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more appropriate charge, the arm's length charge for services is
deemed to equal the cost or deductions incurred with respect to
the services performed by the renderer for the recipient. Id.
For services which are an integral part of the business
activity of either the renderer or the recipient, the costs or
deductions incurred in rendering such services are not deemed to
equal an arm’s-length charge. Sec. 1.482-2(b)(7), Income Tax
Regs. Services are considered an integral part of the business
activity of a related entity in four situations. The situation
applicable to the instant case is the second situation, defined
as a case in which "the renderer renders services to one or more
related parties as one of its principal activities." Sec. 1.482-
2(b)(7)(ii), Income Tax Regs. The regulations provide two tests
for determining the applicability of the second situation. The
first test (the 25-percent test) is stated as follows:
it will be presumed that the renderer does not render
services to related parties as one of its principal
activities if the cost of services of the renderer
attributable to the rendition of services for the
taxable year to related parties do not exceed 25
percent of the total costs or deductions of the
renderer for the taxable year. * * * [Sec. 1.482-
2(b)(7)(ii)(a), Income Tax Regs.]
Pursuant to the 25-percent test, the costs of services
rendered to related parties include "all costs or deductions
directly or indirectly related to the rendition of such services"
but excludes "amounts properly reflected in the cost of goods
sold of the renderer." Sec. 1.482-2(b)(7)(ii)(b), Income Tax
Regs. Additionally, the regulations provide that, in a case:
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