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The issues under consideration arise in connection with
GENDYN and its foreign sales corporations. One issue concerns
the manner in which petitioners compute the amount of commission
income that may be deferred or excluded under the foreign sales
corporation statutes and regulations. That issue is one of first
impression, involving the interpretation of certain statutes and
regulations. The other issue concerns whether either of two
ships is export property under section 993(c)(1) so as to enable
petitioners to include it in the computation of commission income
under the foreign sales corporation statutes and regulations. We
first consider the former issue.
I. Petitioners’ Treatment of Period Costs in Computing Combined
Taxable Income
Petitioners were on the completed contract method of
accounting for long-term contracts for Federal income tax
purposes. In the process of computing corporate Federal income
tax under the completed contract method, GENDYN, under section
1.451-3(d)(5)(iii), Income Tax Regs., elected to expense rather
than capitalize certain period expenses. Normally, under the
completed contract method, the income and expenses connected with
long-term contracts are not reported or claimed until the
completion of the contract.
In computing the allowable amount of deferral or exclusion
of DISC or FSC commission income, petitioners did not include the
period costs that were deducted in prior years' domestic Federal
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