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Under the profit-split method, taxable income is that amount
equal to 50 percent of the "combined taxable income" of the
affiliated group (organizations other than foreign affiliates owned
directly or indirectly by the same interests as provided in section
482) derived from sales (known as covered sales) of units of the
product produced by the qualifying possessions corporation to
persons other than members of the affiliated group (i.e., unrelated
parties) or to foreign affiliates. Sec. 936(h)(5)(C)(ii)(I), (IV).
The method for computing the combined taxable income of the
affiliated group is provided in section 936(h)(5)(C)(ii)(II). See
Coca-Cola Co. & Subs. v. Commissioner, 106 T.C. 1 (1996), relating
to the computation of combined taxable income under the profit-
split method. (Respondent concedes that MS-Puerto Rico qualified as
an affiliate of petitioner for purposes of the profit-split method
election.4) Where the profit-split method election is in effect,
the combined taxable income of the affiliated group is allocated 50
percent to the electing possession corporation (here, MS-Puerto
Rico). The remaining 50 percent is allocated to the appropriate
domestic member(s) (other than the electing corporation) of the
affiliated group (here, petitioner) and treated as income from
sources within the United States. Sec. 936(h)(5)(C)(ii)(III).
4 Under sec. 1504(b)(4), MS-Puerto Rico was not eligible
to be a member of petitioner's affiliated group for filing 1990
and 1991 consolidated Federal corporate income tax returns.
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