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B. Parties' Positions
Respondent first argues that Q&A-1 governs in the instant
case, requiring that all expenses USA incurs and those CBO
expenses that are factually related to gross income from the sale
of concentrate be apportioned in full to such income regardless
of the form in which the possession product is sold. Second,
respondent argues in the alternative that even were Q&A-12
controlling in the instant case, the application of the
production cost ratio contained in Q&A-12 produces absurd
results, and petitioner's motion should be denied on the basis of
Exxon Corp. v. Commissioner, 102 T.C. 721 (1994). Respondent
maintains that the question before this Court is whether Congress
intended the results that flow from petitioner's application of
the production cost ratio (PCR) to the U.S. affiliates' expenses
known to be factually related to the gross income derived from
CRI's component concentrate.
Respondent argues further that the factual relationship test
found in section 1.861-8(b) and (c), Income Tax Regs., is adopted
in section 936(h)(5)(C)(ii)(II) through its overall incorporation
of the standards contained in section 861. Respondent claims
that Q&A-12 must be read in the context of the statute and is to
be applied only as a supplement to Q&A-1, which determines,
according to respondent, the expenses allocable and apportionable
to the possession product in all cases including those cases in
which the possession product is sold in a component form.
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