Electronic Arts, Inc. and Subsidiaries - Page 56




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                          C.  Significant Business Presence                           
          1.  The Statutory Setting of the Dispute                                    
               If a possessions corporation has “intangible property                  
          income”, then that income is generally treated as income of the             
          possessions corporation’s shareholders, in accordance with rules            
          set forth in section 936(h).  However, a possessions corporation            
          may “elect out” under section 936(h)(5)12 and choose to compute             

               12Par. (5) of sec. 936(h) provides, in pertinent part, as              
          follows:                                                                    
                         (5) Election Out.–-                                          
                              (A) In general.--The rules contained in                 
                         paragraphs (1) through (4) do not apply for any              
                         taxable year if an election pursuant to                      
                         subparagraph (F) is in effect to use one of the              
                         methods specified in subparagraph (C).                       
                              (B) Eligibility.--                                      
                                   (i) Requirement of significant business            
                              presence.–-An election may be made to use one           
                              of the methods specified in subparagraph (C)            
                              with respect to a product or type of service            
                              only if an electing corporation has a                   
                              significant business presence in a possession           
                              with respect to such product or type of                 
                              service. An election may remain in effect               
                              with respect to such product or type of                 
                              service for any subsequent taxable year only            
                              if such electing corporation maintains a                
                              significant business presence in a possession           
                              with respect to such product or type of                 
                              service in such subsequent taxable year. If             
                              an election is not in effect for a taxable              
                              year because of the preceding sentence, the             
                              electing corporation shall be deemed to have            
                              revoked the election on the first day of such           
                              taxable year.                                           
                                                             (continued...)           





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