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product, i.e., syrup and soft drink, are determined under section
1.861-8, Income Tax Regs., as described in section 1.936-6(b)(1),
Q&A-1, Income Tax Regs. These expenses include, inter alia,
research and development, experimental, interest, marketing,
distribution, and advertising expenses. Sec. 1.936-6(b)(1),
Income Tax Regs.
We provide the following examples for illustration:
Example 1
When petitioner sells concentrate as concentrate, i.e., in
unchanged form, to unrelated third parties, CTI is determined as
follows:
Item Amount
Gross income from the sale
of concentrate per unit1 $2.24
Total USA expenses (1.48)
Combined taxable income .76
1Concentrate is sold in units; syrup and soft drinks are
sold in equivalent gallons.
In this example, the PCR is not applicable because the
concentrate is being sold in unchanged form and not as a
component of something larger. Here, Q&A-1 determines the
computation of CTI, requiring that all expenses factually related
to the concentrate be allocated and apportioned in full to the
income derived from the sale of the concentrate as concentrate.
Thus, 50 percent of the CTI is 38 cents per unit, resulting in a
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