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component product bear to the total production costs
for the integrated product. * * *
(ii) * * * The possessions corporation will determine
its costs * * * attributable to the possession product and
its expenses allocable and apportionable to the possession
product under sec. 1.861-8, as described in question and
answer 1 * * *
Each member of the affiliated group that is a
United States person, other than the possessions
corporation, shall determine its costs (other than
costs incurred for materials purchased from a U.S.
affiliate) attributable to the possession product, and
its expenses allocable and apportionable to the
integrated product under sec. 1.861-8, as described in
question and answer 1 of this paragraph (b)(1). Each
such United States person (other than the possessions
corporation) shall apportion to the possession product,
on the basis of the ratio of the production costs for
the possession product to the total production costs
for the integrated product, the expenses that such
affiliate allocated and apportioned to the integrated
product. * * * [Emphasis added.]
For purposes of computing combined taxable income, section
1.936-6(b)(1), Q&A-1, Income Tax Regs. (Q&A-1), governs the
computation of combined taxable income by prescribing rules for
the allocation and apportionment of expenses derived from the
sale of a possession product sold to unrelated third parties in
unchanged form. Q&A-12, on the other hand, appears to govern the
computation of combined taxable income by prescribing rules for
the allocation and apportionment of expenses derived from the
sale of a product sold to unrelated third parties which contains
a component possession product.
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