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1990 and 1991 to 1987-89 and to foreign tax credit carrybacks from
1990 to 1987 and 1988. These adjustments are computational,
arising from income adjustments for 1990 and 1991.
Introduction
Petitioner develops, produces, and markets computer software.
During 1990 and 1991, petitioner engaged its wholly owned
subsidiary, Microsoft FSC Corp. (MS-FSC), to act as its agent for
the international sales of standardized mass-marketed computer
products and computer software masters.1 These products were
sold/licensed to petitioner’s controlled foreign corporations
(CFC’s) and unrelated foreign original equipment manufacturers
(foreign OEM’s).
1 Pursuant to the foreign sales corporation provisions
(secs. 921 through 927), a domestic corporation may receive
favorable tax treatment on a portion of its profits from
international sales of its U.S.-made products by selling/leasing
such products through a foreign corporate subsidiary (the foreign
sales corporation). Specifically,
(1) That portion of the foreign sales corporation’s income
(known as exempt foreign trade income) is not subject to U.S.
taxation in the hands of the foreign sales corporation;
(2) the domestic corporation may deduct the commission paid
to the foreign sales corporation based upon the amount the
foreign sales corporation reports as foreign trade gross receipts
(using certain administrative pricing rules); and
(3) the domestic corporation can exclude dividend
distributions from its foreign subsidiary (e.g., the foreign
sales corporation) that are attributable to the foreign sales
corporation’s exempt foreign trade income.
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