118 T.C. No. 13
UNITED STATES TAX COURT
ELECTRONIC ARTS, INC. AND SUBSIDIARIES, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
ELECTRONIC ARTS PUERTO RICO, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 2433-99, 2434-99. Filed March 22, 2002.
Before the years in issue, petitioner parent (EA)
had relied on unrelated video games manufacturers in
Taiwan and Japan to manufacture the video games that EA
sold. EA created a subsidiary (EAPR) to move the video
game manufacturing operations to Puerto Rico. EAPR
entered into agreements with an unrelated company
(PPI), which was located in Puerto Rico. PPI
manufactured ignition modules and related products for
small engines. PPI did not own equipment, raw
materials, or components to manufacture video games.
Under the EAPR-PPI agreements, EAPR leased space in
PPI’s factory, leased employees from PPI, bought
capital equipment which was installed in the leased
space, bought components and raw materials, and
provided the foregoing to PPI in order to manufacture
video games. PPI was paid for its services. EAPR sold
the resulting video games to EA. The video games in
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