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of a consolidated group should be based on dealings with
outsiders rather than on transactions within the group. See id.
Section 1.1502-13(a)(2), Income Tax Regs., defines a
“deferred intercompany transaction” to include the sale or
exchange of property or any other expenditure in which the amount
of the expenditure is capitalized in an intercompany transaction.
An intercompany transaction includes:
[A] transaction during a consolidated return year
between corporations which are members of the same
group immediately after such transaction. Thus, for
example, an intercompany transaction would include a
sale of property by one member of a group (hereinafter
referred to as the “selling member”) to another member
of the same group (“purchasing member”), the
performance of services by one member of a group * * *
for another member of the same group * * *, or the
payment of interest by one member of a group * * * to
another member of the same group * * *, during a
consolidated return year. [Sec. 1.1502-13(a)(1)(i),
Income Tax Regs.; emphasis added.]
Respondent argues that petitioner did not have ownership
rights in the telephone systems as the systems were being
produced. Instead, respondent asserts that the rights of the
third-party customers in the telephone systems were superior to
those of petitioner during the period of production because of
the commitments under the purchase agreements. Respondent
contends that petitioner was never free to sell the telephone
systems to the subsidiary or anyone else. Thus, respondent
argues that the third-party customers were the source of the
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