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Taxable income............................... 400
The product sold, an automobile, is not sufficiently
distinguishable from the components purchased (the
engine, transmission, etc.) to constitute a substantial
transformation of purchased parts within the meaning of
subdivision (ii) of this subparagraph. Although con-
version costs of B Corporation are less than 20 percent
of total cost of goods sold ($325/$1,800 or 18 per-
cent), the operations conducted by B Corporation in
connection with the property purchased and sold are
substantial in nature and are generally considered to
constitute the manufacture of a product. Corporation B
will be considered under this subdivision to have
manufactured the product it sells.
Example (3). Controlled foreign corporation C,
incorporated under the laws of foreign country X, pur-
chases from related persons radio parts manufactured in
foreign country Y. Corporation C designs radio kits,
packages component parts required for assembly of such
kits, and sells the parts in a knocked-down condition
to unrelated persons for use outside country X. These
packaging operations of C Corporation do not constitute
the manufacture, production, or construction of per-
sonal property for purposes of section 954(d)(1).
(Hereinafter, we shall refer to the standards of section 1.954-
3(a)(4)(iii), Income Tax Regs., that the operations conducted be
substantial in nature and be generally considered to constitute
the manufacture of a product as the facts and circumstances test
of that regulation, and we shall refer to the standard of section
1.954-3(a)(4)(iii), Income Tax Regs., that the conversion costs
be equal to 20 percent of the total cost of goods sold as the me-
chanical test of that regulation.)
Respondent determined that the income for each of the years
at issue from the sale of sunglasses assembled by B&L Ireland and
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