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an amount equal to that portion of its U.S. tax that is
attributable to certain of its possession-source taxable income.
Sec. 936(a)(1).3 To qualify for the section 936 credit, the
possessions corporation (here, MS-Puerto Rico) must show that: (1)
80 percent or more of its gross income for the 3-year period
immediately preceding the taxable year for which the credit is
elected was derived from sources within a possession of the United
States (here, Puerto Rico); and (2) 75 percent or more of its gross
income for that period was derived from the active conduct of a
trade or business within the U.S. possession. Sec. 936(a)(2).
If the possessions corporation qualifies for the section 936
credit, it may further elect to compute its taxable income under
the profit-split method (described in section 936(h)(5)(C)(ii))
provided it satisfies the "significant business presence" test with
respect to its product (here, the diskettes). Sec. 936(h)(5)(B)(i).
This test requires that, among other things, the electing
possessions corporation manufacture or produce the product in the
U.S. possession within the meaning of section 954. Sec.
936(h)(5)(B)(ii).
3 For a discussion of the historical development of sec.
936, see Coca-Cola Co. & Subs. v. Commissioner, 106 T.C. 1
(1996). The sec. 936 credit was terminated, effective for all
tax years after Dec. 31, 1995, with a limited phaseout until Dec.
31, 2005. Small Business Job Protection Act of 1996, Pub. L.
104-188, sec. 1601(a), 110 Stat. 1827.
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Last modified: May 25, 2011