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apportioned to the possession product, i.e., the soft-drink
concentrate. The latter apportionment is based on the ratio of
the production costs for the possession product to the total
production costs for the integrated product.
In using this formulaic method to arrive at CTI, it becomes
clear that the greater the expense allocation to the concentrate,
the lower the CTI, and, thus, the smaller the credit.
Conversely, the lesser the expense allocation to the concentrate,
the higher the CTI, and, thus, the greater the credit. In the
example in Q&A 12, the taxpayer's PCR is 80 percent. This is
because the production costs incurred at the possessions level
are high relative to total production costs. Petitioner,
however, has relatively low PCR's with respect to its component
product, which, as stated earlier, results in a quite favorable
tax benefit. The use of a formula will cut both ways; it will be
beneficial to some and not so beneficial to others. That is the
intrinsic nature of formulas.
Essentially, respondent is arguing that, at each level, the
application of the PCR impermissibly misapportions away from the
component concentrate expenses that are known and admitted to be
factually related to the concentrate, which in turn inflates the
CTI figure, causing the sheltering of post-allocation income. We
find that the focus of respondent's argument appears to center on
the wisdom of the choice between two alternatives; i.e., a
formulaic versus a fact-based approach, rather than on whether
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