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of B&L Hong Kong constituted the manufacture of sunglasses for
purposes of section 954(d)(1) and that therefore the income from
those operations does not constitute gross income to petitioners,
petitioners further argue that, pursuant to section 954(b)(4),
the income of B&L Hong Kong is excludible from their gross income
for their taxable years ended December 25, 1983, through December
28, 1986.42
Section 954(b)(4) provides in pertinent part:
(4) Exception for Foreign Corporations Not Avail-
ed of To Reduce Taxes.--For purposes of subsection (a),
foreign base company income does not include any item
of income received by a controlled foreign corporation
if it is established to the satisfaction of the Secre-
tary that neither--
(A) the creation or organization of such
controlled foreign corporation under the laws of
the foreign country in which it is incorporated *
* *, nor
(B) the effecting of the transaction giving
rise to such income through the controlled foreign
corporation,
has as one of its significant purposes a substantial
reduction of income, war profits, or excess profits or
similar taxes. * * *
The exception in section 954(b)(4) applies only "if it is
established to the satisfaction of the Secretary" that the reduc-
42 Petitioners' argument does not relate to their last taxable
year at issue (viz., the year ended Dec. 27, 1987) because sec.
954(b)(4) in effect for their taxable years ended Dec. 25, 1983,
through Dec. 28, 1986, was amended in 1986 and was no longer
effective for that last year.
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