer pricing. While most taxpayers instinctively cringe at any new MTC initiative, we view the Arm s- Length Adjustment Service (ALAS) program as a potential positive for corporate taxpayers. Our optimistic, albeit measured, response stems from some disturbing trends arising in state corporate income tax audits. States have increasingly used statutory variations of IRC section 482 to either disregard entities and intercompany transactions as shams or deny intercompany expense deductions without performing any substantive transfer pricing analysis. State tax authorities often justify those adjustments by arguing that either: (1) all intercompany transactions, no matter the underlying terms, are per se non-arm s-length; or (2) they lack the resources to determine whether an intercompany transaction satisfies the arm s-length standard. This article explores why these justifications misapply the transfer pricing statutes and concludes that ALAS may provide a superior alternative to the states defective approach. I. Section 482 and the Federal Arm s-length Standard Section 482 authorizes the IRS to adjust the prices of controlled transactions to reflect those that would result from unrelated parties transacting at arm s length. 1 Federal courts have issued hundreds of decisions, and the U.S. Treasury Department has promulgated extensive regulations, all seeking to answer two questions: When may the IRS use its section 482 authority? How may the IRS use its section 482 authority? The IRS may exercise its section 482 authority if a controlled taxpayer has not reported its true taxable income. 2 A controlled taxpayer s true taxable income is the taxable income that would have resulted had it dealt with the other member or members of the group at arm s length. 3 A taxpayer satisfies this arm s-length standard, thus precluding a section 482 adjustment, if the result of its controlled transaction is consistent with the projected result of a hypothetical transaction between unrelated third parties under comparable circumstances, regardless of motive. 4 As the U.S. Court of Appeals for the Second Circuit observed in U.S. Steel v. Commissioner 5 : 1 Section 482 provides: In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organizations, trades, or businesses. IRC section Treas. reg. section (a)(2). 3 Treas. reg. section 1.482(i)(9). 4 See Treas. reg. section (b) and (c) F.2d 942 (2d Cir. 1980) (internal quotations omitted). State Tax Notes, April 25,

2 A Pinch of SALT It is clear that if a taxpayer can show that the price he paid or was charged for a service is the amount which was charged or would have been charged for the same or similar services in independent transactions with or between unrelated parties it has earned the right, under the Regulations, to be free from a [section] 482 reallocation despite other evidence tending to show that its activities have resulted in a shifting of tax liability among controlled corporations. 6 The arm s-length standard, therefore, objectively analyzes the economic reality of a controlled transaction rather than attempts to deduce a taxpayer s motive or intent. 7 If controlled entities do not transact on arm s-length terms, the regulations and federal case law prescribe how the IRS may reallocate the resulting income or deductions. The bulk of the regulations complexity arises from their descriptions of the methods the IRS and taxpayers may use to measure whether a transaction produces an arm s-length result. The regulations assign methods for transaction classifications. 8 Some rules are assigned to determine an arm slength standard for intercompany loans, 9 while different methods are designated for service transactions, 10 sales of tangible personal property, 11 and transactions involving intangible property. 12 Most modern transfer pricing controversies involve disputes regarding which method produces a more reliable measure of an arm s-length result. 13 However, many federal court cases also recognize various limitations on the IRS s reallocation authority. Federal courts will overturn IRS adjustments that fall outside the distribute, apportion, or allocate mandate that the plain language of section 482 provides. For example, federal courts have rejected IRS reallocations that have: created income to attribute to the taxpayer where none previously existed; 14 disallowed in their entirety deductions otherwise permitted under the IRC; 15 6 Id. at See id. (stating that the arm s-length standard is an objective standard that does not depend on the absence or presence of any intent on the part of the taxpayer to distort his income ); see alsoyour Host Inc. v. Commissioner, 58 T.C. 10, 24 (1972), aff d, 489 F.2d 957 (2d Cir. 1973), cert. denied, 419 U.S. 829 (1974) (section 482 does not deal with motivation and purpose...butwith economic reality ). 