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Consider the following scenario: Acme Company transfers a product to a foreign affiliate at $15 per unit, and the IRS determines the correct price should

Consider the following scenario:

Acme Company transfers a product to a foreign affiliate at $15 per unit, and the IRS determines the correct price should have been $65 per unit. The adjustment results in an increase in U.S. tax liability of $1,250,000.

Required:

(a) Define the circumstances for a "gross valuation misstatement" and the penalty which can be imposed by the IRS as a result.

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