- 37 -
may, however, “elect out” under section 936(h)(5) and choose to
compute its taxable income under one of two methods: (1) The
cost-sharing method; or (2) the profit-split method. Pursuant to
either method, the stockholders of the section 936 corporation
are taxed on a share of the income generated from intangible
assets.
Congress recognized in enacting section 936(h) that some
section 936 corporations produce products that are not sold to
unrelated parties, but rather are transferred to affiliates and
used as component parts in the production of other products that
are then sold by the affiliates to unrelated parties. The
statute, however, does not provide any specific rules for the
computation of combined taxable income in such a case. Rather,
Congress directed the Treasury to write the rules with respect to
such component products. Sec. 936(h)(7). The conference report
accompanying the enactment of section 936(h) instructs the
Secretary to:
prescribe regulations providing for appropriate
treatment in cases where the island affiliate * * *
produces a component which it sells to an affiliate for
incorporation into a product sold to third parties.
[H. Conf. Rept. 97-760, supra at 508, 1982-2 C.B. at
619.8]
We conclude that section 1.936-6(b)(1) Q&A-12, Income Tax
Regs., establishes a permissible method for computing CTI where
8Sec. 936(h)(7) was redesignated as sec. 936(h)(8) by the
Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647,
sec. 1012(h)(2)(B), 102 Stat. 3502.
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