Medchem (P.R.), Inc. - Page 29




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                                   (i) the active                                     
                              conduct of a trade or                                   
                              business within a                                       
                              possession of the United                                
                              States, or                                              
                                   (ii) the sale or                                   
                              exchange of substantially                               
                              all of the assets used by                               
                              the taxpayer in the                                     
                              active conduct of such                                  
                              trade or business, and                                  
                              (B) the qualified possession                            
                         source investment income.                                    
                         (2) Conditions which must be satisfied.-                     
                    -The conditions referred to in paragraph (1)                      
                    are:                                                              
                              (A) 3-year period.--If 80                               
                         percent or more of the gross income                          
                         of such domestic corporation for                             
                         the 3-year period immediately                                
                         preceding the close of the taxable                           
                         year (or for such part of such                               
                         period immediately preceding the                             
                         close of such taxable year as may                            
                         be applicable) was derived from                              
                         sources within a possession of the                           
                         United States (determined without                            
                         regard to section 904(f)); and                               
                              (B) Trade or business.--If 75                           
                         percent or more of the gross income                          
                         of such domestic corporation for                             
                         such period or such part thereof                             
                         was derived from the active conduct                          
                         of a trade or business within a                              
                         possession of the United States.                             
               Respondent determined and contends that none of MedChem                
          P.R.’s taxable income for its fiscal year ended August 31, 1992,            









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