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the taxable years at issue amounts intended to be the maximum
commission allowable on foreign trading gross receipts (FTGR)
derived from the sale of its export products. Petitioner
calculated UCFSC's profit each year to be the maximum profit
allowable under the administrative pricing rules of section
925(a) and accompanying regulations.
On its 1987, 1988, and 1989 Forms 1120, U.S. Corporation
Income Tax Return, petitioner reported FSC commission expenses
under section 925(a) in the amounts of $32,670,323, $68,033,199,
and $57,622,379, respectively. For purposes of calculating those
expenses, petitioner used the administrative pricing rule set
forth in section 925(a)(2), which requires taxpayers to determine
the combined taxable income (CTI) of the FSC and the related
supplier attributable to FTGR. For purposes of calculating CTI,
petitioner allocated and apportioned operating expenses pursuant
to the "sales factor" allocation method under section 861 and
accompanying regulations.
UCFSC filed its 1987, 1988, and 1989 Forms 1120-FSC, U.S.
Income Tax Return of a Foreign Sales Corporation, on September
15, 1988, August 22, 1989, and September 10, 1990, respectively.
(UCFSC is not a party in the instant case.)
Petitioner is subject to respondent's Coordinated
Examination Program (CEP). Typically, every income tax return of
a CEP taxpayer is surveyed or examined by respondent, usually in
2- or 3-year cycles. The examination of petitioner's 1987
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