Electronic Arts, Inc. and Subsidiaries - Page 1

                                   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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