8 See Treas. reg. sections (c) and See Treas. reg. section (a). 10 See Treas. reg. section See Treas. reg. sections through See Treas. reg. section See Treas. reg. sections (c) and Tennessee-Arkansas Gravel Co. v. Commissioner, 112 F.2d 508, 510 (6th Cir. 1940); and Texsum Supply Corp., 17 T.C. 433, 445 (1951). 15 Hypotheek Land Co. v. Commissioner, 200 F.2d 390, 396 (9th Cir. 1952). forced combination or consolidation of the income of separate but related taxpayers, or imposed adjustments that had the same effect; 16 and disregarded an entity found to have a business purpose. 17 The purpose of section 482 is to place controlled entities on tax parity with uncontrolled entities by determining the true taxable income from the property and business of the controlled taxpayer. 18 IRS allocations, therefore, may not simply erase a non-arm s-length result but instead must reconfigure the transaction so that it resembles how the entities would have dealt with each other had they not been controlled. 19 As the U.S. Court of Appeals for the Second Circuit once phrased it, section 482 reallocations are based not on a disregard of taxable entities but on the correction of business entries. 20 There is no doubt the IRS has authority to undo transactions lacking business purpose or to disregard sham entities. This authority, however, does not arise from section 482 or its regulations. 16 Cedar Valley Distillery Inc. v. Commissioner, 16 T.C. 870, 876 (1951) (stating that section 482 s predecessor, section 45, was not enacted to consolidate two organizations by ignoring one completely, but merely to adjust gross income and deductions between or among certain organizations); Seminole Flavor Co. v. Commissioner, 4 T.C. 1215, (1945) (acknowledging the commissioner s authority to distribute, apportion, and allocate, but section 45 does not specifically authorize it to combine); and Ross v. Commissioner, 129 F.2d 310, 313 (5th Cir. 1942). 17 W. Braun Co. v. Commissioner, 396 F.2d 264, (2d Cir. 1968). 18 See Commissioner v. First Sec. Bank of Utah NA, 405 U.S. 394, 400 (1972); E.I. Du Pont de Nemours & Co. v. United States, 608 F.2d 445, 450 (Ct. Cl. 1979); and Treas. reg. section (b)(1). 19 Id.; Treas. reg. section (a)(2), (b), and (c). 20 Advance Mach. Exchange v. Commissioner, 196 F.2d 1006, 1010 (2d Cir. 1952) (emphasis added). Federal courts have permitted the IRS to effectively disregard nonrecognition transactions (such as IRC section 351 or 721) to reallocate an entire loss or completely deny a deduction in very limited circumstances: tax avoidance cases where property, such as appreciated or depreciated stock, was transferred without valid business purpose to achieve tax consequences on the disposition of the property by the transferee that was more favorable than the tax consequences of a disposition by the transferor; and clear reflection of income cases resulting in the separation of income on the disposition of property from the expenses of creating the property, such as the transfer of mature crops for immediate sale. See Eli Lilly v. Commissioner, 856 F.2d 855, (7th Cir. 1988); Nat l Sec. Corp. v. Commissioner, 137 F.2d 600 (3d Cir. 1943); and Central Cuba Sugar Co. v. Commissioner, 198 F.2d 214 (2d Cir. 1952). 282 State Tax Notes, April 25, 2016

3 II. States Adoption of Adjustment Authority Similar to Section 482 Most states incorporate section 482 or its concepts into their tax codes. 21 Some simply adopt section 482 as part of their general conformity with the IRC. 22 Others, such as California, expressly incorporate by reference section 482 into their tax code. 23 Rather than through direct reference, many states enact transfer pricing statutes that track the federal version substantive language. 24 These states may not statutorily reference section 482 but instead cite it through regulations or official guidance. 25 Courts generally agree that tax authorities should apply state statutes that parallel section 482 consistent with the federal arm s-length standard. 26 Other state courts provide a general rule of federal comity and require that the tax authority interpret state statutes consistent with the federal laws on which they are based. 27 States whose transfer pricing statutes neither mirror nor directly reference section 482 still seek to ensure that intercompany transactions do not artificially shift income. These states may refer to the fair profit 28 or fair price 29 that should arise from a transaction but generally seek section 482 s objective. 30 Statutes that follow this pattern were 21 According to our research, only Delaware, Iowa, Kentucky, New Hampshire, Pennsylvania, and Rhode Island impose a corporate income or franchise tax, yet have not adopted a transfer pricing statute similar to IRC section See, e.g., Alaska Stat. section (a); and Hawaii Rev. Stat. section (a). 