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Washington, at the time the petition was filed. Microsoft, as the
common parent of an affiliated group of corporations, filed a
consolidated U.S. Corporation Income Tax Return (Form 1120) for
taxable year ended June 30, 1990 (the 1990 year), on March 15,
1991, and for taxable year ended June 30, 1991 (the 1991 year), on
March 14, 1992. Microsoft Puerto Rico, Inc. (MS-Puerto Rico), a
Delaware corporation, is a wholly owned subsidiary of Microsoft.
Section 936 Possessions Tax Credit
During 1990 and 1991, MS-Puerto Rico manufactured2 (by
duplicating from a master diskette furnished by Microsoft)
software-encoded diskettes at its 45,000-square-foot facility in
Humacao, Puerto Rico. These diskettes were sold to Microsoft for
packaging with other components and distribution to customers as
standardized, mass-marketed software products. On its 1990 Federal
corporate income tax return, MS-Puerto Rico elected to be taxed as
a possessions corporation under section 936 and to report its
taxable income pursuant to the profit-split method under section
936(h)(5)(C)(ii). These elections continued during the 1991 year.
Section 936 entitles certain qualifying domestic corporations
(the possessions corporation) to elect to claim as a possessions
tax credit (the section 936 credit) against its U.S. tax liability
2 The use herein of the term "manufactured" or "produced"
is not meant to be dispositive of whether Microsoft Puerto Rico,
Inc. (MS-Puerto Rico), satisfied the significant business
presence test of sec. 936(h)(5)(B)(i) and (ii).
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