Chapter 2 Questions3. What is an arm’s length transaction? What is its significance to income taxation?An arm’s length transaction is one in which all parties have bargained in good faith and for their individual benefits, not for the benefit of the transaction group. Transactions not made at arm’s length are generally not given any teax effect or are not given the intended tax effect. 6. What is the difference between a taxable entity and a conduit entity?Taxable entities are those that are liable for the payment of tax. That is, taxable entities must pay a tax based on their taxable income. The entities responsible for the payment of income tax are individuals; regular, or C corporations; estates, and some trusts.Conduit entities are nontaxable reporting entities. It is one in which the tax attributes (income, deductions, losses, credit) of the entity flow through the entity to the owner of the entity for tax purposes.
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