23 See, e.g., Calif. Rev. & Tax Code section 24725; Ala. Code section 40-2A-17; and Miss. Code Ann. section (j)(6)(A). 24 See, e.g., La. Rev. Stat. Ann. section 47:95(A); Tenn. Code Ann. section (c)(1); and Utah Code Ann. section See, e.g., N.J. Admin. Code section 18:7-5.10(a)(3); and N.J. Div. Taxation, TAM (Feb. 16, 2012). 26 See McNamara v. Tube-Alloy Corp., 583 So.2d 930, 932 (La. Ct. App. 1991) (stating that the arm s-length standard applies to Louisiana s transfer pricing statute); see also Rent-A-Center East Inc. v. Indiana Department of State Revenue, 42 N.E.3d 1043, 1049 (Ind. Tax Ct. 2015) (ruling that taxpayer s section 482-based transfer pricing study was relevant to determining whether taxpayer s intercompany transactions did not clearly reflect Indiana income). 27 See Md. Code Ann. section ; and Comptroller of Treasury v. Gannett Co. Inc., 741 A.2d 1130, (Md. 1999) (holding that the comptroller must comply with judicial and administrative interpretation of federal statutes upon which a state law is based). Maryland later enacted Md. Code Ann. section , which mirrors section 482 and specifically requires the comptroller to follow the Treasury regulations and judicial decisions interpreting it. 28 See, e.g., Ga. Code Ann. section (a). 29 See, e.g., Conn. Gen. Stat. section a. 30 States that delegate adjustment authority to their tax authorities with statutes that differ from the language of section 482 still often require that tax authorities look to the Treasury regulations for guidance in administering this authority. See N.C. Gen. Stat. section A(h). Other states will use their regulations to advise taxpayers that section 482 provides guidance about how the tax authority will use its adjustment authority. See N.J. Admin. Code section 18:7-5.10(a)(3); and N.J. Div. Taxation, TAM (Feb. 16, 2012). A Pinch of SALT generally enacted before arm s length became the required standard used in transfer pricing disputes. 31 While these statutes language may differ from section 482, the principles of uniformity and the lack of a viable alternative strongly counsel in favor of applying the arm s-length standard. III. States Misuse of Section 482 Adjustment Authority Despite the applicability of section 482 and its regulations to transfer pricing at the state level, many states have eschewed the arm s-length standard to achieve results otherwise available through more familiar (and less resourceintensive) assessment tools. While alternative apportionment, statutory addback, and the economic substance doctrine may each be independently viable, we have seen state tax authorities co-opt these tools under the guise of transfer pricing statutes. States accomplish this by ignoring the arm s-length standard in an attempt to lower the threshold for invoking their adjustment authority and use remedies unavailable under section 482 and its regulations. First, recent experience reveals that states are increasingly using their transfer pricing adjustment authority without demonstrating that the intercompany transactions at issue are not at arm s length. In fact, tax authorities often do not conduct an arm s-length analysis but instead rely on a watered-down version of the sham transaction doctrine to argue that intercompany transactions are per se distortive. States often use this strategy when the related entities have undisputed business purpose, take on actual risk, incur significant expenses, and have employees, investments, and other indicia of economic substance that render the common law tax doctrines inapplicable. While states use of economic substance or business purpose principles to unwind transactions between related parties is nothing new, 32 increasingly tax authorities have relied on and cite their respective section 482-like provisions as a statutory hook for assessment instead of the common law doctrines. But this tack ignores a central tenant of section 482: Intercompany transactions that reflect true taxable income cannot be adjusted if they produce results that are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances. 33 Indeed, Congress would have felt less compelled to codify the economic substance and business purpose doctrines had that statutory authority 31 See, e.g., 1931 Ga. Laws, Ex. Sess. 24 (enacting what is now Ga. Code Ann. section (a)); see also Baldwin-Lima-Hamilton Corp. v. United States, 435 F.2d 182 (7th Cir. 1970) (generally regarded as the turning point for courts adopting the 1968 Treasury regulations arm s-length standard for all intercompany transactions). 32 See e.g., Sherwin-Williams Co. v. Commissioner of Revenue, No. F233560, 2000 WL (Mass. App. Tax Bd. 2000); and Syms Corp. v. Commissioner of Revenue, 436 Mass. 505 (2002). 33 Treas. reg. section (b)(1), (a)(2), and (i)(9). State Tax Notes, April 25,

