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1992 did not constitute arm's-length prices. The notice of
deficiency increased Compaq U.S. income by the following amounts:
Taxable Year Ended Amount
Nov. 30, 1991 $124,482,000
Nov. 30, 1992 90,370,000
Petitioner's Analysis
Prior to trial, petitioner abandoned its cost-plus method of
calculating the arm's-length prices for Compaq Asia PCA's and, at
trial, defended the intercompany prices pursuant to the CUP
method based on Compaq U.S. regular and substantial purchases of
identical or nearly identical PCA's from uncontrolled
subcontractors.
To support its position at trial of this case, Compaq U.S.
compared these prices to its standard cost, which was on a
turnkey basis, using a process referred to as the turnkey
equivalent. The turnkey equivalent is the sum of the turnkey
transactions and the adjusted consignment transactions. Adjusted
consignment transactions are calculated by taking consignment
transactions with unrelated subcontractors and adding Compaq U.S.
standard material costs plus a material markup of 17.7 percent, a
markup that was derived from Compaq U.S. turnkey purchases of
$96.6 million from IEC Electronics Corporation (IEC), an
unrelated subcontractor of Compaq U.S.
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