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(b) Profit split option--(1) Computation of
combined taxable income.
Question 1: In determining combined taxable
income from sales of a possession product, how are the
allocations and apportionments of expenses, losses, and
other deductions to be determined?
Answer 1: (i) Expenses, losses, and other
deductions are to be allocated and apportioned on a
"fully-loaded" basis under � 1.861-8 to the combined
gross income of the possessions corporation and other
members of the affiliated group * * * The amount of
research, development, and experimental expenses
allocated and apportioned to combined gross income is
to be determined under � 1.861-8(e)(3). * * * Other
expenses which are subject to � 1.861-8(e) are to be
allocated and apportioned in accordance with that
section. For example, interest expense * * * is to be
allocated and apportioned under � 1.861-8(e)(2). With
the exception of marketing and distribution expenses
discussed below, the other remaining expenses which are
definitely related to a class of gross income shall be
allocated to that class of gross income and shall be
apportioned on the basis of any reasonable method, as
described in � 1.861-8(b)(3) and (c)(1). Examples of
such methods may include, but are not limited to, those
specified in � 1.861-8(c)(1)(i) through (vi).
* * * * * * *
Question 12: If the possession product is a
component product or an end-product form, how is the
combined taxable income for such product to be
determined?
Answer 12: (i) In computing combined taxable income,
the sales price of the component product * * * is
determined as follows. With respect to a component
product, an independent sales price from comparable
uncontrolled transactions must be used if such price
can be determined in accordance with sec. 1.482-
2(e)(2). If an independent sales price of the
component product from comparable uncontrolled
transactions cannot be determined, then the possessions
corporation must treat the sales price for the
component product as equal to the same proportion of
the third party sales price of the integrated product
which the production costs attributable to the
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