1. USAco is the wholly-owned U.S. subsidiary of FORCo, a foreign corporation. USAco's income statement in millions of dollars, appears as follows:

Income Statement

Gross Profit 400

Administrative Expenses 300

Interest Expense 100

The interest expense of $100 is on a longterm note payable from USAco to FORCo, which is entitled to the benefits of a treaty that exempts interest from withholding tax.

What will the IRS auditor argue when they encounter this taxpayers facts and circumstances?