4 A Pinch of SALT previously existed under section Some states have also codified the economic substance doctrine while already having a statute that mirrors section Federal courts consistently segregate economic substance and business purpose analyses from section 482 determinations. 36 Accordingly, states should not be adjusting related-party transactions under their section 482-type authority without first demonstrating that they were not made on arm s-length terms. It is troubling to see states impose adjustments under their section 482-type authority without conducting any transfer pricing or arm s-length analysis. More states have also run afoul of section 482 by making adjustments unavailable under the statute s plain meaning. Without an arm s-length analysis, state auditors disregard entities or transactions, deny deductions, or impose alternative apportionment instead of adjusting the transactions to reflect that which would have occurred had the taxpayer dealt with an unrelated party. 37 While these adjustments are generally independently available to tax administrators, they often present significant legal and factual burdens. However, states try to avoid these burdens by obtaining similar results under a transfer pricing statute that requires no arm s-length analysis. For example, to impose alternative apportionment, many states require the tax authority to bear the burden of proving that the statutory formula does not fairly represent a taxpayer s business activity in the state. 38 However, if a tax authority can achieve a similar result by assessing the taxpayer under its transfer pricing statute, the taxpayer instead most often bears the 34 See Health Care and Education Reconciliation Act of 2010, P.L , section 1409, 124 Stat (2010) (codified at IRC section 7701(o)). Obviously, federal courts have long used these judicial doctrines to disregard transactions that are not in substance what they purport to be in form. However, federal courts have also recognized that this authority arises from common law and not statutory authority under section 482 or its predecessors. 35 See Wis. Stat. section 71.10(1), (1m). Wisconsin recently amended its economic substance statute so that it ties directly to the federal clarification under IRC section 7701(o). See 2015 Wis. Legis. Serv. 218 (West), section 1 and 2 (enacted Mar. 1, 2016). 36 See Rubin v. Commissioner, 429 F.2d 650, 653 (2d Cir. 1970) (recognizing the superiority of an objective section 482 analysis over the blunt tool of judicial doctrines); G.D. Searle & Co. v. Commissioner, 88 T.C. 252, 367 (recognizing that the presence of economic substance or business purpose is not a defense to a section 482 adjustment); and Stewart v. Commissioner, 714 F.2d 977, (9th Cir. 1983) (noting that economic substance is a condition precedent for any transaction to be recognized for tax purposes, and while section 482 and the substance-over-form doctrine overlap, they are two distinct inquiries). 37 See Treas. reg. section (a)(1) (stating that section 482 places a controlled taxpayer on a tax parity with an uncontrolled taxpayer by determining the true taxable income of the controlled taxpayer ). 38 See, e.g., Carmax Auto Superstores West Coast Inc. v. S.C. Department of Revenue, 767 S.E.2d 195 (S.C. 2014). burden of proving that the assessment is incorrect. 39 These shortcuts conflate transfer pricing issues with impermissible remedies and often render substantive arm s-length analysis irrelevant. Most state transfer pricing statutes and regulatory guidance either adopt, reference, or follow section 482 and its regulations. The regulations provide guidance about when the IRS may assert its adjustment authority and how the IRS may adjust an intercompany transaction not made at arm s length. States express or implicit adoption of the arm slength standard, therefore, makes federal interpretation of the standard a useful guide for states applying their transfer pricing statutes. Further, few if any states have promulgated their own extensive transfer pricing regulations, thereby making reliance on federal guidance a reasonable and pragmatic option. Unfortunately, many state tax administrators ignore that guidance. IV. States Cannot Justify Rejection of Arm s-length Standard It seems benign to suggest that states apply transfer pricing statutes that reference or mirror section 482 in a manner consistent with federal interpretation. Inconsistency and confusion abound when state tax authorities apply a statute nearly identical to section 482 in a manner different from what is sanctioned under the corresponding regulations and federal case law. But most troubling is states frequent refusal to perform any substantive transfer pricing analysis, despite proposing an assessment