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Section 994(a) generally provides methods for computing the
transfer price for property sold to a DISC by a related person.
Section 994(a) provides that the transfer price is deemed to be
set at a level that will allow the DISC to derive taxable income
from the sale14 of property to a DISC by a related person equal
to the greatest of, inter alia, 50 percent of the CTI of the DISC
and the person from whom it purchased the property attributable
to the qualified export receipts from the sale of the property
plus 10 percent of the export promotion expenses attributable to
the receipts. Sec. 994(a). The methods provided by section
994(a) are also used to compute the maximum amount of income that
a DISC acting as a commission agent is permitted to earn in a
year. Sec. 1.994-1(d)(2)(i), Income Tax Regs. The 50 percent of
CTI method defines CTI generally as the excess of gross receipts
from a sale of property over the total costs of the DISC and its
related supplier that relate to the sale. Sec. 1.994-1(c)(6),
Income Tax Regs. The regulations further provide:
Costs (other than cost of goods sold) which shall be
treated as relating to gross receipts from sales of
export property are (a) the expenses, losses, and other
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Although the Internal Revenue Code provides that the
transfer price computation is to be made on a transaction-by-
transaction basis, the regulations promulgated under sec. 994
permit taxpayers to annually elect to group transactions on the
basis of products or product lines for purposes of transfer price
computation. Sec. 994(a); sec. 1.994-1(c)(7)(i), Income Tax
Regs. Petitioners elected to group their export sales
transactions by product lines in each taxable year with respect
to which the DISC commission issue under consideration has been
raised.
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