- 40 -
from taking a managerial role in the manufacturing process.” Id.
at 342. We concluded that the substance of the work as to the
manufacturing of the drug, which required specialized skill and
expertise, was performed by the unrelated entity. Id. at 343.
The facts of the instant cases are distinguishable from
those in MedChem in several material respects.
In MedChem, before the acquisition described supra, the
unrelated entity manufactured the drug in Puerto Rico, and the
taxpayer-parent did not have anything to do with the drug. Id.
at 310-311, 314. After this acquisition, the unrelated entity
continued to manufacture the drug at its own facility with its
own labor and was solely responsible for any problem that arose
up to the time the finished product was delivered to a carrier
for shipment to the taxpayer-parent. Id. at 317. Thus, although
the acquisition affected ownership, it did not affect what
happened “on the ground” in Puerto Rico. In contrast, in the
instant cases, EA was in the entertainment software business and
relied on unrelated manufacturers in Taiwan and Japan. After
EAPR was created, the entertainment software was manufactured in
Puerto Rico, using facilities and labor that PPI leased to EAPR,
and using equipment that EAPR bought from unrelated sellers.
Thus, the arrangements following the creation of EAPR created an
entirely new business in Puerto Rico, using facilities, labor,
and equipment that had not previously been used in this business.
In contrast to MedChem, what happened “on the ground” in Puerto
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