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on the sale of property that gives rise to dividends, interest,
rents and annuities as FPHCI).
Consistent with the general congressional scheme of not
including a CFC’s income from conduct of an active trade or
business within the definition of subpart F income, the
regulations specifically exclude from the FPHCI definition gain
from the sale of the operating assets of a CFC’s active trade or
business. See sec. 954(c)(1)(B)(iii); sec. 1.954-2T(e)(3)(iv),
(v), and (vi), Temporary Income Tax Regs., 53 Fed. Reg. 27505
(July 21, 1988). Thus, under the subpart F income regime and
the definition of FPHCI, a CFC’s gain on the sale or exchange of
property used in its trade or business does not constitute
FPHCI.
The parties in this case agree that any gain from Conner
Malaysia’s sale of the assets constitutes gain from the sale of
operating assets used in its trade or business and that,
therefore, such gain does not constitute FPHCI. The issue
before us is whether the portion of the gain relating to the
increase in the value of the Read-Rite shares during the period
in which Conner Malaysia was prohibited from selling the stock
should be characterized by reference to the sale of the assets
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