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reported as its primary source of income receipts from
the sale of Avitene. P-PR deducted from those receipts
amounts that it paid to P-USA and A for labor that they
expended on Avitene’s manufacturing process. P-PR
claimed on its 1992 Federal income tax return that it
was entitled to a $1,993,264 Puerto Rico and possession
tax credit under sec. 936(a), I.R.C. Ps argue that P-
PR met the “active conduct of a trade or business
within a [U.S.] possession” requirement of sec.
936(a)(2)(B), I.R.C., by virtue of: (1) A’s activities
in Puerto Rico, (2) the fact that A manufactured
Avitene using P-PR’s raw materials and equipment, (3)
the fact that P-PR continued to own the raw materials
from the time that it received them until the time that
it sold them in their manufactured form as Avitene, and
(4) the fact that P-PR paid P-USA and A for the cost of
their labor connected to the Avitene manufacturing
process.
Held: P-PR did not actively conduct a trade or
business in Puerto Rico as required by sec.
936(a)(2)(B), I.R.C.; i.e., P-PR did not participate
regularly, continually, extensively, and actively in
the management and operation of a profit-motivated
activity in that possession.
David A. Hickerson, for petitioners.
Theodore J. Kletnick, Alan S. Kline, George Curran, Jennifer
Allan Kassabian, Marie E. Small, and Melanie A. Garger, for
respondent.
OPINION
LARO, Judge: These consolidated cases were submitted to the
Court without trial. See Rule 122. Respondent determined an
$815,196 deficiency in the Federal income tax of MedChem (P.R.),
Inc. (MedChem P.R.), for its taxable year ended August 31, 1992.
Respondent determined a $1,705,019 deficiency in the Federal
income tax of MedChem Products, Inc., & Subsidiaries (MedChem
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