Final answer:
For a related-party transaction to be deemed acceptable by the IRS, it must be structured as an arm's length transaction, where both parties act independently without any special consideration.
Step-by-step explanation:
In the context of the Internal Revenue Service (IRS) regulations, a related-party transaction is generally expected to be conducted as if the parties to the transaction were independent parties. This means the transaction should be at arm's length, which is option A. An arm's length transaction is one in which the buyers and sellers of a product act independently and have no relationship to each other. The concept of arm's length transaction assumes that both parties in the deal are working in their self-interest and are not subject to any pressure or duress from the other party.
This concept ensures that both parties are acting as they would if they were strangers, which therefore assures others that there is no collusion between the parties. It's crucial since the IRS scrutinizes related-party transactions to prevent entities from creating conditions that might allow them to evade taxes or engage in unfair practices that could distort the true financial positions or taxable incomes of the businesses involved.
To summarize, for a related-party transaction to be acceptable to the IRS, it needs to be carried out just as it would be if the two parties were independent of each other, reflecting fair market value for goods or services exchanged and ensuring no special treatment due to the relationship.