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telephone system from the subsidiary. The lease of the system
was on a net lease basis such that the third-party customer was
responsible for all taxes, fees, and maintenance associated with
the system.
Petitioner carried out other sales of telephone systems
during the years in issue, in which petitioner entered into
purchase agreements directly with the subsidiary rather than with
a third-party customer. Respondent admits that these direct
sales of property to the subsidiary qualify as intercompany
transactions under section 1.1502-13, Income Tax Regs.
Discussion
Respondent argues that, in form and substance, a sale of
property from one member of a consolidated group to another
member of the same group, within the meaning of section
1.1502-13(a)(1)(i), Income Tax Regs., did not occur in this case,
because the rights of the subsidiary to receive title in the
telephone systems were acquired by assignment from a third-party
customer rather than from petitioner by purchase. Respondent
admits that, if the third-party customers had relinquished their
rights under the purchase agreements back to petitioner and if
petitioner and the subsidiary had executed new purchase
agreements for the telephone systems, an intercompany transaction
would have occurred. However, respondent contends that
petitioner chose the manner in which the transactions were
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