Microsoft Corporation - Page 14

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            language of the restricted consent which did not expire until                               
            December 31, 1996.                                                                          
                  Respondent contends that the restricted consent encompasses                           
            the recalculation of the combined taxable income of petitioner's                            
            affiliated group.  Respondent reaches this conclusion by noting                             
            that the restricted consent makes reference generally to section                            
            936(h), which includes the election of the profit-split method and                          
            the calculation of the combined taxable income.  Further, after a                           
            dictionary analysis, respondent argues that the word "use" in                               
            "Microsoft's use of the profit split method" (emphasis added)                               
            refers both to MS-Puerto Rico's "act" of electing the profit-split                          
            method and the "manner" in which the method is employed (i.e., the                          
            calculation of the combined taxable income).                                                
                  Petitioner argues that respondent fails to acknowledge the                            
            critical language in the restricted consent,  namely,  the                                  
            "disallowance of Microsoft's use of the profit split method * * *                           
            and any transfer pricing adjustments from such disallowance".                               
            (Emphasis added.)5  Petitioner asserts that the word "disallowance"                         


                  5     Petitioner also argues that the language "the                                   
            disallowance of Microsoft's use of the profit split method * * *                            
            and any transfer pricing adjustments resulting from such                                    
            disallowance" must be read in the conjunctive.  In this regard,                             
            petitioner contends that respondent's proposed adjustment to the                            
            combined taxable income does not relate to a transfer pricing                               
            adjustment.  Respondent objects to petitioner's interpretation of                           
            the restricted consent.  We do not base our ruling on                                       
            petitioner's reading of the restricted consent in this respect                              
                                                                          (continued...)                




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