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During the years in issue, petitioner entered into purchase
agreements with third-party customers (who were not members of
petitioner’s consolidated group), by which petitioner would
design, manufacture, and install telephone systems. Each
purchase agreement obligated petitioner to produce a telephone
system, provide a license for computer software that would run
the telephone system, provide patent infringement protection,
train employees of a customer to operate the system, and repair
any problems or defects that arose during a 12-month period
beginning when the system was placed in service.
In exchange, each customer agreed to pay a set price for the
telephone system and to pay all taxes associated with the
transaction except for petitioner’s franchise and income tax
liabilities. In some of the purchase agreements, the set price
was due in installments beginning with a downpayment paid on the
date when the purchase agreement was signed and ending with a
payment due on a date that was within 30 days of the system’s
being placed in service. Other purchase agreements required the
set price to be paid in one lump sum due on the day that the
system was placed in service. Each purchase agreement further
provided that risk of loss would switch to the customers upon
delivery of each component of the telephone system, title passage
would occur when the price and taxes were paid in full, and
petitioner would have a security interest in any delivered
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