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country in which the CFC is organized. If, however, the CFC
manufactures, produces, grows, or extracts the property that it
sells in the country in which it is organized, the income from
the sale of that property is not foreign base company sales
income, regardless where the property is used or consumed. Dave
Fischbein Manufacturing Co. v. Commissioner, 59 T.C. 338, 355
(1972); see sec. 1.954-3(a)(4)(i), Income Tax Regs.
Although the terms "manufactured" and "produced" are not
defined by the Code, section 1.954-3(a)(4)(i), Income Tax Regs.,
provides that a CFC will be considered "to have manufactured,
produced, or constructed personal property which it sells if the
property sold is in effect not the property which it purchased."
That regulation further provides that the property sold will not
be considered the property purchased if the provisions of either
section 1.954-3(a)(4)(ii) or (iii), Income Tax Regs., are met.
Section 1.954-3(a)(4)(ii), Income Tax Regs., provides in
pertinent part:
(ii) Substantial transformation of property. If
purchased personal property is substantially trans-
formed prior to sale, the property sold will be treated
as having been manufactured, produced, or constructed
by the selling corporation. * * *
That regulation also includes the following three examples of a
substantial transformation: (1) Wood pulp into paper, (2) steel
rods into screws and bolts, and (3) fresh fish into canned fish.
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