under a transfer pricing statute. State tax authorities often summarily reject taxpayers independent transfer pricing studies, prepared in accordance with section 482, as irrelevant to defending against state transfer pricing assessments. Ignoring the federal arm s-length principle has the effect of turning a transfer pricing dispute into a schizophrenic audit comprising economic substance, expense disallowance, and alternative apportionment arguments. States have justified this position in two ways. First, states offer a legal justification for rejecting transfer pricing studies: Related-party transactions, as a matter of law, cannot ever result in a clear reflection of state income. These states reject transfer pricing studies because, in their 39 State tax assessments generally enjoy a prima facie presumption of validity, and taxpayers must prove that an assessment is incorrect. See e.g., Ala. Code section 40-2A-7; 45 Ind. Admin. Code section (b)(8); see also Ind. Department of State Revenue v. Rent-A-Center East Inc., 963 N.E.2d 463, (Ind. 2012) (stating that the DOR need only its motion for summary judgment and the notice of proposed assessment to constitute a prima facie showing that there is no genuine issue of fact regarding the validity of an unpaid tax). In the context of federal transfer pricing cases, courts will uphold an IRS adjustment unless it is arbitrary, capricious, and unreasonable. See e.g., Sundstrand Corp. v. Commissioner, 96 T.C. 226 (1991); and R.T. French Co. v. Commissioner, 60 T.C. 836 (1973). 284 State Tax Notes, April 25, 2016

5 view, even arm s-length intercompany transactions distort true state taxable income anytime the transactions reduce the taxpayer s state tax base. Despite their statutes mirroring section 482, these states argue that federal transfer pricing rules aim only to curtail offshore tax evasion and U.S. base erosion rather than clearly reflect state income or prevent state tax evasion. Hopefully, tax administrators from these states will heed the Indiana Tax Court s recent decisions that resoundingly rejected these contentions. In Rent-A-Center East Inc. v. Indiana Department of Revenue, the Indiana Department of Revenue forced Rent-A- Center East Inc. (RAC East) to file a combined return because it paid royalties and management fee payments to out-of-state, affiliated entities. 40 The DOR dismissed RAC East s transfer pricing studies as irrelevant and even stipulated that the intercompany payments were paid on arm slength terms. 41 The Indiana Tax Court recognized that one of section 482 s purposes is to clearly reflect the income of related organizations and that Indiana s transfer pricing statute is substantially similar to its federal counterpart. 42 The court, therefore, rejected the department s bald assertions of distortion and ruled that the transfer pricing studies are relevant to determining whether RAC East s intercompany payments resulted in the clear reflection of income. In Columbia Sportswear USA Corp. v. Indiana Department of State Revenue, the DOR doubled down on its attempt to render a taxpayer s transfer pricing studies irrelevant, despite this time actually using its section 482- inspired statute as a basis for its assessment. 43 Instead of engaging in a substantive analysis of Columbia s intercompany pricing, the department claimed it could allocate 99 percent of the consolidated group s gross income to Columbia simply because the company s intercompany transactions had the effect of reducing its Indiana tax liability. 44 Again, the Indiana Tax Court struck down this argument and concluded that because Columbia s transfer pricing studies demonstrated that its intercompany transactions were conducted at arm s-length rates, its Indiana income was fairly reflected for purposes of the state s section 482- like statute. 45 Second, other states have offered a more pragmatic justification for rejecting substantive transfer pricing discussions. Some tax authorities have readily admitted that they lack the personnel, expertise, and funding necessary to engage in a full arm s-length pricing analysis. 46 To combat N.E.3d at Id. at Id. at No. 49T TA-00032, at *6 (Ind. Tax Ct. Dec. 18, 2015). 44 Id. at *8. 45 Id. 46 See MTC, Design for an MTC Arm s-length Adjustment Service, at 2-3 (May 7, 2015). A Pinch of SALT this problem, revenue departments have either contracted with third-party firms to conduct their own transfer pricing analyses or simply ignored the analyses altogether. Without any competing transfer pricing analysis, tax authorities are left to reject taxpayers transfer pricing studies wholesale. Perhaps this position is more intellectually honest, but it garners little sympathy from taxpayers under audit. Further, transfer pricing audits by for-profit contractors may emanate from nefarious motives and result in debunked pricing methods. 