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production costs associated with the possession product equal 10
cents per unit, resulting in a PCR of 12.5 percent. The PCR is
then applied to the total expense amount of $1.48 per unit,
resulting in approximately 19 cents per unit expense allocation.
The CTI equals $2.05 per unit, resulting in a tax credit equal to
the tax attributable to approximately $1.03 per unit of beverage
product sold.
In this example, only 12.5 percent of the expenses known to
be factually related to the sale of the integrated product are
allocated and apportioned to the income derived from the sale of
the possession product. This results in an increased CTI figure,
which in turn increases the amount of the section 936 possessions
tax credit. Thus, where production costs at the possession level
are small in relation to the total production costs, as in the
instant case, a low PCR is produced, resulting in the allocation
of a relatively small percentage of the total amount of expenses
to the income derived from the sale of the possession product.
Respondent argues that the application of the PCR in the
instant case results in unapportioned USA expenses totaling
$227,213,515 in 1985, representing approximately 89.84 percent of
the total amount of expenses for that year, and unapportioned
expenses totaling $263,021,507 in 1986, representing 91.7 percent
of the total expenses for that year.
Both parties acknowledge that regardless of the form in
which the concentrate is sold, i.e., one unit of concentrate,
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