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The examination of petitioner's 1987-89 Cycle resulted in
the issuance of a notice of deficiency to petitioner for those
years on December 7, 1993. Petitioner filed a petition on
February 28, 1994, in which, among other things, petitioner
assigned error to the entire amount of deficiencies determined by
respondent. On May 6, 1994, respondent advised petitioner that
the case had been forwarded to the Internal Revenue Service (IRS)
Appeals Office in an effort to resolve without a trial some or
all of the adjustments set forth in the deficiency notice.
Petitioner first learned of the potential tax benefit of
redetermining its FSC commission expenses for the years in issue
in connection with the preparation of its 1993 tax returns. On
December 15, 1994, petitioner gave written notice to the Appeals
officer who was then considering the case that petitioner
intended to seek additional FSC commission expenses for the years
in issue. The additional FSC commissions were premised on
petitioner's redetermination of the operating expenses allocable
and apportionable using a "production cost" method under section
861(b) to determine CTI, instead of the sales allocation method
previously used on petitioner's returns. On May 5, 1995,
petitioner filed an amendment to its petition (first amendment),
claiming additional FSC commission expenses in the amounts of
$17,578,042, $18,638,279, and $23,111,671, for 1987, 1988, and
1989, respectively. On July 7, 1995, respondent filed an answer
to the first amendment, asserting, among other things, that
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