47 Corporate taxpayers and practitioners, therefore, may be open to alternative ways to engage in meaningful transfer pricing discussions given the realities of these substandard justifications for ignoring section 482 and its regulations. V. The Potential of ALAS to Streamline Disputes State tax administrators, taxpayers, and practitioners have closely monitored the development of the MTC s ALAS program. The plan for designing ALAS began in earnest during the summer of 2014, and organizers immediately began recruiting member states. 48 While Alabama, Iowa, New Jersey, North Carolina, and Pennsylvania have agreed to participate, the final ALAS program design requires an average $200,000 annual commitment from 10 states to commence. 49 ALAS has yet to garner enough support from the requisite 10 states. However, many see the hiring of the Florida DOR s Marshall Stranburg as the new MTC deputy executive director as the catalyst ALAS needs to get off the ground. The ALAS program offers to assist states with their transfer pricing audits in two primary ways. First, ALAS will provide training 50 to enable state auditors and administrators to better identify transfer pricing issues and facilitate more substantive analysis at the outset of an audit. We are aware that many state auditors perceive all intercompany transactions, no matter the terms, as devious tax planning tools. Through this lens, many auditors view transfer pricing studies simply as smoke and mirrors created to confuse rather than provide context and validity to a taxpayer s business transactions. ALAS can provide foundational training that may help tax administrators and taxpayers objectively analyze intercompany transactions and the methods 47 See Microsoft Corp. v. Office of Tax and Revenue, No OTR , at (D.C. Office Admin. Hrgs. May 1, 2012) (stating that a third-party transfer pricing firm s calculation methods were meaningless and useless in determining whether Microsoft s controlled transactions were conducted in accordance with the arm s length standard ). 48 See MTC, Preliminary Design for an MTC Arm s-length Adjustment Service (Feb. 6, 2015). 49 Supra note 47, at 1, 8. Kentucky recently rescinded its initial commitment and is currently in an evaluative mode. 50 See id. at 10. State Tax Notes, April 25,

6 A Pinch of SALT by which the taxpayer arrived at its pricing and terms rather than quibble over the taxpayer s perceived motives or intent. Second, ALAS will assist states in conducting arm slength analyses and preparing transfer pricing reports. 51 Either through direct training or engaging third-party consultants, ALAS can help tax administrators offer competing methods to identify the arm s-length result of a given transaction. On the surface this may appear to be counterintuitive. However, we view substantive transfer pricing discussions with a proficient state tax department as positive. Many taxpayers expend significant resources to document and support their transfer prices. We believe most taxpayers would probably welcome the opportunity for states to analyze the substance of their transfer pricing reports rather than dismiss them completely (as was the case in the Indiana litigation). Substantive negotiations between competing transfer pricing analyses rather than a wholesale rejection of their relevance ultimately produce more accurate pricing and clearer reflections of income. Optimism over the potential benefits of ALAS is measured. If ALAS only enables states to further perpetuate the 51 Id. at 13, 21. misapplication of their transfer pricing statutes, the program will do more harm than good. For example, ALAS says that its training program will assist states with identifying the absence of business purpose for transactions. 52 If transfer pricing audits conducted under the auspices of ALAS become little more than business purpose squabbles, the program will have exceeded its intended scope and only exacerbate a preexisting problem. However, if additional training enables state auditors to recognize that relatedentity transactions can in fact have business purpose, ALAS may help dispel the fiction that all intercompany transactions spring from improper motives. The result of past projects may justify a negative, kneejerk reaction from taxpayers to any MTC initiative. However, if the MTC and ALAS consider taxpayer concerns and input as the program design evolves, the new program could benefit both sides of a dispute. There is little doubt that states will increasingly scrutinize taxpayers intercompany pricing. If more transfer pricing disputes are on the horizon, many taxpayers will welcome substantive and robust arm slength discussions over legal shortcuts and hybrid assessments. 52 Id. at State Tax Notes, April 25, 2016